P
e
a
r
s
o
n
A
n
n
u
a
l
r
e
p
o
r
t
a
n
d
a
c
c
o
u
n
t
s
2
0
1
7
The future
of learning
Pearson Annual report and accounts 2017
In this report
Strategic report
01 Overview
02 Our KPIs
04 About Pearson
06 Chairman’s introduction
08 CEO’s strategic overview
12 Our strategy in action
12 Market trends
13 Our strategy
22
24
Efficacy
Sustainability
34 Our performance
34
Financial review
42 Operating performance
48 Risk management
50 Principal risks and uncertainties
Governance
Financial statements
62 Governance overview
64
Leadership and effectiveness
76 Accountability
86
Engagement
90 Remuneration
106 Additional disclosures
110 Statement of Directors’ responsibilities
112 Independent auditor’s report to the members
of Pearson plc
118 Group accounts
178 Parent company accounts
190 Five-year summary
192 Financial key performance indicators
196 Shareholder information
BC Principal offices worldwide
Helping create the future of learning
In this report we have included employee interviews from around our business to
showcase how Pearson’s people are helping create the future of learning.
CC
KE
Cedrick Collomb
Senior Vice President for
Global Product Technology
Kate Edwards
Senior Vice President
Efficacy & Research
19
IS
Indika Senadhira
Senior Manager, Software
Engineering, Pearson Technology
Delivery Centre
23
AC
Alvaro Castro
Product Management Analyst,
Pearson Test of English
33
41
Strategy and performance reporting The
strategic report up to and including p60 is
formed of three sections: ‘Overview’, ‘Our
strategy in action’ and ‘Our performance’, and
was approved for issue by the Board on
14 March 2018 and signed on its behalf by:
Coram Williams Chief Financial Officer
0101
At Pearson we have a clear mission:
to help people make progress in their lives
through learning.
We are focusing on the changing needs of the world’s education markets,
and our strategy is to combine content and assessment, powered by
services and technology, leading to more effective teaching and
personalised learning at scale.
That is at the heart of what we do and is reflected through our three
strategic priorities: We are growing market share through our
digital transformation, focusing on structural growth markets and
becoming a simpler and more efficient business.
See Our strategy, p13
This will enable us to drive innovation by providing more authentic learning
and assessment experiences, helping more learners around the globe
build their skills and be better prepared for the future world of work.
Pearson products provide:
1
Better learning
“I can’t imagine
a better way to learn.
“The digital experience that students get
can really shape their understanding of the
subject – it gives them a real world feel, with
first class pedagogy and assessment built in.”
2
Anywhere,
anytime technology
See case study on p15
N I N
SI G
Pearson author Glenn Hubbard on why he and partner
Anthony P O’Brien are transforming their classic textbook
from print format into a digital education experience.
3
Real-time feedback
See case study on p43
See case study on p15
Section 1 Overview 02
Pearson plc Annual report and accounts 2017
Our KPIs
Financial measures
We measure our progress
against three broad categories
of KPIs: financial, business and
non-financial measures.
These two pages summarise
performance against all of
these KPIs. More details on
the performance, trends and
factors influencing select
KPIs are described within the
relevant sections throughout
this report.
R
See how we link strategy to how management is
rewarded on p90.
Maintain long-term growth
Indicator
Sales R
Adjusted operating
profit R
Operating profit
2017 Underlying change
Reference
£4,513m
£576m1
-2% p35
-9% p35
£451m2
n/a
Deliver sustainable returns
Indicator
2017
Headline change
Reference
Adjusted earnings
per share R
Basic earnings
per share
Return on invested
capital (gross basis) R
One year total
shareholder return R
Dividend per share
54.1p1
49.9p2
-8% p36
n/a
4.3%
-0.7
percentage points
p36
-4.5%3
17p
-67%
p7
Manage our cash and balance sheet
Indicator
2017
Headline change
Reference
Operating cash flow R £669m1
Net cash generated
from operations
£462m2
+1% p37
-11%
Net debt
£432m
+60% p37
1
See p36–38 for an explanation of these alternative performance measures
and p192–195 for full reconciliation of the numbers to the equivalent
statutory measure and definitions of headline and underlying variances.
2 Equivalent statutory measure.
3 Source: Datastream.
Our KPIs
Section 1 Overview
0303
Business measures
Non-financial measures
1
Grow market share through digital
transformation of our courseware
& assessment businesses R
Indicator
2017 Digital revenues4
Digital: 32%
Digitally enabled: 27%
Non-digital: 41%
US higher education
courseware
US assessment
UK assessment5
Performance Reference
p14
p14
p14
p14
Market position: #1
Market position: #1
Market position: #1
4 Excluding GEDU, WSE and US K-12 courseware.
5
Includes both vocational and general qualifications.
2
Invest in structural
growth markets
Indicator
Virtual schools
(Connections)
Global online program
management
Global professional
testing (Pearson VUE)
English
Performance Reference
Market position: #2 p16
Market position: #1
Market position: #1
Market position (courseware): #2
Market position (testing): #3
p16
p16
p16
3
Become simpler
& more efficient R
Indicator
Expected cost savings
2017-2020 programme6
Restructuring costs
in 2017
Planned headcount
reduction 2017-2020
programme
Performance
Reference
c.£300m p18
£79m
c.3,000 p18
6 Phased plan first presented on August 4 2017, based on December 2016
FX rates. Note: A significant part of these costs and savings are in US Dollar
and other non-Sterling currencies and so subject to FX movements over
the implementation timeframe.
Talent & employee engagement
Indicator
Executive team’s achievement of
quarterly employee engagement
milestones
% of Senior Leadership Group with
development goals
Employees taking at least one
course on Pearson’s internal training
programme, PearsonU
Performance
Reference
100% p27
89% p27
83% p27
Strengthen brand & reputation
Indicator
Performance
Change
Reference
Awareness of Pearson
among teachers,
learners and parents
Favourability of those
aware of Pearson
59%
+2
percentage points
89%
+1
percentage points
Deliver gender diversity
Indicator
Performance
Change
Reference
Female Board
members
Female senior
managers7
Female employees
30%
30%
61%
no change
p29
-2% p29
+1% p29
7 Two reporting lines from the Chief Executive.
Reduce our carbon footprint
Indicator
Performance
Change
Reference
Global greenhouse
gas emissions
(Metric Tonnes of CO2e)
104,384
-17% p29
Maintain investment in communities
& social innovation
Indicator
Performance
Change
Reference
Target 1% or
more of adjusted
pre-tax profits
£7.2m
+1.4% p31
04
About Pearson
Pearson is the world’s learning company,
providing a range of products and
services to help people across different
learning stages make measurable
progress in their lives.
Where we operate
Sales by geography
We operate in 70 markets worldwide, with a focus on those below.
We report by geography because this is how we deliver learning:
through providing a range of educational products and services to
institutions, governments, professional bodies and individual learners
in our key markets around the world, helping people everywhere
aim higher and fulfil their true potential.
North America
Core markets
Growth markets
Sales
£2,929m
Sales
£815m
Sales
£769m
Our largest market including
all 50 US states and Canada.
Our international business
in established and mature
education markets including
the UK, Australia, Italy,
France, Germany, Spain,
Poland, Singapore,
Malaysia and Vietnam.
Our growth markets in
emerging and developing
economies, with investment
priorities in Brazil, India,
South Africa, Mexico,
Hong Kong & China,
and the Middle East.
Pearson plc Annual report and accounts 2017 What we offer
Sales by products and services
0505
We provide content, assessment and digital services to schools, colleges
and universities, as well as professional and vocational education
to learners to help increase their skills and employability prospects.
Increasingly, we do this through partnership models where we bring
investment, expertise and scale to help deliver better learning outcomes.
Courseware
Assessment
Services
Sales
49%
Sales
30%
Sales
21%
We provide world-leading
educational content
for use in both traditional
and digital learning.
We provide assessment
services to measure and
validate learner progress,
and to certify competency.
We provide integrated
services that help educational
institutions improve
learner outcomes.
Courseware
Assessment
Services
Higher Education
Schools
Online Program Management
Our personalised course content and digital
resources help educators build knowledge and
unlock learners’ potential. We increasingly
sell direct to consumers and to educational
institutions so students can come to class
completely prepared from
day one. This helps drive
better learning experiences
and outcomes.
We partner with US educators and districts to
develop new, personalised ways of learning
through effective, scalable assessments that
measure 21st century skills and inform instruction
for all learners. In the UK, Pearson is a market-
leading, award winning organisation offering
academic and vocational qualifications. We’re
leading the adoption of AI (Artificial Intelligence)
in assessment to support better learning.
Pearson helps higher education institutions
launch or expand online degree programs
enabling them to increase enrolments,
support online learning, boost graduation
rates and deliver on
employability.
See case study, p15
See case study, p45
Virtual schools
Schools
Professional certification
Our content business for schools in the US,
UK and globally provides educational
instructional resources, curriculum materials,
digital learning tools and assessments to
help to educate children across the world.
Going forward, we are focusing
our school content business on
markets outside the US.
English
Pearson English language teaching develops
courses, qualifications and learning tools
to make teaching English easier.
We help organisations measure and make
improvements to ensure the success of
employees and learners. Test owners and
test takers across the world choose us to
help develop, manage, deliver and grow their
computer-based testing programmes. With the
industry’s most secure testing environments,
we’re the leader in computer-based testing.
See case study, p42
Clinical assessment
We provide assessment solutions to help
professionals through the identification and
management of barriers to learning and
functioning in daily life. Our wide range of
assessment and intervention products are used
by psychologists, speech language pathologists,
occupational therapists, counselors, human
resources and talent management professionals.
English
Our fast-growing test, Pearson Test of English
Academic, is the world’s leading computer-based
test of English for study abroad and immigration.
Connections Education is an accredited
provider of high-quality, highly accountable
virtual education solutions for students
in grade K–12, including
online schools, online
courses, instructional
tools and more.
See case study, p17
Fully integrated programmes
Our sistemas businesses offers a complete
package of products and services for private
and public K-12 schools in Brazil. We provide
courseware, educational assistance, professional
development, management consulting and
marketing support, as well as digital content.
In India we offer similar whole-school academic
partnerships called MyPedia.
See interview on p47
English
Leading the English learning market in Brazil,
we offer a diverse methodology in a franchising
based model to help learners improve their
lives by learning a second language.
Link to strategic priorities 1 Grow share through digital transformation 2 Invest in structural growth markets See Our strategy, p13–21
Section 1 Overview
06
Chairman’s introduction
“2018 is a pivotal year for Pearson – it is the
first in several when Pearson is expected
to return to underlying profit growth.”
Dear shareholders,
This has been an important year in the
company’s transformation and significant
progress has been made in 2017. On an
operational level, the company has
stabilised and, for the first time in several
years, Pearson has met both internal
and external expectations. We are still in
the midst of a transformation and the
environment in our largest business,
US higher education courseware, remains
challenging. However, we continue to
take action and have a good handle on
these challenges, as well as on the growth
opportunities in other parts of our business,
leaving us well placed to meet our long-term
aspiration to be the leader in digital learning.
From a Board perspective, management is
faithfully executing on our strategy, as seen
through the actions taken to simplify the
company, focus our portfolio, invest in our
digital capabilities and invest in growth
opportunities that will drive the future of
Pearson. 2017 performance provides a
solid foundation from which to build,
with Pearson aiming to return to
underlying profit growth in 2018.
Overseeing our strategic progress
The Pearson strategy must meet the
evolving demands of learners while
delivering sustainable returns to
shareholders. Pearson meets those
demands by combining world-class content
and assessment, powered by services
and technology, to support more effective
teaching and personalised learning at
scale. To deliver on the strategy, Pearson is
focused on three priorities:
1. Grow share through the digital
transformation of our courseware
and assessment businesses
2. Invest in the biggest structural
growth markets
3. Simplify the company, becoming
more efficient and delivering
better customer experiences.
Sidney Taurel
Chairman
In the latter part of the year, Pearson also
agreed the sale of two of its direct delivery
businesses – GEDU and Wall Street English.
Pearson has raised £2.4bn from strategic
disposals since 2015, which has helped
Pearson greatly strengthen its balance
sheet, reinvest back into the business
and return excess capital to shareholders.
In October 2017, Pearson commenced a
share buyback programme, completed on
16 February 2018, repurchasing a total of
42.8m shares at an average price of 700p.
Shareholder returns
It is my job to ensure that capital is allocated
appropriately on behalf of our shareholders.
I know that shareholders are disappointed
about the reduction of the dividend in 2017.
This was not a decision the Board took
lightly and it reflects a continued focus
on maintaining a strong balance sheet,
investing in Pearson’s digital transformation
and sustaining a solid investment-grade
credit rating.
A key tenet of the strategy is investment
in content and technology to ensure
Pearson has the skills and platforms to keep
its products relevant, to become more agile
in its digital capabilities, and to provide a
robust infrastructure to deliver efficiencies.
In turn, these will help Pearson win market
share with products that deliver better
outcomes, provide better customer
experiences and deliver sustainable
long-term growth, driving greater value
for shareholders. You can read more
about these priorities on p13–21.
Our simplification journey
Pearson enters 2018 in a strong financial
position because of tight management of
costs, actions to simplify the portfolio and a
sharper focus on the biggest opportunities –
areas that are consistent with our previously
announced simplification strategy. In July
2017, the Board sanctioned the sale of
a 22% stake in the Penguin Random House
venture to Pearson’s joint venture partner
Bertelsmann, and the recapitalisation of its
remaining 25% stake in the business.
Governance at Pearson
Leadership and effectiveness
Accountability
Board members challenge and debate
strategy, performance, responsibility and
accountability to ensure that the decisions
we make are robust. Board activity and
performance are assessed annually.
Detailed risk assessment and management
information shapes all strategic and
operational decisions, with clearly defined
Board and management responsibilities
and processes.
Engagement
Remuneration
Building strong relationships with our
diverse stakeholders is crucial to our
sustainable success. We aim to engage
through many forums, and channels,
to build trust.
See our Governance report on p61–110
Our remuneration policy aligns with
strategy and adapts to market conditions
and performance.
See our Remuneration report
on p90–105
Pearson plc Annual report and accounts 2017 Chairman’s introduction
Key performance indicators Deliver sustainable returns
Total shareholder return (Five years % change)
Dividend per share in fiscal year (pence)
-20.9%
70.0
82.6
63.0
57.2
-20.9
17p
51p
52p
52p
48p
0707
17p
STOXX
600 Media
FTSE All-
Share Media
FTSE
All-Share
FTSE 100
Pearson
2013
2014
2015
2016
2017
Five-year TSR in 2017 was -20.9% which compares with a 57.2% return on the
FTSE 100 Index of large UK listed companies. Our recent share price performance
has been disappointing but we are confident that the plans and strategy laid out in
this report will continue to make Pearson a simpler, stronger company, and that
they set the company up for a sustained period of growth and value creation.
We cut our dividend in 2017 to reflect portfolio changes, increased product
investment and challenging market conditions in our largest business. Our intention
is to pay a sustainable and progressive dividend that is comfortably covered by
the earnings of our ongoing business, excluding any contribution from our stake
in Penguin Random House.
Our stated objective in the long term is
to rebuild our payment to shareholders,
reflecting the Board’s long-standing
confidence in the strong future cash
generation of Pearson. At this stage, we are
focused on striking the right balance
between short-term shareholder reward
and investing in the long-term success of
the business. As a result, the proposed final
dividend payment for 2017 is 12p per share,
taking the full year dividend to 17p per share.
the remuneration section of this report on
p90–105, and I would like to thank those
who helped us refine our proposals.
More broadly, our Board members
have been engaging with educators,
learners, community and thought leaders,
and other stakeholders in a variety of
ways. This remains an ongoing area of
focus for us – you can read more about our
engagement in the governance section
on p61–110.
Board engagement with our investors and
company stakeholders
Investing in world-class talent
The 2017 financial year has been one of
significant engagement with our
shareholders. I have enjoyed spending
time throughout the year with many of
you to ensure that we maintain an open,
transparent dialogue, keep you updated
on our strategy and receive your inputs.
Since May 2017, Elizabeth Corley, who chairs
the Pearson Remuneration Committee,
has led our work to engage with investors in
connection with Pearson’s remuneration
policy and to listen to your concerns. It is
clear that shareholders and other
stakeholders would like our approach to
remuneration to be simple and transparent,
closely linked to our strategy and the
company’s performance.
We have worked hard to develop an
approach that the majority of our
shareholders can support. Elizabeth
explains our approach in more detail in
A company that is moving to a digital-first
model needs to have the best and brightest
talent to help guide it through the transition.
I am pleased that in 2017 we made a
number of significant hires – at Board
and Executive level, as well as across the
entire company.
Over the last few years we have further
strengthened the composition of our
Board through the addition of more
technology knowledge, more international
experience and greater depth regarding
transformation. For example, Michael
Lynton joined us as an Independent
Non-Executive Director on 1 February 2018.
Michael was formerly Chairman and CEO
of Sony Entertainment, and CEO of Sony
Pictures Entertainment before that. He is
currently Chairman of Snap Inc., the owner
of messaging start-up Snapchat, and brings
a wealth of experience and expertise.
I believe we have a strong and experienced
Board, fully engaged with the business and
focused on helping guide Pearson back
to growth. All across Pearson, there is a
focus on developing necessary skills and
capabilities to ensure Pearson has the
right talent, building a market-leading,
digital-first business.
Looking ahead
Pearson has an important role to play
in supporting customers across the
globe to make progress in their lives
through learning. This encapsulates
our work to build a more digital and
sustainable business.
2018 is a pivotal year for Pearson – it is the
first in several when Pearson is expected
to return to underlying profit growth. The
Board is confident management has a good
plan to deliver on this guidance and that
the strategy is working. Longer term, we are
excited about the significant growth
opportunities globally and about delivering
sustainable long-term growth to drive
shareholder value.
Thank you for your ongoing support
of Pearson.
Sidney Taurel Chairman
Section 1 Overview 08
CEO’s strategic overview
“We are optimistic about what the
future holds and expect to make
further progress in 2018.“
Dear shareholders,
The global opportunity
In 2017, in a challenging trading
environment, we made an adjusted
operating profit of £576m – at the top end
of our guidance range – and we reported
adjusted earnings per share of 54.1p.
We continued to invest in the digital
transformation and simplification of the
company. We have further strengthened
our balance sheet, ending the financial year
with net debt of £432m. We expect to make
further progress in 2018, and over the next
three years, we will start growing again,
in a sustainable way.
Returns to shareholders
As a result of our strong cash flow
generation and proceeds from the further
simplification of our portfolio, we launched
a £300m share buyback during 2017,
which was completed on 16 February 2018,
repurchasing a total of 42.8m shares
at an average price of 700p. This was
accompanied by a significant cut in the
dividend. While difficult, this ensures that
we can continue to invest in the business
to drive long-term growth and a sustainable
and progressive dividend going forward.
This will enable us to deliver value for
our shareholders.
Globally, there continues to be a
tremendous opportunity in education.
The estimated global spend is £3.6tn* per
year. Currently only 2%* of that spend is on
digital but we expect that to grow. But what
does digital, look like in effective practice?
It means moving to a world of better
learning – anywhere, anytime, with real time
feedback – driving better outcomes and
more meaningful learning experiences.
It means better understanding not just what
works, but how it works and in what context.
That is what our commitment to efficacy –
and reporting on the impact of the use our
products on learning outcomes – is about.
We made that commitment in 2013 and,
as promised, this year we release audited
efficacy reports. We are listening to the
challenges and opportunities faced by
teachers and students, and designing and
developing products based on learning and
data science – all with a focus on helping
them achieve the outcomes that matter
most. Technology has changed how,
when and where learning takes place.
With our scale and resources, brand and
commitment to digital, we are in a unique
position to make a significant mark on the
future of learning.
Put simply, we need to give flexibility
to students, arming them with the
opportunities to learn in modern, innovative
ways, so they have the foundational
knowledge and the 21st century skills
to not only adapt but succeed.
* Source: Citi GPS: Global Perspectives & Solutions, July 2017.
John Fallon
Chief Executive
Our diverse global customer base shares
common values of wanting to have more
control of their futures in an increasingly
uncertain world. We can enable them to
do that by helping drive better engagement
and by helping learners realise the true
economic value of education – and how it
helps them make progress. Our focus is on
giving the next generation of learners the
confidence to be successful no matter
what they do. Read more on our approach
to creating value for all our stakeholders
on p20–21.
It is with this in mind that Pearson is
accelerating its move to digital. We are
creating products and services to help
people teach, learn and grow in new and
powerful ways, while fostering a culture
of continuous innovation that will ensure
we stay relevant over time. Through this
transformation, our products will deliver:
Better learning. Our technology inspires
more personalised, flexible and engaging
learning that delivers better outcomes
Anywhere, anytime technology. Our
technology gives people the freedom
and flexibility they crave, giving them
the control over when, where and how
they learn
Real-time feedback. Our innovative online
products and services provide real-time
personalised feedback so that teachers
and faculty can see where they might need
to adjust their lessons, and learners can
focus where they need to.
This focus on understanding the evolving
needs of learners and on innovating to
anticipate and meet those needs drives
everything we do.
Pearson plc Annual report and accounts 2017 CEO’s strategic overview
Our strategy and priorities
Our mission at Pearson is to help people
make progress in their lives through
learning. To deliver our purpose, we have
a vision to be the trusted gateway to
lifelong learning.
In order to deliver on this vision, there are
three areas of focus:
1. We will grow share through the digital
transformation of our courseware and
assessment businesses
2. We will invest to build our businesses
in structurally growing markets
more quickly
3. We will simplify our company to be more
efficient and to deliver a much better
experience to our customers.
We need to leverage our core strengths
in content and assessment powered by
services and technology to bring more
effective teaching and personalised
learning at scale.
Gain share through our digital
transformation
This will help us satisfy changing learner
consumption preferences and transition
our assessment businesses to deliver
fewer, smarter tests.
The single biggest opportunity to gain share
through our digital transformation is in US
higher education courseware, which makes
up 28% of product contribution. These
profits have declined over the last few
years due to the challenges we face in this
business, which will continue for the next
couple of years.
0909
More
effective
teaching and
personalised
learning at
scale
Our strategy
Our business
CONTENT
ASSESSMENT
Powered by services and technology
Our strategic priorities
1
2
3
Grow market share through digital transformation
Invest in structural growth markets
Become simpler and more efficient
Fostering complex skills: using machine
learning to improve and accelerate essay
grading and student feedback in US higher
education courseware
Personalised pathways: providing adaptive
practice and learning in maths and
the sciences in US higher education
courseware
Intelligent tutoring: partnering with IBM
Watson to embed tutoring dialogue into
our courseware products to help students
when they need it most
Natural Language Processing:
partnering with Microsoft Research Asia
to integrate AI capabilities into English
language learning curriculum in China.
See Our strategy, p13
However, we are making good progress in
shifting the business from ownership to ‘pay
for use’, which is a much more viable and
sustainable model. We are doing this by
ensuring the business is significantly more
digital, prioritising access to content over
ownership and transacting more product
directly to consumers and institutions. Last
January, we lowered the price on thousands
of eBook rentals, and we also launched a
new print rental programme. Our ‘Inclusive
Access’ model gives convenience and better
value to students and is a direct-to-
institution model that allows students to
have materials for their course on day one.
We are building a Global Learning Platform,
which is a single, cloud-based platform
that’s highly scalable and more reliable,
and allows us to innovate faster and support
a lifelong learning ecosystem for hundreds
of millions of learners.
We also know that getting to market more
quickly and improving our agility will help
us win. To that end, we are making a record
level of investment in our business each
year – over £700m annually – to drive and
scale innovation at Pearson. Some recent
examples include:
Section 1 Overview 10
CEO’s strategic overview
Invest in structural growth markets
Our second strategic priority is to invest
in structural market opportunities.
That means investing and growing share
in our fastest-growing businesses across
Pearson, such as:
Professional Certifications (Pearson VUE),
which helps more than 450 credential
owners across the globe develop, manage,
deliver and grow their assessment
programmes.
Virtual Schools (Connections Academy),
which provides high-quality online
education for c.78,000 K-12 students
in the US.
English language learning curriculum,
instruction and assessment, including
our fast-growing Pearson Test of English
Academic, the only fully digital test which
offers a convenient way for people to
demonstrate their English language
proficiency as a gateway for other
opportunities.
Online Program Management, which
helps colleges and universities take
their programmes online and improves
access for learners who cannot attend a
brick-and-mortar school.
Become a simpler and more
efficient company
Our third strategic priority is to become
a simpler and more efficient company,
phasing out dated technologies and
systems, eliminating duplication and
streamlining operations.
As many of you know, we removed more
than £650m in cost between 2013 to 2016.
In 2017, we announced our plans to deliver
another £300m in cost savings over a
three-year period by further simplifying
our technology, increasing the use of shared
service centres and standardising our
processes. This will reduce Pearson’s
employee base by roughly 3,000 roles but,
more importantly, it will improve the way we
operate as a company and respond to the
needs of a changing educational landscape.
Looking ahead
We are optimistic about what the future
holds and expect to make further progress
in 2018. At the same time, we know that we
will continue to see challenging headwinds
in US higher education courseware for the
next few years, and we’ve planned for that.
We will offset these headwinds by the
broader 70% of Pearson that is stabilising
or growing, by creating further cost
efficiencies, and by the strength of our cash
flow generation and our balance sheet.
It won’t be easy, and it will take time.
However, I am confident that we will deliver
because no other learning company can
match our scale, investment and expertise,
which includes the incredible, mission-
driven talent at Pearson that each day
helps people make progress in their lives
through learning.
Thank you for your ongoing support of
Pearson.
John Fallon
Chief Executive
Future
of skills
Employment
in 2030
Preparing people for the jobs of the future is core to Pearson’s mission
of helping people make progress in their lives through learning.
A student entering formal education today
will be making decisions about his or her career
by the year 2030.
That is why in 2017 Pearson partnered with
Nesta and the Oxford Martin School, on a
research project designed to advance the
conversation about the future of work past
fears of automation. Offering the most
comprehensive research on this topic to date,
it better predicts how major societal and
economic trends – and the interactions
between them – will affect the future of work,
and the skills needed to succeed in the future.
Along with technology, factors such as
globalisation and climate change are changing
our economy and our labour market. This
presents challenges, but also creates an
opportunity for real change.
Clearly we need to re-evaluate the skills
employers and individuals will need – but we
also need to update education systems, better
support teachers and create effective new tools
to support future teaching and learning. The
future will be marked by lifelong learning,
and we cannot afford to leave anyone behind.
This research provides an optimistic blueprint
for reforming education for the needs of this
rapidly changing future.
For Pearson, this is a significant opportunity.
Our hope is that employers, education systems
and policymakers will collaborate to redesign
jobs, retrain individuals and encourage greater
skills development in order to make a future
economy and world where more people can
flourish and make meaningful progress
throughout their lives.
Read more: www.futureskills.pearson.com
Pearson plc Annual report and accounts 2017 CEO’s strategic overview
Executive team
1111
John Fallon Chief Executive
Coram Williams Chief Financial Officer
Albert Hitchcock Chief Technology &
Operations Officer
Anna Vikström Persson Chief Human
Resources Officer
Bob Whelan President Pearson Assessments
Bjarne Tellmann General Counsel &
Chief Legal Officer
Giovanni Giovannelli President
Growth Markets
Jonathan Chocqueel-Mangan Chief
Strategy Officer
Kate James Chief Corporate Affairs &
Global Marketing Officer
Kevin Capitani President North America
Rod Bristow President UK & Core Markets
Tim Bozik President Global Product
Section 1 Overview 12
Market trends
Technology is changing expectations and
increasing possibilities in education.
101
10101
010101
10101
101
The future of work is about skills not jobs
Much of the conversation about the
future of work revolves around fears of
technology making workers obsolete.
However, when we solely talk about
how automation will change the nature
of work, we are missing the bigger
picture. Rather than jobs disappearing,
what is more likely is that the jobs
that exist in the future will be broadly
recognisable but the skills required to
do them will have shifted. To succeed in
the future, individuals, employers and
education systems need to respond
to the notion that while we are not able
to control the jobs that will be available,
we can prepare people with the skills
that will be most valuable for their
ongoing success.
Decline of the traditional textbook?
While many students across the world
still use traditional textbooks, the rapid
pace of technology means that learners
increasingly expect to consume
educational content in digital format.
This is driving rapid advances in
accessibility, affordability and a user
experience that is immersive, utilising
sophisticated technologies designed
to help educators increase engagement
and produce measurable outcomes
for learners.
Rise of personalised learning,
virtual and augmented reality
Through the move to digital education,
these rapid advances in technology are
also enabling individual, adaptive
learning to take place at scale. The rise
of Artificial Intelligence and virtual
reality in the classroom, training
centres and workplace brings exciting
new opportunities for learners, schools,
colleges and educators, which will
help increase lifelong learning,
student engagement and, ultimately,
improve learning outcomes.
1.
+
Pearson plc Annual report and accounts 2017 1313
Our strategy
Our business
We are transforming our business to meet the evolving needs of our customers.
We will do that by combining content and assessment powered by services and
technology, leading to more effective teaching and personalised learning at scale.
CONTENT
ASSESSMENT
Powered by services and technology
More
effective
teaching and
personalised
learning at
scale
Our strategic priorities
Our strategy is focused on the major growth opportunities – sectors and channels.
Our products and services are becoming more personalised, accessible and
affordable. And we are becoming leaner and more efficient.
1
2
3
Grow market share through digital transformation
Invest in structural growth markets
Become simpler and more efficient
Efficacy programme see p22
Sustainability plan see p24
Stakeholder value
Section 2 Our strategy in action 14
Pearson plc Annual report and accounts 2017
Our business model and strategy
Better learning. More personalised, flexible and engaging with better outcomes.
With anytime, anywhere technology. Giving people the freedom and flexibility
they crave, and control over when they learn.
1
Grow market share through digital transformation
Our performance
Our market
Our approach and strengths
US higher education courseware
2017 sales
Size of market*
Size of new materials market** Market position**
£1,146m
c.$7bn
$3.5bn
#1
Percentage of
Pearson’s total sales
25%
Underlying market pressures relating to lower
enrolment and print attrition to the secondary
market persist for the next couple of years, but as
we move to an access model and shift to digital we
expect pressures to ease and that we will become
a more predictable business with greater visibility
* Total student spend: (Pearson estimates)
** Source: MPI
We serve three interrelated customers –
students, faculty and administrators. We are
meeting the needs of each group by:
Moving from an ownership to access model
Selling directly to institutions and B2C channels
Accelerating digital formats
Investing in better learning experiences
and outcomes.
Core student assessment and qualifications
2017 sales
Size of market
Market position
£256m
c.£700m
#1
Market position in
General Qualifications
#2
Percentage of
Pearson’s total sales
6%
Demographics and demand for qualifications
will drive overall growth. After a period of significant
curriculum change, we expect greater stability
from 2018
We serve students, teachers, schools and
government through our qualifications business
where we are the awarding body and own the
IP (intellectual property). Our strengths include:
Pioneering digital assessment platforms
Strong brands built around quality at scale
Investment in IP and new products.
US student assessment
2017 sales
Size of market
Market position
Market share
£355m
$1.2bn
#1
+35%
We remain the largest vendor and we have
led the shift towards digital testing with our
best-in-class platform TestNav.
Percentage of
Pearson’s total sales
8%
Stability returning after a period of policy change in
recent years, we have continued to invest and are
well positioned to grow again:
Stable market outlook
Better contract win momentum
Increased partnering opportunities
Better margins in digital.
Our business model and strategy
Section 2 Our strategy in action
15
The future
of learning
What the future of learning looks like in US higher education
courseware – Revel and the Global Learning Platform
Our world is changing. As the nature
of work evolves, our solutions must
foster the knowledge and skills students
need to succeed both in school and in
their careers.
Pearson is meeting this challenge head
on. We are leveraging the latest
technology to provide real-time feedback
as students engage in open-ended
challenges that foster critical thinking
and effective communication.
Today, Revel supports engaging learning
experiences and activities, including
automated essay feedback and scoring.
The essay assignments ask students to
answer open-ended questions to assess
their understanding and communication
skills. For selected essay prompts,
Revel provides immediate feedback and
generates a score for the instructor and
students to review in the gradebook.
In the future, the product will offer
enhanced automated essay grading and
feedback services that leverage the latest
developments in Artificial Intelligence,
machine learning, and data science. In this
way, an AI-based student essay scoring
system will learn instructors’ grading and
feedback patterns and automatically
apply them to subsequent essays at scale.
The scoring system will measure both
what students say and how they say it,
assessing both comprehension and ability
to communicate a wider variety of
knowledge and skills. Each student will
receive personalised feedback on their
essay and scores for their instructor’s
review. Students can then choose to
revise their work based on the feedback
and resubmit it to their instructor.
The Global Learning Platform will support
faster innovation, the continued evolution
of Revel, and new learning experiences
across our digital products. That will allow
us to respond more quickly to students
and educators’ needs, and deliver a more
personalised approach to learning, on an
unprecedented worldwide scale.
“The Global Learning
Platform will support faster
innovation, the continued
evolution of Revel, and new
learning experiences across
our digital products.”
Our strategic priorities
US higher education courseware
Offering learners more affordable choices
and better outcomes will help us take
share through expanding our addressable
market. We will do this by:
The exciting pipeline of new products
The deployment of our new Global
Learning Platform to enable faster
innovation and scalability
Investing in services, such as analytics.
Core student assessment and
qualifications
Pioneering a shift to a more digital
future, building on innovative online
data analytics tool Results Plus,
making access to marked exam
scripts available online, free to all
students, teachers and schools
Investing in new products and services
to drive growth and market share gain.
US student assessment
Digitally administered tests now
account for well over 50% of the total
Digital lead is allowing us to develop
strong partnerships and reduce
regulatory risk
Leading the adoption of artificial
intelligence in assessment providing
real-time, personalised feedback,
supporting teachers to help learners
focus on what they need to achieve.
16
Pearson plc Annual report and accounts 2017
Our business model and strategy
2
Invest in structural growth markets
Our performance
Our market
Our approach and strengths
Virtual schools
2017 sales
Size of market
Market position
£274m
$1.5bn+ #2
Percentage of
Pearson’s total sales
6%
Total virtual school enrolment in the US is
about 330k
Virtual schools are permitted in 34 states,
covering about 80% of K-12 population,
including the ‘big three’ – CA, TX, FL.
Online Program Management and other HE services
2017 sales
Size of market
Market position
£253m
$1.2bn
#1
Percentage of
Pearson’s total sales
5%
Market growing at 10%
Pearson has 40 global partners and runs
over 250 programs
45 new programs signed and 14 new
programs launched in 2017
Course registration growth of 8%.
Professional certification
2017 sales
Size of market
Market position
£474m
$1.2bn
#1
Growing market driven by increasing
demand for professional credentials and
regulatory change.
A digital business where we offer complete
services for charter school partners, support
for district programmes and blended offerings.
Our strengths include:
Strong brand, good learning outcomes,
high parental satisfaction
Domain knowledge; end-to-end solution
Proven partner school model.
The digital promise of “anywhere, anytime
learning” opens up one of our biggest structural
growth markets:
Strong brand and track record
Domain knowledge; end-to-end solution;
and can leverage further strengths
in content and assessment
Proven enterprise/undergraduate model
Multi-programme and multi-discipline
approach.
We are the largest vendor in this market
and have built our brand through:
Security and reliability
Leading digital platforms
Global network of 20,000 testing centres.
Size of market
$5bn+
Market position in
English courseware
Market position in
English assessment
#2
#3
1.7bn English speakers globally, expected
to be 2bn by 2020
A growing opportunity – ELT courseware,
assessment, PTE-Academic and adult
school franchises.
Better customer experience/outcomes
Embedded in-course assessment
and analytics
Alignment to Global Scale of English
consistency and scale.
Percentage of
Pearson’s total sales
11%
English
2017 sales
£305m*
Percentage of
Pearson’s total sales
7%
* excluding WSE
Our business model and strategy
Section 2 Our strategy in action
17
The future
of learning
Virtual
schools
Connections
Academy
Our strategic priorities
Virtual schools
Expand the addressable market with
new partner schools
Scale up in existing states while
continuing to take market share.
Online Program Management and
other HE services
Strong pipeline of investment
for longer-term growth
Expansion of enterprise/
undergraduate models, global
growth and employer education.
Professional certification
Near-term growth from US MCAT
Long-term growth through leveraging
operational excellence and expertise.
English
Grow English courseware with new
product pipeline that leverages
strength in content and assessment
Grow PTE-Academic, our leading
digital test that gives faster, more
accurate results
Use insights from our direct delivery
businesses in China to power a wide
range of partners, deploying our
brands, content, assessment and
ability to scale online.
We are currently the number
two player in virtual schooling in
the US, but are growing more
rapidly and have a strong
reputation in the market.
We are aiming to build share by
deepening existing relationships,
accelerating the opening of new schools
and investing to drive greater efficacy
through our product offering.
Our model is proven, our results are
strong academically and we have a
powerful brand which is highly regarded
by parents and educators alike.
Learner
story
Alex
LeViness
Ohio Connections Academy (OCA)
virtual school graduate
In a letter to The Columbus Dispatch,
Alex wrote:
“I enrolled in the online charter school
before my junior year because I had a
very difficult experience in my previous
school. I had grown to hate everything
about school (especially my math
courses) and I didn’t care if I finished
high school. College wasn’t even a
consideration. Once I started at OCA,
I discovered I could learn at my own pace
and my teachers motivated me to dive
deeper into subjects that interested me.
Along the way, I started to love studying
and learning and I even found that I
actually liked science… I really don’t think
that I would be anywhere close to where
I am today if I hadn’t had the opportunity
to attend Ohio Connections Academy…
I wish to thank all my teachers and
counselors at OCA who worked with me
and inspired me. They really changed my
life at a time when I thought education
was pointless.”
Alex recently graduated from the
University of Alabama and plans to travel
to Germany to conduct research as part
of her Fulbright Scholarship to the
Max Planck Institute for Plasma Physics,
and then to begin her Ph.D. programme
in physics at Princeton University.
“I started to love studying
and learning and I even found
that I actually liked science…
I really don’t think that I would
be anywhere close to where
I am today if I hadn’t had the
opportunity to attend Ohio
Connections Academy…”
18
Pearson plc Annual report and accounts 2017
Our business model and strategy
3
Become simpler and more efficient
2013
Focus areas
c. £650m
of cost savings1
2016
2017
Focus areas
c. £300m
of cost savings2
2020
Centralising functions for a simpler and leaner organisation
Commence roll-out of single global Enterprise Resource
Planning software
Further simplification through shared services centres
Leaner organisations through reduction in headcount
Reduction in number of legacy applications, data centres
and office locations
Complete roll-out of global Enterprise Resource Planning
Recent activity
US K-12 courseware Held-For-Sale in 2018
Exited WSE, GEDU, Utel, smaller businesses in 2017
Infrastructure simplification
Headcount reduction
Applications
Data centres
Offices
3,024
93
>200
Current
headcount
Disposals3
Net exits
2020
headcount
32,500
c.5,000
3,000
c.24,500
<100
c.300
6
2014
2020E+
2014
2020E+
2014
2020E+
Our competitive advantage
Record level of investment
Pearson’s strong balance sheet underpins
the continuing investment in our
digital transformation and structural
growth markets. We are investing over
£700m a year to become the winners
in digital education.
Global player
We have a truly global scale and focus.
We operate in over 70 markets worldwide.
Our products and services benefit from
being centrally developed, globally
deployed with local expertise and
capabilities ensuring success.
Move to digital
Pearson’s products and services are
becoming more digital and personalised,
offering more affordable choices for
students with better learning outcomes.
This is building a more sustainable and
profitable business with a more visible
and predictable revenue profile, based
around access not ownership models.
Common platforms
Our products and services are increasingly
being delivered across common platforms,
enabling a leaner Pearson, driving
significant revenue and cost synergies.
Market leader
Our competitive position is strong and
we occupy either number one or number
two positions in all our major markets.
We are focused on gaining share through
our digital transformation and building
sustainable, leading positions in our
structural growth markets.
1 Calculated at year end 2016 exchange rates.
2 Phased plan first presented on August 4 2017, based on December 2016 FX rates. Note: A significant part of these costs and savings are in US Dollar and other
non-Sterling currencies and so subject to FX movements over the implementation timeframe.
3 Not including US K-12 courseware.
Our business model and strategy
Section 2 Our strategy in action
19
Helping create
the future of learning
An interview with Cedrick Collomb,
Senior Vice President for Global Product Technology
What excites you most about the work
you do at Pearson?
CC
What excites me the most about working
for Pearson is how we are using technology
to revolutionise and drastically transform
education. Our customers and learners are
at the heart of everything that we do, and
we are bringing them the best – and most
advanced – technologies so that they have
engaging, highly interactive experiences
with our products. Leveraging the latest
technologies
such as artificial intelligence, machine
learning, augmented reality, virtual
reality, advanced real-time rendering,
simulation, to name a few, will enable
this experience, and ultimately improve
their learning outcomes.
What is your main goal for 2018?
CC
This year, we are shaping the future of
education by bringing our Global Learning
Platform technology to life through
next-generation software. The platform will
enable us to deliver unparalleled learning
experiences to our customers and learners
around the world.
How are you helping Pearson in its
transition to digital?
CC
Pearson’s digital transformation isn’t just
taking our legacy products and making
them digital, it is much more than that.
Every aspect of the company is undergoing
transformation; how we operate, our
processes, how our teams work, how we
build and deliver, it’s everything. In building
the Global Learning Platform, our teams
have been laser focused on using the best
data to learn as much as we can about our
customers’ behaviour and what we as a
company need to do in order to give them
world-class learning experiences.
What is your biggest win at Pearson
to date?
CC
Personally, I have enjoyed sharing the
developments of the Global Learning
Platform with our employees, especially
the first-look demo which brought the idea
of the Global Learning Platform to
life and showed the promise of profound
educational changes. Transforming
education as we know it today is no easy
feat, and I am humbled to be the leader
of an exceptionally high-performing team,
who collectively have delivered – and
continue to deliver – so that we deliver on
Pearson’s mission. The team are not only
building next-generation products and
software, but are also serving our current
customer base by ensuring all of the
products across our portfolio are stable,
reliable and deliver a quality experience for
our customers.
Global Learning Platform
in one minute
Over time, all of
Pearson’s products will be
brought onto a single platform
which will allow us to deliver:
Personalised learning
experiences across
our portfolio ...
At a global
scale ...
Using machine
learning and
Artificial Intelligence
innovation
GLP products will:
be highly scalable and more
reliable, speeding up innovation
support customer and third
party integration
be a foundation for a lifelong
learning ecosystem
“Pearson’s digital
transformation isn’t
just taking our legacy
products and making
them digital... every
aspect of the company
is undergoing
transformation.”
CC
Cedrick Collomb
Senior Vice President for Global Product Technology
20
Pearson plc Annual report and accounts 2017
Our business model and strategy
Value created for our stakeholders
Our strategy is driven by the belief that education is evolving to meet the
demands of today’s learners, and we are a driving force behind that change.
This will enable us to create long-term, sustainable value for our shareholders,
customers, partners and learners across the world.
Educators
want more engaging ways to connect
with their students and better and more
timely feedback on student progress
to help set them up for success.
Learners
Want control over their education and are
increasingly questioning the value of an education,
and the traditional trappings of institutions –
whether it is courseware, outdated teaching
methods or brick-and-mortar institutions.
Industry
is looking for the educational
system to help drive growth
and innovation by graduating
students from high school
prepared for college or a career,
and for higher education to
become more accessible and
affordable. A strong education
system is crucial to preparing
people for prosperous
employment and successful
lifelong learning.
Govermants & other education agenda setters
learners
Suppliers
Addressing the
needs of today
Customers
Government
Shareholders and investors
Govermants & other education agenda setters
on a local, state, federal and national level are
trying to address inequities in the growing skills gap,
by providing education systems attuned to the
needs of the workforce and designed to deliver the
education and training individuals need to prosper
in today’s labour market. Governments and
regulators also set policy to ensure that both
businesses and consumers are provided with the
most effective legislative frameworks that help
drive sustainable growth.
Teachers & educators
Govermants & other education agenda setters
Administrators
in a cost-conscious environment, aim to
deliver innovative and high-quality experiences
that set students on a course to become
prosperous lifelong learners.
Value for our customers
No one can predict with certainty what the
future of learning will look like, but we know
that technology has enabled autonomy and
customisation for the individual. Education,
without a doubt, has to follow suit. Not all
students, educators and institutions are
the same; they each have to choose what is
most likely to make them successful.
Building skills around lifelong learning,
agility and innovation will give the next
generation of learners the confidence to
be successful, no matter what they do.
We offer traditional tools and methods and
continually innovate so that learners are
given the power to choose what, how,
when and where they learn.
Our business model and strategy
Section 2 Our strategy in action
21
For our partners and suppliers:
Building successful business
partnerships across the education
ecosystem to build joint success
and growth.
For our customers:
Building a truly customer-centric
operating model based on effective
use of data to drive strategic insights.
Teachers & educators
Govermants & other education agenda setters
Channel partners:
Help ensure learners have the
course materials they need to
succeed in their studies.
For governments:
Building strong political and
institutional relationships to
support our stakeholders.
We are committed to aligning
our agendas – we provide counsel
and share our knowledge on the
future trends in global education;
we create opportunities for
private-public partnerships.
Media
Delivering
value
Teachers & educators
Suppliers
For our learners:
Developing an innovative
technology platform to support
and enable lifelong learning,
focusing on achieving better
learning outcomes.
Govermants & other education agenda setters
learners
Govermants & other education agenda setters
Teachers & educators
Customers
For our authors:
Share their passion for teaching
and research to bring new skills and
concepts to life for learners.
Employees
International, non-govermental
& non-profit organisations
For our employees:
Creating a healthier company, with clear expectations,
sufficient resources, supportive relationships and
clear accountability to deliver a very ambitious
programme of change and transformation.
Our approach to value creation
We are developing new organisational
capabilities to create value for all our
stakeholders while keeping our learners at
the heart of everything we do. Our culture
will enable sustained success, capturing
external ideas, fostering top-down
innovation and driving business
partnerships and collaboration.
Value for our shareholders:
This will ultimately help us
achieve long-term sustainable
growth for all our company
shareholders.
Shareholders and investors
Govermants & other education agenda setters
Please see the stakeholder engagement section of the Governance report
for more on how we build strong relationships with our diverse range of
stakeholders on p88–89
22
Efficacy
We made a commitment in 2013 to report annually on the impact of use of our products
on outcomes, and to externally audit the reports by 2018. From 2014–2016, we shared
preliminary efficacy findings; this year we are proud to publish our first set of audited
efficacy reports, certified by PricewaterhouseCoopers. Collectively these reports are
representative of products impacting the lives of 18m learners. We are proud to be the
only learning company committed to efficacy with such rigour and at such scale.
What we did and what we have learned
When we launched our commitment to
report on the efficacy of our products,
we aspired to have impact in three areas:
evidencing that our in-market products
improve the outcomes that matter most
to customers and learners;
supporting evidence-based product
innovation; and
galvanising the education sector and all
learning companies to measure their impact
by the outcomes they deliver for learners.
Over the past four years, working across
all of Pearson’s major digital product
portfolios, we embedded efficacy and
research across product development in
both early-stage product strategy, design
and development, and later stage product
improvement. For the majority of our
in-market digital supplemental products,
we have evidence that there are statistically
significant relationships between the use of
our products and student achievement.
Learning
We have evidence that there are statistically
significant relationships between the use
of many of our digital products and course
achievement outcomes. However, the
efficacy of a digital product cannot be
separated from the way that product is
implemented, or the context in which it is
used. Who is using the product – what their
prior knowledge and experience is,
implementation – the way a product is
integrated into teaching and learning –
and product alignment – the way that the
features of a product are designed, aligned
and used to support the achievement of
learning goals – all have a significant impact
on the outcomes that can be achieved.
The more we can engage with our
customers to better understand the
outcomes that matter most to them;
select products that have features that
can support the delivery of those outcomes;
and share best practices about how learning
technologies can be integrated into their
teaching, the more likely they will be to
achieve their desired outcomes.
In order to understand where, when, how,
why and for whom our products are effective,
we focus on defining and collecting evidence
of impact on the outcomes that matter most
to our customers and learners, including
access and engagement, competency and
skill, achievement and progression.
Product innovation
Our efficacy research to date has focused
on measuring the impact of the use of
digital supplemental products on course
achievement goals. We have used what we
have learned about our in-market products
to make incremental improvements to
existing products as well as to support
new product innovation.
In parallel, we are further driving more
evidence based approaches to product
development by applying evidence about
what works from the learning and data
sciences to the design, development and
ongoing improvement of products. We are
focusing on helping learners develop the
knowledge and the skills they need to be
successful in the future.
As we progress with the development of
fully digital learning experiences, we expect
that the combination of these elements –
paired with implementation support for
our customers – will enable an even greater
impact on learning.
Education sector
In 2013, Pearson was the first learning
company to make a public commitment
to reporting on the impact of use of our
products on outcomes. Since then, both our
traditional and non-traditional competitors
have announced similar efforts. Today, we
remain the only learning company in the
world that is subjecting its efficacy
statements to external audit and peer review.
Put simply, we are the only company that has
made a public, evidence-based commitment
to helping more learners learn more.
https://www.pearson.com/corporate/
efficacy-and-research.html
Connections
In 2017 we took a critical lens to better
understand the efficacy of Connections
Academy. This work was intended to help us
evaluate how we are educating young people
through our virtual schools. Through three
different methodological approaches,
we sought to better understand the students
we serve, as well as their performance at
Connections Academy relative to peers in brick
and mortar schools with similar populations.
Our research confirms that our virtual schools
serve a diverse and unique student body with
some of the highest mobility rates in the
United States. When we adjust for this student
mobility and control for prior student
achievement, our studies found that the
academic performance of Connections
students is comparable to that of students in
brick and mortar schools.
We look forward to sharing this research with
the virtual schools sector to help inform the
discourse around virtual schools, so that
students and families who may benefit from
such learning environments have the
opportunity to do so.
Pearson plc Annual report and accounts 2017 Efficacy
Helping create
the future of learning
An interview with Kate Edwards,
Senior Vice President Efficacy & Research
2323
“In 2018, we will be the first learning
company in the world to undertake,
and release, non-financial reporting
on the impact of use of our products
on outcomes for learners.”
KE
Kate Edwards
Senior Vice President
Efficacy & Research
SUSTAINABILITY OVERMATTER
EMPLOYEE INTERVIEW (SENIOR MEMBER OF THE GLP TEAM)
What excites you most about the work
you do at Pearson?
KE
Working for a business that seeks to
combine commercial growth with
impact on learning. For me this is all
about understanding the greatest
learning-related challenges and needs
our customers and learners have now,
and will have in the future, and then
applying outcomes-focused, evidence-
based design to our solutions. This is
what keeps me up at night (in a good way!)
and what gets me up in the morning.
What are your main goals for 2018?
KE
At the company level, our efficacy &
research goal is to continue to improve
our impact on learning outcomes.
In 2018, we will be doing this by:
1. Developing evidence-based products,
applying efficacy improvement
activities and undertaking
efficacy reporting
2. Using efficacy & research more
frequently to help our colleagues
have learner-led conversations with
our customers
3. Developing the efficacy & research
skills and expertise of our people
4. Actively participating in external
conversations on efficacy & research
In particular, we want to apply this work
to informing the design of products that
develop the skills needed for both work
and life in the future.
How are you helping Pearson in its
transition to digital?
KE
I’m passionate about the role we need
to play in exploring and explaining three
things in digital teaching and learning:
the role of the educator, the role of the
student and the role of the technology.
What is the most important milestone
Pearson has reached from an efficacy &
research perspective to date?
KE
The most important milestone, to date,
is yet to come. We will reach it at the end
of March 2018 when we release our 2018
Efficacy Reports. We will be the first
learning company in the world to
undertake, and release, non-financial
reporting on the impact of use of our
products on outcomes for learners.
External reporting and auditing for
the first time is an important milestone
for Pearson and efficacy. However,
the ongoing commitment to external
reporting is a means to an end: the
primary goal being for Pearson to use
evidence about how to improve learning
to develop and sell best-in-class products
and services.
Section 2 Our strategy in action 24
Sustainability
Sustainability is integral to our company strategy. This is no accident
as commercial success cannot be separated from ethical and
sustainable business practice. It is fundamental to achieving our
mission to help people progress in their lives through learning.
Two years ago, Pearson adopted its 2020
sustainability plan. It provides a framework
for the business to focus on the most
important ways we can contribute to solving
some of the world’s greatest social and
environmental challenges, while helping
to grow and strengthen our business at the
same time. By setting a vision to integrate
sustainability into every aspect of the
company, the plan continues to guide us
as we deliver on our business strategy.
The plan was designed to reflect the United
Nations Sustainable Development Goals
(SDGs), which together point towards a
more equitable, ethical and environmentally
sustainable world. Of the 17 SDGs, we have
prioritised Goal 4 on quality education,
Goal 8 on decent work and economic
growth and Goal 10 on reducing inequalities.
Quality education is both one of the goals
but also a factor underpinning success
across all the goals. As such, a stronger
and more sustainable Pearson in turn will
allow us to help more people progress.
Sustainability Plan
Our material issues
Our 2020 Sustainability Plan is designed to
create value for our learners, shareholders
and society. It is built around three pillars:
1. Be a trusted partner
2. Reach more learners
3. Shape the future of learning.
More information on our performance
will be available later this year when we
publish our 2017 Sustainability Report.
In this section, we:
Set out the key material issues for the
company and how these relate to our
risk management process
Outline how sustainability is governed
at Pearson
Report on highlights from each of the
three pillars.
Our 2020 Sustainability Plan is informed by
our material issues – those most relevant to
the sustainability of the business. They were
identified following consultation with senior
leaders and employees, external experts
and stakeholders, and a review and
benchmark of current policies and priorities.
We then further prioritised nine key issues.
These issues represent both opportunities
for growth as well as risks to revenue. We
continue to map these sustainability issues
against our enterprise risk management
process. As part of our risk management
process, company-wide risks are tracked
across geographies and functions.
See Our material issues matrix p26
Sustainability governance
The Reputation & Responsibility Committee,
a formal committee of the Board, provides
ongoing oversight, scrutiny and challenge on
both matters relating to our sustainability
strategy and our corporate reputation.
Learn more on p86.
The Pearson Executive drives
implementation of business strategy,
including responding to our sustainability
issues. The Responsible Business
Leadership Council oversees the
development of the strategy on behalf
of the Board. It is chaired by our Chief
Corporate Affairs & Global Marketing
Officer and comprises senior leaders
from across the business.
Skills
for jobs
Pearson plc Annual report and accounts 2017 2525
Sustainability
Sustainability plan
Building a sustainable business is critical to achieving our mission and ensuring our long-term competitiveness. Our customers,
employees, partners and learners expect us to uphold the highest business standards, to continuously enhance the quality of
our products and to contribute to their communities.
To help achieve this, we have three sustainability pillars:
1
Be a trusted
partner
2
Reach more
learners
3
Shape the future
of education
Deliver high-quality products and services
Respect human rights
Develop our people and communities
Protect our natural environment
Build a sustainable supply chain
Ensure strong governance
Our plan aligns with the United Nations
SDGs creating better outcomes for
customers and society, and stronger
financial returns for shareholders.
1
Be a trusted
partner
Pearson has a set of commitments that
together define responsible business for us.
These are to:
Ensure that our products and services are
inclusive, appropriate in content to the age,
location and ability of the learner and are
easy and safe to use and access
Respect and progress our employees and
provide opportunities for them to get
involved in their local communities
Respect human rights, including protecting
data entrusted to us by learners and our
customers. More information on our
approach to data privacy and security
can be found in the Principal Risks
section (p58)
Extend our commitments on human rights
and environmental responsibility to include
our suppliers, franchisees and other
business partners
Deliver against our targets to make more
efficient use of resources and on our
response to climate change.
Improve access to and affordability of
products and services
Leverage technology for equitable
learning outcomes
Collaborate to reach underserved learners
Build skills that foster employability and
inclusive economic growth
Promote education for sustainable
development
Contribute to global research, dialogue
and collective action on quality education
4 – Quality
education
8 – Decent work and
economic growth
10 – Reduced
inequalities
Deliver high-quality products and services
Learners trust and depend on Pearson to
provide course materials that are relevant,
appropriate, inclusive, safe and work well.
Our primary responsibility to learners is
through the products and services we sell
and how we extend our reach. Our section
on Efficacy (p22) describes the progress
we have made in ensuring our products
have their intended learning outcomes.
A focus area last year was the development
and release of a new global editorial policy
designed to ensure we consistently publish
high-quality content and prevent errors
or offensive content. The policy is global
in scope and builds upon both existing
editorial principles in operation today
across our business as well as a review
of external guidelines.
This work was happening at the same time
as the discovery of inappropriate material in
our Concepts in Nursing series of textbooks.
We took immediate action – issuing a public
apology, removing the offensive material
and offering a free replacement copy to
students who requested a reprinted copy.
We now have more work to do, and work
will begin on training on the new policy early
in 2018. This is a first step ahead of policy
due diligence. We are also starting work in
partnership with Stonewall on developing
guidelines for our UK Schools business
on how we can make our products more
LGBT inclusive.
Respect and progress our employees
Our commitments to our people as a
responsible employer are to:
Inform, support and equip colleagues
to work collaboratively
Encourage and reward high performance,
nurturing talent and creating a culture
where all are able to realise their
individual potential
Provide a safe and healthy work
environment for our employees and
the learners we serve. See the Principal
Risks section on p54 for more detail on
how we manage this issue
Help our employees understand how we
are doing as a company, including how
world and sector trends might affect them.
Section 2 Our strategy in action 26
Sustainability
Our material issues
Materiality matrix
The following matrix shows how we
mapped our 19 issues, and highlights
the nine that we have deemed to be
the most material for the purpose of
our sustainability strategy.
We will evaluate, refine and talk with
stakeholders about our material issues
on an ongoing basis, in the spirit of
continuous iteration and improvement.
Key to material issues
Nine material issues
in our sustainability plan and reporting
Corporate functions
Societal issues
Education industry
Environmental issues
Degree of control
High
Medium
Low
H
G
H
I
n
r
e
c
n
o
c
r
e
d
o
h
e
k
a
t
S
l
W
O
L
LOW
Economic
empowerment
Competitiveness
of digital products
Learner
expectations
Academic quality
Data privacy
and security
Progression
Summative testing
Accessibility
21st century skills
Literacy
Education for
sustainable development
Girls’ and women’s
empowerment
and equality
Lobbying and public
policy
Security, health
and safety
Affordability
Corporate
governance
GHG emissions and
climate change
Digital infrastructure
Disruptive
distribution models
Business impact
HIGH
Alignment of material issues to principal and other Pearson risks
Sustainability report 2016
Material issues
Annual report 2017
Principal risk
Company-wide
risk
Business area risk monitoring
Disruptive distribution models
Competitiveness of digital products
Affordability
Learner expectations
Academic quality
Summative testing
Lobbying and public policy
Data privacy and security
Digital infrastructure
Security, health and safety
Accessibility*
GHG emissions and climate change
* Emerging risk
2
2
2
2
2
5
4
12
8
6 7
–
–
YES
Global Product
Core
Growth
North America
Environmental, Social & Governance
YES
YES
YES
YES
YES
–
–
Assessment
Core
Core
Growth
North America
Assessment
Global Product
North America
Legal
Core
Growth
Assessment
Tech & Ops
Global Product
North America
Tech & Ops
Core
Growth
HR
Assessment
Tech & Ops
Environmental,
Social &
Governance
Assessment
Legal
Environmental, Social & Governance
Environmental,
Social &
Governance
See Principal risks and
uncertainties, p50
Pearson plc Annual report and accounts 2017
2727
Culture, mission and values
Our values – to be brave, imaginative,
decent and accountable – continue to
guide us in implementing our strategy.
They are embedded into our performance
assessment, which means all employees
are evaluated on and rewarded for acting
consistently with them.
The Pearson Code of Conduct underpins our
values by setting out the ethical, social and
environmental standards of behaviour we
expect from employees, and we have a
companion code for business partners.
The Code was refreshed and last circulated
in September 2017. We make sure everyone
in Pearson is aware of the Code and
confirms they understand and will comply
with it. Agreeing to the Code is a mandatory
part of the on-boarding process for all new
Pearson employees. We have achieved our
target of 100% of employees having signed
up to the Code.
Many of the areas covered by the Code
are supported by detailed policies and
procedures. For example, anti-bribery &
corruption, health & safety & safeguarding.
Learn more about these issues in our
section on Principal Risks (p54–55).
Sustainability
Pearson continues to manage considerable
amounts of change both within the business
and outside it. We have introduced new
business models as well as continued our
investment programme in new platforms
and products to help us simplify and
standardise how we work.
During 2017, we announced additional
plans to achieve annualised cost savings
of £300m by 2020, including a target to
reduce the total Pearson team by 3,000.
We continue to provide comprehensive
information on the trends behind these
plans, regular communication with extra
detail on the process for affected teams
and consultation as well as support for
colleagues leaving the company.
Employee engagement survey
Employee engagement remains a consistent priority as we navigate changes to our business. Last year, each member of the Pearson Executive
Management team committed to respond to the key themes highlighted in our 2016 Employee Engagement Survey. Each Executive developed a
plan with progress monitored quarterly. Highlights from those plans:
Aspect
Issue
Response
Career Development
and Mentoring
More information for employees
on how to progress their careers
at Pearson
Over 1,500 employees participated in Career Development Workshops across
111 sessions in 27 locations in 23 countries. Over 100 mentoring relationships
have been established.
Company Strategy
To do more to communicate on our
products and reporting on progress
We introduced Discovery Days – forums to engage employees on our strategy,
products and brand and provide workshops to gain new skills. 24 Discovery Days
were held in 2017 in 14 countries. Since 2016, 24% of Pearson employees have
attended a Discovery Day.
Learning and
Development
More opportunity to develop
functional and management skills
Academies were launched on Technology, Product, Sales and Finance to strengthen
expertise and career development.
£
We introduced Workforce 2020 capabilities defining who we are, how we act and
what we do. These provide guidance on the capabilities Pearson expects.
We launched our Leadership Academy, delivering what leadership looks like at
all levels in the organisation. The Academy offers a range of programmes, resources
and support. It includes a pilot of a new Manager Fundamentals training
programme to help prepare new managers for success.
All of the above are available through Pearson U and open to all employees.
In 2017, 25,725 employees took at least one course in Pearson U.
During 2017, we followed up by asking 1,700 Pearson leaders to take an organisational health survey to help us understand areas where we could
further boost performance. Key findings include the following:
Aspect:
Action taken:
Being clear on our strategy
Set our three strategic priorities, published a company-wide performance dashboard, appointed a new
Chief Strategy Officer and been clear on our priorities as part of our brand focus
Accountability and ownership
Have been more explicit on expectations of individuals to collaborate and deliver against the strategy
Innovation and partnership
Invested in new platforms and partnerships
Insight
Created a global research and insight function
Operational excellence
Accelerated the investment in centres of excellence, driving efficiency through investment in technology
Diversity and inclusion
Established a new committee and global team to help us better reflect the communities we serve
Section 2 Our strategy in action 28
Sustainability
Working with the 30% Club on women’s mentorship
and empowerment
the power of mentoring; and for supporting
mentors and mentees to make time for
meetings and fully embrace the value of
mentoring. In the same award ceremony,
Pearson employee Carol Hill was awarded
Committed Mentee of the Year Runner Up.
“Being a mentee in the 30% Club scheme
has been an amazing experience for me.
I was paired with a mentor from the banking
industry who acted as an unbiased sounding
board for me as I tried to work my way
through my career goals.”
Carol Hill, Director of Global Product Lifecycle
Implementation at Pearson
Highlights of our activity include:
Expansion of the new global D&I team
and appointment of a senior leadership
role to drive the agenda.
Establishment of a new Executive level
committee led by the General Counsel
and Chief Legal Officer to provide
strategic oversight.
Around 2,400 employees get involved
in our eight global employee resource
networks. The networks are for women,
parents, veterans, Latinos, the LGBT
community, generational differences,
people with disabilities and employees
of black and/or African ancestry.
Reached more than 6m people through
initiatives such as our #DiscussDiversity
Twitter chats
Over 2,400 people completed D&I related
training courses
For a fifth year, achieved a perfect score
of 100% in the 2017 Corporate Equality
Index run by LGBT advocacy group
the Human Rights Campaign.
To support Pearson’s commitment
to progressing women within
our organisation and supporting
women in leadership, we joined
forces with the 30% Club on a
mentorship programme in the UK.
The 30% Club is dedicated to bringing
the percentage of women on Boards
and in executive management up to 30%.
Expanding mentorship for women
is a key part of reaching that goal.
Our Women in Learning and Leadership
(WILL) group in the UK worked with the
30% Club to facilitate a cross-company
mentorship for talented mid-career
Pearson women via a scheme that
began four years ago.
At a 2017 award ceremony, the 30% Club
named Pearson ‘Dynamic Mentoring
Organisation of the Year’ for our work
around expanding diversity and inclusion;
for developing events and services to harness
We operate a free, independent, confidential
telephone helpline and website available
to anyone who wants to raise a concern.
We have a clear non-retaliation policy in
place to encourage people to share the
issues they have and we ask about how
comfortable people are in raising concerns
in our employee engagement survey.
In 2017, we had 87 concerns (107 in 2016),
which were investigated and, where
possible, the outcome shared with the
whistleblower. As in previous years, the
majority of the concerns related to HR
practices. Material concerns are reported
to the Pearson Audit Committee.
Diversity, equality and inclusion
At Pearson, we value the power of our
differences. Our global Diversity & Inclusion
(D&I) programme aims to build a better,
stronger company for our employees,
our learners and the communities we serve.
Our commitment is to aspire to maintain
a work environment that’s inclusive as
well as diverse, in which our people can be
themselves. And we are building a culture
of innovation and learning where every
idea and perspective is valued, so that our
products reflect the people we serve –
our teachers and learners.
Respect human rights
In 2017, Pearson undertook a review of
its approach to human rights. Drawing on
the expertise of BSR (Business for Social
Responsibility), we considered how our
operations, products and services, as well
as the activities of our business partners,
may have a positive or negative impact.
The work considered the rights of learners,
parents, employees and contractors,
teachers and educators, customers, supply
chain workers and the broader community.
Pearson also looked at how its policies seek
to respect human rights standards defined
by internationally agreed principles:
the International Bill of Human Rights;
the International Labour Organization
Declaration on Fundamental Principles
and Rights at Work; and the United
Nations Guiding Principles on Business
and Human Rights.
As a result of the human rights review,
we have identified priority human rights
risks and opportunities and have developed
a roadmap to address them. For more, see
the section on compliance in Principal Risks
on p59.
Our Business Partner Code of Conduct sets
out our requirements of third parties and, as
part of our global approach to procurement,
we include specific obligations relating to
human rights compliance in new and
renewed supplier agreements. We audit
suppliers in high-risk categories in our
book printing supply chain.
A concern across the value chain is for
ensuring our activities are free from slavery,
servitude, forced or compulsory labour
and human trafficking. A statement on the
steps taken by Pearson to combat modern
slavery was approved by the Board and
can be viewed on the Pearson website
(www.pearson.com).
As a result of our review on human rights,
we have identified relevant areas of risk
and opportunity for Pearson. These include
providing a safe and inclusive environment
for learners, employees and contractors
as well as analysing how technology and
partnerships impact on rights. We do not
currently have an overarching human rights
policy, although we intend to introduce one
in 2018. We do have policies in place for key
elements of human rights including editorial
content, health & safety, safeguarding and
data privacy.
Pearson plc Annual report and accounts 2017 Sustainability
Protect our natural environment
Climate change remains a focus for us
as one of the most serious issues facing
the planet and GHG emissions is one of
our material sustainability issues.
Minimising our environmental impact is
not just the right thing to do; it helps
deliver cost savings.
The environmental impact of our directly
controlled operations – our buildings and
business travel – is low. Our single most
significant impact area is energy use and
this accounts for less than 1% of our supply
chain cost. As such, environmental risk has
been considered and does not feature
as a Principal Risk for the company.
Nevertheless, good environmental
stewardship by companies is expected by
stakeholders. This is why GHG emissions
was identified as a material sustainability
issue for the company.
We maintained our climate neutral status
for our directly controlled operations –
a commitment first introduced in 2009.
Our strategy is for:
Reduction: A 50% reduction in operational
emissions as at the end of 2017 compared
with a 2009 base year.
2929
Renewables: We maintained our record
of purchasing 100% of the electricity we
use from renewable sources and generate
our own renewable electricity at five of
our sites.
Offset: Since 2009, we have now protected
over 1,600 hectares of forest. One of our
offset providers – the Woodland Trust –
has also again provided offsets equivalent
to those generated by the printing of
this report.
Pearson has had an environment policy
in place since 1992. We remain certified
against the Carbon Trust Standard for our
global operations and were the second
ever organisation to secure the standard
which recognises leadership in measuring,
managing and reducing year-on-year carbon
emissions. We also continue to be certified
against ISO 14001, the environmental
management standard in the UK and
Australia. This standard incorporates
both internal and external audit.
The Task Force on Climate-related
Financial Disclosures has published
recommendations for voluntary, consistent
climate-related financial risk disclosures for
use by companies. The biggest impact on
the environment for Pearson is in its supply
chain through the purchase of paper and
the associated carbon emissions. During
2018, we will consider the extent to which
Pearson should amend its disclosures in
light of the taskforce recommendations.
On paper, our focus is on sustainability of
supply, being efficient in how we use paper
and on promoting responsible forest
management. We:
Have a policy on environmental sourcing
of paper
Discuss our approach with suppliers,
customers, environmental groups
and investors
Are active members of industry
bodies dedicated to responsible
forest management
Hold Forest Stewardship Council (FSC)
chain of custody in the UK as does LSC
Communication, our outsource partner
in North America, allowing books in those
markets to carry the FSC label.
We will publish full details of our
environmental performance including other
materially important emissions such as
water use and embedded carbon dioxide
in purchased raw materials in our 2017
Environment Report.
Key performance indicators
Gender diversity
Key performance indicators
Global Greenhouse Gas emissions data
Women in Pearson %
Pearson works hard to create an environment
where women have the opportunity to build
careers in all functions and at all management
levels of the organisation.
At Board level, 30% of our members were female
as at the end of 2017. As a founder member of
the 30% Club, we remain committed to the target
of a minimum of 30% representation of women
on the Board.
Metric tonnes of CO2e
Emissions from
Combustion of fuel and operation of facilities
(GHG Protocol Scope 1)
Electricity (GHG Protocol Scope 2)
Emissions relating to air and rail travel, electricity
transmission, waste and water (GHG Protocol scope 3)
Total
2015
2016
2017
Intensity ratios
Board of Directors
33% 30% 30%
Scope 1 and 2/sales revenue
Senior leadership*
34% 32% 30%
Scope 1 and 2/FTE
2015
2016
2017
22,343
88,831
19,093
77,579
15,691
61,047
35,644
29,714
27,646
146,368
126,386
104,384
2015
24.8
2.7
2016
21.2
2.95
2017
17
2.53
All employees
59% 60% 61%
* Two reporting lines from the Chief Executive.
Over the last two years, we have seen a fall in the
proportion of women at senior leadership level.
To help reverse this, we will increase our focus
and investment in diversity for 2018. Our CEO has
recently become a signatory to the latest 30% Club
challenge to reach and maintain a minimum of 30%
representation of women in senior leadership.
In the UK, the government has introduced new
regulations designed to help address the gender
pay gap. Pearson has provided information on
its gender pay gap in the UK and has made a
commitment to extend our reporting globally
by 2020.
Methodology: We have reported on all of the emission sources required under the Companies Act 2006
(Strategic Report and Directors’ Reports) Regulations 2013. These sources fall within our consolidated
financial statement. We do not have responsibility for any emission sources that are not included in our
consolidated statement. The method we have used to calculate GHG emissions is the GHG Protocol Corporate
Accounting and Reporting Standard (revised edition), using the location-based scope 2 calculation method,
together with the latest emission factors from recognised public sources, including, but not limited to,
the UK Department for Business Energy & Industrial Strategy, the International Energy Agency, the US Energy
Information Administration, the US Environmental Protection Agency and the Intergovernmental Panel on
Climate Change. The data in the table above has been independently verified by Corporate Citizenship.
Section 2 Our strategy in action 30
Sustainability
2
Reach more
learners
Reaching more learners is integral to both
our business goals and our sustainability
strategy. Through growing our business,
we can both achieve our financial targets
and help more people to progress through
learning. The commitments we make
are designed to contribute to a quality
education for all, decent jobs and equality:
Expand access to education and make
learning more affordable for people
everywhere, including the most
disadvantaged groups
Harness the power of new technologies
to bring education and opportunities
to more people in more places
Work together with charities, teachers,
education experts, governments and others
to tackle some of the biggest education
challenges related to gender inequality,
conflicts and emergencies, and illiteracy.
We are taking steps to tackle some of the
barriers underserved learners face, such
as geographic, cultural or socioeconomic
obstacles, or personal constraints, such as
the need to balance education with work
and family responsibilities.
For example, products like Revel (our
next-generation US higher education
courseware product) help students learn in
smaller, bite-sized chunks and shorter time
periods, so they are able to carve out a few
minutes from their busy days or make use
of transition times like commuting when
they would not otherwise be able to study.
Personalised, adaptive solutions in products
like MyLab can identify students who are
behind and help them stay on track.
Our inclusive access subscription model
helps students to access their materials
at a lower price.
Ability and access
Accessibility is one of our nine material
sustainability issues as tailoring the learning
experience to the ability level of the learner
is a key factor in reaching more learners.
Standards on accessibility for people with
disabilities are evolving. Focusing on higher
education, Pearson has adopted a road
map to invest in integrating accessibility
standards into existing products while
committing to apply those standards
into new product development. In 2017,
we announced that we will make 100% of
our digital portfolio accessible for people
with disabilities by 2020.
As an employer, disability is part of our
wider commitment to inclusion. We work
to ensure that appropriate procedures,
training and support are in place for people
with disabilities to ensure fair access to
career and progression opportunities.
One of our eight employee resource
groups is Pearson Able – its remit is to
improve company practice for learners
and employees.
Innovating to address youth unemployment in South Africa
Through Tomorrow’s Markets Incubator, Pearson employee Carolynne
Lengfeld, Head of Learning Innovation in South Africa, is leading a team
that has worked to develop Project Boost, a recruitment, job preparation
and integration service in South Africa.
Boost aims to address the unemployment
challenge for low-income youth, while making
recruitment of high-quality candidates more
efficient for potential employers. Unemployed
young people who participate will receive
support and training at no cost and will have
access to jobs that offer the chance to build a
CV, establish a network of contacts, gain work
experience and increase their earnings.
The project is in its early R&D phase and will
be piloted with a small group of unemployed
young people alongside a number of
employers who have shown interest in
the service.
The initiative is targeted at young people
between the ages of 18 and 34 who are below
or close to the poverty line. This group
remains vulnerable in the labour market
with an unemployment rate of 37.1%, which is
10.6% higher than the national average.
Pearson aims to replicate the model in other
countries in Africa in due course.
The DFID Business Partnership Fund is
supporting this project by providing a
combination of technical assistance and
a financial grant to the value of £225,210
over 20 months.
Pearson plc Annual report and accounts 2017 Sustainability
Community contribution
Pearson focuses on a small number of
campaigns and issues where, working
together with others, we can both improve
access to education for underserved groups
as well as be relevant to our commercial
objectives. We invest in a small number
of partnerships, making sure we provide
opportunities for our employees to bring
their energy and enthusiasm in getting
involved in social impact work.
Our 2017 investment in social innovation
and impact was £7.2m or 1.4% of adjusted
pre-tax profits and included a number
of programmes:
Our Every Child Learning partnership with
Save the Children and Tomorrow’s Markets
Incubator, which supports Pearson
employees to develop new products
and services, as well as overall business
models, to bring high-quality education to
learners in low-income and underserved
communities. Our investment in the
Incubator seeks to identify commercially
viable market opportunities as well as
social return
Our award-winning flagship campaign is
Project Literacy. Founded and convened
by Pearson, the global campaign brings
together not-for-profits and companies
with a shared aim of bringing the power
of words to the world, by building
partnerships and driving action
Our people are our best ambassadors
and advocates. We support them to give
time and money to invest in communities
around where they work as well as in
good causes around the world.
Additionally, the Pearson Affordable
Learning Fund invests ‘patient capital’ in
independently run, for-profit, education
start-ups using innovative approaches
to improving learning outcomes and
increasing access, at scale.
Our performance sustainability rankings
One way we assess how we are
doing as a sustainable business
is to maintain our position in key
indices and benchmarks of social
responsibility.
This year, we were delighted to
be recognised in the Dow Jones
Sustainability Indices as best in
class for the global media sector.
Inclusion in Global 100 most sustainable
corporations (Corporate Knights)
3131
Project Literacy
Every Child Learning
Tomorrow’s Markets
Incubator
Employee engagement/
other partnerships/
local gifts
Total
Community
Investment
Social
Innovation
£3.6m
£0.9m
–
–
–
£1.2m
£1.5m
–
£6.0m
£1.2m
2017 Gold Class & Media Sector leader
2016 Silver Class
2015 Bronze Class
2014 Bronze Class
2017 Yes
2016 Yes
2015 Yes
2014 Yes
Yes signifies inclusion in FTSE4Good
2017 Yes
2016 Yes
2015 Yes
2014 Yes
Section 2 Our strategy in action 32
Sustainability
3
Shape the future
of education
The pace of change in education is faster
than ever before.
We have a responsibility to play our part
in shaping a future where learning does
even more to foster inclusive and equitable
societies and economies. This means
ensuring our learners are equipped with
the skills they need to build careers and
communities, navigate uncertainty,
address the world’s biggest sustainable
development challenges and thrive in
the 21st century and beyond.
Cutting-edge technology, insights
and partnerships will help us deliver.
We contribute to a growing body of
research, working with others to together
help global education systems better
serve the next generation of students.
There is rising demand from educators for
the integration of sustainable development
topics into content, courses and curricula.
By integrating sustainability-related content
into our products, we can explore new
market opportunities while making a direct
contribution to the SDGs and inspiring the
next generation to improve their world.
We are collaborating with leading experts
in the space to advance education for
sustainability and respond to our
customer needs.
To equip learners for jobs, Pearson’s Career
Success Programme aims to meet the
needs of both colleges and employers by
providing a digital suite of assessments,
learning modules and tools that help
students identify career goals and the
gaps in their academic and career skills
that they need to fill.
Delivering the knowledge, skills and
understanding students need to prepare
for their chosen career, BTECs can support
progression to higher or further education
or into employment. Pearson VUE
helps individuals prepare for their next
educational or career opportunity
through credentials that verify the skills
and learning required for a specific job or
educational programme.
Pearson and Everglades University prepare learners for careers in green building
Pearson has partnered with
Everglades University in the United
States and the US Green Building
Council (USGBC) to develop an
Introduction to Sustainability digital
course designed to put students on
the path to high-demand careers in
green energy and building design.
Upon completion of the course, students earn
certificates that can be featured in the form
of digital badges and added to their résumés,
demonstrating their education in and
commitment to sustainability.
Ultimately, this partnership will benefit
thousands of students, dozens of university
staff and faculty members, and the community
at large surrounding Everglades University’s
four locations.
“Through our partnership with
the USGBC and Pearson, we are
improving the quality of our
course offerings and student
learning outcomes, thereby
further educating, training,
and certifying the future
leaders in these growing fields.”
Through a combination of online and
hands-on learning, the course improves
students’ preparation for Leadership in
Energy and Environmental Design (LEED)
certification in growing fields such as
construction; alternative and renewable
energy; environmental policy and
management; land and energy; and crisis
and disaster management.
Kristi Mollis, President and Chief Executive
Officer, Everglades University
Pearson plc Annual report and accounts 2017 Sustainability
3333
Helping create
the future of learning
An interview with Indika Senadhira, Senior Manager, Software Engineering,
Pearson Technology Delivery Centre, Colombo, Sri Lanka.
IS
Indika Senadhira
Senior Manager, Software Engineering
“Growing the skills of my engineers ensures they
can build the best possible solutions to achieve
Pearson’s goals.”
What excites you most about the
work you do at Pearson?
IS
I’m most excited by the continuous
learning opportunities available at
Pearson that help me to grow in my
career. There is a friendly environment
and great team culture too, and I often
feel like Pearson is my second home.
What is your main goal for 2018?
IS
My main goal for 2018 is to increase
the technical and behavioural skills
of myself and my teams. Primarily,
this will help us to contribute more
effectively to the development of highly
scalable solutions for the business in
line with Engineering Best Practices.
How are you helping Pearson in its
transition to digital?
IS
I have three teams working on
Next Generation technology projects
that are used in Revel, eText and
Learning Applications. Those
applications are providing a more
sophisticated digital experience for
our learners and customers.
Another way I contribute to the digital
transition is by encouraging a team
culture of continuous learning and
providing the opportunity for my team
to grow. Growing the skills of my
engineers ensures they can build the
best possible solutions to achieve
Pearson’s goals.
What is your biggest win at Pearson
to date?
IS
I am one of Pearson’s ‘home grown’
managers. I joined eCollege (which was
later acquired by Pearson) 13 years ago
as an Associate Software Engineer.
I then moved up in my career to
become a Senior Manager. During that
journey, the biggest win for me has
been acquiring IEng accreditation
with the UK’s prestigious Institute of
Engineering & Technology. That has
opened up the opportunity for me to
learn both professionally and
academically, as well as contribute
my knowledge to Pearson and to
wider society.
The Technology
Delivery Centre
in one minute
WHO
The Technology Delivery Centre
is a team of
2,230 digital specialists
used by program and product
teams across Pearson.
WHAT
Capabilities include:
Mobile
Content
Salesforce
Integration
User interface
Digital Marketing
Performance
testing
Security testing
Accessibility
testing
Analytics & Big
Data
Oracle
WHERE
Operates out of Sri Lanka,
India, the US and UK
WHEN
24/7, 365
Section 2 Our strategy in action 34
Financial review
“We expect ongoing headwinds in our US higher
education courseware business to be offset by
improving conditions in our other businesses.”
Coram Williams
Chief Financial Officer
Profit and loss statement
In 2017, Pearson’s sales decreased by
£39m in headline terms to £4,513m.
Adjusted operating profit fell £59m to
£576m (2016: £635m).
Currency movements, primarily from the
depreciation of Sterling against the US Dollar
and other currencies during the period,
increased sales by £126m and operating
profits by £23m.
The effect of disposals reduced sales by
£54m and continuing adjusted operating
profits by £24m.
Stripping out the impact of portfolio changes
and currency movements, revenues were
down 2% in underlying terms while adjusted
operating profit fell £58m or 9%.
Trading contributed £58m to this decline in
adjusted operating profit, other operating
factors including increased amortisation
expense and staff incentive contributed
£95m to the decline and cost inflation,
an estimated £55m. This was partly offset
by a £150m year-on-year benefit from
restructuring savings.
Net interest payable in 2017 was £79m,
compared with £59m in 2016. The increase
was primarily due to additional charges
relating to the early redemption of various
bonds during the year and higher US
interest rates.
Our adjusted tax rate in 2017 was 11.1%
(2016: 16.5%). The decrease in tax rate
was primarily due to uncertain tax position
provision releases following the expiry
of the relevant statutes of limitation.
Adjusted earnings per share were 54.1p
(2016: 58.8p).
Cash generation
Operating cash flow rose by 1% in headline
terms, despite a decrease in adjusted
operating profit, driven by a strong cash
conversion of 116% driven by tight working
capital control, strong collections and high
Penguin Random House cash dividends.
Return on invested capital
On a gross basis ROIC decreased from
5.0% in 2016 to 4.3% in 2017 and from
7.2% in 2016 to 6.2% in 2017 on a net basis.
The movement largely reflects lower profit
in the year and increased tax payments.
Statutory results
Our statutory profit from continuing
operations of £451m in 2017 compares with
a loss of £2,497m in 2016. The loss in 2016 is
mainly attributable to an impairment charge
to North American goodwill and the higher
level of restructuring spend.
Financial summary
Business performance
Statutory results
£ millions
Sales
2017
2016
Headline
growth
CER
growth
Under-
lying
growth
£ millions
2017
2016
Headline
growth
CER
growth
Under-
lying
growth
4,513
4,552
(1)%
(4)%
(2)%
Sales
4,513
4,552
(1)%
(4)%
(2)%
Adjusted operating profit
Operating cash flow
576
669
635
663
Adjusted earnings per share 54.1p
58.8p
1%
(8)%
(9)% (13)%
(9)%
Operating profit/(loss)
451 (2,497)
Profit/(loss) for the year
408 (2,335)
n/a
n/a
Dividend per share
17p
52p
(67)%
Net debt
(432)
(1,092)
60%
Growth rates stated on a headline basis are calculated by comparing
the reported results. Growth rates on a constant exchange rate (CER)
basis are calculated after excluding the effect of exchange. Underlying
growth rates exclude both the effect of exchange and portfolio
changes arising from acquisitions and disposals.
Cash generated from
operations
Basic earnings/(loss)
per share
462
552
(11)%
49.9p (286.8)p
n/a
The business performance measures include our adjusted performance
measures which are non-GAAP measures. An explanation of
these measures is included in this financial review section and full
reconciliations to the equivalent statutory heading under IFRS are
included in the financial key performance indicators section on
p192–195.
Pearson plc Annual report and accounts 2017 Financial review
3535
Capital allocation
Our capital allocation policy remains
unchanged: to maintain a strong balance
sheet and a solid investment grade rating,
to continue to invest in the business,
to have a sustainable and progressive
dividend policy, and to return surplus
cash to our shareholders.
Balance sheet
Net debt to EBITDA was 0.6x (or 2.1x on a
simplified credit agency view adjusting for
leases and other items). Net debt decreased
to £432m (2016: £1,092m) reflecting disposal
proceeds, operating cash flow and a benefit
from the weakening of the US Dollar relative
to Sterling, partially offset by restructuring
costs, pension contributions, including
amounts related to agreements regarding
the disposals of the FT and Penguin,
interest, tax, dividend payments and the
share buyback.
During 2017, we took steps to reduce our
level of gross debt and optimise our balance
sheet, successfully executing market
tenders repurchasing $383m of our $500m
3.75% US Dollar Notes due 2022 and $406m
of our $500m 3.25% US Dollar Notes due
2023. In addition, we redeemed the $300m
4.625% Senior Notes due June 2018 and
the $550m 6.25% Notes due May 2018.
During January 2018, we also successfully
repurchased a total of $569m of debt at an
average interest rate of around 2.5% by
tendering for €250m of our Euro 1.875%
Notes due May 2021 and €200m of our
Euro 1.375% Notes due May 2025 and
cancelling the associated currency swaps.
Pension plan
The overall surplus on the UK Group
Pension Plan of £158m at the end of 2016
has increased to a surplus of £545m at the
end of 2017. This has arisen due to increased
contributions, including £227m as part of
the agreements relating to the Penguin
Random House merger in 2013 and FT
Group sale in 2015, together with the impact
of favourable movements in assumptions.
The UK Group Pension Plan used its strong
funding position to purchase two insurance
buy-in policies with Legal & General and
Aviva, covering approximately £1.2bn
(one-third) of its total liabilities. This put
the Plan in an even stronger position and
substantially reduced Pearson’s future
pension funding risk, at no further cost to
the company.
Dividend
In line with our policy, the Board is
proposing a final dividend of 12p (2016: 34p)
which results in an overall dividend of 17p
(2016: 52p) subject to shareholder approval.
Share buyback
We launched a £300m share buyback,
beginning on 18 October 2017 utilising
part of the proceeds from the disposal of
a 22% stake in Penguin Random House.
We completed the programme on
16 February 2018.
Businesses held for sale
Following the decision to sell both WSE
and the K-12 school courseware business
in the US, the assets and liabilities of those
businesses have been classified as held
for sale on the balance sheet at
31 December 2017.
2018 outlook
2017 was a year of progress for Pearson,
delivering adjusted operating profit at the
top end of our guidance range and continuing
to invest in the digital transformation and
simplification of the company. We expect to
make further progress in 2018, with
underlying profit growth, reporting adjusted
operating profit of between £520m and
£560m and adjusted earnings per share of
49p to 53p. This reflects our portfolio and
exchange rates as at 31 December 2017 and
the factors outlined overleaf.
Key performance indicators Maintain long-term growth
See a summary of all our KPIs on p2–3
Sales (£m)
£4,513m
-1%
4,728
4,540
4,468
4,552
4,513
Adjusted operating profit (£m)
£576m
-9%
736
722
723
635
576
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
Sales decreased in headline terms by £39m or 1% and fell by 4% in
CER terms and 2% in underlying terms. The underlying decline was
due to a 4% decline in North America, partially offset by stabilisation
in Core and Growth. Over the last five years, revenues have benefited
from growth in digital and the relative strength of the dollar but this
has been offset by pressure on print revenues, cyclical and policy factors
and adverse currency movements in some of our markets.
Adjusted operating profit fell by 9% in headline terms with the
impact of lower sales, other operating factors, including increased
amortisation and staff incentives, and cost inflation offsetting the
benefit from restructuring savings. Over the last five years, adjusted
operating profit has declined due to the pressure on revenues
in higher margin businesses, portfolio changes and increased
investment in digital, partially offset by benefits from restructuring.
Section 3 Our performance 36
Financial review
Trading
We expect ongoing headwinds in our US
higher education courseware business to
be offset by improving conditions in our
other businesses.
Portfolio changes
We completed the sale of a 22% stake in
Penguin Random House and our Chinese
English test preparation business GEDU
in 2017. The annualised impact of these
disposals will reduce 2018 operating profit
by £44m. We expect to complete the disposal
of WSE and our stake in Mexican joint venture
Utel in the first half of 2018 and have
announced that we have concluded the
strategic review of our US K-12 courseware
business and have classified the business as
held for sale. WSE contributed £195m to 2017
sales and WSE and Utel contributed £5m to
2017 adjusted operating profit and £5m to
statutory profit. US K-12 courseware is
expected to contribute £385m to 2018
sales and around £11m to 2018 adjusted
and statutory profit.
Adjusted performance measures
The Group’s adjusted performance
measures are non-GAAP financial measures
and are included as they are key financial
measures used by management to evaluate
performance and allocate resources to
business segments. The measures also
enable investors to more easily, and
consistently, track the underlying
operational performance of the Group
and its business segments by separating
out those items of income and expenditure
relating to acquisition and disposal
transactions, and major restructuring
programmes.
The Group’s definition of adjusted
performance measures may not be
comparable to other similarly titled
measures reported by other companies.
A reconciliation of the adjusted measures
to their corresponding statutory reported
figures is shown in summary below and in
more detail on p192–195.
Other operational factors, incentives
and inflation
Our 2018 guidance incorporates cost
inflation of around £50m together with
other operational factors and incentives
of £30m.
Restructuring benefits
We expect incremental in-year benefits
from the 2017–2019 restructuring
programme of £80m in 2018. Exceptional
restructuring costs of £90m will be excluded
from adjusted operating profit in line with
our recent practice.
Interest and tax
We expect a 2018 net interest charge of
around £45m and a tax rate of 20%.
Currency
In 2017, Pearson generated approximately
61% of its sales in the US, 7% in Greater
China, 5% in the Eurozone, 3% in Brazil, 3%
in Canada, 3% in Australia, 2% in South Africa
and 1% in India and our guidance is based
on exchange rates at 31 December 2017.
We calculate that a 5 cent move in the
US Dollar exchange rate to Sterling would
impact adjusted earnings per share by
between 2p and 2.5p.
Key performance indicators Deliver sustainable returns
Performance over the last five years reflects the market pressures we have faced. But we are building a strong future returns potential.
See a summary of all our KPIs on p2–3
Adjusted earnings per share (£m headline)
Return on invested capital (% headline)
54.1p
-8%
70.1
66.7
70.3
58.8
54.1
4.3%
-0.7
percentage points
5.4 5.4
5.6 5.7
5.8
7.2
6.3
6.2
5.0
4.3
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
Gross basis
Net basis
Adjusted earnings per share (EPS) is down 8% in 2017, reflecting lower
adjusted operating profit and increased interest charges partially
offset by a decrease in the tax rate. Over the last five years EPS
has declined in line with the decline in adjusted operating profit.
Return on invested capital (ROIC) fell by 0.7 percentage points to
4.3% in 2017 mainly due to lower adjusted operating profit and higher
cash tax paid. We have also presented ROIC on a net basis after
removing impaired goodwill from the invested capital balance.
The net approach assumes that goodwill which has been impaired
is treated in a similar way to goodwill disposed as it is no longer
being used to generate returns.
Pearson plc Annual report and accounts 2017 Financial review
Adjusted operating profit
Adjusted operating profit includes the
operating profit from the total business,
including the results of discontinued
operations when relevant. There were
no discontinued operations in either 2016
or 2017. A reconciliation of the statutory
measure to the adjusted measure is
shown below:
£ millions
Operating profit/(loss)
Add back: Cost of major
restructuring
Add back: Other net (gains)
and losses
2017
2016
451 (2,497)
(128)
25
Add back: Intangible charges
166
2,769
Add back: Impact of
US tax reform
8
–
Adjusted operating profit
576
635
In January 2016, the Group announced
that it was embarking on a restructuring
programme to simplify the business,
reduce costs and position the company
for growth in its major markets. The costs
of this 2016 restructuring programme in
2016 were significant enough to exclude
from the adjusted operating profit measure
so as to better highlight underlying
performance. A new restructuring
programme, the 2017-2019 restructuring
programme announced in May 2017, began
79
338
Reducing exposure to large-scale
direct delivery
in the second half of 2017 and is expected to
drive further significant cost savings. This
new programme has also been excluded
from the adjusted operating profit measure.
These major restructuring costs are
analysed below:
£ millions
2016 restructuring programme
Combining into one single
product organisation
Integrating our assessment operations
Making efficiency improvements in
enabling functions
Rationalising our property portfolio
and consolidating major supplier
agreements
Total major restructuring cost
£ millions
2017-2019 restructuring programme
Adjusting the cost base in our US higher
education courseware business
Further efficiency improvements in
enabling functions through back office
change programmes in Human
Resources, Finance and Technology
Further rationalisation of property and
supplier agreements
Total major restructuring cost
2016
77
33
67
110
51
338
2017
23
23
33
79
3737
Other net gains and losses that represent
profits and losses on the sale of subsidiaries,
joint ventures, associates and other financial
assets are excluded from adjusted operating
profit as it is important to highlight their
impact on operating profit, as reported,
in the period in which the disposal
transaction takes place in order to
understand the underlying trend in the
performance of the Group. Other gains of
£128m in 2017 largely relate to the sale of
the test preparation business in China which
resulted in a profit on sale of £44m and the
part sale of the Group’s share in Penguin
Random House which resulted in a profit of
£96m. In 2016, the losses mainly relate to
the closure of the English language schools
in Germany and the sale of the Pearson
English Business Solutions business in
North America.
Charges relating to acquired intangibles and
acquisitions are also excluded from adjusted
operating profit when relevant as these
items reflect past acquisition activity and
do not necessarily reflect the current year
performance of the Group. In 2016,
intangible charges included an impairment
of goodwill in our North American business
of £2,548m.
Key performance indicators Manage cash effectively
See a summary of all our KPIs on p2–3
Operating cash flow (£m headline)
Net debt (£m headline)
£669m
+1%
649
588
663
669
435
£432m
+60%
1,639
1,379
1,092
654
432
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
Operating cash flow increased by 1% in 2017, despite the reduction
in adjusted operating profit, reflecting continued tight working
capital control, strong cash collections and higher dividends from
Penguin Random House.
The Group’s net debt decreased from £1,092m at the end of 2016
to £432m at the end of 2017 as the proceeds from disposals,
operating cash flow and the positive effect of exchange rate
movements more than offset restructuring spend, tax, interest,
pension and dividend payments.
Section 3 Our performance 38
Financial review
As a result of US tax reform, the reported
tax charge on a statutory basis includes a
benefit from revaluation of deferred tax
balances to the reduced federal rate of
£5m and a repatriation tax charge of £6m.
In addition to the impact on the reported tax
charge, the Group’s share of profit from
associates was adversely impacted by £8m.
These adjustments have been excluded
from adjusted operating profit and the
adjusted tax charge as they are considered
to be transition adjustments that are not
expected to recur in the near future.
Adjusted earnings per share
Adjusted earnings includes adjusted
operating profit and adjusted finance
and tax charges. A reconciliation to the
statutory profit is shown below:
£ millions
Profit/(loss) for the year
Non-controlling interest
Add back: Cost of major
restructuring
Add back: Other net (gains)
and losses
2017
2016
408 (2,335)
(2)
(2)
79
338
(128)
25
Foreign exchange and other gains and
losses are also excluded as they represent
short-term fluctuations in market value
and are subject to significant volatility. Other
gains and losses may not be realised in due
course as it is normally the intention to hold
the related instruments to maturity.
In 2017, the total of these net finance cost
items excluded from adjusted earnings
was a gain of £49m compared with a loss of
£1m in 2016. Finance income relating to
retirement benefits decreased from £11m
in 2016 to £3m in 2017, but this decrease was
more than offset by foreign exchange gains
on unhedged cash and cash equivalents and
other financial instruments that generated
losses in 2016.
The adjusted income tax charge excludes
the tax benefit or charge on items that are
excluded from the profit or loss before
tax. In addition, the tax benefit from tax
deductible goodwill and intangibles is added
to the adjusted income tax charge as this
benefit more accurately aligns the adjusted
tax charge with the expected rate of cash
tax payments.
Add back: Intangible charges
166
2,769
Operating cash flow
Add back: Other net finance
(income)/costs
Add back: Impact of US tax
reform on profit from associate
Tax benefit relating to items
added back
Adjusted earnings
(49)
8
1
–
(42)
(317)
440
479
Operating cash flow is presented in order
to align the cash flows with corresponding
adjusted operating profit measures.
A reconciliation to operating cash flow
from net cash generated from operations,
the equivalent statutory measure, is
shown below:
£ millions
2017
2016
Weighted average number of
shares (millions)
813.4
814.8
Adjusted earnings per share
54.1p
58.8p
Net finance costs classified as other net
finance costs or income are excluded in
the calculation of adjusted earnings.
Finance income relating to retirement
benefits are excluded as management
believes the presentation does not reflect
the economic substance of the underlying
assets and liabilities. Finance costs relating
to acquisition transactions are also excluded
as these relate to future earn-outs or
acquisition expenses and are not part
of the underlying financing.
462
522
146
131
(237)
(247)
Net cash generated from
operations
Dividends from joint ventures
and associates
Capital expenditure on
property, plant, equipment
and software
Add back: Cost of major
restructuring paid
Add back: Special pension
contribution paid
Operating cash flow
In addition to the dividends received from
associates above, there were dividends
from Penguin Random House in 2017 of
£312m relating to the recapitalisation of
Penguin Random House following the sale
of part of the Group’s interest in the venture.
This cash flow is not related to the
underlying trading of the business and
has not been included in the adjusted
operating cash measure.
Costs of major restructuring paid in 2017
include cash flow from both the 2016
restructuring programme (£44m) and the
2017–2019 programme (£27m).
Special pension contributions of £227m in
2017 were made as part of the agreements
relating to the Penguin Random House
merger in 2013 (£202m) and the sale of the
FT Group in 2015 (£25m). In 2016, special
pension contributions of £72m (net of tax)
relate to the sale of the FT Group.
Return on invested capital (ROIC)
ROIC is a non-GAAP measure and has
been disclosed as it is part of Pearson’s key
business performance measures. ROIC is
used to track investment returns and to
help inform capital allocation decisions
within the business. Average values for
total invested capital are calculated as
the average monthly balance for the year.
For the first time in 2017, we have presented
ROIC on a net basis after removing impaired
goodwill from the invested capital balance.
The net approach assumes that goodwill
that has been impaired is treated in a similar
fashion to goodwill disposed as it is no
longer being used to generate returns.
2017
2016
2017
2016
£ millions
Gross basis
Net basis
Adjusted
operating
profit
Operating cash
tax paid
Return
Average
invested
capital
576
635
576
635
(75)
(63)
(75)
(63)
501
572
501
572
11,568 11,464
8,126
7,906
71
167
ROIC
4.3% 5.0% 6.2%
7.2%
227
669
90
663
Pearson plc Annual report and accounts 2017 Financial review
Other financial information
Net finance costs
£ millions
Net interest payable
Finance income in respect of
retirement benefits
Other net finance
income/(costs)
Net finance costs
2017
2016
(79)
(59)
3
11
46
(30)
(12)
(60)
Net interest payable was £79m in 2017,
compared with £59m in 2016. The increase
was primarily due to higher US interest rates
in 2017, additional charges relating to the
early redemption of various bonds during
the year and some additional interest on tax
provisions. In March and November 2017
respectively, the Group redeemed the
$550m 6.25% global Dollar bonds and the
$300m 4.625% US Dollar notes, both
originally due in 2018. In addition, in August
2017, the Group redeemed $383m out of the
$500m 3.75% US Dollar notes due in 2022
and $406m out of the 3.25% US Dollar notes
due in 2023. Although there is a charge in
respect of the early redemptions, there are
partial year interest savings as a result which
have flowed through the income statement
in the period since redemption, with the full
annualised savings coming through in 2018.
In 2017, the total of other net finance income
excluded from adjusted earnings was a gain
of £49m compared with a loss of £1m in
2016. Finance income relating to retirement
benefits decreased from £11m in 2016 to
£3m in 2017 reflecting the comparative
funding position of the plans at the
beginning of each year. This decrease was
more than offset by foreign exchange gains
on unhedged cash and cash equivalents and
other financial instruments that generated
losses in 2016.
Capital risk
The Group’s objectives when managing
capital are:
To safeguard the Group’s ability to
continue as a going concern and retain
financial flexibility by maintaining a strong
balance sheet
To maintain a solid investment grade
credit rating
To provide returns for shareholders.
The Group is currently rated BBB (negative
outlook) by Standard and Poor’s and
Baa2 (negative outlook) by Moody’s.
Net debt
The net debt position of the Group is set
out below:
£ millions
2017
2016
Cash and cash equivalents
645
1,459
Marketable securities
Derivative financial instruments
Bank loans and overdrafts
Bonds
Finance lease liabilities
Net debt
8
–
(15)
10
(93)
(39)
(1,062)
(2,420)
(8)
(9)
(432)
(1,092)
Net debt was reduced during the year
following the partial disposal and
recapitalisation of the Group’s stake in
Penguin Random House.
Bond debt was reduced to £1.1bn from
£2.4bn through debt repayments of £1.3bn
which reduced cash balances. The Group
holds Dollar debt as a natural hedge of the
Group’s largest earnings generating region,
North America.
Despite the low balance sheet gearing,
the Group has significant operating lease
liabilities of around £1.2bn which are not
currently included as balance sheet liabilities
but are included by the credit rating
agencies within debt.
Liquidity and funding
The Group had a strong liquidity position
at 31 December 2017, with over £600m of
cash and an undrawn US Dollar
denominated Revolving Credit Facility due
in 2021 of $1.75bn (at 31 December 2016,
the Group had cash of over £1.4bn and
an undrawn Revolving Credit Facility due
2021 of $1.75bn). To ensure efficient use
of the Group’s cash balances, the Group
repaid €450m (around £400m) of bond
debt in January 2018 at a premium broadly
equivalent to interest due for 2018, which
will result in a reduced interest charge
from 2019.
Taxation
The effective tax rate on adjusted earnings
in 2017 was 11.1% compared with an
effective rate of 16.5% in 2016. The decrease
in tax rate was primarily due to uncertain
tax position provision releases due to the
expiry of relevant statutes of limitation.
3939
The reported tax charge on a statutory
basis in 2017 was £13m (3.1%) compared
with a benefit of £222m (8.7%) in 2016.
The statutory tax benefit in 2016 was mainly
due to the release of deferred tax liabilities
relating to tax deductible goodwill that was
impaired. Operating tax paid in 2017 was
£75m compared with £63m in 2016.
As a result of US tax reform, the reported
tax charge on a statutory basis includes a
benefit from revaluation of deferred tax
balances to the reduced federal rate of
£5m and a repatriation tax charge of £6m.
The Group continues to analyse the detail
of the new legislation and this may result in
revisions to these impacts. In addition to
the impact on the reported tax charge,
the Group’s share of profit from associates
was adversely impacted by £8m.
Other comprehensive income
Included in other comprehensive income
are the net exchange differences on
translation of foreign operations. The loss
on translation of £262m in 2017 compares
with a gain in 2016 of £913m and has arisen
due to the relative weakness of the US
Dollar compared with Sterling. A significant
proportion of the Group’s operations are
based in the US and the US Dollar weakened
in 2017 from an opening rate of £1:$1.23
to a closing rate at the end of 2017 of
£1:$1.35. At the end of 2016 most of the
currencies that Pearson is exposed to
had strengthened relative to Sterling
following the Brexit vote. In 2016, the
US Dollar had strengthened in comparison
with the opening rate moving from
£1:$1.47 to £1:$1.23.
Also included in other comprehensive
income in 2017 is an actuarial gain of £182m
in relation to post-retirement plans of the
Group and our share of the post-retirement
plans of Penguin Random House. The gain
arises from the impact of favourable
movements in mortality assumptions,
discount rates, member options on
retirement and asset returns which offset
the impact of the UK Group plan’s purchase
of insurance buy-in policies. The gain in
2017 compares with an actuarial loss in
2016 of £276m.
Section 3 Our performance 40
Financial review
Post-retirement benefits
Share buyback
Acquisitions and disposals
The £300m share buyback programme
announced in October 2017 was completed
on 16 February 2018. At 31 December 2017,
21m shares at a value of £153m had been
purchased. Cash payments of £149m had
been made in respect of the purchases with
the outstanding £4m settlement made at
the beginning of January 2018. This £4m
together with the remaining value of the
buyback programme (£147m) was recorded
as a liability on the balance sheet at
31 December 2017. A further 22m shares
were repurchased under the programme
in 2018.
Businesses held for sale
Following the decision to sell both our
Wall Street English language teaching
business and the K-12 school courseware
business in the US, the assets and liabilities
of those businesses have been classified
as held for sale on the balance sheet at
31 December 2017.
Goodwill and intangible assets
Amortisation and impairment charges in
2017 were £166m compared with a charge
of £2,769m in 2016. The 2016 charge
includes an impairment charge to North
American goodwill of £2,548m. This charge
arose following trading in the final quarter
of 2016 and the consequent revision to
strategic plans which reflected underlying
issues in the US higher education
courseware market that were more severe
than had previously been anticipated.
These issues related to declining student
enrolments, changes in buying patterns of
students and correction of inventory levels
by distributors and bookshops.
There were no significant acquisitions in
2017 or 2016. In 2017, disposals in total gave
rise to a profit of £128m. These disposals
included the sale of our test preparation
business in China (GEDU) which resulted
in a profit on sale of £44m and the sale of a
portion of our stake in Penguin Random
House to our venture partner, Bertelsmann,
resulting in a reduction in our interest from
47% to 25% and a profit on sale of £96m.
In 2016, we closed our English language
schools in Germany and also sold the
Pearson English Business Solutions
business. These two disposals, together
with other smaller disposal related items,
gave rise to an aggregate loss of £25m.
Related party transactions
Transactions with related parties are
shown in note 36 of the consolidated
financial statements.
Post-balance sheet events
During January 2018, Pearson successfully
executed market tenders to repurchase
€250m of its €500m Euro 1.875% Notes
due May 2021 and €200m of its €500m
Euro 1.375% Notes due May 2025.
On 16 February 2018, Pearson completed
its £300m share buyback programme.
In aggregate between 18 October 2017 and
16 February 2018, Pearson repurchased
42,835,577 shares, including 21,839,676
repurchased since 31 December 2017,
at a cost of £151m.
Coram Williams
Chief Financial Officer
Pearson operates a variety of pension and
post-retirement plans. Our UK Group
Pension Plan has by far the largest defined
benefit section. We have some smaller
defined benefit sections in the US and
Canada but, outside the UK, most of
our companies operate defined
contribution plans.
The charge to profit in respect of worldwide
pensions and retirement benefits amounted
to £72m in 2017 (2016: £70m) of which a
charge of £75m (2016: £81m) was reported
in adjusted operating profit and an income
of £3m (2016: £11m) was reported against
other net finance costs.
The overall surplus on the UK Group
pension plan of £158m at the end of 2016
increased to a surplus of £545m at the end
of 2017. The increase has arisen principally
due to the impact of favourable movements
in assumptions discussed above but also
due to increased contributions, including
£227m as part of the agreements relating
to the Penguin Random House merger in
2013 and FT Group sale in 2015.
In total, our worldwide net position
in respect of pensions and other post-
retirement benefits increased from a net
asset of £19m at the end of 2016 to a net
asset of £441m at the end of 2017.
Dividends
The dividend accounted for in our 2017
financial statements totalling £318m
represents the final dividend in respect
of 2016 (34.0p) and the interim dividend
for 2017 (5.0p). We are proposing a final
dividend for 2017 of 12p, bringing the
total paid and payable in respect of 2017
to 17p. This final 2017 dividend, which
was approved by the Board in February
2018, is subject to approval at the
forthcoming AGM and will be charged
against 2018 profits. For 2017, the dividend
is covered 3.2 times by adjusted earnings
and, after excluding the contribution from
Penguin Random House, the dividend is
covered 2.5 times.
Pearson plc Annual report and accounts 2017 Financial review
Helping create
the future of learning
An interview with Alvaro Castro,
Product Management Analyst, Pearson Test of English
What excites you most about the
work you do at Pearson?
How are you helping Pearson in its
transition to digital?
AC
AC
In Pearson I have the amazing opportunity
to work with different geographies all over
the world. PTE Academic is delivered in
over 50 countries and part of my job is
really to understand the singularities of
each market. I particularly enjoy engaging
with the geographies and providing them
with data insights that can inform their
business strategy.
PTE Academic is a computer-based
test and I have been involved in the
operational and technology
improvements of the product. As with
every digital product, we can generate
valuable operational data that can turn
into evidence based decision-making.
What is your biggest win at Pearson
to date?
What is your main goal for 2018?
AC
AC
To support the growth of the PTE
Academic test, our main goal as a team is
to improve the operational infrastructure
around the test, and to redevelop the
customer journey. My role is to help the
team achieve this goal by analysing
operational performance, identifying
areas of improvement and working
with stakeholders to make them.
I am proud of my work producing genuine
data reporting that has been used by
teams, colleagues and management.
In addition to providing valuable insight
and informing decision-making at all
levels, I have been able to introduce a
data-driven culture within the team and
with the geographies. These reporting
capabilities have also served to provide
accurate forecasting and a robust test
centre capacity plan, which has been
instrumental for supporting the growth
of the test.
“I introduced a data-driven culture.
More accurate forecasting has
supported the growth of the test.”
4141
Pearson Test of English
in one minute
The Pearson Test of English
Academic is the computer-based
English test trusted by
universities, colleges and
governments around
the world.
250 centres
around the world
“The test is a true reflection
of what’s required
in communicating ...
Reading, Writing,
Speaking and Listening”
Elizabeth Karanja,
Australia, October 2017
Differentiated consumer experience
drove c.70% volume growth
+c.70%
AC
Alvaro Castro
Product Management Analyst
Section 3 Our performance 42
Operating performance
North America
Market summary
Our largest market includes all
50 US states and Canada.
Contribution to Group revenues
65%
Sales
£2,929m
Adjusted operating profit
£394m
Efficacy finding
Working with Penn State
University, we found that
students in Introductory
Physics courses who do better on
their Mastering Physics homework
tended to perform better in exams
and external assessments.
Revenues declined 4% in underlying terms,
primarily due to anticipated declines in
higher education and school courseware,
school assessment and Learning Studio, a
learning management system we are retiring.
North American higher education
courseware fell 3%. School courseware
fell high-single digits, impacted by a lower
adoption participation rate and weak Open
Territory sales in the second half of the year.
School assessment declined high-single
digits, due to previously announced contract
losses. Learning Studio revenues continued
to decline as we move towards the
retirement of the product in 2019. Offsetting
that, we saw modest growth in both virtual
schools and Online Program Management
(OPM) due to good underlying volume
growth partially offset by some contract
exits and in-sourcing. Revenues in North
American Professional Certification were
flat on phasing of new contracts and a
slowdown in IT certification late in 2017.
Adjusted operating profits fell 10% in
underlying terms, due primarily to the
impact of lower sales and other
operating factors partially offset by
restructuring savings.
Courseware
School
In school, revenue declined high-single
digits primarily due to sharp declines across
Open Territory states in the second half
of the year. This was partially offset by
growth in Adoption state revenues where
strong performance in Texas Grades
K-12 Spanish, Indiana Grades K-12 Science
and South Carolina Grades 6-8 Science
outweighed a lower adoption participation
rate resulting from our decision not to
compete for the California Grades K-8
English Language Arts (ELA) adoption
with a core basal programme.
Our new adoption participation rate fell to
61% from 64% in 2016. We won an estimated
38% share of adoptions competed for
(30% in 2016) and 29% of total new adoption
expenditure of $365m (19% of $470m
in 2016).
Higher education
In higher education, total US college
enrolments, as reported by the National
Student Clearinghouse, fell 1.1%, with
combined two-year public and four-year
for-profit enrolments declining 2.5%.
Enrolment weakness was particularly
focused on part-time students where
enrolment declined 3.3%, a bigger decline
than in any of the last five years. Full-time
enrolment grew 0.3%, the first expansion
since autumn 2010.
Net revenues in our higher education
courseware business declined 3% during
the year. We estimate around 2% of this
decline was driven by lower enrolment;
just over 1% from the adoption of Open
Market
spotlight
North American
Assessment
Association of American Medical Colleges
The Association of American Medical
Colleges (AAMC) has selected Pearson VUE
to deliver the prestigious Medical College
Admission Test® (MCAT®) beginning in 2018.
“We are proud to enter into an agreement
with the AAMC to deliver this important
exam to tomorrow’s doctors,” says Bob
Whelan, President, Pearson Assessments.
“We understand the AAMC’s commitment to
excellence and we are proud to be part of
their continued commitment to examinees
and the testing community. As an extension
of the AAMC to its test takers, we will deliver
each exam with care, consistency and the
highest levels of customer service.”
Pearson VUE will deliver the MCAT exam in
its premium, patented, owned-and-operated
network of Pearson Professional Centres and
several Pearson VUE Authorized Test Centre
Selects globally. In addition to the existing
test centres, Pearson VUE is investing in an
expansion of its test centre network to
provide additional capacity for test takers.
The Pearson Professional Centres are the gold
standard in exam delivery, offering test takers
a professional, highly secure and consistent
testing experience.
Pearson plc Annual report and accounts 2017 Operating performance
Link to strategic priorities 1 Grow share through digital transformation 2 Invest in structural growth markets See Our strategy, p13–21
4343
Educational Resources (OER); around 5%
from the secondary market, new initiatives
and other factors, primarily the growth in
print rental; offset by c.3% benefit from
institutional selling and the shift to digital
and a 2% benefit in 2017 from lower
returns by the channel.
In 2017, Pearson’s US higher education
courseware market share, as reported by
MPI, was in the upper half of the c.40–41.5%
range seen over the last five years.
During 2017, we performed strongly in
Statistics and Business Statistics, Biology
and Accounting. Statistics benefited from
the popularity of “best in class” learning
application StatCrunch, Biology from the
success of Campbell Biology 11e and
MasteringBiology, and Accounting from
the success of Miller-Nobles Horngren
Accounting 11e and MyAccountingLab.
This was offset by weakness in Information
Technology, particularly in the for-profit
sector and continued softness in
Developmental Mathematics.
Digital revenues grew 9% benefiting from
continued growth in direct sales, favourable
mix and selected price increases. Global
digital registrations of MyLab and related
products fell 1%. In North America, digital
registrations fell 3% with good growth in
Science, Business & Economics and Revel
offset by lower overall enrolment and
continued softness in Developmental
Mathematics. Revel registrations grew more
than 50%. Including stand-alone eBook
registrations, total North American digital
registrations were flat.
The actions announced in early 2017 to
promote access over ownership met with
success. We reduced the rental price of
2,000 eBook titles and saw eBook revenues
increase more than 20% in response.
Our print rental programme has had
a successful start, and we have added
more than 90 further titles. In institutional
courseware solutions we signed 210
institutions to our Inclusive Access
(Direct Digital Access, DDA) solutions,
taking the total to over 500. During the
year, we delivered over 1m course
enrolments with inclusive access rising
to c.5% of our higher education revenue
as more colleges and faculties see the
benefit of this model.
Assessment
School assessment
In school assessment (State and National
assessments), revenues declined high-single
digits due to previously announced
contract losses.
Pearson secured contract extensions in
Virginia, Indiana, Arizona, Minnesota,
Puerto Rico, Kentucky, New York City and
North Carolina and for the National
Assessment of Educational Progress.
We delivered 25.3m standardised online
tests to K-12 students, up 7% from 2016.
TestNav 8, Pearson’s next-generation online
test platform, supported a peak load of
752,000 tests in a single day and provided
99.99% up time. Our AI scoring systems
scored 35m responses to open-ended test
items, around 30% of the total. Paper-based
standardised test volumes fell 7% to 20.4m.
Professional Certification
In Professional Certification, VUE global test
volume rose 1% to over 15m. Revenues in
North America were flat, with continued
growth in certification for professional
bodies, offset by modest declines in US
teacher certification and the GED High School
Equivalency Test, after strong performance
last year, and by weakness in higher level IT
certifications in the second half.
We signed over 50 new contracts in 2017
including a multi year contract with the
Association of American Medical Colleges
(AAMC) to administer the MCAT, and
multi-year contracts with ExxonMobil
and the Project Management Institute.
Our renewal rate on existing contracts
continues to be over 95%.
Helping create
the future of learning
An interview with Glenn Hubbard,
Pearson author, economist and academic
“This digital experience will completely change the way we teach.”
The digital experience that students get can
really shape their understanding of the
subject. Digital gives a much better experience
for students – it gives them a real world feel,
with first class pedagogy and assessment
built in – I can’t imagine a better way to learn.
This digital experience will completely change
the way we teach. It meets students at their
point of need. Students are able to go as fast
or slow through the content as they need,
getting a great learning experience. From
the professor’s perspective, they know their
student is getting help to prepare for class.
We are in the early days of an incredibly
exciting future of learning. Students come
to economics as they care about the world
and want to learn about it. A product that
can bring the real world together with a
user-friendly interface for students is a
game changer. The technology we have
makes that future possible.
We are going to see a future in less than ten
years’ time where students are no longer
lugging a big bag of textbooks around. Instead
they will have a simple interface that gives
them a great learning experience.
GH
GlennHubbard
Economist and academic
Section 3 Our performance 44
Operating performance
North America
Clinical assessment
Clinical assessment sales declined slightly
on an absence of new major product
introductions. Q-Interactive, Pearson’s
digital solution for Clinical Assessment
administration, saw continued strong
growth in licence sales with sub-test
administrations up more than 33% over
the same period last year.
Services
Connections Education
Connections Education, our virtual school
business, served nearly 78,000 Full Time
Equivalent students through full-time virtual
and blended school programmes, up 6%
on last year.
Two new full-time online, state-wide,
partner schools opened for the 2017–2018
school year. Enrolment growth from new
and existing schools was partially offset
by the termination of a school partnership
at the end of the 2016–2017 school year.
Revenues grew modestly as enrolment
growth was partially offset by increased
in-sourcing, as some partners took
non-core services in-house.
Enrolment and revenue is expected to
grow in 2018 as growth in existing school
partnerships and the opening of new
partner schools for the 2018–2019 school
year offsets the termination of two further
contracts and the in-sourcing of services
by some customers.
The 2017 Connections Academy Parent
Satisfaction Survey showed strong results
with 92% of families with students enrolled
in full-time online partner schools stating
they would recommend the schools to
others and 95% agreeing that the curriculum
is of high quality. Results from the survey
are available at pear.sn/HPTn30dCNHH.
Pearson Online Services
In Pearson Online Services, revenues
declined high-single digits, primarily due
to a decline in Learning Studio revenues as
we retire the product and the restructuring
of smaller non-OPM contracts. Learning
Studio declined by just over 50% to a
revenue contribution of £11m in 2017.
In OPM, we grew revenues modestly as
course enrolments grew strongly, up 8% to
more than 341,000, boosted by good growth
and programme extensions at key partners,
including Arizona State University Online,
Maryville University, Rutgers University
and University of Alabama at Birmingham
and from new partners, partially offset
by contract exits.
by print rental are partially offset by growth
in digital revenues, benefits from our
actions to promote access over ownership
and a continued normalisation of channel
returns behaviour.
We signed 45 multi-year programmes
in 2017, renewed 19 programmes and
launched 14 new programmes at partners,
including Maryville University, Duquesne
University and Ohio University. During the
year, we also agreed the termination
of nine programmes that were not
mutually viable and did not renew
a further six programmes.
Brinker International, Inc. (NYSE: EAT), one
of the world’s leading casual dining
restaurant companies and owner of Chili’s®
Grill & Bar and Maggiano’s Little Italy®,
with over 1,600 owned, operated and
franchised restaurant locations, partnered
with Pearson to launch a comprehensive
employer-education programme Best You
EDU that provides free educational
opportunities to Brinker employees,
including foundational, GED and Associate
Degree programmes.
2018 outlook
US higher education courseware
In US higher education courseware,
we expect revenues to be flat to down
mid-single digit percentages as similar
pressures seen in the last two years
continue with lower college enrolments,
increased use of OER and attrition from
growth in the secondary market driven
Evidence of a marginally slower rate of
decline in US student enrolment, together
with slightly lower than expected attrition
from OER in 2017, means that we are now
planning for an underlying decline in
demand of around 6% in US higher
education courseware, slightly improved
from our prior range of 6% to 7%.
North American student assessment
We expect stable testing revenues in
North American student assessment as
new contracts offset a continued
contraction in revenue associated with
our PARCC contract.
Connections Education
Connections Education is expected to grow
modestly as new partner school openings
and good growth in enrolment are partially
offset by in-sourcing of non-core services
by some partners and contract exits.
Professional Certification
North American Online Program
Management is expected to see modest
growth in revenue as investment in new
programs begin to ramp up. Professional
certification is expected to grow revenues
in the mid-single digits benefiting from
new contracts, including our nationwide
contract with the AAMC.
Author
view
North American
Services
Jean M Twenge, Professor of Psychology at
San Diego University and Pearson author
A Pearson author’s view on the future
As a professor, staying relevant to my
students is not just about what I teach,
but the way I teach it. With the advent of
iGen – the smartphone generation –
academics and publishers need to
be evolving. This means offering
digital, interactive
learning to stay
successfully
switched on by the
students of today
and of the future.
JT
JeanMTwenge
Professor of Psychology
Pearson plc Annual report and accounts 2017 Operating performance
Link to strategic priorities 1 Grow share through digital transformation 2 Invest in structural growth markets See Our strategy, p13–21
4545
Core
Market summary
Our international business in established
and mature education markets including
the UK, Australia and Italy.
Contribution to Group revenues
18%
Sales
£815m
Adjusted operating profit
£50m
Efficacy finding
Research to understand
the impact of Bug Club on
pupils’ literacy learning,
their attitudes to reading and school,
and their reading activity found children
made 30 months of progress in 18 months.
Revenues grew 1% in headline terms, were
down 1% at CER and flat on underlying
terms, primarily due to growth in OPM in the
UK and Australia and growth in Pearson Test
of English offset by declines in school, higher
education, English courseware and student
assessment and qualifications.
Adjusted operating profit declined 14%,
or £8m, in underlying terms due to revenue
mix, investment in new products and
services and business exits, partially
offset by restructuring savings.
Courseware
School
Higher education
English
Courseware revenues declined moderately.
In school, revenues declined in Australia,
due to market contraction in the primary
sector partly offset by slight growth in
secondary, and declines in smaller markets
in Europe and Africa. In higher education,
revenues were down slightly due to declines
in smaller markets, while in Australia and
the UK an increase in direct to institution
sales and a further shift to digital offset
declines in traditional textbook sales.
In English, there were declines in
smaller markets.
Assessment
Student assessment and qualifications
In student assessment and qualifications,
revenues declined mid-single digits
primarily due to lower AS level, iGCSE and
apprenticeship volumes as a result of policy
changes. BTEC revenues also declined
modestly as revenues recognised in 2017
lagged the greater stability we have seen in
registrations and billed revenue in the year.
We successfully delivered the National
Curriculum Test for 2017, marking 3.5m
scripts, up slightly from 2016.
Clinical assessment
Clinical assessment grew strongly with
revenues benefiting from strong growth
in the new editions of the Wechsler
Intelligence Scale for Children (WISC-V)
and the Clinical Evaluation of Language
Fundamentals (CELF-5).
Pearson Test of English (PTE)
Pearson Test of English (PTE) saw continued
strong growth in test volumes, which rose
84% from 2016, driven primarily by its use to
support visa applications to the Australian
Department of Immigration and Border
Protection and good growth in New Zealand.
Professional Certification
In Professional Certification, revenues were
flat as the impact of last year’s renegotiated
terms of the UK Driving Theory test for the
DVSA was offset by growth from new and
existing contracts.
Thefuture
of learning
Further education
Core
BTEC
They chose BTEC – will you?
Olympic hero Max Whitlock MBE said:
“I’m the type of person that likes to get stuck
in and really involved in what I do. That’s the
way I learn best. It’s not about being the
hardest worker in the room – it’s about
being the smartest. I would definitely
recommend BTEC to other people.”
www.ichoosebtec.com
This year, we’ve been proud to partner once
again with some high profile leaders who’ve
told us why they love their careers – and why
they believe in BTEC.
The ‘I Choose BTEC’ campaign was all about
our BTEC Ambassadors telling their stories
to show how BTEC opens doors to university,
an apprenticeship – and a thriving career.
Business entrepreneurs Peter Jones CBE,
Jamal Edwards MBE and Sharmadean Reid
MBE and double Olympic Gold medallist
Max Whitlock MBE all featured on London
buses, posters in schools and colleges,
and in online campaigns.
Section 3 Our performance 46
Operating performance
Services
Higher education services
Growth
In higher education services, revenues grew
strongly. Our OPM revenues were up 33%.
In Australia, we saw good growth due to
our successful partnership with Monash
University, and continued success of the
Graduate Diploma in Psychology. We have a
total of c.9,300 course registrations across
the seven programs in Australia up from
c.6,900 in 2016. In the UK, we launched
five new programs in addition to the two
launched in 2016. UK course registrations
grew, reaching c.1,400 compared with
c.370 in 2016.
English services
English services grew, with strong growth in
WSE Italy, due to the opening of new centres
in 2015 and 2016, partially offset by declines
in Japan.
2018 outlook
In Core, we are expecting modest growth
driven by our recent investments in student
assessment and qualifications, where we
are offering new products and services
of considerably greater value, along with
continued growth in PTE and OPM with
ten new program launches in the UK, and
growth in existing programs in Australia.
Market summary
Our growth markets in emerging and
developing economies with investment
priorities in Brazil, China, India and
South Africa.
Contribution to Group revenues
17%
Sales
£769m
Adjusted operating profit
£38m
Efficacy finding
Speakout: Students report
that Speakout with
MyEnglishLab has increased
their confidence, motivation
and enjoyment.
Revenues were flat in both headline and
underlying terms due to growth in China,
school courseware in South Africa and
Pearson Test of English, offset by declines
in higher education services primarily due
to lower enrolment at CTI and business
disposals in India, and declines in Brazil.
Revenues were down 4% at CER due to the
disposal of GEDU.
Adjusted operating profit increased 3%
in underlying terms, reflecting the higher
revenues in China, South Africa school
courseware and PTE in India, together
with the benefits of restructuring, partially
offset by lower revenues in Brazil.
Courseware
Courseware revenues grew moderately,
due to strong growth in school textbook
sales in South Africa and English language
courseware in China, partially offset by
weakness in Brazil.
Helping create the
future of learning
An interview with teachers from
Gyananda School, Dehradun
Thank you MyPedia
“For a new school like ours, MyPedia has been
a great support in terms of curriculum
planning, assessments and teacher support.
It challenges both teachers and students to
break away from the conventional teaching
learning methodology and encourages them
to explore and derive their own conclusions.”
MeenakshiMehtaHeadteacher
“MyPedia is user friendly software for the
teachers. I was hesitant using it earlier but
now it has become an integral part of my
teaching plan. It has everything that a teacher
can wish for. Thank you MyPedia.”
PoojaBisht,Teacher
Pearson plc Annual report and accounts 2017 Operating performance
Link to strategic priorities 1 Grow share through digital transformation 2 Invest in structural growth markets See Our strategy, p13–21
4747
Services
English services
Assessment
Pearson Test of English
In English services, growth in Wall Street
English in China, due to new centre
openings, was offset by declines in Brazil
due to macroeconomic pressures.
Professional Certification grew strongly.
Pearson Test of English saw over 30%
growth in the volume of tests taken in India.
School services
2018 outlook
In our growth markets we expect a modest
increase in revenues, with growth in China
in ELT products, PTE and in South Africa
due to improving enrolments in CTI partially
offset by declines in school courseware
after a strong 2017. In Brazil, we expect
revenue to increase modestly from growth
in Wizard and school sistemas, partially
offset by declines in government contracts.
In India, we expect PTE and MyPedia to
continue growing.
In school services, revenue fell, with student
enrolment in our sistemas business in
Brazil falling 14% primarily due to NAME,
our public sistema, where we took the
strategic decision to exit two-thirds of
our contracts with municipalities due to
unattractive economic prospects, together
with a reduction in student enrolments
in our Dom Bosco private sistema due
to challenging economic conditions.
In India, Pearson MyPedia, an inside service
‘sistema’ solution for schools, expanded
to over 500 schools with approximately
157,000 learners.
Higher education services
In higher education services, revenues
declined sharply due to a 14% fall in total
student enrolment at CTI, our university
in South Africa driven by the cumulative
impact of economic factors in recent years,
partially offset by improved new student
enrolments in 2017, together with business
exits in India.
Penguin Random House
Following the disposal of a 22% stake
on 5 October 2017 Pearson owns 25%
of Penguin Random House, the first
truly global consumer book
publishing company.
Penguin Random House performed in
line with our expectations with revenues
up slightly on a headline and underlying
basis year on year on rising audio sales,
broadly stable print sales and modest
ongoing declines in demand for eBooks,
while the business benefited from
bestsellers by Dan Brown, R.J. Palacio,
John Grisham, Jamie Oliver and Dr. Seuss.
2018 outlook
In Penguin Random House, we anticipate
a broadly level publishing performance
and expect an annual after-tax
contribution of around £60–65m to
our adjusted operating profit.
Helping create the
future of learning
An interview with Alan Palau, Innovation & Efficacy
Delivery Director, Hispano-America, Pearson
MePro: A new English Learning solution in Hispano-America
“MePro is a new and innovative English
Learning programme launching spring 2018
in Hispano-America initially, with plans to roll
it out further across markets such as China,
Brazil and the Middle East. English Learning
opens up a world of opportunities and
future careers and continues to grow as
an indispensable core competency in
non-English speaking countries – Pearson
has the opportunity to reach millions of
learners and teachers across the Growth
markets through MePro which can help
meet this need by leveraging successful
existing content, assessment and enhanced
technology solutions and platforms to deliver
personalised learning for students measured
by Global Scale of English learning outcomes.”
Measuring learning progress
1
2
3
4
Efficacy consulting
& placement
Learning
progress plan
Measuring
progress
Relevant
achievement
Section 3 Our performance 48
Risk management
The goal of our approach to Enterprise Risk Management (ERM), summarised in the framework below,
is to support Pearson in meeting its strategic and operational objectives, as set out by the Chairman
and the Chief Executive on p6–10. Our framework aligns to international standards (e.g. COSO and
ISO 31000) and aids our compliance with the Financial Reporting Council’s (FRC) UK Corporate
Governance Code guidance on risk management.
Managing risk
Our approach to managing risk has remained consistent
with our approach in 2016.
Context
Monitoring
and review
Reporting
Assessment
identify, analyse,
evaluate
Treatment
Context
The risk context sets the criteria against which risks are
identified and assessed. It defines the external and internal
parameters to be taken into account, as well as the scope
of the risk management process.
The risk management policy, framework and supporting
guidance set out how to manage risks, such as determining
probability and impact as well as instructions on how to
translate these into an overall risk rating. Adaptations
of these matrices, tailored for a specific business area,
are in use and align with the policy.
Foundations
Risk foundations are all the elements (as set out in
this framework) which underpin successful ERM,
and risk management more broadly, across Pearson.
Governance and oversight
The Board, assisted by the Audit Committee, oversees
the ERM framework, validates risk appetite targets,
risk status and mitigation plans, plus verifies the viability
statement process.
Roles and responsibilities
Day-to-day ERM is undertaken by a dedicated team.
For a list of their responsibilities, as well as other key
risk stakeholders, see p84 ‘Governance’.
Policy, framework, processes and tools
Our policy, framework and supporting guidance outline our
commitment to managing risk and set what we consider
to be the minimum standards. These can be tailored by a
business area as long as they align with the policy. The
process is assessed during the annual effectiveness
review, covered in more detail on p84 in ‘Governance’.
Appetite and tolerance
Pearson leadership sets the target risk appetite for each
risk they own, validated by the Audit Committee and
Board. Understanding the degree of risk the Board will
accept determines the most appropriate risk treatment.
For example, a legal or compliance risk has a low target
appetite where we try to eliminate risk as much as we
can. Whereas a business transformation risk is often
also a strategic opportunity and likely to have a higher
appetite, where we would take well-informed and
well-managed risks to achieve our goals.
Working with third-parties
The use of third-parties (for example, suppliers or
partnerships) can create risk, such as an interruption
to operations or an impact on reputation. In 2017, we
drafted a third-party risk management policy. We also
created risk identification questions to help us flag areas
requiring investigation. Questions cover principal risks as
well as material issues, e.g. environmental matters and
respect for human rights, as described in ‘Sustainability’
on p24–33. This process is being rolled out in phases as
part the implementation of a new procurement system.
Pearson plc Annual report and accounts 2017 Managing risk
Risk management
4949
Assessment
At least twice a year, the ERM team facilitates a risk
assessment process through discussions with leadership,
senior management and key stakeholders from each
business area. For each risk, the probability of it
materialising and its potential impact is rated.
The adequacy of action plans to address any
remaining control gaps is then assessed.
We do this for both new risks identified as well as those
already being monitored. Horizon scanning also takes
place throughout the year to aid in the identification
of new risks.
Treatment
Once assessed, the most appropriate course of action for
each risk is decided, taking into account the size of the gap
that needs to be closed between its current status versus
its risk appetite target. This can include ‘avoid’ (e.g. not
doing something); implementing mitigation or contingency
plans to change the probability or reduce the impact
of a risk; accepting increasing risk in order to pursue
an opportunity; or sharing the risk with another party
or parties.
Monitoring and review
Reports are submitted to the Board and Audit Committee
bi-annually. This gives them the opportunity to review,
challenge and validate the ERM process and key risks.
The reports cover current risk status as well as an update
on risk mitigation initiatives and their effectiveness.
Discussions focus on where there is either a) the greatest
change in rating or b) the biggest gap between current
rating and the target appetite, with the emphasis on the
strength of mitigation plans in place. The risk maps for
each business area are also included in these reports.
Risk deep dives also take place at the Audit Committee
throughout the year. In 2017, some of the risks covered
included business transformation, data privacy and
security (including GDPR), tax and treasury. You can
read the details in the Chairman of the Audit Committee’s
report on p76–78.
Culture
The ERM framework is also used to drive the
integration of risk management approaches
into the culture of the organisation.
Communication, training, education and awareness
Our Code of Conduct remained in place throughout
2017 to drive ethical behaviours across the organisation.
The ERM team is committed to raising awareness among
employees on the importance of better managing their
day-to-day risks. In 2017, the team regularly attended
leadership and team meetings to highlight best practice
and conducted specific training events.
Embedding risk in decision-making
A key focus area for the ERM team in 2017 was the further
embedding of risk management across the wider
organisation to support the business in making risk
aware decisions.
All Pearson business functions continued to maintain
their own risk map, with the spotlight in 2017 on the
robustness of the mitigation plans. Business functions
follow the same framework for identifying, assessing,
treating and monitoring risk. Each identified risk is also
assigned a risk appetite target. This work underpins
the assessment of the company-wide risks. 2017 saw
greater ownership and extension of risk processes by
individual business areas.
Continuous improvement
At the end of 2014, we reviewed our current risk
management maturity against this risk framework and
set maturity targets for the following three years.
In 2018 we will be implementing a more integrated
approach to assurance across Pearson (based on a
model which outlines the different levels of assurance
responsibilities from business management through
to external audit and oversight), as well as updating
our framework to ensure it continues to align with the
2017 update of the COSO ERM standard.
Section 3 Our performance 50
Principal risks and uncertainties
The Board of Directors confirms that
throughout 2017 they undertook a
robust assessment of the principal
risks facing the company, in
accordance with provision C.2.1 of the
2016 UK Corporate Governance Code.
Our principal risks
(as of 31 December 2017)
Listed in the table below (and shown on the
adjacent risk map) are the most significant
risks that may affect Pearson’s future.
A longer list of company-wide risks, plus
emerging risks, was monitored and
reviewed throughout the year. The most
material of these are identified as principal
risks. Principal risks are those which have
a higher probability and significant impact
on strategy, reputation or operations,
or a financial impact greater than £50m.
The full impact of the UK’s pending
departure from the EU (Brexit) is still
unclear, but we remain vigilant to potentially
material risks for Pearson. Work continued
throughout 2017 (led by a Steering
Committee chaired by the CFO) to identify
and mitigate any potential impact on
(a) our principal risks below, such as
treasury, tax or data privacy, or (b) other
areas such as UK-EU supply chain and
workforce mobility, including in the event
of a ‘no deal’ exit scenario. We continue
to believe that Brexit, in whatever form it
takes, will not have a material adverse
impact on Pearson as a whole.
The following principal risks also relate to
the material issues considered in the 2017
sustainability report: products and services,
testing failure, political and regulatory risk,
data privacy, information security, customer
digital experience, and safety and corporate
security. You can read more in the
Sustainability section on p24–33.
Principal risks: status and 2017 change
t
c
a
p
m
I
e
r
e
v
e
S
j
r
o
a
M
e
t
a
r
e
d
o
M
r
o
n
M
i
t
n
a
c
fi
n
g
i
s
n
i
I
14
7
6
9 15
11
1
5
4
8
10
12
3
2
13
Key
0
Net risk Probability
and impact are
based on residual
risk, i.e. after taking
into account
controls already in
place and assumed
to be operating
effectively.
Indicates
change in 2017
For more
information
see principal risks
and uncertainties
tables p51–60.
Rare
Unlikely
Possible
Likely
Probability
Almost
certain
Risks are categorised into four main areas:
Strategy & change
Relating to the goals that support our
strategy. This category is the most likely
to contain ‘opportunity’ risks which
typically have a higher risk appetite
1
2
3
4
Business transformation
and change
Executive responsibility
Chief Executive Officer
Products and services
President, Global Product
Talent
Chief Human
Resources Officer
Political and
regulatory risk
Chief Corporate Affairs and
Global Marketing Officer
Operational
Involving people, systems
and processes
Testing failure
5
6 Health and safety
President, Assessments
President, UK & Core Markets
Chief Human
Resources Officer
7
8
9
Safeguarding
President, Assessments
Customer digital
experience
Corporate security and
business resilience
President, Global Product &
Chief Technology and
Operations Officer
Chief Financial Officer
Financial
Involving financial planning, investments,
budgeting, potential losses of and
exposures to Pearson’s assets
10
11
Tax
Treasury
Legal & compliance
Relating to the adherence to
applicable laws and regulations.
Risks in this category typically
have a very low risk appetite.
12
Data privacy and
information security
13
Intellectual property
and rights, permissions
and royalties
14 Compliance
Chief Financial Officer
Chief Financial Officer
Chief Technology and
Operations Officer &
General Counsel
General Counsel
General Counsel
15 Competition law
General Counsel
Pearson plc Annual report and accounts 2017 Principal risks and uncertainties
5151
Strategy & change
1
Business
transformation
and change
The pace and scope of our
business transformation initiatives
increase our execution risk that
benefits may not be fully realised,
costs may increase, or that our
business as usual activities may
be impacted and do not perform
in line with expectations.
Incorporates ‘Data quality and
integrity’ risk: Unavailability of
timely complete and accurate
data limits informed decision-
making and increases risk
of non-compliance with legal,
regulatory and reporting
requirements.
Increase in impact
and probability
Existing controls
2018 outlook and plans
Business transformation and change initiatives will
continue to support our strategic goals to accelerate
our digital transition in higher education, to manage
the print decline, and to reshape our portfolio,
as outlined by our Chief Executive on p8–10 and
covered in more detail under our strategy in action
on p14–21.
In 2018, we will continue with the development
of the GLP, a single, cloud-based platform to
support learners and our digital transformation,
as well as the next phase of TEP to further progress
the simplification of our business. Both programmes
will continue to be closely monitored by the Audit
Committee at each meeting (you can read more
about their oversight of key programmes in the
report from the Chair of the Audit Committee
on p76–77).
Successful execution of all our change programmes
in 2018 will depend on having the right change
management skills (see also Talent risk on p52).
The focus on data quality in 2018 will be supporting
the TEP North America implementation. In addition,
the new EU data privacy law, the General Data
Protection Regulation (GDPR) which will apply from
May 2018 and spans all of our underlying systems,
is a priority.
Transformation programme office
Global learning platform (GLP) and the enabling
programme (TEP) are standing Audit Committee
agenda items. See ‘Governance’ p76–77
Regular updates with Pearson Executive
Executive owned Steering Committees in place
Independent assurance on key programmes
Outcome of 2017 activities
In 2017, we continued to invest in the digital
transformation and simplification of the company.
The volume and accelerated pace of change
combined with execution interdependencies
as we go into 2018 are keeping this our highest
rated (and slightly increased) risk. We also have
capabilities we need to continue to develop
internally to deliver transformation and change
(See Talent risk on p52).
The £300m 2017-2019 cost efficiency programme
remains on track to achieve its targets. Following
the planning phase culminating in the August 2017
announcement, the programme transitioned to
implementation.
HR Fusion, part of TEP, successfully went live in the
US in June 2017. Significant progress was also made
regarding data governance as our quality focus
and scope expanded in 2017 to global data. We now
have a much more top-down view of product data,
moving on to sales, marketing, rights and royalties
and fulfilment. We also started putting in place
customer data governance.
Section 3 Our performance 52
Principal risks and uncertainties
Strategy & change
2
Products and
services
Failure to accelerate our shift
to digital by developing and
delivering (to time and quality)
market leading global products
and services that will have the
biggest impact on learners and
drive growth; ensuring Pearson
offers products to market at
the right price and with a
deal structure that remains
competitive as well as
supports our strategy.
Decrease in probability
Existing controls
Global product lifecycle process
Portfolio management
Audit Committee oversight of GLP
Outcome of 2017 activities
Successfully managing this risk underpins two of
our key strategic priorities – growing our market
share through digital transformation plus investing
in structural growth opportunities (see p14–17).
The likelihood of this risk occurring reduced in
2017 due to the progress we’ve made towards
implementing portfolio management practices
and strategic investment recommendations,
as well as on pricing strategy and governance
in US higher education courseware.
In 2017, we progressed our understanding of the
competitive and structural threats, especially to
our courseware business in terms of general and
student buying behaviour and have taken steps to
mitigate these. For example, we are making good
progress in shifting the business from ownership to
‘pay for use’, we reduced the price of a number of
eBook rentals and also launched a print rental
3
Talent
Existing controls
Failure to attract, retain and
develop staff, including adapting
to new skill sets required to
run the business.
Consistent performance, talent and succession
management processes
Employee policies including the Code of Conduct
(see p27 in Sustainability)
Employee engagement forums and action plans
Decrease in probability
Turnover data monitored on a monthly basis
Exit interviews conducted and monitored globally
to identify any trends and concerns
Learning programmes now offered on a single
platform for all staff (Pearson U)
Revamped external careers website and talent
acquisition approach to improve attraction of
digital skills
Wide range of employee benefits
Outcome of 2017 activities
The likelihood of this risk occurring has reduced due
to the mitigation activities successfully implemented
in 2017. However, talent remains an ongoing priority
for the company, with a focus on building the talent
needed to deliver the business strategy for 2020
especially in key areas such as digital and change
management skills.
Work was undertaken to ensure we have clarity
on the key capabilities required to achieve our
2020 goals, using this to support learning and
development, assessment, development and
talent attraction.
Throughout 2017, there was a strong focus on
leadership communication of the Pearson
strategy, as well as increased visibility of the
Pearson Executive and leadership teams.
programme to give greater convenience and value
to students.
2018 outlook and plans
Turning this risk into an opportunity – successfully
accelerating our shift to digital as well as investing
in and delivering the right products and services –
is as key to successful business performance in
2018 as it was in 2017. A new Chief Strategy Officer
joined at the start of 2018 see p63.
We will continue to improve the US higher education
courseware integrated business strategy, product
lifecycle and governance, as well as pricing strategy.
In addition to the development of GLP, we are
investing in other innovations, such as Artificial
Intelligence, to ensure our products stay relevant
and to become more agile in our delivery. We are
also prioritising investment in our fastest growing
businesses across Pearson. See p16–17 in Strategy
in action.
Market research and analysis activity across
Pearson was centralised into one Global Insights
team in January 2018. Their remit is to develop
customer insights to inform portfolio, product,
channel and business strategy.
Employee engagement action plans communicated
across Pearson and the Executive are reporting
progress to the Board on a quarterly basis.
Highlights from these plans are listed on p27
in the Sustainability section.
An organisational health survey was conducted,
and results and action plan shared in Q4.
Our platform for learning and development was
upgraded in 2017, increasing accessibility to learning
and development solutions and greater flexibility
in goal-setting. Academies were also launched
for leadership teams as well as Technology, Product,
Marketing and Finance. These aim to increase both
our capabilities and retention.
2018 outlook and plans
Pearson will implement further programmes to
improve connection with the Pearson strategy, and
to increase engagement and organisational health.
In order to build the talent we need to deliver the
2020 business strategy, there will additional focus on
direct sourcing and construction of targeted talent
pools to target skills (digital), address succession gaps,
and increase diversity in leadership roles. We will
also continue to support change activities through
Change Leadership training and handbooks.
In 2018, there will be a stronger focus on development
planning linked to further roll-out of career workshops.
We will expand and upgrade Pearson U learning,
launching new Sales Academy and leadership
programmes that support succession planning and
increase retention. We will also further refine the
careers website to increase employee attraction.
The Pearson Executive will maintain their focus in
2018 on talent actions for the senior leadership
group and succession through quarterly reviews.
Pearson plc Annual report and accounts 2017 Principal risks and uncertainties
5353
Strategy & change
4
Political and
regulatory risk
Changes in policy and/or
regulations have the potential to
impact business models and/or
decisions across all markets.
Existing controls
2018 outlook and plans
Pearson will continue to position itself as a leader
in the education space, an innovator in higher
education and establish the company as a key
engine in workforce development and economic
growth. We are also driving opportunities to
engage directly with other businesses.
In the UK, there is ongoing concern about the
amount of testing (and the sheer difficulty
of the new tests) in primary schools. As a test
administrator, we are mitigating this through
a stakeholder outreach programme on
assessment. In addition:
The new 9-1 GCSEs will be awarded in almost
all subjects
Technical education: as the government becomes
more clear about the role of T Levels we will need
ongoing government relations, media and thought
leadership work.
Across our educational markets in 2018, we believe
the trend for more intrusive and voluminous
regulation in our sector will continue. We will
continue our work from 2016 and 2017 to
mitigate this.
We will continue to assess the potential impacts of
the UK’s decision to leave the EU as the model that
will replace our membership becomes clearer.
Board and Executive oversight
Government relationship teams
EU referendum Steering Committee
Outcome of 2017 activities
Although there has been no overall change in the
risk rating, significant work has been done to ensure
we can more proactively identify and mitigate
political and regulatory risk.
Over the last two years, there has been a specific
focus on leveraging resources across the US and
UK to build global political/regulatory relationships,
and an international political profile in order to
understand future international risks and
proactively mitigate them.
In the UK, 2017 was the year that GCSEs began their
changeover from grades A*-G to 9-1 with English and
Maths. Our focus was on working with government,
regulator and other awarding organisations to
demonstrate the professionalism and solidity of the
system, which resulted in a stable set of results.
In the US, we continued to implement our ten
priority state strategy engaging with new and
existing office holders in key states and worked
to shape the state and federal regulatory and
legislative environment in favour of Pearson
strengths. This work focused on Pearson solutions
to affordability and access with stakeholders
in Congress, the Administration and priority
state capitals.
The full impact of the UK’s pending departure from
the EU is still unclear, but we remain vigilant to
potentially material risks for Pearson. Work
continued throughout 2017 (led by a Steering
Committee chaired by the CFO) to identify and
mitigate any potential impacts on our principal risks
below, such as treasury, tax or data privacy, or
on other areas such as UK-EU supply chain and
workforce mobility, including in the event of a
‘no deal’ exit scenario. We continue to believe that
Brexit, in whatever form it takes, will not have a
material adverse impact on Pearson as a whole.
Section 3 Our performance 54
Principal risks and uncertainties
Operational
5
Testing failure
Existing controls
We seek to minimise the risk of a breakdown in
In the UK, we successfully delivered the UK summer
exam series in 2017 to a high standard of quality.
Failure to deliver tests and
assessments and other related
contractual requirements because
of operational or technology
issues, resulting in negative
publicity impacting our
brand and reputation.
our student marking systems with the use of:
2018 outlook and plans
Robust quality assurance procedures and controls
Oversight of contract performance Investment
in technology, project management and skills
development of our people, including software
security controls, system monitoring, pre-
deployment testing, change controls and the
use of root cause analysis procedures to learn
from incidents and prevent recurrence
Use of Amazon Web Services (AWS) in Clinical
and Schools
IBM counter-fraud tool.
Outcome of 2017 activities
Pearson is an education content, assessment and
related services company and, as such, managing
this risk remains a priority.
In the US, the majority of student testing is now
conducted via AWS, resulting in improved
availability and stability.
The drive to continue improvements to availability
and stability of testing systems continues. The
migration and retirement of legacy systems in
use will continue.
Given the high stakes nature of the UK testing
business, there remains a risk of breaches of
security either as a result of error or of a malicious
nature. We are reviewing what additional measures
we can put in place for 2018 to further mitigate
against potential question paper security breaches.
The plan to upgrade Pearson’s bespoke online
marking system – ePEN – in the UK will continue
throughout 2018 with full implementation due by
the end of 2019, taking into account the complexity
of our systems as well as external marking
contract obligations.
Clinical’s Q-global will be moving to AWS in Q1 of
2018. Additional technology stack updates will be
implemented during 2018 to address 2017 issues.
6
Health and safety
Existing controls
2018 outlook and plans
Failure to adequately protect the
health, safety and wellbeing of
our employees, learners and other
stakeholders from harm could
adversely impact our reputation.
This risk previously incorporated
Corporate security which is now part
of risk 9 ‘Corporate security and
business resilience’.
Decrease in probability
Implement the new global H&S Policy and
standards and continue to improve the application
of our H&S standards
Refine and Implement a new 18–20 H&S Strategy
Deliver the IOSH Managing Safely course to our
global H&S coordinators
Review our H&S systems to ensure they continually
evolve to reflect our changing business
Enhance our global assurance programme to not
only provide risk-based auditing of key locations,
but to also include advisory reviews and focused
risk-based H&S Projects
Continue to evolve our key risk reduction
programmes covering:
– Ergonomics
– Occupational Road Risk
– Occupational health risk management
and wellbeing
Global health and safety (H&S) team
Global policy and standards
Global assurance and incident reporting system
Audit programme
Regional training
Outcome of 2017 activities
The likelihood of this risk occurring has decreased as
a result of the outcomes of the following:
Overall implementation status of Pearson’s H&S
minimum standards continues to improve globally
The 2017 global H&S audit programme was
completed across a wide range of our locations
Our global H&S coordinator role has been
formalised with a new terms of reference
The global H&S team became a registered
centre to teach the globally recognised
Institution of Occupational Safety and Health
(IOSH), Managing Safely course
A completely revised global H&S Policy (with
improved governance and responsibilities) and
standards have been developed, which now
include good practice goals, recognising the
H&S maturity in many of our key markets
Good progress was made across our
15–17 H&S Strategy.
Pearson plc Annual report and accounts 2017 Principal risks and uncertainties
5555
Operational
7
Safeguarding
Failure to adequately protect
children and learners, particularly
in our direct delivery businesses.
Existing controls
Safeguarding policy
Internal procedures and controls
Staff Code of Conduct
Third-party risk management policy
Safeguarding Steering Committee
Local safeguarding coordinators
An exercise was conducted to test the response of
selected businesses to an online safeguarding issue
regarding a member of staff, the results of which
were used to further refine training and awareness,
ready for implementation in 2018.
A sexual harassment policy for our further
education business has been developed and
currently training is being produced to support its
implementation in Q2 2018.
Outcome of 2017 activities
2018 outlook and plans
We continue to view safeguarding as a fundamental
obligation to our learners and a high priority.
Although the risk has been reduced due to our
disposal of the majority of our direct delivery
businesses, we are exposed to greater online
risk as we move to more digital services. There is
never a zero risk of a safeguarding incident and
organisations should always challenge themselves
and look to improve their practice. Hence the
overall risk remains the same.
We will continue to develop and question our
practices around safeguarding in 2018, with
a focus on ongoing training and awareness
across the business, especially with regard to
online safeguarding.
We will also further refine our safeguarding metrics
and the system used for reporting, as well as
developing and implementing a system for
external validation of our safeguarding practice.
8
Customer digital
experience
Challenges with reliability and
availability of customer facing
systems could result in incidents
of poor customer digital
experience and impact our
customer service responsiveness.
Existing controls
Real-time monitoring of systems (for service
disruptions) and reporting of operational
performance used to identify issues
Project management disciplines in place to
ensure enhancements and new products
meet required standards
Further investment was made in 2017 in our global
learning platform (GLP). You can read more on
this and how it underpins our strategy and the
learning experience in ‘Our strategy in action’
section on p14–15.
Customer support also improved response times
for incoming calls and improved outgoing customer
communications during the recent outages.
Outcome of 2017 activities
2018 outlook and plans
Managing this risk is critical to achieving our
strategic goal of accelerating our shift to digital
products and services, and, crucially, becoming
a trusted partner. Therefore this risk remains
high, despite the significant improvements in
2017 to our product stability and execution.
Mitigations were put in place to prevent a recurrence
of the 2016 back-to-school (BTS) issues experienced
by customers. BTS stability in the second half of
2017 was significantly improved, resulting in only a
few minor incidents and the highest availability
levels seen in the last three years.
In 2018, there will be a continued focus on the
performance, stability and usability of all product
platforms as well as customer service quality
and responsiveness.
Our GLP development, critical to our digital
transformation strategy, will continue in 2018,
with the first pilots due to go live. This platform
will allow us to innovate faster as well as better
support our learners.
Section 3 Our performance 56
Principal risks and uncertainties
Operational
9
Corporate security
and business
resilience
Corporate security: Failure to
ensure security for our staff,
learners, assets and reputation,
due to increasing numbers of and
variety of local and global threats.
Business resilience: Failure to plan
for or prevent incidents at any
of our locations. Incident
management and technology
disaster recovery (DR) plans
may not be comprehensive
across the whole Group.
Risk definition has changed from
‘business continuity’ in 2016 and
now incorporates corporate security,
previously reported as part of
risk 6 ‘Health and safety’.
Existing controls
2018 outlook and plans
Security and resilience policies
In 2018, we will:
Continue to drive security as a proactive rather
than reactive activity, with ongoing physical and
travel security reviews
Refine the incident response model towards a
broader regional/geographic response
Continue work on the sustainable and data specific
roll-out of the Everbridge mass notification system
Mandate travel security training for travel to high
risk countries (due for deployment in February)
Work to refine DR planning for any legacy systems
and applications, as well as our support of the
GLP, TEP and the £300m 2017-2019 cost
efficiency programmes
Grow our knowledge around cloud-based
technologies and implement future
digital resilience.
Security minimum protection standards
Incident management process
Resilience governance Steering Committee
Incident management and DR teams
Global notification and incident reporting tools
ISO audit programme
PQS & VUE – ISO 22301 accredited
Outcome of 2017 activities
There were an increased number of incidents
in 2017, which fortunately did not impact
Pearson directly.
Continued work across the ‘Top 40’ locations for
planning, testing and response
Increased collaboration across the organisation,
improving understanding of current and future
risks, particularly regarding incident response
and DR planning
Training of global incident management teams
for different response levels
A mass notification system was deployed in the
UK and will be further deployed globally during
2018 in order to better communicate with our
staff and confirm their safety during an incident
We strengthened our travel security programme,
including greater support provision for higher
risk trips
In physical security, the security policy and global
property guidelines were released in early 2017,
and contain advice and direction for all projects
involving the build, refurbishment and disposal of
properties. Security reviews in specific locations
resulted in a reduction of risks and therefore
improvements for staff and learners.
Pearson plc Annual report and accounts 2017 Principal risks and uncertainties
5757
Financial
10
Tax
Legislative change caused by the
OECD Base Erosion and Profit
Shifting initiative, the UK exit from
the EU, other tax reform or
domestic government initiatives,
potentially in response to the
ongoing EU anti-tax abuse
activities, results in a higher
effective tax rate, double
taxation and/or negative
reputational impact.
Increase in impact
Existing controls
Our tax strategy reflects our business strategy and
the locations and financing needs of our operations.
In common with many companies, we seek to
manage our tax affairs to protect value for our
shareholders, in line with our broader fiduciary
duties. We do not seek to avoid tax by the use of
‘tax havens’ or by transactions that we would not
fully disclose to a tax authority. We are guided by
our taxation principles, which include complying
with all relevant laws, including claiming available
tax incentives and exemptions that are available
to all market participants.
Oversight of the tax strategy is within the remit
of the Audit Committee, which receives a report
and risk deep dive on this topic at least once a year
(see p78 for details). The CFO is responsible for
tax strategy; the conduct of our tax affairs and the
management of tax risk are delegated to a global
team of tax professionals.
Outcome of 2017 activities
This risk increased in 2017 due to the US tax
reform changes legislated in December and the
announcement in November of the European
Commission opening decision on the United
Kingdom Controlled Foreign Companies exemption
[see note 34, contingent liabilities on p175).
11
Treasury
Controls
Failure to manage treasury
financial risks e.g. debt
repayments, key corporate
ratios, counterparty risk,
rising interest rates and
transactional FX exposure.
Decrease in impact
and probability
Treasury policy (see note 19 starting on p156)
The treasury strategy and policy is also subject to
an Audit Committee risk ‘deep dive’. See p78
Outcome of 2017 activities
Overall treasury risk has reduced over 2017 due
to a proactive exercise to reduce gross debt and
strengthen our balance sheet which has had a
direct impact on refinancing, counterparty and
interest rate risk.
Pearson has no debt maturities in 2018. We
anticipate that cash from operations, our existing
cash balances and cash equivalents, together
with availability under our existing credit facility,
and cash from operations, will be sufficient to fund
our operations for at least the next 12 months.
In August the Audit Committee received an update
on our tax strategy and approved our first tax report
which was published in September. A further update
was given to the Audit Committee and Board in
December mainly focusing on the impact of US
tax reform.
US tax reform is not expected to have a material
impact on our effective tax rate, however
we continue to work through the detail and
assess whether any changes to our strategy
are appropriate.
The outcome of Brexit remains insufficiently
clear to assess any impact on tax but we continue
to monitor.
2018 outlook and plans
We will continue to assess (and implement
mitigation plans if required) US legislation changes
as well as monitoring potential tax law changes
globally, along with Brexit implications and the
State Aid situation.
2018 will see the publication of our second
tax report.
Media and public scrutiny on tax issues will
continue to be actively monitored by group
tax and corporate affairs.
Pearson maintains investment grade credit ratings
with Moody’s and Standard and Poor’s which facilitate
good access to capital markets. These credit ratings
in February 2018 were Baa2 (negative outlook) with
Moody’s and BBB (negative outlook) with Standard
and Poor’s. The negative outlooks reflect perceived
business risk as the business transforms, particularly
in US Higher Education.
See note 19 starting on p156 for more information
on credit, counterparty, interest rate and
transactional FX activities in 2017.
2018 outlook and plans
In 2018, we will continue to operate in line with
our treasury policy. More on this can be found in
note 19, starting on p156.
Section 3 Our performance 58
Principal risks and uncertainties
Legal & compliance
12
Data privacy and
information
security
Risk of a data privacy incident or
other failure to comply with data
privacy regulations and standards,
and/or a weakness in information
security, including a failure to
prevent or detect a malicious
attack on our systems, could
result in a major data privacy or
confidentiality breach causing
reputational damage, damage to
the student experience, lack of
compliance and financial loss.
Existing controls
Information Security and Data Privacy Offices
Privacy impact assessment process
Regular audits
Automated tools
Annual data privacy training and awareness week
Risk management framework
Vendor oversight
Audit Committee risk ‘deep dive’. See p78
Outcome of 2017 activities
Risks concerning cyber-security and data privacy
remain high due to complex external factors.
We now have clarity on the increased regulatory
obligations and their impact on Pearson, such as
the new EU data privacy law, the General Data
Protection Regulation (GDPR) which will apply from
May 2018 and introduce more onerous privacy
obligations and more stringent penalties for
non-compliance. The UK’s departure from the
EU is also adding another layer of uncertainty with
regard to the regulator, and customers are also
demanding more from us in terms of data privacy
(e.g. GDPR and data sovereignty).
We continued to roll out our GDPR programme in
2017; our work to improve the security of our critical
products; as well as our privacy impact assessment
process for new vendors and programmes.
Many information security risks previously identified
have been addressed, plus there was increased
vendor oversight in 2017. However, ongoing
assessments uncover new vulnerabilities and risk
areas arising from increasingly sophisticated attack
strategies, as well as Pearson’s ongoing transition
to digital products, services and cloud adoption.
In 2017, the information security team focused
on an improvement programme for critical
applications, core platforms and infrastructure
to enable Pearson’s digitisation and simplification
strategy. In addition, we also instituted a
programme to review our top vendor contracts to
ensure they have the most up-to-date data privacy
and information security wording and that they
align with GDPR where relevant.
2018 outlook and plans
The Data Privacy Office continues to monitor
developments relating to the UK’s departure from
the EU and, where necessary, adapt to any new UK
specific privacy developments. As Pearson operates
across several EU Member States, we will still need
to comply with GDPR when the UK leaves the EU.
The information security team will continue to drive
security maturity (and also thus security compliance
to GDPR, PCI, HIPAA, FERPA and other regulatory
requirements). A new risk management tool has
been deployed so that security risk accountability
can be cascaded effectively.
We are conducting an inventory of what personal
and other sensitive data we hold and where in
the organisation to better focus our resources
and attention.
Joint data privacy and information security activities
to build security and privacy controls into the design
critical products (including the new global learning
platform) will continue.
Increased vendor oversight is a critical initiative for
security and broad compliance.
Pearson plc Annual report and accounts 2017 Principal risks and uncertainties
Legal & compliance
5959
13
Intellectual
property and
rights, permissions
and royalties
Existing controls
Policies in place to manage and protect our IP
Global trademark monitoring platform
Cooperation with trade associations
In 2017, we launched patent management
technology to further improve our asset tracking,
as well as implementing a global trademark
monitoring platform to improve visibility of
potential infringement threats.
Monitoring of technology and legal advances
2018 outlook and plans
Failure to adequately manage,
procure, register or protect
intellectual property (IP) rights
(including patents and general
copyright) in our brands, content
and technology or to prevent
unauthorised printing and
distribution of books and digital
piracy may prevent us from
enforcing our rights which
will reduce our sales and/or
erode our revenues.
Failure to obtain permissions,
or to comply with the terms of
permissions, for copyrighted or
otherwise protected materials
such as photos resulting in
potential litigation; risk of authors
alleging improper calculations
or payments of royalties.
Decrease in probability
Patent programme in place
Establishment of Anti-piracy Committee
Legal department provides ongoing monitoring
and enforcement of print and digital
copyright piracy
Outcome of 2017 activities
Overall risk has reduced due to careful litigation
management, the continued negotiation of
preferred vendor agreements, as well as the
ongoing work to implement a new rights and
royalties system which will further mitigate this
risk. We started our phased implementation of this
system in the UK in 2017.
We established an Anti-piracy Committee to
manage piracy related risk in a coordinated manner.
We conduct internet monitoring, takedown and
internet ‘search result’ scrubbing to reduce digital
piracy. We have also worked with our larger North
America channel partners to adopt best-practice
anti-counterfeit measures.
We will continue to streamline our portfolios;
procure and register expanded rights in our high
value IP globally, including aggressively expanding
our patent portfolio; monitor activities and
regulations; and proactively enforce our rights,
taking necessary legal action.
We will continue to implement the newly developed
royalty and business practices, along with the new
rights management system across the US and
Canada during 2018.
A new author agreement is being rolled out in
the first half of 2018.
14
Compliance
Failure to effectively manage risks
associated with compliance (global
and local legislation), including
failure to vet third-parties,
resulting in reputational harm,
anti-bribery and corruption (ABC)
liability, or sanctions violations.
Expanded from the previously
reported anti-bribery and
corruption risk.
Existing controls
Audit Committee oversight
ABC policy certification
Internal procedures and controls
Risk-based third-party due diligence
Employee and business partner codes of conduct
(see also ‘Respect for human rights’ under
Sustainability on p28)
Local Compliance Officers (LCOs)
Outcome of 2017 activities
Internal procedures, controls and training continue
to mature, which are designed to prevent
corruption. Pearson’s Code of Conduct was
refreshed and rolled out for all employee
certification in September 2017, including references
to ABC policy and requirements (also discussed
under ‘Sustainability on p28). Pearson’s ABC policy
reflects our zero tolerance towards bribery and
corruption of any kind by establishing a consistent
set of expectations and requirements regarding
ABC for all our personnel and business partners to
adhere to.
Pearson’s 2016 ABC programme self-assessment
served as a roadmap for work for 2017-2018.
Progress was made on ABC risk assessments of
the various regional and local business units.
We conducted due diligence on our highest risk
third-parties and developed roll-out plans for
further phases.
Pearson’s ABC infrastructure includes a network
of LCOs based in country, mainly members of
the legal team. This programme continues to
be successful with greater knowledge and
competencies of the LCOs and better leadership,
guidance and helpful tools and resources
provided by the global compliance office.
2018 outlook and plans
In 2018, we will:
Implement a comprehensive plan for risk-based
roll-out of further ABC third-party due diligence,
including new tools and resources
Roll out a comprehensive refresh of the training
programme on ABC and Code of Conduct globally
Continue risk assessments in 2018 to ensure
that the ABC programme reflects local market
and business model risks, as well as plan
actions to remediate issues revealed during
those assessments
Employ a more robust analytic framework to our
investigative data to spot trends and root causes.
Section 3 Our performance 60
Principal risks and uncertainties
Legal & compliance
15
Competition law
Existing controls
Failure to comply with anti-trust
and competition legislation
could result in costly legal
proceedings and/or adversely
impact our reputation.
Increase in probability
Global policy published
Training and guidance
Regular internal communications
Lawyer network
Outcome of 2017 activities
This risk increased during 2017, reflecting our
participation in industry associations, including
Board membership, as well as the recent activity
of associations being challenged by anti-trust
authorities such as in Spain.
A global policy, general training and guidance were
launched in 2017 and contain all the measures,
indicators and actions required to ensure anti-trust
and competition compliance.
A lawyer network was launched in 2017 and training
has taken place to improve their expertise around
competition/anti-trust laws. An increasing number
of employees have also been trained. All employees
will need to be certified.
2018 outlook and plans
Training, including e-learning modules, is being
further expanded in 2018 with metrics being
developed to track engagement. The lawyer
network is contributing more data to feed into
training and risk assessment indicators.
Risk assessment of prospects and viability
This section should be read together with
the full viability statement on p106.
Pearson’s principal risks and our ability to
manage them as outlined above are linked
to our viability as a company. These risks
have therefore been taken into account
when preparing the viability statement.
The Board assessed the prospects of the
company over a three-year period, longer
than the minimum 12 months of the annual
going concern review. The three-year
period corresponds with Pearson’s strategic
planning process and represents the time
over which the company can reasonably
predict market dynamics and the likely
impact of additions to the product portfolio.
The Board discusses the company’s
strategic plan on an annual basis taking
account of a range of factors, including
market conditions, the principal risks to
the Group above, product and capital
investment levels as well as available
funding. Pearson’s strategy and business
model are discussed in more detail
on p14–21.
The key assumptions which underpin our
three-year strategic plan to December
2020 are as follows:
Implementation of our 2017-2019 cost
efficiency programme reducing our
annualised cost base exiting 2019
by c.£300m
Increased investment in the product
technology platform to accelerate the
shift to digital and enhance courseware
service capabilities
Further declines in enrolments and other
downwards pressures in the US higher
education courseware market
US higher education courseware
returns rates continue to improve as
the previous inventory correction
continues to unwind and sales become
more direct to consumers
Online Program Management
grows, driven by global enrolment in
undergraduate and post-graduate
online courses
US assessment revenues stabilise
Other strategic priorities, including Online
Blended Learning and Professional
Certification, show modest growth.
In assessing the company’s viability for the
three years to December 2020, the Board
analysed a variety of downside scenarios,
including a scenario where the company is
impacted by all principal risks. The primary
modelling overlaid a ‘severe but plausible’
downside scenario onto the base case
strategic plan for Pearson, focusing on
the impact of the following assumptions
and key risks:
Failure to materialise anticipated
benefits of our 2017-2019 cost
efficiency programme
Increased declines in enrolments and
further channel disruption in US higher
education courseware
Failure to accelerate our shift to digital
while successfully investing and
delivering market leading global
products and services
Online Program Management fails to
generate expected revenue growth
US assessment revenues fail to stabilise
Other strategic priorities, including
Online Blended Learning and Professional
Certification, do not achieve modest
growth amid global economic uncertainty
and local market pressures.
The Board also stress-tested the impact
on our liquidity of all the principal risks
occurring together. Although this is not
regarded as a plausible scenario, the test
showed that the company would still
have liquid resources subject to a limited
number of management actions.
The Board’s confirmation of Pearson’s
viability for the three years to 2020, based
on this assessment, is included alongside
the going concern statement on p106.
Pearson plc Annual report and accounts 2017 Section 4 Governance
616161
Governance
report
In this section
Governance overview
62
Chairman’s letter
Leadership & effectiveness
64 Board of Directors
66
Board governance and activities
74 Nomination & Governance
Remuneration
90
Remuneration overview
94 Our Executive remuneration framework
96
2017 remuneration report
Additional disclosures
106 Report of the Directors
Committee report
110 Statement of Directors’ responsibilities
Accountability
76
84
Audit Committee report
Risk governance and control
Engagement
86
Reputation & Responsibility
Committee report
88
Stakeholder engagement
Section 4 Governance 62
Governance overview
Sidney Taurel
Chairman
In this Governance section
Leadership & effectiveness
Accountability
Engagement
Remuneration
Additional disclosures
p64–75
p76–85
p86–89
p90–105
p106–110
UK Corporate Governance Code
This year, we are reporting against the 2016 edition of the
UK Corporate Governance Code (the Code). The Board
believes that during 2017 the company was in full compliance
with all relevant provisions of the Code. A detailed account
of the provisions of the Code can be found on the FRC’s
website at www.frc.org.uk and we encourage readers to
view our compliance schedule on the company website at
www.pearson.com/governance
Dear shareholders,
As I said last year, during times of change, good governance is
paramount. As a Board we continue to organise our work around
five major themes where we believe we can add value: governance
and risk, strategy, performance, leadership and people, and
shareholder engagement. A summary of the key items covered by
the Board throughout the year appears on p68, and I have set out
below further detail on our particular areas of focus during 2017.
Looking back on 2017, the Board is satisfied that external and
internal expectations regarding performance have been met and
that the company has achieved operational stability. We have been
very focused throughout the year on the simplification of our
portfolio and investment in our transformation programmes,
including The Enabling Programme (TEP) and the Global Learning
Platform (GLP). We are now in a position where, in addition to
regularly monitoring performance and simplification, the Board
can begin to pivot its attentions towards longer-term strategic
opportunities through structural growth, digital transformation
and in the lifelong learning sector.
Leadership & effectiveness
See full section on p64–75
In my letter to shareholders at this time last year, I set out a number
of priorities for the Board during 2017. I am pleased to report that
good progress has been made on all fronts, summarised below,
and with further detail given throughout this report:
monitor the company’s strategic and tactical actions related to
the refocusing of the business – the Board monitors financial and
operational performance through a streamlined and effective
dashboard, which is provided to the Directors on a monthly basis,
enabling us to spend more time on strategic discussions during
Board meetings
implement previously signposted portfolio decisions – in 2016 we
indicated that we intended to reduce our exposure to large-scale
direct delivery businesses to focus on more scalable online, virtual,
and blended services. In line with this strategy, we completed
the sale of our English test preparation business in China, Global
Education (GEDU), in August 2017. We also announced the sale of
our English language learning business, Wall Street English (WSE),
which is expected to complete in the first half of 2018. In addition,
we indicated in early 2017 our intention to exit from our stake in
Penguin Random House. Following negotiations with our partner
in Penguin Random House, Bertelsmann, we agreed to divest a
22% stake in Penguin Random House, retaining an interest of
25%, and to recapitalise that business
significantly drive down our cost structure – we announced
in 2017 our plans to reduce Pearson’s cost base by a further
£300m exiting 2019. We are on track to deliver the planned savings,
many of which will come through simplification of our technology
architecture allowing the increased use of shared service centres
enabling us to standardise processes and reduce headcount.
This will facilitate further opportunities such as the greater
centralisation of procurement and the reduction in the number
of our office locations
reduce the dividend – in 2017, we took the decision to rebase our
dividend policy to reflect portfolio changes, the challenging market
environment, the pace of investment required to transform the
Pearson plc Annual report and accounts 2017 Governance overview
business and the need to sustain a healthy balance sheet to ensure
we have the financial flexibility to maintain a solid investment
grade credit rating. Our policy reflects a sustainable and progressive
dividend, comfortably covered by the earnings of our business and
which can grow as our business expands into the opportunities in
global education. For the 2017 financial year, we therefore propose
to pay a total dividend of 17p per share – 5p per share at the interim,
paid in September 2017, and 12p per share final dividend, subject
to shareholder approval at the Annual General Meeting (AGM) in
May 2018
effect an optimal capital allocation, particularly following the
outcome of negotiations regarding our investment in Penguin
Random House, to ensure long-term sustainability and to reward
our shareholders. The proceeds from the sale of the Penguin
Random House stake have been used as follows: we undertook
a buyback programme to repurchase £300m of ordinary shares
which completed on 16 February 2018; $306m was utilised to
pay down debt in the form of an early redemption of a US dollar
denominated bond; and the remainder reinvested to build a
strong balance sheet.
In the coming year, our main focus is to pivot towards our longer-
term growth opportunities by delivering on the three strategic
priorities described in this report and to continue to monitor
progress against our dashboard and key milestones for 2018.
The Board continued to work closely with the Executive team to
ensure ongoing leadership development throughout the year.
At an Executive level, we recruited a Chief Strategy Officer, Jonathan
Chocqueel-Mangan, and a new Chief Human Resources Officer,
Anna Vikström Persson, both of whom joined the team in early 2018.
The Board looks forward to working closely with Jonathan and Anna,
who each have a key role to play in shaping Pearson as we continue
to transform the business, hone our strategy and ensure we are able
to attract and develop the talent that will lead the business forward.
The Board evaluation for 2017 was facilitated externally – the first
external evaluation during my tenure as Chairman. I am pleased
to report that there was unanimous agreement by all Directors that
the Board is operating effectively. In times of transformation and
disruption within Pearson itself and the wider sector in which we
operate, it is imperative to ensure that our long-term strategy is
appropriate, with shorter-term tactical actions that support delivery
of that strategy. One particular theme arising from our evaluation
was that the Board will spend even more time considering long-term
strategy and ensure we are aligned on process and deliverables.
Our Chief Strategy Officer will play an important role in this work
during 2018.
Building on our 2016 evaluation, the Board and management gave
consideration to the areas where we could particularly leverage
external expertise and advice, and as a result Pearson established
a Digital Advisory Network of external experts who are partnering
with us to help maximise the opportunity from digital disruption.
Lincoln Wallen was instrumental in the creation of this network,
which held its inaugural meeting late in 2017. We are also pleased
that Michael Lynton has been appointed as a Non-Executive Director
with effect from 1 February 2018. Michael’s experience leading
businesses through times of digital disruption will further
strengthen our capabilities in this area.
6363
We recently announced that Harish Manwani, a Non-Executive
Director of Pearson since 2013, is retiring from the Board at the
forthcoming AGM, and will not be seeking re-election, in anticipation
of his future commitments. The Board joins me in thanking Harish
for his commitment and invaluable contribution to Pearson, and we
wish him all the best in his future endeavours.
Accountability
See full section on p76–85
As a Board, we are accountable for Pearson’s successes and
addressing its challenges. We aim to communicate to you in a
transparent manner the steps we have taken to ensure that we have
a clear oversight of the business and the work we have undertaken
in respect of Pearson’s strategy throughout the year. Our Audit
Committee, led by Tim Score, plays a key role in monitoring and
evaluating our risk management processes, providing independent
oversight of our external audit and internal control programmes,
accounting policies, business transformation projects, such as
TEP and GLP, and in assisting the Board in reporting in a fair,
balanced and understandable manner to our shareholders.
Engagement
See full section on p86–89
The 2017 financial year has been one of significant engagement with
our shareholders. I have enjoyed spending time throughout the year
with many of you to ensure that we maintain an open, transparent
dialogue, keep you updated on our strategy and receive your
inputs. In common with most large, public companies, we have a
wider range of stakeholders than just traditional investors, and
our Reputation & Responsibility Committee has oversight of our
sustainability and social impact initiatives, government and public
affairs matters, and engagement with the education community.
Board members also engage with the wider stakeholder population,
including employees, customers and partners, both through formal
Board events and by way of individual contributions to internal and
external initiatives.
Remuneration
See full section on p90–105
Since our last AGM in May 2017, Elizabeth Corley, who chairs our
Remuneration Committee, has led our work to engage with
investors in connection with Pearson’s remuneration policy and
to listen to their concerns. It is clear that shareholders and other
stakeholders would like our approach to remuneration to be simple,
transparent, closely linked to our strategy and the company’s
performance. We have worked hard to develop an approach that
the majority of our shareholders can support. Our approach is
explained in more detail in the remuneration section of this report
on p90–105.
Conclusion
I hope this report clearly sets out how your company is run, and
how we align governance and our Board agenda with the strategic
direction of Pearson. We always welcome questions or comments
from shareholders, either via our website (www.pearson.com) or
in person at our AGM.
Sidney Taurel
Chairman
O
v
e
r
v
i
e
w
O
u
r
s
t
r
a
t
e
g
y
i
n
a
c
t
i
o
n
O
u
r
p
e
r
f
o
r
m
a
n
c
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
Section 4 Governance
64
Board of Directors
Executive Directors
N
R
Sidney Taurel Chairman
aged 69, appointed 1 January 2016
John Fallon Chief Executive
aged 55, appointed 3 October 2012
Coram Williams Chief Financial Officer
aged 44, appointed 1 August 2015
Sidney has over 45 years of experience in
business and finance, and is currently a board
director and chairman of the compensation
committee at IBM Corporation. Sidney is an
advisory board member at pharmaceutical
firm Almirall. He was chief executive officer
of global pharmaceutical firm Eli Lilly and
Company from 1998 until 2008, chairman
from 1999 until 2008, and has been chairman
emeritus since 2009. He was also a director
at McGraw Hill Financial, Inc., a role which he
held from 1996 until April 2016, and at ITT
Industries from 1996 to 2001. Sidney has
received three US presidential appointments
to: the Homeland Security Advisory Council,
the President’s Export Council and the
Advisory Committee for Trade Policy and
Negotiations, and is an officer of the
French Legion of Honour.
John became Pearson’s Chief Executive on
1 January 2013. Since 2008, he had been
responsible for the company’s education
businesses outside North America and
a member of the Pearson management
committee. He joined Pearson in 1997 as
Director of Communications and was
appointed President of Pearson Inc. in 2000.
In 2003 he was appointed CEO of Pearson’s
educational publishing businesses for Europe,
Middle East & Africa. Prior to joining Pearson,
John was director of corporate affairs at
Powergen plc and was also a member of the
company’s executive committee. Earlier in his
career, John held senior public policy and
communications roles in UK local government.
He is an advisory board member of the Global
Business Coalition for Education, a member
of the Council of the University of Hull, and
trustee and director of the Oracle Cancer Trust.
Non-Executive Directors
Coram joined Pearson in 2003 and has held
a number of senior positions including Finance
and Operations Director for Pearson’s English
Language Teaching business in Europe, Middle
East & Africa, Interim President of Pearson
Education Italia and Head of Financial Planning
and Analysis for Pearson. In 2008, Coram
became CFO of The Penguin Group and was
latterly appointed CFO of Penguin Random
House in 2013, where he oversaw the integration
of the two businesses. Coram trained at Arthur
Andersen, and subsequently worked in both
the auditing and consulting practices of the firm.
He is a non-executive director and chairman
of the audit committee for the Guardian
Media Group.
A
RR
N
RR
Digital/technology
experience
56%
Education/learning
experience
33%
International
markets experience
89%
Sustainable business
practice experience
67%
Linda Lorimer Non-Executive Director
aged 65, appointed 1 July 2013
Harish Manwani Non-Executive Director
aged 64, appointed 1 October 2013
Linda spent almost 40 years serving higher
education. She retired from Yale in spring
2016 after 34 years at the university where she
served in an array of senior positions including
vice president for Global & Strategic Initiatives.
She oversaw the development of Yale’s
burgeoning online education division and the
expansion of Yale international programmes
and centres. During her tenure, she was
responsible for many administrative services,
ranging from Yale’s public communications
and alumni relations to sustainability, human
resources and the university press. Previously,
Linda was president of Randolph-Macon
Woman’s College and chair of the board of
the Association of American Colleges and
Universities. She also served on the boards
of several public companies, including as
presiding director of the McGraw-Hill
companies. She is a member of the
Trilateral Commission and the Council
on Foreign Relations.
Harish has an extensive background in emerging
markets and senior experience in a successful
global organisation. He was previously chief
operating officer of consumer products
company Unilever, having joined the company
in 1976 as a marketing management trainee
in India, and held senior management roles
around the world, including North America,
Latin America, Europe, Africa and Asia. He is
non-executive chairman of Hindustan Unilever
Limited in India, and serves on the boards of
Whirlpool Corporation, Qualcomm Inc. and
Nielsen Holdings. He is also on the board of
the Indian School of Business and the Economic
Development Board (EDB) of Singapore,
and is global executive advisor at Blackstone
Private Equity.
Key to Committees A Audit N Nomination & Governance RR Reputation & Responsibility R Remuneration Committee chair
Pearson plc Annual report and accounts 2017ChairmanPearson Board members bring a wide range of experience, skills and backgrounds which complement our strategy.Executive experience of Chairman and Non-Executive Directors Section 4 Governance/Leadership & effectiveness
6565
Board of Directors
Non-Executive Directors
A
N
R
A
N
RR
N
R
Elizabeth Corley, CBE Non-Executive Director
aged 61, appointed 1 May 2014
Vivienne Cox, CBE Senior Independent Director
aged 58, appointed 1 January 2012
Josh Lewis Non-Executive Director
aged 55, appointed 1 March 2011
Elizabeth was CEO of Allianz Global Investors,
initially for Europe then globally, from 2005 to
2016, and continues to act as a senior adviser
to the firm as vice-chair. She was previously at
Merrill Lynch Investment Managers and Coopers
& Lybrand. In addition to Pearson, Elizabeth
serves on two other company boards as a
non-executive director – BAE Systems plc and
Morgan Stanley. She has various financial
services industry roles including as a member
of the FICC Markets Standards Board, the ESMA
stakeholder group and the TheCityUK Advisory
Council. Additionally she is a member of the
Committee of 200 and a trustee of the British
Museum. Elizabeth currently chairs a group
advising the UK government on social impact
investing. She is also a crime fiction author.
Vivienne has wide experience in energy, natural
resources and business innovation. She worked
for BP plc for 28 years in global roles including
executive vice president and chief executive of
BP’s gas, power and renewables business and
its alternative energy unit. She is non-executive
director of Stena International and chairman
of the supervisory board of Vallourec, a leader
in the seamless steel pipe markets. She is also
non-executive director at pharmaceutical
company GlaxoSmithKline plc and an
advisory board member of the African
Leadership Institute.
Josh’s experience spans finance, education
and the development of digital enterprises.
He is the founder of Salmon River Capital LLC,
a New York-based private equity/venture
capital firm focused on technology-enabled
businesses in education, financial services and
other sectors. Over a 25-year career in active,
principal investing, he has been involved in a
broad range of successful companies, including
several pioneering enterprises in the education
sector. In addition, he has long been active
in the non-profit education sector, with
associations including New Leaders, New
Classrooms and the Bill & Melinda Gates
Foundation. He is also a non-executive director
of several enterprises in the fin-tech/data,
education and other sectors.
A
N
R
A
RR
Tim Score Non-Executive Director
aged 57, appointed 1 January 2015
Lincoln Wallen Non-Executive Director
aged 57, appointed 1 January 2016
Michael Lynton Non-Executive Director
aged 58, appointed 1 February 2018
Tim has extensive experience of the technology
sector in both developed and emerging markets,
having served as chief financial officer of ARM
Holdings plc, the world’s leading semiconductor
IP company, for 13 years. He is an experienced
non-executive director and currently sits on the
boards of The British Land Company plc and
HM Treasury, in addition to being on the board
of trustees of the Royal National Theatre and
chairman of the group audit committee of the
Football Association. He served on the board of
National Express Group plc from 2005 to 2014,
including time as interim chairman and six years
as the senior independent director. Earlier in
his career Tim held senior finance roles with
Rebus Group, William Baird, LucasVarity plc
and BTR plc.
Lincoln has extensive experience in the
technology and media industries, having been
CEO of DWA Nova, a software-as-a-service
company spun out of DreamWorks Animation
Studios in Los Angeles, a position he held until
2017. He worked at DreamWorks Animation for
nine years in a variety of leadership roles
including chief technology officer and head of
animation technology. He was formerly CTO at
Electronic Arts Mobile, leading EA’s entry into
the mobile gaming business internationally.
He is currently a visiting associate in Computing
and Mathematical Sciences at the California
Institute of Technology (Caltech). Lincoln is also
a non-executive director of the Smith Institute
for Industrial Mathematics and Systems
Engineering. Lincoln’s early career involved
20 years of professional IT and mathematics
research, including as a reader in Computer
Science at Oxford.
Michael served as CEO of Sony Entertainment
from 2012 until 2017, overseeing Sony’s global
entertainment businesses. He also served
as chairman and CEO of Sony Pictures
Entertainment from 2004. Prior to this, he held
senior roles within Time Warner and AOL, and
earlier served as chairman and CEO of Penguin
Group where he extended the Penguin brand
to music and the internet. Michael is chairman
of Snap, Inc., and currently serves on the
boards of Pandora Media Inc., IEX and Ares
Management, L.P. He is also a member on the
Council on Foreign Relations, the Harvard
Board of Overseers and serves on the boards
of the Los Angeles County Museum of Art, the
Tate and the Rand Corporation. Michael holds a
B.A. in History and Literature from Harvard
College, where he also received his M.B.A.
66
Board governance and activities
Board of Directors
Composition of the Board As at the date of this report, the Board
consists of the Chairman, Sidney Taurel, two Executive Directors:
the Chief Executive, John Fallon, and Chief Financial Officer,
Coram Williams, and eight independent Non-Executive Directors.
As previously disclosed, Harish Manwani will step down from the
Board at the forthcoming AGM.
Chairman and Chief Executive There is a defined split of
responsibilities between the Chairman and the Chief Executive.
The roles and responsibilities of the Chairman and Chief Executive
are clearly defined, set out in writing and reviewed and agreed
by the Board on an annual basis.
Chairman’s significant commitments On 1 January 2017, Mr Taurel
stepped down from his role as a senior adviser at the global
investment bank, Moelis & Co, and on 30 November 2017 he stepped
down from his role on the advisory Board of Takeda Pharmaceutical.
Roles and composition of the Board
Role
Name
Responsibility
Chairman
Sidney Taurel
Chief
Executive
John Fallon
The Chairman is primarily responsible for the leadership of the Board
and ensuring its effectiveness. He ensures the Board upholds and
promotes the highest standards of corporate governance, setting
the Board’s agenda and encouraging open, constructive debate of
all agenda items for effective decision-making. He regularly meets the
Chief Executive to stay informed. He also ensures that shareholders’
views are communicated to the Board.
The Chief Executive is responsible for the operational management
of the business and for the development and implementation of the
company’s strategy as agreed by the Board and management. He is
responsible for developing operational proposals and policies for
approval by the Board, and promotes Pearson’s culture and standards.
Chief Financial
Officer
Coram Williams The Chief Financial Officer is responsible for the preparation and
integrity of Pearson’s financial reporting and statements and also
oversees other functional areas including tax, treasury, internal
audit and corporate finance. He supports the Chief Executive in
developing and implementing the strategy of the company as
agreed by the Board and management.
Vivienne Cox
Senior
Independent
Director
The Senior Independent Director’s role includes meeting regularly
with the Chairman and Chief Executive to discuss specific issues,
as well as being available to shareholders generally should they
have concerns that have not been addressed through the normal
channels. She also leads the evaluation of the Chairman on behalf
of the other Directors.
Committee
Chairmen
Elizabeth Corley
Vivienne Cox
Linda Lorimer
Tim Score
The Committee Chairmen are responsible for leading the Board
committees and ensuring their effectiveness. They set the
Committees’ agendas, in consultation with the company’s
management, and report to the Board on Committee proceedings.
They lead on engagement with shareholders regarding matters
within the remit of the Committees, alongside senior management.
Non-Executive
Directors
Company
Secretary
Elizabeth Corley
Vivienne Cox
Josh Lewis
Linda Lorimer
Michael Lynton
Harish Manwani
Tim Score
Lincoln Wallen
Stephen Jones
The Non-Executive Directors contribute to the development of
our strategy and scrutinise and constructively challenge the
performance of management in the execution of strategy
and risk planning. They also engage with various stakeholders
of the company and provide guidance and independent
perspective to management.
The Company Secretary acts as secretary to the Board and its
committees, ensuring compliance with Board procedures and
advising on governance matters. He is responsible, under the
direction of the Chairman, for ensuring the Board receives accurate,
timely and clear information. The Company Secretary supports
the Chairman in delivery of the corporate governance agenda and
organises Director inductions and ongoing training.
Gender split
of Board
Nationality
of Directors
Men
8
Women 3
British
6
USA
4
Singapore 1
Ethnicity
Length of
tenure of
Non-Executive
Directors
Under 3 years 2
3 to 6 years
4
Over 6 years 2
Asian
Mixed
White
1
1
9
Asian – Indian (1)
Mixed – White &
Black Caribbean (1)
White – English/
Welsh/Scottish/
Northern Irish/
British (6)
White – Any other
White Background (3)
Pearson plc Annual report and accounts 2017
Section 4 Governance/Leadership & effectiveness
6767
Board governance and activities
Governance at Pearson
Board of Directors
Board Committees
N
O
I
T
A
M
R
O
F
N
I
F
O
W
O
L
F
Audit
Committee
Nomination & Governance
Committee
Remuneration
Committee
Reputation & Responsibility
Committee
Appraises our financial
management and reporting
and assesses the integrity
of our accounting procedures
and financial control.
Reviews corporate governance
matters, including Code
compliance and Board
evaluation, considers the
appointment of new Directors,
Board experience and diversity,
and reviews Board induction
and succession plans.
Determines the remuneration
and benefits of the Executive
Directors and oversees
remuneration arrangements
for the Pearson Executive.
Considers the company’s impact
on society and the communities
in which Pearson operates,
including to ensure strategies
are in place to manage and
improve Pearson’s reputation.
Pearson Executive management (PEM)
PEM consists of John Fallon (Chief Executive) and his direct reports. They are the leadership group
for Pearson, responsible for delivering Pearson’s strategy under clearly defined accountabilities
and in line with agreed governance and processes.
Chief Executive
Chief Financial Officer
General Counsel and Chief Legal Officer
President, Core markets
Chief Technology and Operations Officer
President, Growth markets
Chief Corporate Affairs and Global Marketing Officer
President, North America
Chief Human Resources Officer
President, Assessments
Chief Strategy Officer
President, Global Product
There were no other changes to the Chairman’s significant
commitments during 2017.
Independence of Chairman In accordance with the Code,
Sidney Taurel was considered to be independent upon his
appointment as Chairman on 1 January 2016.
Independence of Directors All of the Non-Executive Directors
who served during 2017 were considered by the Board to be
independent for the purposes of the Code. The Board reviews
the independence of each of the Non-Executive Directors annually.
This includes reviewing their external appointments and any
potential conflicts of interest as well as assessing their individual
circumstances in order to ensure that there are no relationships
or matters likely to affect their judgement. In addition to this
review, each of the Non-Executive Directors is asked annually to
complete an independence questionnaire to satisfy requirements
arising from Pearson’s US listing.
Josh Lewis and Vivienne Cox have served on the Board for more
than six years. Accordingly, their performance has been subject
to a rigorous review, including with regard to their independence.
The Board has determined that Josh Lewis and Vivienne Cox
continue to be independent, nothwithstanding their length of
service, taking into account their valuable contribution to Board
discussions and constructive challenge of management.
Conflicts of interest Under the Companies Act 2006 (the Act),
Directors have a statutory duty to avoid conflicts of interest with
the company. The company’s Articles of Association (Articles) allow
the Directors to authorise conflicts of interest. The company has
established a procedure to identify actual and potential conflicts
of interest, including all directorships or other appointments to,
or relationships with, companies which are not part of the Pearson
Group and which could give rise to actual or potential conflicts of
interest. Once notified to the Chairman or Company Secretary, such
potential conflicts are considered for authorisation by the Board
at its next scheduled meeting. The relevant Director cannot vote on
an authorisation resolution, or be counted in the quorum, in relation
to the resolution relating to his/her conflict or potential conflict.
The Board reviews any authorisations granted on an annual basis.
68
Board governance and activities
Board meetings
Boston, USA
The Board had seven formal meetings in 2017, with discussions
and debates focused on the key strategic issues facing the
company. This included two meetings each of three days’ duration
in São Paulo, Brazil and Boston, USA at which the Board considered
growth markets and strategy. Major items covered by the Board in
2017 are shown in the table below.
In addition to the formal meetings, the Board meets as necessary
to consider matters of a time-sensitive nature.
São Paulo, Brazil
At a three-day meeting at São Paulo in June, the Board and Pearson
Executive focused primarily on the Pearson business in Brazil,
while also taking a wider look at our Growth geographic markets,
including time focusing on India and South Africa. They engaged
with the Brazilian leadership team and wider employee population
throughout the visit, and spent time gaining an insight into the
macro-economic environment in Brazil.
The Board participated in demonstrations for three products in
the learning and assessment sectors. In two groups, the Board and
Executive then visited schools where they met students and teachers,
considered the school culture and classroom innovations, and
discussed the students’ perspectives on the value of learning.
The Board and the Pearson Executive visited Boston in October
for a three-day meeting where they were joined by members of the
North American senior management team to consider leadership,
culture and the change agenda in Pearson North America. The
Board also spent time considering Pearson’s vision and strategy,
including a financial overview and consideration of synergies and
our product investment portfolio, US higher education courseware
and key strategic initiatives and opportunities, before taking some
time to review organisational health.
The Board and Executive participated in a range of engagement
opportunities with a variety of Pearson stakeholders, including an
event on Employment in 2030 – The Future of Skills, and customer
panel sessions. On the final day of the three-day meeting, the Board
attended a facilitated breakfast meeting with top talent and new
employees and gained insight into employees’ views on Pearson’s
current challenges and opportunities. Read more about the Board’s
engagement with these stakeholders on p89.
Board meeting focus during 2017
Area of responsibility
Activity
Governance
& risk
Training on Market Abuse Regulation
Compliance with UK Corporate Governance Code
Income statement and Going concern and viability
Shareholder activism and defence plan
Enterprise risk management review
Strategy
Penguin Random House, WSE, GEDU and K-12
courseware – updates
Strategy meeting in São Paulo focusing on local
Brazilian businesses and wider Growth strategy
Efficiency and simplification initiatives
US higher education courseware
Interactive product demonstrations
Approval of division of responsibilities between
Chairman and Chief Executive
Annual review of conflicts of interest
Pension scheme derisking
Approval of Committee terms of reference
Communications strategy and positioning
Capital structure
Product, technology and operations strategies
Digital advisory network update
Operating and strategic plan updates
Tax update
Performance
2016 preliminary results and annual report and accounts
2017 operating plan
Interim results and trading updates
Final and interim dividend proposals
Monthly dashboard and milestone reports
Draft 2018 operating plan and 2017 and 2018 goals
Leadership &
people
Chief Executive’s goals
Talent and succession planning
Organisational health including review of
Pearson’s culture
Dinner with senior local management and facilitated
breakfasts with key talent at overseas strategy meetings.
Read more on employee engagement on p27.
Shareholders
& engagement
Share buyback programme
Major shareholders and share register analysis
Investor relations strategy and share
price performance
Shareholder issues and voting
Focus on forthcoming AGM
Pearson plc Annual report and accounts 2017 Board governance and activities
Board in action
US higher education courseware
Robin Baliszewski, Managing Director, Higher Education Sales, leads
a panel of student ambassadors at the Board’s meeting in Boston
At the Board’s request, US higher education courseware was
an area of focus at each Board meeting during 2017 as Pearson
looked to respond to and proactively mitigate against challenges
in that market sector. At each meeting, the Board was joined by
the Presidents of North America and Global Product and by
the Chief Technology and Operations Officer to review the
market and associated financial model, changes in the trading
environment, possible short- and longer-term implications of
Section 4 Governance/Leadership & effectiveness
6969
those changes, and to consider and assess Pearson’s strategic
response, including the impact of the new digital and print rental
models on both customer and competitor activity and on the
traditional sales channel.
At its October meeting in Boston, the Board viewed an early
stage product demonstration of the Global Learning Platform
which would initially be focused on the higher education
portfolio. The Board also engaged with panels of students and
faculty members in order to gain a greater insight into how
Pearson’s higher education products and services are viewed
by those that use them. Throughout the year, including between
scheduled meetings, the Board also monitored progress through
a monthly dashboard which enabled them to track Pearson’s
delivery of agreed strategic, performance and customer-focused
metrics in the higher education courseware market.
Link to strategic priorities,
See p14
1
Grow market share through digital transformation
Structural growth opportunities
Portfolio changes
Pearson considers Online Program Management (OPM) and
virtual schools to be among its biggest growth opportunities.
During the year, the Board considered Pearson’s prospects in
these areas, how to measure success, and what differentiates
Pearson and provides real competitive advantage. The Board
also considered what Pearson might look like in the medium
term as these and other opportunities come to fruition, and the
characteristics for these businesses in terms of revenues and
profits. At its strategy meeting in October, the Board held a
deep dive into each of these areas with the responsible
Executives. In respect of OPM, the Board reviewed the global
market opportunity, and considered how Pearson’s expertise
in courseware and assessment could continue to support
partners in the development and delivery of online
programmes that deliver demonstrable learner outcomes
and superior student learning experience. The Board discussed
how to deliver that strategy, and considered management’s
recommendations for next steps. Regular reporting to the
Board of progress in this market has been introduced and
OPM will be a particular item for the Board’s ongoing
consideration in 2018.
Following the announcement of Pearson’s strategy of reducing
exposure to large-scale direct delivery businesses, the Board
had considered its portfolio for strategic alignment, and had
determined that its English test preparation business in
China, Global Education (GEDU), and English language learning
business, Wall Street English (WSE), were no longer aligned with
Pearson’s core strategy and accordingly that exits from these
business would be explored. At a number of meetings during
2017, the Board considered input from the President, Growth
markets, with responsibility for Pearson’s business in China,
and from the SVP Corporate Finance & Strategic Development,
both of whom provided updates as the negotiations proceeded
and the transactions took shape. The Board considered the
potential terms of the transactions, the status of interested
parties, and in light of all relevant factors – including the impact
of the potential divestments on Pearson, its shareholders and
wider stakeholders – gave approval for the sales of GEDU and
WSE businesses in line with agreed terms.
Link to strategic priorities,
See p16
Link to strategic priorities,
See p18
2
Invest in structural growth markets
3
Become simpler and more efficient
70
Board governance and activities
The role and business of the Board
Culture and values
The Board is deeply engaged in developing and measuring the
company’s long-term strategy, performance and values. We believe
that it adds a valuable and diverse set of external perspectives
and that robust, open debate about significant business issues
brings an additional discipline to major decisions.
A schedule of formal matters reserved for the Board’s
decision and approval is available on our website, at
www.pearson.com/governance.
The key responsibilities of the Board include:
Overall leadership of the company and setting the company’s
values and standards
Determining the company’s strategy in consultation with
management, reviewing performance against it and overseeing
management execution thereof
Major changes to the company’s corporate, capital, management
and control structures
Approval of all transactions or financial commitments in excess
of the authority limits delegated to the Chief Executive and other
Executive management.
The Board receives timely, regular and necessary financial,
management and other information to fulfil its duties.
Comprehensive meeting papers are circulated to the Board and
committee members at least one week in advance of each meeting
and the Board receives a monthly dashboard and key milestones
report and regular updates from the Chief Executive and CFO.
In addition to meeting papers, a library of current and historic
corporate information is made available to Directors electronically
to support the Board’s decision-making process. Directors can
obtain independent professional advice, at the company’s expense,
in the performance of their duties as Directors. All Directors have
access to the advice and services of the Company Secretary.
Standing Committee
A Standing Committee of the Board is established to approve
certain operational and ordinary course of business items such
as banking matters, guarantees, intra-group transactions and
to make routine approvals relating to employee share plans.
The Committee has written terms of reference, reviewed
and approved each year, which clearly set out its authority
and duties. These can be found on the company website at
www.pearson.com/governance.
Pearson’s core values – to be brave, imaginative, decent and
accountable – go to the heart of our mission to improve learning
outcomes, and the Board and employees are committed to
demonstrating these characteristics throughout their work and
deliberations. The Board monitors the culture of the company and
levels of employee engagement and advocacy with the assistance
of its Reputation & Responsibility Committee and through regular
updates from the Chief Human Resources Officer. It aims to foster
a culture of collaboration, diversity and inclusion at all levels,
including by engaging with employees from across Pearson at
various events throughout the year. Pearson’s Code of Conduct
outlines how we work to our mission and values in an ethical and
responsible manner.
Board attendance
Directors are expected to attend all Board and committee meetings
but in certain exceptional circumstances, such as due to pre-existing
business or personal commitments, Directors may be unable to
attend. In these circumstances, Directors receive relevant papers
and, where possible, will communicate any comments and
observations in advance of the meeting for raising as appropriate
during the meeting. They are updated on any developments after
the meeting by the Chairman of the Board or committee, as
appropriate. Individuals’ attendance at Board and committee
meetings is considered, as necessary, as part of the formal
annual review of their performance. There was a high level of
attendance by Directors at Board and committee meetings in 2017.
The following table sets out the attendance of the company’s
Directors at scheduled Board meetings during 2017:
Board meetings attended
Chairman
Sidney Taurel
Executive Directors
John Fallon
Coram Williams
Non-Executive Directors
Elizabeth Corley
Vivienne Cox
Josh Lewis
Linda Lorimer
Harish Manwani
Tim Score1
Lincoln Wallen
7/7
7/7
7/7
7/7
7/7
7/7
7/7
7/7
6/7
7/7
1 Unable to attend one meeting due to pre-existing commitment. Ahead of
the meeting, Mr Score communicated his comments on the business of the
Board to the Chairman.
Pearson plc Annual report and accounts 2017 Board governance and activities
Section 4 Governance/Leadership & effectiveness
7171
Succession planning
The Board considers oversight of succession planning as one of its
prime responsibilities, assisted by the Nomination & Governance
Committee. As well as Board and Executive management succession,
the Board oversees the process for all key positions throughout the
business with a particular focus on high potential talent.
The company has formal contingency plans in place for the
temporary absence of the Chief Executive for health or other
reasons. The matter of Chief Executive succession is a standing
item for discussion and review by the Chairman and the Board
annually. Succession planning for the Board and Chairman is also
considered annually by the full Board and on an ongoing basis by
the Nomination & Governance Committee. There is also discussion
and oversight of key positions at Executive management level,
including the recent appointments of Jonathan Chocqueel-Mangan
as Chief Strategy Officer and Anna Vikström Persson as Chief
Human Resources Officer.
Directors’ training and induction
All Directors receive training in the form of presentations about the
company’s operations, through Board meetings held at operational
locations and by encouraging the Directors to visit local facilities
and management as and when their schedule allows, including if
they are travelling to a country or region on non-Pearson business.
The Company Secretary and General Counsel, in conjunction with
Pearson’s advisers, monitor legal and governance developments
and update the Board on such matters as agreed with the
Chairman. In 2017, the Directors and other senior managers
were briefed on:
The EU Market Abuse Regulation, including the impact of
regulatory guidance introduced during the year
The latest regulatory framework, corporate governance
reporting and Directors’ remuneration report as part of a
training session led by PwC
Regular market updates for the Remuneration Committee on
industry practice and regulation received from external advisers.
Our Directors can also make use of external courses.
Directors receive a significant bespoke induction programme
and a range of information about Pearson when they join the
Board. This includes background information on Pearson and
details of Board procedures, Directors’ responsibilities and various
governance-related issues, including procedures for dealing
in Pearson shares and their legal obligations as Directors. The
induction also typically includes a series of meetings with members
of the Board, external legal advisers and brokers, the Pearson
Executive and senior management, presentations regarding the
business from Senior Executives and a briefing on Pearson’s
investor relations programme.
The induction programme for Michael Lynton, our most recently
appointed Non-Executive Director, will take place in 2018. The initial
phase will include meetings with other Board members, business
area familiarisation with members of the Pearson Executive,
a briefing on Directors’ duties and sessions with the SVP Internal
Audit, Compliance and Risk and SVP Investor Relations, with the
remainder of the induction tailored to Michael’s particular areas
of interest and aligned with the Board’s focus areas.
Directors’ indemnities
A qualifying third-party indemnity (QTPI), as permitted by the
Articles and sections 232 and 234 of the Act, has been granted by
the company to each of its Directors. Under the provisions of the
QTPI, the company undertakes to indemnify each Director against
liability to third-parties (excluding criminal and regulatory penalties)
and to pay Directors’ costs as incurred, provided that they are
reimbursed to the company if the Director is found guilty, the court
refuses to grant the relief sought or, in an action brought by the
company, judgment is given against the Director. The indemnity
has been in force for the financial year ended 31 December 2017
and is currently in force.
The company has purchased and maintains Directors’ and Officers’
insurance cover against certain legal liabilities and costs for claims
in connection with any act or omission by such Directors and
Officers in the execution of their duties.
Board Committees
The Board has established four formal Committees: Audit,
Nomination & Governance, Remuneration, and Reputation &
Responsibility. The chairmen and members of these committees
are appointed by the Board on the recommendation (where
appropriate) of the Nomination & Governance Committee and
in consultation with each relevant committee chairman. In addition
to these formal Board Committees, the Standing Committee
also operates with Board-level input.
Learn more about Pearson’s governance structure on p67
More Committee information:
Audit Committee
Nomination & Governance Committee
Remuneration Committee
Reputation & Responsibility Committee
Standing Committee
p76
p74
p90
p86
p70
The Committees focus on their own areas of expertise, enabling
the Board meetings to focus on governance and risk, strategy,
performance, and leadership and people, thereby making the
best use of the Board’s time together as a whole. The Committee
chairmen report to the full Board at each Board meeting
immediately following their sessions, ensuring a good
communication flow while retaining the ability to escalate
items to the full Board’s agenda if appropriate.
72
Board governance and activities
Board evaluation
The Board evaluation for 2017 was an externally facilitated process
led by Heidrick & Struggles JCA Group, which was selected following
a review by the Nomination & Governance Committee of various
providers and consideration of the potential scope of the evaluation.
In addition to facilitating the Board evaluation, Heidrick & Struggles
JCA Group was also engaged by Pearson in relation to Non-Executive
Director and Senior Executive search activity during the year.
In reporting back to the Board, the evaluator reported that
conversations with Board members were positive, with unanimous
agreement that the Board operates effectively. The evaluator
noted that the Board had acknowledged the management team’s
commitment which has put the business in a much more positive
position at the end of the year than it was at the beginning of the
year. This was the first external evaluation since the appointment
of Sidney Taurel as Chairman, and it was noted by the other Board
members that he had created a different and positive dynamic,
with his leadership style and experience. The evaluator reported
that the relationship between the Executive and Non-Executive
Directors remains positive, with the additions of Coram Williams and
Lincoln Wallen to the Board further complementing that dynamic.
The evaluator noted that the Board was particularly appreciative of
Elizabeth Corley’s commitment throughout 2017 in her engagement
with investors in respect of remuneration matters.
More detail on the evaluation process and the priorities arising
from it is given opposite, and the Nomination & Governance
Committee will consider Heidrick & Struggles JCA Group’s findings
and recommendations in greater detail throughout 2018.
A number of actions were taken during 2017 in response to findings
arising from the 2016 Board evaluation process. You can read
more about progress on these in the table below.
Individual evaluation
In addition to the evaluation of the Board as a whole, Executives
are evaluated each year on their performance against personal
objectives under the company’s annual incentive plan. These
objectives are linked to certain strategic metrics, including efficiency
and cost savings initiatives, driving the digital agenda, and growing
market share in US higher education courseware. Progress against
each of these metrics is reviewed by the Board on a monthly basis,
as part of the dashboard of KPIs which we believe to be central to
Pearson’s turnaround.
The Chairman meets with each Non-Executive Director individually
on a regular basis and, in assessing the contribution of each,
has confirmed that each Director continues to make a significant
contribution to the business and deliberations of the Board. The
Non-Executive Directors, led by the Senior Independent Director,
also conduct an annual review of the Chairman’s performance.
Committee evaluation
All committees undertake an annual evaluation process to review
their performance and effectiveness. For 2017, the process was
facilitated externally by Heidrick & Struggles JCA Group as part
of the Board evaluation. The Committees were considered to be
working effectively, led well by their respective chairmen with
appropriate agendas and a strong work ethic from each committee
member. Read more on this in the pages that follow.
Progress on findings of 2016 evaluation
Finding
Response/Action taken
Continue to focus on US higher education
courseware at every meeting, and build
additional measures into the monthly
dashboard to monitor this business.
US higher education courseware is a standing item at each Board meeting, with the responsible
Executives providing updates on progress and initiatives. The regular monthly dashboard has been
refined and provides more detail on US higher education courseware. The dashboard is kept under
review and evolves as necessary with business and Board requirements.
Drive to increase use of external
expertise in digital technologies.
Building on a scoping session involving Directors and members of the Pearson Executive, we launched
a digital advisory network in 2017 to bring together a diverse cross-section of people with experience
and knowledge of digital disruption. Learn more about the digital advisory network on p88.
Experience identified as valuable in
new Board members, including digital
transformation and disruption.
An agreed candidate specification was drawn up for any potential new Non-Executive Director
appointments, resulting in the appointment of Michael Lynton.
Agree most appropriate format and
scheduling for Non-Executive and
Chairman only sessions
These sessions are a standing item at each Board, Audit Committee and Remuneration Committee
meeting, to enable open discussion of issues and ensure the Board or committee continues to work
effectively as a group. The Chairman also held a number of Non-Executive Director dinners in 2017.
Desire to build a compelling narrative
about the role for Pearson in the future
of learning.
Building on research with teachers and learners, a set of insights-driven communications
principles and practices has been developed about who we are, what we do, and what that means
for our customers.
Creation of a strategic framework
to guide disposals.
This was discussed and agreed by the Board at a strategy session in late 2016 and the framework
implemented in 2017.
Increase visibility of ROIC-style
metrics in each part of portfolio.
Additional ROIC-style measures were introduced into the Board’s reporting during 2017, and both
gross and net ROIC were reported publicly in our 2017 full year results.
Continued focus on retention of
key talent, both at senior levels
and throughout organisation.
Key talent and ‘regretted leavers’ report considered regularly by Remuneration Committee.
A ‘managers’ toolkit’ has also been developed to encourage and enable retention of key employees.
Pearson plc Annual report and accounts 2017 Board governance and activities
Section 4 Governance/Leadership & effectiveness
7373
External Board evaluation process 2017
Preparation
One-on-one meetings
Following discussions with
the Chairman, Senior
Independent Director
and Chief Executive,
Heidrick & Struggles JCA
Group (the evaluator)
prepared a framework for
discussion, as set out below,
which formed the basis for
all one-on-one meetings.
The evaluator met
individually with each of the
Directors and the Company
Secretary for an open,
confidential, unattributed
conversation using the
framework for discussion
as a prompt on proposed
topics. The discussion was
not limited to these topics
if participants wanted to
raise additional subjects.
Discussion framework
A framework for an open discussion with Directors
Feedback to the Board
The evaluator facilitated
an open discussion with the
Board in December 2017
on the findings of the
evaluation process.
Feedback to the
Chairman and Senior
Independent Director
The evaluator submitted
a draft report to the
Chairman and Senior
Independent Director.
This was followed by a
discussion of the findings
and a number of
recommendations
arising therefrom.
Final review with
another Independent
Director
For the purposes of good
governance, the evaluator
spoke with another
Independent Non-Executive
Director following the
Board meeting to confirm
all information provided
was a fair reflection of the
feedback from each of
the Directors, and was not
influenced inappropriately
by any Director.
Chairman and roles
Organisation
Dynamics
Strategy
Performance
Risk management
Communications
Succession
management and
planning
Committees
Composition
Key themes arising from the evaluation
The Board and
Committees work
effectively, led well by
their respective chairs,
with a clear and significant
personal commitment to
Pearson demonstrated by
all Board members
The Non-Executive
Directors recognised the
inclusive and thoughtful
approach of the Executive
Directors in ensuring
transparent communication
between the Board
and the Executive
Effective processes and
monthly reporting have
helped the Board ensure
the company achieves and
maintains operational
control and stability
The Board members
appreciate the sequencing
of meetings, including
overseas meetings,
which afford them the
opportunity to engage
with the wider senior
management team and
to meet employees,
customers and other
stakeholders
Ongoing Board education
to continue to focus on
competitive landscape
and digital technologies
A desire for additional
informal joint Board and
Executive sessions to
permit open dialogue
and discussion in a less
structured format
Board succession planning
should consider future
committee chairs, and
other desirable expertise
in new Board members
Ensure ongoing strategic
development aligned with
business transformation
activity. New Chief
Strategy Officer to
facilitate, enabling all
Board members’ strategic
perspectives to be
captured and considered
Ensure continued
understanding by the
Board of significant
shareholders’ views to
encourage constructive
dialogue and clear
communication
of strategy
New Chief Human
Resources Officer to
continue executive
succession planning and
complete a talent review
aligned to the strategic
needs of the business.
74
Nomination & Governance Committee report
Committee Chairman
Vivienne Cox
Members Elizabeth Corley,
Vivienne Cox, Josh Lewis,
Harish Manwani,
Tim Score and Sidney Taurel
Committee responsibilities include:
Appointments
Identifying and nominating
candidates for Board vacancies.
Balance
Succession
Ensuring that the Board and its Committees
have the appropriate balance of skills,
experience, independence, diversity and
knowledge to operate effectively.
Reviewing the company’s leadership
needs with a view to ensuring the continued
ability of the organisation to compete in
the marketplace.
Governance
Review and oversight of Pearson’s corporate
governance framework, Board evaluation and
training plans, and Board diversity policy.
Terms of reference
The Committee has written terms of reference which clearly set out
its authority and duties. These are reviewed annually and can be
found on the company website www.pearson.com/governance
Attendance
Attendance by Directors at Nomination & Governance Committee
meetings throughout 2017:
Meetings attended
Elizabeth Corley
Vivienne Cox
Josh Lewis
Harish Manwani
Tim Score
Sidney Taurel
Board search
3/3
3/3
3/3
3/3
3/3
3/3
Pearson uses a number of leading firms in its Board search activities
and ensures that we retain good relationships with them. During 2017,
the services of Heidrick & Struggles JCA Group were availed for the
appointment of Michael Lynton, Non-Executive Director, who joined
the Board on 1 February 2018. During 2017, Heidrick & Struggles JCA
Group also led the externally facilitated evaluation of the Board and
its Committees, and was engaged in Senior Executive search activity.
Heidrick & Struggles JCA Group is a signatory to the voluntary code
of conduct for executive search firms.
Role and business of the Committee
The Committee monitors the composition and balance of the Board
and of its Committees, identifying and recommending to the Board
the appointment of new Directors and/or Committee members. The
Committee also oversees talent and succession plans for senior roles.
As the remit of the Committee expanded in 2017, the Committee
now also oversees the company’s compliance with, and approach
to, all applicable regulation and guidance related to corporate
governance matters, including Board diversity, oversight of the
annual Board evaluation processes, the company’s corporate
governance policies and practices, compliance with the Code,
and oversight of Director induction and training. In respect of its
governance remit, the Committee primarily has the role of reviewing
current practices on behalf of the Board, and recommending actions
or changes for the Board’s formal approval.
The Committee is comprised of five independent Non-Executive
Directors and the Chairman of the Board. The Chief Executive and
other senior management attend Committee meetings by invitation.
Appointment of Michael Lynton
During the 2016 Board evaluation process, the Board considered
the experience it would require in its next Non-Executive Director.
Accordingly, the Committee met in early 2017 and agreed the
specific skills and experience required in potential candidates, which
included: a current or former CEO of a mid-to-large sized company;
experience in an industry which has undergone digital disruption;
and global experience, including of the US market. Other desired
experience included marketing or branding and experience in the
service sector. Pearson also expects all Non-Executives to
demonstrate the highest level of integrity and credibility,
independence of judgement, maturity, collegiality, a high interest in
education and the commitment to devote the necessary time. Based
on these criteria, candidates were then shortlisted for the proposed
role at the Committee’s next meeting and were interviewed by
Heidrick & Struggles JCA Group and then the Committee. As a result
of this process, the Committee was satisfied that Michael Lynton
met the required skills and experience and also possessed the
personal attributes that we would expect to see in any Pearson
Non-Executive Director.
Diversity
The Board embraces the Code’s underlying principles with regard to
Board balance and diversity, including in respect of ethnicity, gender
and age. In May 2017, the Committee adopted the Board diversity
and inclusion policy. The objectives set out in the policy and our
progress towards these objectives are shown in the table opposite.
The Committee ensures that the Directors of Pearson demonstrate
a broad balance of skills, background and experience, and
nationalities, to support Pearson’s strategic development and reflect
the global nature of our business. The Committee also ensures that
appointments are made on merit and relevant experience, while
taking into account the broadest definition of diversity.
As at 31 December 2017, the gender diversity of the Board, exceeded
Lord Davies’ 2015 target with 30% female representation on the
Board. However, as noted in the Board diversity and inclusion
policy, we are committed to work towards the recommendations
Pearson plc Annual report and accounts 2017 Nomination & Governance Committee report
Section 4 Governance/Leadership & effectiveness
7575
suggested by the Hampton-Alexander Review aimed at having at
least 33% female representation on the Board by 2020.
Our Code of Conduct sets out our global standards and
responsibilities with regard to diversity & inclusion (D&I) at all
employee levels, including the Pearson Executive, and covers many
aspects, including gender, age, disability and sexual orientation. This
is underpinned by a global statement on D&I along with country and
business specific policies. We are a founder member of the 30% Club
and the Chief Executive has also signed a personal commitment
to set an aspirational target of 30% women in Pearson’s senior
management team by 2020. The Chief Executive and the Chief
Financial Officer are both members of the Board. Among the other
ten members of the Executive team there are currently two women
(20%) although for most of 2017 the percentage was 22% (two
members out of nine). The senior leadership team, comprising the
members of the Pearson Executive and their direct reports, has 30%
female representation. We believe that we have a strong pipeline of
women in leadership and senior management positions, and the
Committee will monitor their development, and the development
of all key talent, with care. The sustainability section provides more
detail on how we implement our standards on D&I on p28.
Further, in the UK, the government has introduced new regulations
designed to help address the gender pay gap. Pearson has
published its gender pay gap report in Great Britain and has made a
commitment to extend our reporting globally by 2020.
Nomination & Governance Committee meeting
focus during 2017
Area of responsibility
Activity
Appointments
Appointment of Michael Lynton as
Non-Executive Director
Balance
Succession
Agreement of desired
skills and experience
of new Non-Executive
Director
Board diversity and
inclusion policy
Contingency
succession planning
for temporary
absence of CEO
Succession planning
and updates on
search for Non-
Executive Director
Succession planning
for senior executives
including CEO
Governance
Approval of
committee terms of
reference
Compliance with UK
Corporate
Governance Code
Consideration of
Board evaluation
feedback
View details of the Board’s diversity and breadth of professional experience
on p64 & 66
Committee aims for 2018
Committee evaluation
The Committee undertook an annual evaluation to review its own
performance and effectiveness. This evaluation was facilitated by
Heidrick & Struggles JCA Group as part of the wider Board evaluation
process. The Committee was considered to have operated effectively
throughout 2017 with a clear agenda and effective leadership.
In response to the findings of the 2017 evaluation, the Committee
will consider succession planning as a priority in 2018, particularly
for Committee chair roles.
Board diversity & inclusion objectives
We will have a full agenda for 2018, with a particular focus on
Non-Executive Directors’ succession planning activity, Board and
senior management diversity and inclusion plan, findings of the Board
evaluation and review of the corporate governance framework in light
of changes to the Code expected to come into effect during 2018.
Vivienne Cox
Chairman of Nomination & Governance Committee
The Committee has agreed the following objectives to support the Board diversity & inclusion policy:
Objectives
Progress
We will strive to maintain a Board composition of:
At least 25% female Directors, with a target of at least 33% female Directors by 2020
At least one Director of colour
25% female Directors achieved
Achieved
All Board appointments will be made on merit, in the context of the skills and relevant
experience that are needed for the Board to oversee Pearson’s strategic development
and that reflect the global nature of our business.
Achieved. Rigorous process used during recent
search for Michael Lynton who has relevant
experience and skills.
The Board will prioritise use of search firms which adhere to the Voluntary Code of
Conduct for Executive Search Firms when seeking to make Board-level appointments.
Achieved. Availed services of Heidrick & Struggles
JCA Group, which has signed the Voluntary Code.
The Board will continue to adopt best practice, as appropriate, in response to the
Davies Review, the Hampton-Alexander Review and the Parker Review.
Suggestions noted by the Board.
Where appropriate, we will assist with the development and support of initiatives
that promote all forms of diversity and inclusion in the Board, Pearson Executive and
our senior management.
Adopted the Board diversity & inclusion policy.
Board members personally sponsor Women in
Learning & Leadership network.
76
Audit Committee report
Committee Chairman
Tim Score
Members Elizabeth Corley, Vivienne Cox,
Linda Lorimer, Tim Score
and Lincoln Wallen
Committee responsibilities include oversight of:
Reporting
The quality and integrity of financial reporting
and statements and related disclosure.
Policy
Group policies, including accounting
policies and practices.
External
audit
External audit, including the appointment,
qualification, independence and the
performance of the external auditor.
Risk &
internal control
Risk management systems and internal
control environment, including the
performance of the internal audit function.
Compliance
& governance
Compliance with legal and regulatory
requirements in relation to financial
reporting and accounting matters.
Terms of reference
The Committee has written terms of reference which clearly set out
its authority and duties. These are reviewed annually and can be
found on the company website www.pearson.com/governance
Attendance
Attendance by Directors at Audit Committee meetings
throughout 2017:
Elizabeth Corley1
Vivienne Cox
Linda Lorimer
Tim Score
Lincoln Wallen
Meetings attended
3/4
4/4
4/4
4/4
4/4
1. Unable to attend one meeting due to existing commitment pre-dating
her appointment to the Committee. Ahead of the meeting, Ms Corley
communicated her comments on the business of the Committee to
the Chairman.
Audit Committee role
The Committee has been established by the Board primarily for the
purpose of overseeing the accounting, financial reporting, internal
control and risk management processes of the company and the
audit of the financial statements of the company. As a Committee,
we are responsible for assisting the Board’s oversight of the quality
and integrity of the company’s external financial reporting and
statements and the company’s accounting policies and practices.
Pearson’s SVP Internal Audit, Compliance and Risk has a dual
reporting line to the Chief Financial Officer and to me, and external
auditors have direct access to the Committee to raise any matters
of concern and to report on the results of work directed by the
Committee. As Audit Committee Chairman, I report to the full
Board at every Board meeting immediately following a Committee
meeting. I also work closely with the Chief Financial Officer and
senior financial management outside the formal meeting schedule
to ensure robust oversight and challenge in relation to financial
control and risk management.
Audit Committee composition
The Committee comprises five independent Non-Executive
Directors. As a committee, we have a good balance of skills and
knowledge with competence and experience covering all aspects
of the sector in which Pearson operates – education, digital and
services – and our key geographic markets.
Fair, balanced and understandable reporting
We are mindful of the Code’s provision C.1.1 relating to fair, balanced
and understandable reporting and we build sufficient time into
our annual report timetable to ensure that the full Board receives
sufficient opportunity to review, consider and comment on the
report as it progresses. Learn more about fair, balanced and
understandable reporting on p109
Risk assessment, assurance and integrity
A key role of the Committee is to provide oversight and reassurance
to the Board with regard to the integrity of the company’s financial
reporting, internal control policies and procedures for the
identification, assessment and reporting of risk. During 2017,
we conducted a number of deep dives into selected principal risks,
and the key risks on which the Committee focused throughout the
year are set out below. Learn more about principal risks and
uncertainties on p50–60
Business transformation
Ongoing business transformation is one of Pearson’s key risks
and opportunities. The Enabling Programme (TEP) is an important
operational simplification project covering Pearson’s key enterprise
resource planning technology and processes, including financial and
HR systems and processes, and the Committee received an update
at each meeting as TEP progressed during the year.
Pearson plc Annual report and accounts 2017 Audit Committee report
Section 4 Governance/Accountability
7777
The primary areas of focus for the Committee throughout 2017 were
monitoring the stabilisation of finance and operations systems in
the UK which were implemented in the second half of 2016, and
oversight of the planned implementation of finance and operations
systems throughout our North American business. In particular,
the Committee considered the phasing of the North America
implementation which has been aligned to the business cycle to
minimise associated risk. The Committee also considered lessons
learned from the previous year’s UK implementation, including
employee training and design adaptations, and how these lessons
would be applied to the next phase.
The Committee heard from the project team leading the North
American design and implementation, as well as the senior
management team in charge of the transformation programme.
Customer experience, data quality and readiness were key areas
under regular consideration by the Committee, and updates were
considered at every meeting on adherence to key project milestones
and budget. In addition to the continued finance and operations
system implementation, new global procurement, supply chain
and contingent worker systems were also rolled out across Pearson.
The Global Learning Platform (GLP) is a key customer- and
learner-facing element of the transformation programme, and
is a mitigating factor in a number of risks facing the business,
including data security and accessibility. Accordingly, the Committee
has introduced GLP as a standing item for consideration at each
meeting as the project progresses. The Committee will continue
to monitor progress on TEP and GLP throughout 2018 with the
assistance of senior management.
Leveraging the progress made through TEP, a review of general
controls operating in the business commenced in 2017 with the
aim of moving the control environment to best-in-class standard,
alongside processes and systems. To this end, a formal control
Steering Committee was established with representation from
finance, HR, and technology, chaired by the Deputy CFO. The
Steering Committee has oversight for controls globally, and centres
of excellence have been created for both financial and IT general
controls. The controls transformation is expected to be a
progressive programme, over a multi-year period, building on
TEP, with automated controls. The “first line of defence” will also be
strengthened to reduce reliance on mitigating and audit controls.
The Committee approved the proposed framework at its meeting in
May 2017, and progress reports are now a standing item for the
Committee’s consideration. Learn more about GLP on p15 and
TEP on p51
Audit Committee meeting focus during 2017
Area of responsibility
Activity
Reporting
Accounting and technical updates
Impact of legal claims and regulatory
issues on financial reporting
2016 annual report and accounts:
preliminary announcement, financial
statements and income statement
Fair, balanced and understandable,
Going concern and viability statements
Review of interim results and
trading updates
Form 20-F and related disclosures,
including annual Sarbanes-Oxley Act
section 404 attestation of financial
reporting internal controls
Significant issues reporting
Policy
Accounting matters and
Group accounting policies
External
audit
Risk &
internal control
Provision of non-audit
services by PwC
Receipt of external auditors’
report on Form 20-F and
year-end audit
Half year review
Internal audit activity reports
and review of key findings
Enterprise risk management
2018 internal audit plan
Legacy product review
Compliance
& governance
Fraud, whistleblowing reports
and Code of Conduct matters
Schedule of authorities
Analysis supporting viability statement
Treasury policy and strategy
Annual review and approval of external
auditor policy
Tax strategy
Reappointment of external auditors
Confirmation of auditor independence
Remuneration and engagement letter
of external auditors
2017 external audit plan
Assessment of the effectiveness of
internal control environment and
risk management systems
Impact of transformation on
contract royalties
Health and safety
Global Learning Platform
Compliance with accounting and
audit-related aspects of the UK
Corporate Governance Code
Internal audit terms of reference
Review opinion on interim results
Review of the effectiveness of
external auditors
Risk deep dives: data security;
data privacy including GDPR;
anti-bribery and corruption; tax;
treasury; business resilience
Oversight of The Enabling Programme
Controls transformation initiative and
subsequent Committee updates
Committee terms of reference
Review of the effectiveness of the
internal audit function
78
Audit Committee report
Data security and data privacy
In a deep dive led by the Chief Information Security Officer, the
Committee considered the progress being made in security across
Pearson’s technology estate, where multiple workstreams arising
from the business transformation programme have contributed
to an improved remediation position in relation to risk. The risk
level remains high overall, however, due primarily to the nature and
volume of data held within our systems, particularly legacy systems,
although decommissioning of these has accelerated under the
simplification programme. The maturity of the security programme
has improved through 2017, and business continuity and disaster
recovery capabilities are expected to also improve as data centres
are closed.
The Committee considered the balance to be struck between
ongoing improvements to security maturity and the actions
required by the Group-wide simplification initiatives, as well as
the appropriate mix of talent required to both protect and
remediate legacy systems and continue development of leading
edge solutions.
The Chief Privacy Officer led a separate deep dive into Pearson’s
data privacy framework. The Committee considered a report on
Pearson’s readiness for the implementation of the General Data
Protection Regulation (GDPR) in May 2018, and the plan in place
to remediate the gaps identified. Also noted were the actions that
were being taken to replace or retire legacy systems, and it was
agreed that good progress had been made during the year in
terms of Group-wide data privacy governance.
Tax and treasury
The Committee held two deep dives into Pearson’s tax strategy,
led by the SVP Tax, to keep abreast of developments at a time of
uncertainty in the tax environment. External factors under
consideration by the Committee included possible impacts of
the proposed US tax reforms and activity at an EU level, including
potential effects on Pearson and the sectors in which we operate.
From an internal perspective, the Committee considered with
management and PwC the appropriate level of provisioning in
respect of historical tax issues, and how such provisioning might
be applied going forward, taking into account the evolution of
Pearson’s size and structure in recent years.
Tax transparency is a particular topic of focus in the corporate sector
as a whole, being a matter of public trust for companies and the
taxation system. In September 2017, Pearson published a report on
its tax strategy and financial information on a country-by-country
basis for our 12 largest markets, the report being a matter of
consideration for the Committee prior to publication.
The Committee also considered the direction of Pearson’s treasury
strategy, with input from the new SVP Treasury who joined the
business in early 2017. Key findings were that the fundamentals
of the Group’s funding structure were sound and controls around
dealing and cash payments were in good shape. Priorities moving
forward were also considered, including the continued evolution of
the treasury strategy aligned with the commercial direction of the
business and the finance transformation programme, and ongoing
integration of the insurance function within treasury to give a more
holistic view of financial risk.
Audit Committee meetings and activities
At every meeting, the Committee considered reports on the
activities of the internal audit and compliance functions, including
the results of internal audits, risk reviews, project assurance reviews
and fraud and whistleblowing reports. The Committee also
monitored the company’s financial reporting and risk management
procedures, reviewed the services provided by PwC and considered
any significant legal claims and regulatory issues in the context of
their impact on financial reporting, each on a regular basis.
At our August meeting, the Committee considered the findings
of our review of the performance and effectiveness of Pearson’s
internal audit function, a process which is undertaken annually.
This review was conducted by distributing a questionnaire to the
key stakeholders of the internal function – including Committee
members, the lead external audit partner, members of the Pearson
Executive, and senior financial, legal and operational management
– and the findings indicated an effective internal audit function.
The Committee also considered Pearson’s anti-bribery and
corruption programme, and the planned governance framework in
respect of new anti-facilitation of tax evasion legislation, which came
into effect in September 2017. In February 2018, the Committee
considered the 2017 annual report and accounts, including the
preliminary results announcement, financial statements, strategic
report and Directors’ report.
Learn more about the key activities of the Audit Committee
on p77
Members
All of the Audit Committee members are independent Non-
Executive Directors and have financial and/or related business
experience due to the senior positions they hold or have held
in other listed or publicly traded companies and/or similar large
organisations. Tim Score, Chairman of the Committee since April
2015, is the company’s designated financial expert, having recent
and relevant financial experience, and is an Associate Chartered
Accountant. He also serves as Audit Committee Chairman for
The British Land Company plc. The qualifications and relevant
experience of the other Committee members are detailed on
p64–65
Pearson plc Annual report and accounts 2017 Audit Committee report
Section 4 Governance/Accountability
7979
Additional meeting attendees
External audit
In addition to the Committee members, advisers and executives
from across the business also attended meetings during the year,
as outlined in the table below. This gives the Committee direct
contact with key leadership. The Chairman and Chief Executive each
attend at least one meeting per year, and the Chief Executive also
attends for discussion of matters with an operational focus. The
Committee also met regularly in private with the external auditors,
SVP Internal Audit, Compliance and Risk, and VP Internal Audit.
Attendees
Chief Financial Officer
Deputy CFO
Legal Counsel
SVP Internal Audit, Compliance and Risk
SVP Finance, Group Reporting
VP Internal Audit*
Committee Secretary
Meetings attended
4/4
4/4
4/4
4/4
4/4
3/3
4/4
* VP Internal Audit role created partway through 2017
Audit Committee training
The Committee receives regular technical updates as well as
specific or personal training as appropriate. In August 2017,
PwC led a training session for the Committee and other
Board members on the current regulatory framework and
corporate reporting.
Committee members also meet with local management on a
periodic basis, such as when travelling for overseas Board meetings,
in order to gain a better understanding of how Pearson’s policies
are embedded in operations.
Committee evaluation
In 2017, the Committee evaluation was undertaken by Heidrick &
Struggles JCA Group as part of the wider Board evaluation process.
The responses illustrated an effective Committee, which uses its
time well and has an appropriate focus on the key issues. The key
findings were:
The combination of the Committee Chairman and CFO, who
attends Committee meetings by invitation, is very effective
and creates a well-functioning Audit Committee
All Committee members contribute fully and the balance of
challenge and support is felt to be appropriate
The meetings are well run to a disciplined timetable ensuring
appropriate allocation of time for discussion and agreement
Risk management is given the right attention and review in the
Committee’s meetings, and there is appropriate escalation of
matters to the full Board when necessary
Directors who do not serve on the Committee feel well informed
of its proceedings
Succession for the role of Audit Committee Chairman should be
borne in mind with future Non-Executive Director appointments,
although this is not immediately pressing.
Oversight of external auditors
The Committee reviews and makes recommendations to the Board
in respect of the appointment and compensation of the external
auditors. This recommendation is made by the Committee after
considering the external auditors’ performance during the year,
reviewing external auditor fees, conducting an effectiveness review
and confirming the independence, objectivity, qualifications and
experience of the external auditors.
The Committee reviewed the effectiveness and independence of
the external auditors during 2017, as it does every year, and remains
satisfied that the auditors provide effective independent challenge
to management.
The external auditor review was conducted by distributing a
questionnaire to key audit stakeholders, including members of
the Audit Committee, the Chief Executive, Chief Financial Officer,
Deputy CFO, Company Secretary, SVP Internal Audit, Compliance
and Risk, SVP Finance for each business area and other heads of
corporate functions. Overall, responses to the questionnaire were
very positive, indicating an effective external audit process.
The Committee will continue to review the performance of the
external auditors on an annual basis and will consider their
independence and objectivity, taking account of all appropriate
guidelines. There are no contractual obligations restricting the
Committee’s choice of external auditors. The external auditors are
required to rotate the audit partner responsible for the Pearson
audit every five years. A new lead audit partner, Giles Hannam,
rotates onto the Pearson audit from 2018, with the outgoing
partner, Stuart Newman, having led the audit for five years
concluding at the end of the 2017 audit.
Audit tendering and rotation
Pearson’s last audit tender was in respect of the 1996 year end,
and resulted in the appointment of Price Waterhouse as auditors.
Developments at an EU level regarding mandatory audit rotation
for listed companies have changed the UK landscape on audit
tendering and rotation. The Committee has reviewed the timetable
for tendering and has taken into account relevant regulation and
guidance. EU regulations and the ruling by the Competition and
Markets Authority (CMA) impose mandatory tendering and rotation
requirements, with EU rules requiring a new auditor to be appointed
no later than for the 2024 financial year end.
In considering the appropriate audit tender timetable for Pearson
in light of these requirements, the Committee has also taken
account of the significant business change being experienced by
the Group and is monitoring the extent to which the Group is
drawing upon the services of other accounting firms. As noted
elsewhere within this report, a series of programmes is well
underway throughout Pearson to implement major simplification
and efficiency improvements across all our enabling functions –
particularly technology, finance, HR – to continue to bring the
general and administrative costs of running Pearson more in line
with global best practice. These include a major transformation
programme – The Enabling Programme (TEP) – which includes the
80
Audit Committee report
implementation of new financial systems and changes to our
transaction processing and control activities, which launched in
the UK during 2016, and is expected to be rolled out throughout
our businesses by 2020. Pearson is supported in these changes,
such as in project assurance matters and, more broadly,
by external advisers, including accounting firms.
The table on p81–82 sets out the significant issues considered by
the Audit Committee together with details of how these items have
been addressed. The Committee discussed these issues with the
auditors at the time of their review of the half-year interim financial
statements in August 2017 and again at the conclusion of their audit
of the financial statements for the full year in February 2018.
Due to the status of TEP and the involvement of accounting firms
advising on TEP and other change projects, the Committee is of the
opinion that the level of disruption likely with a change of auditor,
as well as the focus required by finance and management teams
to conduct the tender process thoroughly and effectively, may
unduly impact the Group and would not be in the best interests
of shareholders. The rotation of lead audit partner at the start of
2018 gives us further confidence in the ongoing effectiveness,
independence and challenge brought by the external auditor.
As noted last year, it is the current expectation of the Committee
that an audit tender process would commence in 2022 in order for
the auditor selected as a result of the tender to be appointed for the
financial year ending 31 December 2023. It would be our intention
to look to accelerate this timing if feasible and appropriate following
the completion of TEP, and we would communicate any change in
our plans to shareholders in advance of any decision. For the
reasons outlined above, the Committee considers this timing to be
in the best interests of Pearson’s shareholders and will continue to
monitor this annually in light of the effectiveness and independence
of the current auditors, as well as considering whether the timing
remains appropriate in light of business developments.
Once the next audit tender occurs, Pearson will adopt a policy
of putting the audit contract out to tender at least every ten years,
as required.
Compliance with the CMA Order
Pearson confirms that it was in compliance with the provisions
of The Statutory Audit Services for Large Companies Market
Investigation (Mandatory Use of Competitive Tender Processes
and Audit Committee Responsibilities) Order 2014 during the
financial year ended 31 December 2017.
Review of the external audit
During the year, the Committee discussed the planning, conduct
and conclusions of the external audit as it proceeded.
At the August 2017 Audit Committee meeting, the Committee
discussed and approved the external audit plan and reviewed
the key risks of misstatement of Pearson’s financial statements,
which were updated at the December 2017 Committee meeting.
All the significant issues were also areas of focus for the auditors.
Learn more in the Independent auditors’ report on p112–117
In December 2017, the Committee discussed with the auditors
the status of their work, focusing in particular on internal controls
and Sarbanes-Oxley testing, and covering the significant issues
outlined on the following pages.
As the auditors concluded their audit, they explained to
the Committee:
The work they had conducted over revenue, including over
more complex revenue contracts and judgements in relation
to provisions for returns
Their work in evaluating management’s goodwill impairment
exercise, on a fair value less costs to sell basis, including assessing
assumptions around sales and operating cash flow forecasts,
longer-term growth rates and discount rates
The work performed over the nature and presentation of
non-trading items focusing on subjective judgements and the
transparency with which related adjusted measures are presented
The work they had done to determine the provisioning levels in
respect of potential tax exposures and uncertain tax provisions
and related disclosures
Their evaluation of the recoverability of investments in digital
platforms and pre-publication assets
Their work over completed disposals and the assessment of
certain businesses meeting the definition of held for sale
The results of their controls testing for Sarbanes-Oxley Act section
404 reporting purposes and in support of their financial
statements audit
The results of their work over the company’s going concern and
viability statement reports
Their work in relation to other matters which aren’t classified as
key audit matters, but may give rise to additional disclosure
requirements e.g. the impact of new accounting standards.
The auditors also reported to the Committee the misstatements
that they had found in the course of their work, which were
insignificant, and the Committee confirmed that there were no
material items remaining unadjusted in these financial statements.
Pearson plc Annual report and accounts 2017 Audit Committee report
Section 4 Governance/Accountability
8181
Significant issues considered by the Audit Committee
Area of focus
Issue
Action taken by Audit Committee
Outcome
Impairment
reviews
Revenue
recognition
and IFRS 15
Financial
instruments
Disposal
transactions
The Committee considered the results of the Group’s
annual goodwill impairment review and the key
assumptions which are considered to be the cash flows
derived from strategic and operating plans, long-term
growth rates and the weighted average cost of capital.
The Committee considered the sensitivities to changes
in assumptions and the related disclosures required by
IAS 36 ‘Impairment of Assets’. The Committee considered
sensitivity to assumptions in relation to the Group’s CGUs
noting that after a number of impairments in recent years
even a relatively small change in assumptions could
crystallise impairments particularly in the Group’s
Core CGU.
The Committee regularly reviews revenue recognition
practice and the underlying assumptions and estimates.
In addition, the Committee has visibility of internal audit
findings relating to revenue recognition controls and
processes and routinely monitors the views of external
auditors on revenue recognition issues. During the year,
the Committee continued to monitor the project to
transition to the new revenue recognition standard,
IFRS 15 ‘Revenue from Contracts with Customers’.
The Committee noted the changes to revenue streams
and the quantification of the impact on the opening
balance sheet.
The Committee reviewed the work on the transition
to IFRS 9 and noted the Group’s new approach to hedge
accounting, investment valuation and impairment.
The Committee reviewed the impact on the opening
balance sheet and in particular the impact on bad
debt provisions.
The Committee reviewed the accounting for the
disposal transactions, including the rationale for held
for sale treatments in respect of proposed disposals.
The Committee also considered the status of the
remaining 25% investment in Penguin Random House
and in particular considered whether Pearson continued
to exert significant influence over the venture.
Pearson carries significant
goodwill intangible asset
balances. There is judgement
exercised in the identification
of CGUs and the process of
allocating goodwill to CGUs
and aggregate CGUs and in the
assumptions underlying the
impairment review. In 2016,
Pearson made significant
impairments to goodwill in
its North American business.
There were no impairments
recorded in 2017.
Pearson has a number of
revenue streams where
revenue recognition practices
are complex and management
assumptions and estimates
are necessary. The Group
also finalised its work on the
disclosure required in
connection with the transition
to IFRS 15 ‘Revenue from
Contracts with Customers’
which will be applicable
in 2018.
Pearson will adopt IFRS 9
‘Financial Instruments’
in 2018.
The Group sold a significant
portion of its stake in Penguin
Random House and the China
test preparation business,
‘GEDU’. The Group also
announced its intention
to sell its English Language
teaching business in China,
‘WSE’, and its K-12 school
courseware business in
the US.
Annual impairment
review finalised with
confirmation of sufficient
headroom in each of
the CGUs.
Assumptions underlying
revenue recognition were
reviewed and challenged
and considered to be
appropriate. Progress
on the project to convert
to IFRS 15 and final
quantification and
disclosures were
reviewed and also
agreed as appropriate.
Adjustments relating to
IFRS 9 were reviewed and
disclosure of impact in
2018 was considered
appropriate.
The Committee
determined that disposal
accounting had been
correctly recorded and
that the criteria for held
for sale treatment in
respect of potential
disposals was
appropriate. The
Committee also agreed
that the remaining
investment in Penguin
Random House should
continue to be accounted
for as an associate.
82
Audit Committee report
Significant issues considered by the Audit Committee (continued)
Area of focus
Issue
Action taken by Audit Committee
Outcome
Pension
valuations
Pearson’s UK pension plan
includes a large defined
benefit section. The valuation
of this plan under IAS 19
‘Employee Benefits’ requires
significant judgement.
Comment
letters
received from
regulators
During the year Pearson
received comment letters
from the Financial Reporting
Council (FRC) in the UK and
the Securities Exchange
Commission (SEC) in the US.
The Committee looked at changes in the assumptions
used to value the UK pension plan and in particular noted
updated assumptions for mortality, discount rates and
member options on retirement. The Committee also
reviewed the accounting for the Plan’s purchase of
insurance buy-in policies during the year and for
significant additional pension contributions made
in respect of prior year business disposals.
Letters from the FRC and SEC were circulated to the
Committee and responses by the company were reviewed.
Where relevant additional disclosure was requested by
the regulators this was also reviewed prior to publication
in this report. In particular, the Committee reviewed
proposed changes to disclosures relating to our alternative
performance measures included in the Our KPIs section,
the Financial Review section and the Financial key
performance indicators section of this report.
Restructuring
Returns
Tax
Pearson announced a new
restructuring programme in
May 2017. There are a number
of accounting judgements
to be made regarding
categorisation and timing
of recognition of cost.
The Committee reviewed progress on the restructuring
programme and considered the judgements required in
accounting for the costs of redundancy, asset impairment
and property rationalisation mainly in respect of the
Group’s North America operations and enabling functions.
The Committee also considered the disclosure of
restructuring in Pearson’s adjusted measures.
The Committee considered return provisioning for
the US higher education courseware business following
a high level of returns from retailers in 2016 and a
subsequent change in methodology for establishing
provisions. This methodology was subsequently refined
in 2017.
In light of significant product
returns in 2016 in the US
higher education courseware
business, we continued to
review returns data and
our policy on reserving
for returns.
The impact of US tax reform
and the trend for increased
tax transparency, and
provision levels.
Pension assumptions
were considered
appropriate and the
pension surplus under
IAS 19 was agreed to
be fairly stated.
The Committee agreed
that the company’s
responses to comment
letters were appropriate
and ensured that
disclosures were reviewed
and updated. Both
comment letter processes
have been closed.
The Committee confirmed
that the accounting
and disclosure for the
restructuring programme
were appropriate.
Assumptions underlying
the returns reserve
methodology were
reviewed and agreed as
still being appropriate in
the light of actual returns
in 2017.
The Committee reviewed tax provision levels and was
updated on expanded annual report disclosures concerning
tax provisions. The Committee addressed this matter
through the presentation of two management reports
on Pearson’s tax affairs by the SVP Tax and through a
presentation of the external auditors’ assessment of the
company’s tax provisioning. In addition, the Committee
considered the report on tax strategy issued in September
2017 prior to publication. The Committee was briefed by
management on the anticipated impact of US tax reform
in December 2017. As more information on the detailed
application becomes available, these estimates may
change, and the Committee will be updated as necessary.
The Committee was
satisfied with Pearson’s
approach to tax
provisioning, taking
account of the views of
management and the
assessment of the
external auditors. The
Committee agreed that
expanded disclosure in
this report would be
beneficial to users.
Pearson plc Annual report and accounts 2017 Audit Committee report
Section 4 Governance/Accountability
8383
Auditors’ independence
In line with best practice, our relationship with PwC is governed
by our policy on external auditors, which is reviewed and approved
annually by the Audit Committee. The policy establishes procedures
to ensure the auditors’ independence is not compromised, as well
as defining those non-audit services that PwC may or may not
provide to Pearson. These allowable services are in accordance
with relevant UK and US legislation.
The Audit Committee approves all audit and non-audit services
provided by PwC. Our policy on the use of the external auditors for
non-audit services reflects the restriction on the use of pre-approval
in the 2016 FRC Guidance on Audit Committees and, accordingly
all non-audit services, irrespective of value, are required to be
approved by the Audit Committee. In particular, we expressly
prohibit the provision of certain tax, HR and other services by our
external auditor. We review non-audit services on a case-by-case
basis, including reviewing the ongoing effectiveness and
appropriateness of our policy.
The Audit Committee receives regular reports summarising the
amount of fees paid to the auditors. During 2017, Pearson spent
£0.8m less on non-audit fees with PwC compared with 2016,
due to a reduction in billing on tax services and on the efficacy
programme. For 2017, non-audit fees represented 23% of external
audit fees (35% in 2016). The policy on provision of non-audit
services by external auditors in use in 2016 was in line with
previous FRC requirements.
For all non-audit work in 2017, PwC was selected only after
consideration that it was best able to provide the services we
required at a reasonable fee and within the terms of our policy on
external auditors. Where PwC is selected to provide audit-related
services, we take into account its existing knowledge and experience
of Pearson. Where appropriate, services were tendered prior to a
decision being made as to whether to award work to the auditors.
Significant non-audit work performed by PwC during 2017 included:
Audit-related work in relation to potential and actual corporate
finance transactions
Audit of IT general controls mandated by contractual
commitments.
A full statement of the fees for audit and non-audit services is
provided in note 4 to the consolidated financial statements
on p137.
Tim Score
Chairman of Audit Committee
84
Risk governance and control
Control environment
The Board has overall responsibility for Pearson’s systems of
internal control and risk management, which are designed to
manage, and where possible mitigate, the risks facing Pearson,
safeguard assets and provide reasonable, but not absolute,
assurance against material financial misstatement or loss. The
Board confirms that it has conducted a review of the effectiveness
of Pearson’s systems of risk management and internal control
in accordance with provision C.2.3 of the Code and the FRC
Guidance on Risk Management, Internal Control and Related
Financial and Business Reporting (FRC Guidance). The Board
confirms these systems operated satisfactorily throughout the
year and to the date of this report, and no significant failings or
weaknesses were identified in the review process.
The Board has delegated responsibility for monitoring the
effectiveness of the company’s risk management and internal
control systems to the Audit Committee. The Audit Committee
oversees a risk-based internal audit programme, including periodic
audits of the risk processes across the organisation. It provides
assurance on the management of risk, and receives reports on
the efficiency and effectiveness of internal controls. Each business
area, including the corporate centre, maintains internal controls and
procedures appropriate to its structure, business environment and
risk assessment, while complying with company-wide policies,
standards and guidelines.
Internal control and risk management
Our internal controls and risk oversight are monitored and
continually improved to ensure their compliance with FRC
Guidance. Our risk journey is described more thoroughly in the
risk management section on p50–60.
The Board is ultimately accountable for effective risk
management in Pearson and determines our strategic approach
to risk. It confirms risk appetite targets and receives and reviews
semi-annual reports on the enterprise risk management (ERM)
process and the status of top enterprise-wide risks.
It is supported in the following ways:
The Audit Committee is responsible for overseeing internal controls
within Pearson which includes determining the risk appetite
(recommended by Pearson Executive management), reviewing
and commenting upon key risks and ensuring that risk
management is effective
Pearson’s Executive and leadership teams are responsible for
identifying and mitigating risks, supported by the ERM team
Leaders and managers at all levels in Pearson are responsible
for managing risk in their area of responsibility, including the
identification, assessment and treatment of risk
The ERM team owns the overall risk management framework
for the company and facilitates consolidated reporting on risk
The internal audit team provides independent assurance on the
adequacy of the risk management arrangements in place. The
internal audit plan is aligned to identified enterprise-wide risks
reported by the ERM team and it presents issues and risks arising
from internal audits at each Audit Committee meeting.
The involvement of the Board and Audit Committee in the design,
implementation, identification, monitoring and review of risks
(including setting risk appetite, determining which are principal
to the company and how risk is being embedded in our culture)
is outlined in more detail in the risk management section on
p50–60.
Financial management and reporting
There is a comprehensive strategic planning, budgeting and
forecasting system with an annual operating plan approved by
the Board. Monthly financial information, including trading results,
balance sheets, cash flow statements, capital expenditures and
indebtedness, is reported against the corresponding figures for
the plan and prior years, with corrective action outlined by the
appropriate Senior Executive. Pearson’s senior management meets
regularly with business area management to review their business
and financial performance against plan and forecast. Major risks
relevant to each business area as well as performance against
the stated financial and strategic objectives are reviewed in
these meetings.
We have an ongoing process to monitor the risks and effectiveness
of controls in relation to the financial reporting and consolidation
process, including the related information systems. This includes
up-to-date Pearson financial policies, formal requirements for
finance to certify that they have been in compliance with policies
and that the control environment has been maintained throughout
the year, consolidation reviews and analysis of material variances,
finance technical reviews, and review and sign-off by senior finance
managers. The Group finance function also monitors and assesses
these processes and controls through finance and technology
compliance functions and a Controls Steering Committee
comprising cross-functional experts.
These controls include those over external financial reporting which
are documented and tested in accordance with the requirements of
section 404 of the Sarbanes-Oxley Act, which is relevant to our US
listing. One key control in this area is the Verification Committee,
which submits reports to the Audit Committee. This Committee is
chaired by the SVP Internal Audit, Compliance and Risk, and
members include the Chief Financial Officer and/or their deputy,
General Counsel, SVP Investor Relations and the Company Secretary
as well as senior members of financial management. The primary
responsibility of this Committee is to review Pearson’s public
reporting and disclosures to ensure that information provided to
shareholders is complete, accurate and compliant with all applicable
legislation and listing regulations. The effectiveness of key financial
controls is subject to management review and self-certification and
independent evaluation by the external auditors.
Pearson plc Annual report and accounts 2017 Risk governance and control
Section 4 Governance/Accountability
8585
Internal audit
Treasury management
The treasury department operates within policies approved by
the Audit Committee on behalf of the Board, and treasury
transactions and procedures are subject to regular internal audit.
Major transactions are authorised outside the department at the
requisite level, and there is an appropriate segregation of duties.
Frequent reports are made to the Chief Financial Officer and regular
reports are prepared for the Audit Committee and the Board.
The treasury policy is described in more detail in note 19 to the
consolidated financial statements.
Insurance
Pearson reviews its risk financing options regularly to determine
how the company’s insurable risk exposures are managed and
protected. Pearson purchases comprehensive insurance cover
and annually reviews coverage, insurers and premium spend,
ensuring the programme is fit for purpose and cost-effective.
Pearson’s insurance subsidiary, Spear Insurance Company Limited,
is used to leverage Pearson’s risk retention capability and to achieve
a balance between retaining insurance risk and transferring it to
external insurers.
Pearson has an in-house internal audit function, supported by
co-source agreements to augment our in-house resources, in areas
such as providing specific subject matter expertise or language
skills. The internal audit function is responsible for providing
independent assurance to management and the Audit Committee
on the design and effectiveness of internal controls to mitigate
strategic, financial, operational and compliance risks. The SVP
Internal Audit, Compliance and Risk reports formally to the
Chairman of the Audit Committee and the Chief Financial Officer,
with a reporting line to the General Counsel on compliance matters.
The internal audit mandate and plan are approved annually by the
Audit Committee. Completion and changes to the plan are also
reviewed and approved by the Audit Committee throughout the
year. The internal audit plan is aligned to our greatest areas of
risk as identified by the ERM process, and the Audit Committee
considers issues and risks arising from internal audits. Management
action plans to improve internal controls and to mitigate risks, or
both, are agreed with the business area after each audit. Formal
management self-assessments allow internal audit to monitor
business areas’ progress in implementing management action
plans agreed as part of internal audits to resolve any control
deficiencies. Progress of management action plans is reported to
the Audit Committee at each meeting. Internal audit has a formal
collaboration process in place with the external auditors to ensure
efficient coverage of internal controls. Regular reports on the
findings and emerging themes identified through internal audits
are provided to Executive management and, via the Audit
Committee, to the Board.
The SVP Internal Audit, Compliance and Risk oversees compliance
with our Code of Conduct and works with senior legal and HR
personnel to investigate any reported incidents, including ethical,
corruption and fraud allegations. The Audit Committee is provided
with an update of all significant matters received through our
whistleblowing reporting system, together with an annual review
of the effectiveness of this system. The Pearson anti-bribery and
corruption programme provides the framework to support our
compliance with various anti-bribery and corruption regulations
such as the UK Bribery Act 2010 and the US Foreign Corrupt
Practices Act.
86
Reputation & Responsibility Committee report
Committee Chairman
Linda Lorimer
Members Vivienne Cox, Linda Lorimer,
Harish Manwani and Lincoln Wallen
Committee responsibilities include oversight of:
Reputation
Pearson’s reputation among major
stakeholders, including governments,
investors, employees, customers, learners
and the education community.
Risk
Oversight of Pearson’s approach to
reputational risk, including ensuring that clear
roles have been assigned for management.
Sustainability
Oversight of 2020 sustainability plan and
performance against sustainability goals
and commitments.
Brand &
culture
Ethics
Strategy
Management of the Pearson brand to ensure
that its value and reputation are maintained and
enhanced. Pearson’s approach to monitoring
and supporting the values and desired
behaviours that form our corporate culture.
Ethical business standards, including Pearson’s
approach to issues relevant to its reputation
as a responsible corporate citizen.
Strategies, policies and plans related to
reputation and responsibility issues and the
people, processes and policies that are in
place to manage them.
Terms of reference
The Committee has written terms of reference which clearly set out
its authority and duties. These are reviewed annually and can be
found on the company website www.pearson.com/governance
Attendance
Attendance by Directors at Reputation & Responsibility Committee
meetings throughout 2017:
Vivienne Cox
Linda Lorimer
Harish Manwani
Lincoln Wallen
Meetings attended
4/4
4/4
4/4
4/4
Reputation & Responsibility Committee role
The Committee forms an important part of the Board’s oversight
of the broader governance environment, working to advance
Pearson’s reputation across a range of stakeholders and to
maximise the company’s positive impact on society and the
communities in which we work.
The Committee’s agenda includes discussion of reputation,
critical issues and initiatives, including those identified as material
to Pearson’s stakeholders and long-term sustainability, and
consideration of immediate risks or opportunities. We are
committed to promoting Pearson’s 2020 sustainability plan,
and the Committee works in alignment with the company’s
Responsible Business Leadership Council which comprises
senior leaders from across the business.
Read more about our 2020 sustainability plan on p24–33.
Changes to the Committee
Lincoln Wallen joined the Committee with effect from 1 January
2017, in place of Josh Lewis who stepped down from the Committee
at the end of 2016. I was pleased to take over the chairmanship of
the Committee at the start of the year from Vivienne Cox, who
remains a valuable member of the Committee.
Areas of focus during 2017
As part of Pearson’s 2020 sustainability plan, the company has
identified a shortlist of issues that are most relevant to the
sustainability of our business. The Committee has an integral role
in the oversight and governance of these issues, and during 2017
held a number of deep dives to consider specific issues, in particular
considering the public goals and targets the company is setting
to address these issues, and examining their associated
reputational impacts.
At our August meeting, we reviewed proposals for Pearson’s new
global editorial policy, designed to ensure we consistently publish
high-quality content and prevent errors. The Committee considered
appropriate positioning and communication of the policy and
discussed plans for training to be rolled out to content creators and
editorial staff. We also discussed ways in which Pearson could adapt
and modify its content to reflect local and cultural norms, while
still being true to our values and purpose. During the year we also
considered access enabled by affordability, particularly in the
US higher education courseware market, and discussed plans to
ensure our products meet the needs of learners, educators and
administrators in accessing learning and teaching materials from
anywhere, at any time. In addition, the Committee considered
reports on other material sustainability issues, namely greenhouse
gas emissions and climate change, 21st century skills and lobbying
and public policy.
Read more about our material sustainability issues and our global
editorial policy on p25–26.
During the year we reviewed the progress made by Pearson’s
ongoing social impact initiatives and partnerships. We focused on
developing the next phases of Project Literacy and for the Pearson
Affordable Learning Fund as well as studied the plans for
Tomorrow’s Markets Incubator.
Pearson plc Annual report and accounts 2017 Reputation & Responsibility Committee report
Section 4 Governance/Engagement
8787
Brand strategy is an important part of the Committee’s mandate,
and we assessed the progress in rolling out the new Pearson brand
and the recent market campaigns in North America. We have been
attentive to how the communications are migrating more to digital
dissemination to align with our customers’ practices and
preferences.
The US is our largest market, so it is important for the Committee to
follow Pearson’s reputation and brand in the US particularly. The
likely impact of the US 2016 elections was outlined for us early in
2017, and we have received updates on issues and initiatives in our
higher education business as they related to reputation. Pearson
will be reporting publicly, starting in 2018, on the efficacy of our
products and services to demonstrate their measurable impact.
Throughout 2017, the Committee monitored the progress of our
external reporting plans; we looked at how we are aligning our
efficacy goals with our wider business strategy, and considered
examples of product efficacy reports. We were joined for our
efficacy sessions by PwC, which is providing external assurance
for the efficacy reporting process.
In our report to shareholders last year, we noted that, as a
Committee, we would continue to monitor the Pearson culture and
employee engagement, particularly in light of the changes and
rationalisations throughout the business in 2016. However, due to
the importance of this topic, it was instead considered by the full
Board in 2017. Culture and engagement continues to fall within
the remit of the Committee, and we will consider the matter as
appropriate during 2018.
Committee evaluation
In 2017, the Committee evaluation was undertaken by Heidrick &
Struggles JCA Group as part of the wider Board evaluation process.
Overall, the responses illustrated a collaborative and engaged
Committee, and that the work of the Committee is increasingly
aligned with the strategic agenda. The assessment indicated that
there may be opportunity to evolve the Committee further by
clarifying its focus. In particular, some overlap with the Audit
Committee was identified. As a result, oversight on efficacy, health
and safety and safeguarding will be lodged with this Committee
rather than shared with the Audit Committee.
Committee aims for 2018
Over the next year we will continue to explore Pearson’s material
sustainability issues, including employability and 21st century skills
as well as affordability, health and safety and safeguarding. We will
hold a deep dive into sustainability considerations relating to our
supply chain and review our 2018 efficacy reporting activity and
plans for 2019. We will also review our Group-wide approach to
reputational risk management and will consider culture and
employee engagement, bearing in mind challenges and
opportunities presented by the ongoing transformation and
simplification across the business.
Linda Lorimer
Chairman of Reputation & Responsibility Committee
O
v
e
r
v
i
e
w
O
u
r
s
t
r
a
t
e
g
y
i
n
a
c
t
i
o
n
O
u
r
p
e
r
f
o
r
m
a
n
c
e
G
o
v
e
r
n
a
n
c
e
Reputation & Responsibility Committee meeting focus during 2017
Area of responsibility
Activity
Reputation
Issue management – customer and media engagement in UK and US
Global editorial policy: meeting learner expectations
North American markets – new US administration and approach to government affairs and public policy
Sustainability
Sustainability report
Brand &
culture
Strategy
Tomorrow’s Markets Incubator initiative
Efficacy reporting plans
Greenhouse gas emissions and climate change
Brand strategy
Marketing campaigns
Review of any incidents
Access and affordability of US higher education courseware
Community investment plan, including Project Literacy updates
One story and digital narrative
i
F
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
88
Stakeholder engagement
Engaging with shareholders
Access to capital is key to the long-term performance of our
business. We work to ensure that our investors, analysts and other
investment professionals have a good understanding of our
strategy, performance and purpose.
Pearson has an extensive programme of communication with
all of its shareholders – large and small, institutional and private.
Shareholder outreach In 2017, we continued with our
shareholder outreach programme, conducting over 300 meetings
in the UK, US, Canada and Continental Europe with over
260 investment institutions.
Trading updates There are five trading updates each year and the
Chief Executive and Chief Financial Officer present our preliminary
and interim results. They also attend regular meetings throughout
the year with investors in the UK and around the world, tailored
to investor requirements, to discuss the performance of
the company, the company’s strategy, our change programme,
structural and cyclical changes in our markets, and risks
and opportunities for the future.
The investor relations team Led by Joanne Russell, SVP Investor
Relations, who joined in June 2017 after six years as Head of Investor
Relations at Whitbread plc. The IR team met with investors
throughout the year, including attending several investor
conferences, and addressed regular investor and analyst enquiries.
Chairman and Non-Executive Directors The Chairman meets
regularly with shareholders to understand any issues and concerns
they may have. This is in accordance with the Code and consistent
with the duties of investors under the UK Stewardship Code. The
Non-Executive Directors meet informally with shareholders both
before and after the AGM and respond to shareholder queries and
requests as necessary. The Chairman ensures that the Board is kept
informed of investors’ and advisers’ views on strategy and corporate
governance. At each Board meeting, the Directors consider
commentary from advisers on major shareholders’ positions and
Pearson’s share price. In addition, the Nomination & Governance and
Remuneration Committees consider shareholder views on corporate
governance and remuneration matters, respectively, as required.
The 2017 financial year has been one of significant engagement
with our shareholders. Sidney Taurel, Elizabeth Corley and our
senior management team also consulted with our major
shareholders and with shareholder representative bodies on our
approach to Directors’ remuneration following the vote against
our Directors’ remuneration report at our 2017 AGM.
Further details regarding Directors’ remuneration can be found
on p90–105
Private investors Institutional investors’ holdings in Pearson
account for around 90% of total shares outstanding, but private
investors represent over 80% of the shareholders on our
register and we make a concerted effort to engage with them
regularly. Shareholders who cannot attend the AGM are
Non-Executive Director engagement
Save the Children, Jordan – Vivienne Cox
Digital Advisory Network – Lincoln Wallen
Last September, Vivienne Cox accompanied Kate James
(Chief Corporate Affairs and Global Marketing Officer) and other
Pearson colleagues to Amman, Jordan, on behalf of Pearson,
to launch the next phase of Pearson’s ‘Every Child Learning’
partnership with Save the Children. The team launched a
new pilot education project in Jordan, in partnership with the
Jordanian Ministry of Education, to help Syrian refugees,
and local children living in host communities, to improve
their learning outcomes, to build resilience and to help make
their schools safer.
As part of the trip, the Pearson team:
Visited a community centre in East Amman which over the
previous 12 months had given us access to learners with whom
to develop the maths learning app. The team met some of the
refugee children and ran a focus testing group on the latest
version of the app
Took part in an official launch of our pilot education project
at the Al Emama Al Shafe’e School with officials from the
Jordanian Ministry of Education, British Ambassador and
Save the Children. The team met children, parents, teachers
and Save the Children Jordan Field Staff who were taking part
in our pilot education project
Visited Za’atari refugee camp to see various aid programmes
run by Save the Children.
For Pearson, tackling a major social need – making education
more accessible and effective – is why we exist and how we
create value for our shareholders. In a world where work is
increasingly disrupted by machine intelligence, the need to
be always learning is greater now than ever. It is also a great
challenge, as the legacy analogue businesses that still
generate a lot of Pearson’s profits are themselves being
disrupted by technology.
At this pivotal time in the digital transformation of education,
Pearson launched the Digital Advisory Network to bring together
a diverse cross-section of people with experience and knowledge
of disruption in other industries and to help us apply lessons
learned and insights to shape Pearson’s business strategy for
the Board.
Lincoln Wallen has been an instrumental leader since the
Network’s inception and participated in the first Network Summit
in October 2017. Lincoln continues to serve as a leader and
adviser to both the Network and the Pearson Executive.
Pearson plc Annual report and accounts 2017
Stakeholder engagement
Section 4 Governance/Engagement
8989
invited to e-mail questions to the Chairman in advance at
chairman-agm@pearson.com
We encourage our private shareholders to become more informed
investors and have provided a wealth of information on our website
about managing Pearson shareholdings. We also encourage all
shareholders, who have not already done so, to register their
e-mail addresses through our website and with our registrar.
This enables them to receive e-mail alerts when trading updates
and other important announcements are added to our website.
See Shareholder information on p196 or visit our website
https://www.pearson.com/corporate/investors/managing-your-
shares.html
Vivienne Cox engaging with refugee children at a community centre in
East Amman, Jordan during ‘Every Child Learning’ visit.
Annual General Meeting
Engaging with all stakeholders
Our AGM, on 4 May 2018, is an opportunity for all shareholders
to meet the Board and to hear presentations about Pearson’s
businesses and results.
Share dealing service
Due to its continued popularity, we intend to provide shareholders
with smaller holdings the opportunity to use our registrar’s low-cost
share dealing service, giving them the chance to add to or reduce
their stake in Pearson at significantly reduced dealing rates, or to
donate shares to charity with ease. We believe it is important
that our employees have a shared interest in the direction and
achievements of Pearson and are pleased to say that a large
number of our employees are shareholders in the company.
We post all company announcements on our website,
www.pearson.com, as soon as they are released, and key
shareholder presentations are made accessible via webcast or
conference call. Our website contains a dedicated investor relations
section with an extensive archive of past announcements and
presentations, historical financial performance, share price data
and a calendar of events. It also includes information about all
of our businesses, links to their websites and details of our
sustainability policies and activities. Learn more about our
approach to Sustainability on p24–33
Engagement in action
Industry &
marketplace
Employees
Franchisees
Customers
Non-Executive Directors Josh Lewis
and Linda Lorimer were engaged
and instrumental in redefining the
go-to-market strategy for Pearson’s
Online Program Management
business, working alongside
senior management
The Board attended a discussion
event on Future of Skills:
Employment in 2030, at which
they considered the future of
work and implications for
education. The Board was joined
at the event by external business,
policy and thought leaders from
the Boston area
Read more about the Future of
Skills: Employment in 2030 on p10
The Board met with local staff and
senior management during 2017
visits to São Paulo and Boston.
Dinners with senior local
management and breakfasts
with key talent allowed the
Non-Executive Directors to share
their experience and expertise
with employees as well as allowing
the Directors to better understand
employees’ abilities and
motivations, helping them to
assess the company’s prospects
and plans for succession
Non-Executive Directors
Elizabeth Corley and Vivienne
Cox participated in Women in
Leadership and Learning network
(WILL) meetings, giving virtual
talks to employees on
professional development
The Board had an opportunity
to interact with an audience of
800 people from the Pearson
franchisee sales team at the
Wizard sales convention in
São Paulo, Brazil
During this event, the Board
learned about the Wizard
strategy, marketing campaigns
and training provided to the
franchisee sales team. The event
also included recognition for
high-performing employees
The Board heard from faculty and
students about the challenges
and opportunities they face with
digital teaching and learning at
the Digital Teaching & Learning
Customer Panels in Boston
This session enabled the Board to
understand the customer context
to our higher education strategy
90
Remuneration overview
Committee Chairman
Elizabeth Corley
Members
Elizabeth Corley, Josh Lewis,
Tim Score and Sidney Taurel
“After a thorough review and extensive
shareholder engagement, we believe that
our approach to remuneration is simpler,
transparent, and a balanced reflection of
the performance of the business.”
Key changes to how we implement our remuneration policy
for 2018
Maintaining lower award size for 2018 LTIP awards
Reduction in pension contributions for new hires
Shareholding guidelines to extend post-retirement
Simplifiedandbalancedperformancemeasures
In this remuneration section
Part 1: Remuneration overview
Part 2: Executive remuneration framework
and implementation in 2018
Part 3: 2017 remuneration report
p90
p94
p96
Terms of reference
The Committee’s full charter and terms of reference are available
on the Governance page of the company’s website. A summary of
the Committee’s responsibilities is shown on p105.
Board Committee attendance
The following table shows attendance by Directors at Committee
meetings throughout 2017:
Elizabeth Corley
Josh Lewis
Tim Score
Sidney Taurel
www.pearson.com/governance
Remuneration
5/5
5/5
5/5
5/5
Dear shareholders,
The vote on remuneration at last year’s AGM gave us a clear
message about how we managed executive pay for 2016. We made
a commitment to respond in a constructive way and have taken a
comprehensive look at the remuneration of our Executive Directors
for 2017.
We have engaged with our shareholders
We have held extensive dialogue with major shareholders and
shareholder representative bodies. We began this process in May
2017 and will continue it through this year’s AGM. I would like to
thank all those who contributed to the process. We have listened
and sought to respond to the concerns we have heard. It is clear
that shareholders and other stakeholders would like our approach
to remuneration to be simpler, more transparent and with lower
maximum levels of reward as the business goes through this
challenging phase. Our investors continue to hold a diverse range
of views regarding appropriate performance measures. We have
endeavoured to develop an approach that the majority of
shareholders can support.
Our approach to remuneration supports our strategy
Pearson is the world’s learning company. We create educational
tools, content, products and services that people need to help them
make progress in their lives through learning. Our ambition is to
be the leader in digital learning on a global basis. To deliver on
this ambition we have a strong global management team, and we
compete for talent in a demanding international business
environment. The company’s ability to attract and retain the high
calibre executives needed to lead this complex and changing
business is critical for our shareholders. As such, we have tried to
take a balanced approach to these commercial pressures when
determining executive pay.
We have reduced the LTIP awards for 2017 and 2018
The Remuneration Committee has reduced the 2017 grant of
long-term incentives to the Executive Directors in the year by
approximately 30%. This substantial reduction demonstrates a
responsible approach to the operation of remuneration
arrangements for our Executive Directors as we go through the
current business transformation. The Committee has decided
that we will maintain the same reduced award size for the LTIP
grant to be made in 2018. Therefore, the 2018 awards will be made
with the same face value as a % of salary as those in 2017. We have
also reduced the proportion of these awards that will vest for
threshold performance to 18% of the award.
These share awards will only vest to the extent that performance is
delivered against stretching performance tests over the next three
years. Any awards vesting will be subject to a further two-year
holding period. The eventual value of the awards will depend on
our share price performance and dividends paid to shareholders
overafive-yearperiod.
Pearson plc Annual report and accounts 2017 Remuneration overview
91
How we reflected our progress and performance in the annual
bonus for 2017
A year of progress and performance
Pearsondeliveredadjustedoperatingprofitof£576min2017,
which was at the top end of our guidance range, and underlying
earnings per share of 54.1p, helped by an exceptional change to the
tax rate during the year. The company continued to invest in digital
transformationandsimplification.In2017,Pearsonannounced
planstodeliveranotherc.£300mincostsavingsoverathree-year
period,inadditiontothec.£650mofcostsavingsdeliveredinthe
years immediately prior.
Pearsonhadstrongcashflowgenerationintheyear.Theportfolio
wasfurthersimplifiedwiththepartialdisposalofPenguinRandom
House.A£300msharebuybackprogrammewasannouncedand
theoverallNetDebtofthebusinesswasreducedto£432matthe
endof2017from£1.1bnin2016.Theproposedoveralldividendfor
the year will be 17p. Further details of these results can be found
elsewhere in this Annual Report.
The Committee took this progress and performance into account
when determining the outcome of the annual incentive plan
for 2017.
During 2017, the board set a demanding plan for the business.
The thresholds of the performance ranges for the Annual Incentive
Plan for our Executive Directors were set above market consensus
expectations at the time. As such, bonus was only payable to the
Executive Directors for 2017 for performance delivered ahead of
market expectations.
The company delivered results in line with the demanding plan
setfortheyearonoperatingprofitandearningspershare.
Good progress was made in delivering on a number of aspects
ofthestrategicplan.Cashflowgenerationexceededplaninthe
year driven by strong cash conversion of 116%.
Weannounceda£300msharebuybackbeginning18October
2017 utilising part of the proceeds from the disposal of a 22% stake
in Penguin Random House. We completed the programme on
16February2018.Thesharebuybackprogrammedidnotbenefit
the outcome of incentives for the Executive Directors.
Sales revenues in the year did not reach the stretch targets in the
annual incentive plan.
Thereisnobenefitfromforeignexchangemovementsintheyear
in determining the outcome of the annual bonus.
Remuneration simplified and balanced
LTIP awards reduced for 2017 & 2018 by
approximately 30%
Discretionary reductions in annual bonus
for 2017
Based on performance against targets, in 2017 the CEO achieved a
bonus outcome of 61% of maximum and the CFO achieved a bonus
outcome of 58% of maximum. The Remuneration Committee
exercised its discretion and reduced these outcomes by 5% to
account for the exceptional change in the tax rate during the year so
thattheExecutiveDirectorsdidnotbenefitfromthis.Thisresulted
in a bonus outcome of 56% of maximum for the CEO and 53% of
maximum for the CFO.
The Remuneration Committee then moved to consider the bonus
outcomes in the context of the shareholder experience in the year.
Mindful of this experience, and the work still to be done, the
Executive Directors, along with the Committee, have agreed it
would not be appropriate to take the full bonus and that a further
reduction in outcomes was appropriate. The Committee commends
the Executive Directors for their approach in these matters and
confirmedthatweshouldfurtherreducethebonusoutcomebased
on the following considerations:
The degree of stretch in the targets set relative to plan was
consideredandtheCommitteeweresatisfiedthatthetargets
were appropriately calibrated;
Outcomesagainstthetargetswereareflectionofthe
performance of the company in the year and were a fair and
reasonable outcome;
Management is making tangible progress in executing the strategy
but, at the time of the Committee’s deliberations, this was not fully
reflectedintheshareprice;
A change in dividend policy resulted in a reduced payout of a
proposed 17p;
2017 performance provides a solid foundation from which to build
and positions the company well for a return to growth in 2018.
As a result, the annual bonus payable to the CEO for 2017 is 44%
of maximum and for the CFO is 47% of maximum.
Section 4 Governance/Remuneration 92
Remuneration overview
Understanding total remuneration for the CEO for 2017
Given the level of performance achieved and the progress made
towards executing our longer term strategic plan, the overall
reported‘singlefigure’forthetotalremunerationofJohnFallon
for2017is£1.758m.Thisisa16%increasecomparedwith2016.
The‘singlefigure’hasincreasedbecausewehavepaidanannual
bonus of 44% of the maximum opportunity for 2017. This is
higher than the annual bonus for 2016, which was 24% of the
maximum opportunity.
John Fallon did not receive a salary increase in 2017 and none of
the 2015 LTIP award for the performance cycle from 2015 to 2017
vested. This was the sixth year in which none of the long-term
incentive awards have vested, demonstrating the Remuneration
Committee’s consistent application of a rigorous approach to setting
performance targets.
Having completed 20 years of service with Pearson, from October
2017JohnFallonhadnofurtherserviceaccrualunderhisdefined
benefitpensionarrangements.
Looking forward to 2018 – simpler, balanced
performance measures
The base salary for the CEO and CFO will be increased by 2.5% in
2018 in line with the average increases for UK employees. This is
thefirstincreaseinthreeyears.
Working within our existing policy, to simplify the annual incentive
plan(AIP)structurefor2018,andreflectingshareholderfeedback,
wehavereducedthenumberofperformancemeasuresfromfive
tofour.Wehavereplacedthetwoprofitbasedmeasurespreviously
included(OperatingProfitandEPS)withasingleOperatingProfit
measure, which will determine 40% of the outcome of the plan.
This provides a greater focus on the metric used by management
on a day-to-day basis to manage the business, whilst reducing
the prominence of EPS in the overall remuneration framework.
We have also made minor adjustments to the weightings of the
otherperformancemeasures(Cashflow20%,Revenue20%and
Strategic Measures 20%). We believe this creates an AIP that is
appropriately balanced between key metrics and objectives for
2018. Each performance measure will operate independently.
There will be no changes to the maximum annual incentive
opportunities for 2018.
As noted above, the Remuneration Committee has decided to
maintain the lower level of long-term incentive awards in 2018.
In 2017, we reduced LTIP awards by approximately 30% from prior
levels, whilst retaining stretching performance targets. We have also
reduced the proportion of these awards that will vest for threshold
performance from 25% to 18% of the award. We will adopt the same
approach for the 2018 awards by maintaining the 2017 award levels.
Therefore, the 2018 awards will be made with the same face value as
a % of salary as those in 2017.
Responding to shareholder feedback we are rebalancing the
performance measures for 2018 awards. One third of any award
will vest based on each of Earnings Per Share (EPS), Gross Return
On Invested Capital (ROIC) and Relative Total Shareholder Return
(TSR) measured over three years. Awards will also be subject to a
further two year holding period. The eventual value of the awards
will depend on our share price performance and dividends paid
toshareholdersoverafiveyearperiod.
Other important changes for the future
We will limit the pension allowance for future new external
Executive Director appointments. This will reduce the maximum
cash allowance in lieu of participation in a pension scheme from
26% to 16% of salary.
We are extending our minimum shareholding guidelines
post-retirement. Executive directors will be expected to maintain
a shareholding of at least half their normal guideline for two years
following retirement.
Pearson plc Annual report and accounts 2017 Remuneration overview
93
Our remuneration policy is aligned with our strategy
Our shareholders approved our remuneration policy in 2017.
Nevertheless, the Remuneration Committee considered carefully
whether we should seek shareholder approval for a new policy at
the AGM in 2018. The primary principle of our remuneration policy
remains to support the company’s strategy, which is focused on
delivering sustainable performance and the creation of value over
the long term for our stakeholders. The remuneration of our
Executive Directors is closely tied to the achievement of annual
and longer-term objectives, while remaining sensitive to the
shareholder experience.
We concluded that we are able to operate within our current policy,
which we believe underpins the company’s strategic objectives
and maintains an appropriate relationship between pay and
performance. The policy has worked well in 2017 to provide the right
frameworktoreflectstrategyandexecutionpriorities,whilealso
allowing us to address the concerns raised by our shareholders as
expressed at last year’s AGM and also on subsequent engagement.
Conclusion
Pearson is undergoing substantial change as the business delivers
on digital transformation and continuous improvements in
efficiency,whileaddressingtheneedsofallourstakeholders.
This demands a strong leadership, whom we need to reward
appropriately in the context of the performance of the business,
while remaining mindful of the investor context.
My conversations with shareholders have been invaluable in
understanding a range of perspectives and I thank those
shareholders who engaged with us. Your feedback has helped us
to simplify and balance our remuneration approach and to increase
the transparency you need. I look forward to receiving your support
at our AGM in May 2018 and to continuing the dialogue.
Summary of key Committee actions
and decisions
2017 actions
Comprehensive and multi-phased
investor engagement
30% reduction in LTIP award levels
Reduction in LTIP threshold vesting level
from 25% to 18% of maximum
LTIP subject to stretching targets set above
market consensus expectations at the time
AIP based on challenging targets with no
benefitfrombuybackorcurrencymovement
Maximum payout would require maximum
performance on each individual component
and outperformance on any one element
cannot compensate for others
Discretionary downward adjustment to
removebenefitoftaxratereduction
Further reduction in outcomes
2018 decisions
LTIP awards maintained at same reduced
level as 2017
AIPandLTIPmeasuressimplifiedand
adjusted in the light of investor feedback
Stretching LTIP targets, disclosed
prospectivelyforfirsttimeatPearson
Salary increases of 2.5%, in line with
employees. First increases for three years
Shareholding guidelines now extended to
post-retirement
Reduced pension policy for new hires
Elizabeth Corley
Chairman of Remuneration Committee
14 March 2018
Section 4 Governance/Remuneration 94
Our Executive remuneration framework and
how we will implement it in 2018
Our remuneration policy was approved by shareholders at the AGM held on
5 May 2017 (and can be found in the Governance section of our website
Pearson.com/governance). The table below summarises the key elements of
the remuneration framework for Directors as set out in our Policy, including how
we intend to implement it in 2018 and the changes being introduced as a result
of our recent review (see remuneration overview for further context).
Base salary
Key features of each Policy element
2018 implementation/changes
Fixed paywhichreflectsthe
level, role, skills, experience,
the competitive market and
individual contribution
Under the Policy, base salary
increases will not ordinarily
exceed 10% per annum
Salary review takes into account
a range of factors, including: the
level of increases made across
the company as a whole;
particular circumstances such as
changes in role, responsibilities or
organisation; the remuneration
and level of increases for
Executives in similar positions in
comparable companies; general
economic and market conditions;
and individual performance
Salaries effective 1 April 2018:
John Fallon: £799,800 (+2.5%)
Coram Williams: £527,900 (+2.5%)
When reviewing salaries,
the committee took into account
the level of increases made
across the company (which
were 2.5% across the UK) as a
whole, business and individual
performance, and general
economic and market conditions.
Allowances and benefits
Key features of each Policy element
2018 implementation/changes
Allowances and benefits which
reflectthelocalcompetitive
market and can include travel
andhealth-relatedbenefits
The total value of allowances and
benefits for Executive Directors
will not ordinarily exceed 15%
of base salary in any year
Unchanged for 2018.
Retirement benefits
Key features of each Policy element
2018 implementation/changes
Current Executive Directors are
members of the Final Pay section
of The Pearson Pension Plan,
which is closed to new members.
Additional cash allowances may
applyinspecificcircumstances
New appointments are eligible to
join the Money Purchase section
of The Pearson Pension Plan and
receive contributions of up to
16% of pensionable salary (up to
theearningslimitof£154,200for
2017/18) or may receive a cash
allowance of up to 26% of salary
There will be no changes to the
pension provision of the existing
Executive Directors.
With effect from 2018, the
maximum cash allowance
for any future Executive Director
external appointments will
be reduced from 26% to 16%
of salary.
Annual incentive plan
Key features of each Policy element
Motivate the achievement of
annual business goals aligned to
financialandstrategicimperatives
Performance measures,
weightings and targets are set
annually by the Committee to
ensure continued alignment
with strategy
Each AIP component is
independent. For the CEO to achieve
the maximum overall payout
(180%) would require maximum
performance on each individual
component and outperformance
on any one element cannot
compensate for others
Performance metrics linked
to strategic imperatives are
selected to support Pearson’s
transformation strategy.
A payout will only be made if a
minimum level of performance
has been achieved under the
financialmetrics
Stretching performance targets
are fully disclosed in the annual
remuneration report for the
relevantfinancialyear
Malus and clawback
provisions apply
2018 implementation/changes
Maximum opportunity
unchanged for 2018:
180% of base salary for the CEO
170% of base salary for the CFO
Performance metrics and
associated weightings:
For 2018, the following balanced
mixoffinancialandstrategic
measures will be used
OperatingProfit(40%)
Thetwoprofitbasedmeasures
previouslyincluded(OperatingProfit
and EPS) will be replaced with a
singleOperatingProfitmeasure
which will determine 40% of the
outcome of the plan
We have also made minor
adjustments to the weightings of
the other performance measures:
Sales (20%)
Operating Cash Flow (20%)
Strategic Measures (20%)
Targets will be disclosed in the 2018
directors’ remuneration report
Pearson plc Annual report and accounts 2017 Our Executive framework and how we will implement it in 2018
95
Long-term incentive plan
Key features of each Policy element
2018 implementation/changes
Drive long-term earnings, share
price growth and value creation
An additional two-year holding
period applies following vesting
Align the interests of Executives
and shareholders
Awards are made annually,
and vest based on performance
against stretching targets
measured over a three-year
performance period
The Committee will determine
the performance measures,
weightings and targets governing
an award prior to grant to ensure
continuing alignment with
strategy and to ensure that
targetsaresufficientlystretching
Malus and clawback
provisions apply
Awards will be made at the same reduced level as in 2017:
275% of base salary for the CEO
245% of base salary for the CFO
Performance metrics, weightings and targets:
EPS (one-third)
Relative TSR (one-third)
Vesting schedule
(% max)
EPS for FY20
Vesting schedule
(% max)
Ranked position
versus FTSE 100
15%
65%
100%
ROIC (one-third)
Vesting schedule
(% max)
15%
65%
100%
65p
68p
80p
25%
100%
Median
Upper quartile
Note: Straight line vesting in
between points shown, with
no vesting for performance
below threshold
ROIC for FY20
5%
6%
8%
Shareholding guidelines
Key features of each Policy element
2018 implementation/changes
and 200% of salary for other
Executive Directors
Executive Directors have
fiveyearsfromthedate
of appointment to reach
the guideline
Witheffectfrom2018,
shareholding guidelines for
Executive Directors will be
extended post-retirement
Executive Directors will be
required to retain half of the
current guideline for a period of
two years post-retirement in
respect of shares vested from
company incentive plans.
Align the interests of Executives
and shareholders and encourage
long-term shareholding and
commitment to the company
Executive Directors are expected
to build up a substantial
shareholding in the company.
The target holding is 300% of
salary for the Chief Executive
Non-Executive fees
Key features of each Policy element
2018 implementation/changes
The Chairman is paid a single fee
for all of his responsibilities
The Non-Executive Directors are
paid a basic fee. The Chairmen
and members of the main Board
Committees and the Senior
Independent Director are paid
anadditionalfeetoreflecttheir
extra responsibilities
The Chairman and Non-
Executive Directors receive
nootherpayorbenefits,
except for reimbursement of
expenses, and do not participate
in incentive plans
A minimum of 25% of the
Chairman’s and Non-Executive
Directors’ basic fee is paid
in shares
There will be no changes to fees for 2018:
Role
Chairman of the Board
Base fee for Non-Executive Directors
Additional SID fee
Role
Audit Committee
Remuneration Committee
Fees for 2018
£500,000
£70,000
£22,000
Chair
Member
£27,500
£15,000
£22,000
£10,000
Nomination & Governance Committee
£15,000
£8,000
Reputation & Responsibility Committee
£13,000
£6,000
Section 4 Governance/Remuneration 96
2017 remuneration report
Certain parts of this report have been audited as required by the Large and Medium-sized Companies and Groups (Accounts and Reports)
Regulations 2008 as amended. Those tables which have been subject to audit are marked with an asterisk.
Single total figure of remuneration and prior year comparison*
Totalaggregateemolumentsforexecutiveandnon-executivedirectorswere£4,067min2017.Theseemolumentsareincludedwithinthe
totalemployeebenefitexpenseinnote5tothefinancialstatements(p138).
Executive Directors
TheremunerationreceivedbyExecutiveDirectorsinrespectofthefinancialyearsended31December2017and31December2016isset
out below.
Executive Director remuneration
Element of remuneration
£000s
Base salary
Allowances and benefits
Annual incentives
Long-term incentives
Retirement benefits
Total remuneration
Notes to single figure table
Base salary
Thebasesalaryshowninthesinglefiguretablereflectssalary
paidinthefinancialyear.
Allowances and benefits
Travelbenefitscomprisecompanycar,carallowance,privateuse
of a driver and reimbursements of a taxable nature resulting from
businesstravelandengagements.Healthbenefitscomprise
healthcare, health assessment and gym subsidy. In addition to the
abovebenefitsandallowances,ExecutiveDirectorsmayalso
participateincompanybenefitorpolicyarrangementsthathaveno
taxablevalue.Theallowancesandbenefitsfigurefor2016reflects
whatwasreportedinthesinglefiguretableinthe2016report.
However,thefigureincludesanamountinrespectofcertainrisk
benefitswhichdonotformpartofJohnFallon’staxablebenefits
andsothatamount(being£35kin2016)hasnotbeenincludedin
thecorrespondingfigurefor2017.
The breakdown is as follows for 2017:
Travel
Healthcare
John
Fallon
Coram
Williams
43
2
37
2
John Fallon
Coram Williams
2017
780
2016
780
2017
515
2016
515
45
85
39
53
624
343
412
193
0
0
309
310
0
52
–
47
1,758
1,518
1,018
808
Annual incentives
Annual incentives for the directors are funded by Pearson global
annualfinancialandnon-financialKPIs,andpay-outstakeinto
account individual performance against personal objectives.
For more detail, see below.
Long-term incentives
Thesinglefigureofremunerationfor2017includesalllong-term
incentive awards that were subject to a performance condition
where the performance period ended at 31 December 2017. In 2017,
the performance conditions for the 2015 Long-Term Incentive Plan
(LTIP) were not met and so this award will not vest in 2018.
Retirement benefits
Furtherdetailonretirementbenefitsispresentedlaterin
this report.
Pearson plc Annual report and accounts 2017 2017 remuneration report
97
Executive Directors’ annual incentive payments for 2017
Based on performance against targets, in 2017 the CEO achieved a
bonus outcome of 61% of maximum and the CFO achieved a bonus
outcome of 58% of maximum. The Remuneration Committee
exercised its discretion and reduced these outcomes by 5% to
account for the exceptional change in the tax rate during the year so
thattheExecutiveDirectorsdidnotbenefitfromthis.Thisresulted
in a bonus outcome of 56% of maximum for the CEO and 53% of
maximum for the CFO.
The Remuneration Committee then moved to consider the bonus
outcomes in the context of the shareholder experience in the year.
Mindful of this experience, and the work still to be done, the
Executive Directors, along with the Committee, have agreed it
would not be appropriate to take the full bonus and that a further
reduction in outcomes was appropriate. The Committee commends
the Executive Directors for their approach in these matters and
confirmedthatweshouldfurtherreducethebonusoutcomebased
on the following considerations:
Overall outcome and discretionary adjustment
The degree of stretch in the targets set relative to plan was
consideredandtheCommitteeweresatisfiedthatthetargets
were appropriately calibrated;
Outcomesagainstthetargetswereareflectionofthe
performance of the company in the year and were a fair and
reasonable outcome;
Management is making tangible progress in executing the strategy
but, at the time of the Committee’s deliberations, this was not fully
reflectedintheshareprice;
A change in dividend policy resulted in a reduced payout of a
proposed 17p;
2017 performance provides a solid foundation from which to build
and positions the company well for a return to growth in 2018.
As a result, the annual bonus payable to the CEO for 2017 is 44%
of maximum and for the CFO is 47% of maximum.
Performance measure
Operatingprofit
Group EPS
Sales
Performance range
CEO payout
CFO payout
% of total
Threshold
Target
Max
Actual results
opportunity % of salary
opportunity % of salary
% of max
bonus
% of max
bonus
22.5%
£535m
£579m
£661m
22.5%
45.6p
48.0p
55.7p
£576m
54.1p
15% £4,572m £4,635m £4,728m
£4,513m
11.5%
20.5%
0%
15%
21%
37%
0%
27%
11%
20%
0%
15%
18%
34%
0%
26%
Operatingcashflow
15%
£460m
£506m
£598m
£669m
Strategic measures
See performance against strategic
measures table over page
25%
100%
14%
25%
12%
21%
Performance
outcome
61%
110%
58%
99%
Notes:
– Targets have been re-stated on a constant currency basis using the average 2017 exchange rate.
–AnysharebuybacksdidnotbenefitGroupEPSbonusoutcomesfortheyear.
–AtThreshold,thepayoutis15%ofmaximum.AtTarget,thepayoutis55%ofmaximumfortheCEO(reflectinghison-targetbonusof100%ofsalary)and
50%ofmaximumfortheCFO(reflectinghison-targetbonusof85%ofsalary).
CEO payout
CFO payout
% of max
bonus
% of max
bonus
opportunity % of salary
opportunity % of salary
Group EPS adjusted to remove benefit of tax rate reduction
Shareholdersbenefitedfromasignificantreductionintheeffectivecorporatetaxratein2017from
21% budgeted to 11%. However, for the purposes of the bonus calculation, the Committee used the
budgeted rate. This resulted in a reduction in the total bonus outcome as shown:
56%
(-5%)
101%
(-9%)
53%
(-5%)
90%
(-9%)
Further discretionary adjustment
WhilsttheCommitteeweresatisfiedthatthetargetswereappropriatelycalibratedandthattheoutcomes
werereflectiveoftheperformanceintheyear,inlightoftheworkstilltobedone,andtherecent
shareholder experience, the Executive Directors along with the Committee agreed it would not be
appropriate to take the full bonus and that a further reduction in outcomes was appropriate.
44%
(-12%)
80%
(-21%)
47%
(-6%)
80%
(-10%)
Section 4 Governance/Remuneration 98
2017 remuneration report
Performance against strategic measures
The targets (and outcomes) for performance against each of the strategic measures are shown in the table and supporting narrative below,
with the outcome for each Executive Director shown in the table on the previous page.
% of total
funding
10%
Strategic measure
Delivery of efficiency and cost savings
Measured by cost savings budgeted
in 2018 Operating Plan through
restructuring delivered in 2017
and underpinned by progress on
The Enabling Programme (TEP)
Threshold
Target
Max
Outcome
95% of Plan
cost savings
budgeted
for 2018
Plan cost
savings
budgeted
for 2018
110% of Plan
cost savings
budgeted
for 2018
Management made encouraging progress,
exceeding expected cost savings budgeted for
2018,aswellasrealising£15mofcostsavings
earlier than expected in 2017.
10%
Some key
milestones
on track and
hold NDS
Key milestones
on track and
achieve
Plan NDS
All milestones
on track and
improve on
Plan NDS by 5%
5%
40.0%
41.0%
41.5%
Driving digital agenda
Delivery of key strategic milestones
in support of accelerating digital
transformation through the Global
Learning Platform (GLP) and progress
in US higher education courseware
total net digital sales (NDS) in 2017
Grow market share in our
primary market
US higher education courseware (25% of
revenues) as measured by Management
Practice Inc. (MPI)/American Association
of Publishers (AAP) net sales for 2017
Overall
25%
Much of the savings will come from the
simplificationofthetechnologyarchitecture
under TEP, which allows the increased use
of shared service centres enabling us to
standardise processes and reduce headcount.
Management are on track with digital
transformation, delivering a strong performance
on NDS, which grew by 9% in the year. There
has been continued investment in the Global
Learning Platform (GLP) and innovative product
and future pipeline. A further 210 new
institutions were signed to Inclusive Access
(Direct Digital Access) in 2017, taking the total to
over 500 institutions. During the year, over 1m
course enrolments were delivered in this way.
Achieved US higher education courseware
2017 market share of 41% as reported by MPI
and in the upper half of the c40-41.5% range
seenoverthelastfiveyears.
With management outperforming against some
of the strategic targets set for 2017, and
achievement against plan for others, the
Committee felt overall that an on-target outcome
was a fair result under the strategic measures
for 2017. This translates to a pay-out of 25% of
salary for the CEO and 21% of salary for the
CFO as shown on the previous page.
Note:Ifanelementofjudgementwasrequiredtoassessachievementsthatwerenotcompletelyquantifiable,InternalAuditprovidedanindependentassessment
to the Committee.
Long-term incentives awarded in 2017*
Oneofthesignificantchangesthatwemadein2017wastoreduce
the grant of long-term incentives made to the Executive Directors
in the year by approximately 30%. This substantial reduction
demonstrates a responsible approach to the operation of
remuneration arrangements for our Executive Directors as the
company goes through the current transformation of the business.
The Remuneration Committee has decided that we will maintain the
same approach for LTIP awards to be made in 2018. Therefore, the
2018 awards will be made with the same face value as those in 2017.
We have also reduced the proportion of these awards that will vest
for threshold performance from 25% to 18% of the award.
Director
John Fallon
Coram Williams
Date of award
Vesting date Number of shares
Face value
Face value
(% of base salary)
Value for
threshold
performance (% of
maximum)
Perfomance Period
11 September 17
11 September 17
1 May 20
1 May 20
366,000
£2,144,760
215,000
£1,259,900
275%
245%
18% 1 Jan 17–31 Dec 19
18% 1 Jan 17–31 Dec 19
Face value was determined using a share price of 586p (previous trading day closing price as at the date of grant).
The awards will vest on 1 May 2020 subject to the following performance conditions. Any shares which vest will be subject to an additional
two-year holding period to 1 May 2022.
Pearson plc Annual report and accounts 2017 2017 remuneration report
99
Details of the performance targets for the 2017 long-term incentive awards are set out in the tables below.
Earnings per share (EPS) (40%)
Return on invested capital (ROIC) (30%)
Relative total shareholder return (TSR) (30%)
Vesting schedule (% max)
Adjusted EPS for FY19
Vesting schedule (% max)
Adjusted ROIC for FY19
Vesting schedule (% max) Ranked position vs FTSE 100
15%
75%
100%
55p
62p
75p or above
15%
75%
100%
4.5%
5.5%
7.5% or above
25%
100%
Median
Upper quartile
Note 1: Straight-line vesting will occur in between the points shown, with no vesting for performance below threshold.
Note 2: Pearson’s total shareholder return performance is measured relative to the constituents of the FTSE 100 Index over the performance period.
Directors’ interests in shares and value of shareholdings
Shareholding guidelines
Executive Directors are expected to build up a substantial
shareholding in the company in line with the policy of encouraging
widespread employee share ownership and to align further the
interests of Executive Directors and shareholders. The target
holding is 300% of salary for the Chief Executive and 200% of salary
for the other Executive Directors. Shares that count towards these
guidelines include any shares held unencumbered by an Executive
Director, their spouse and/or dependent children plus any shares
vested but held pending release under a share plan. Executive
Directorshavefiveyearsfromthedateofappointmenttoreach
the guideline. Once the guideline has been met, it is not retested,
other than when shares are sold.
Witheffectfrom2018,shareholdingguidelinesforExecutive
Directors have been extended post-retirement. Executive Directors
are required to retain half of the current guideline for a period of
two years post-retirement in respect of shares vested from
company incentive plans.
The shareholding guidelines do not apply to the Chairman and
Non-Executive Directors. However, a minimum of 25% of the basic
Non-Executive Directors’ fee is paid in Pearson shares that the
Non-Executive Directors have committed to retain for the period
of their directorships.
Directors’ interests*
The share interests of the Directors and their connected persons are as follows:
Director
Chairman
Sidney Taurel
Executive Directors
John Fallon
Coram Williams
Non-Executive Directors
Elizabeth Corley
Vivienne Cox
Josh Lewis
Linda Lorimer
Harish Manwani
Tim Score
Lincoln Wallen
Current
shareholding
(ordinary shares)
at 31 Dec 17
Conditional shares
at 31 Dec 17
Total number of
ordinary and
conditional shares
at 31 Dec 17
Guideline (%
salary)
Guideline met?
–
Yes
78,677
–
–
–
326,784
15,010
749,000
437,000
1,075,784
452,010
300%
200% n/a (see note 4)
8,066
5,263
11,033
6,977
14,151
17,285
4,423
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Note 1: The current value of the Executive Directors’ shareholdings is based
on the closing market value of Pearson shares of 725p on 1 March 2018 against
base salaries at 31 December 2017.
Note 2: Ordinary shares include both ordinary shares listed on the London Stock
Exchange and American Depositary Receipts (ADRs) listed on the New York Stock
Exchange.ThefiguresincludebothsharesandADRsacquiredbyindividuals
under the long-term incentive plan and any legacy share plans they might have
participated in.
Note 3: Conditional shares means unvested shares which remain subject to
performanceconditionsandcontinuingemploymentforapre-definedperiod.
Note 4: CoramWilliamshasfiveyearsfromthedateofhisappointmentasan
Executive Director to reach the shareholding guideline.
Note 5: There have been no changes in the interests of any director between
31 December 2017 and 12 March 2018, being the latest practicable date prior
to the publication of this report.
Section 4 Governance/Remuneration
100
2017 remuneration report
Movements in Directors’ interests in share awards during 2017*
Plan
John Fallon
LTIP
Date
of award
Vesting
date
Number
of shares
as at
1 Jan 2017
Awarded
Released
Lapsed
Number of
shares as at
31 Dec 2017
Status
11 September 2017
1 May 2020
0
366,000
366,000
Outstanding subject to performance
3 May 2016
3 May 2019
383,000
383,000
Outstanding subject to performance
1 May 2015
1 May 2018
230,000
230,000
Lapses in 2018
Total
Coram Williams
613,000
366,000
0
230,000
749,000
LTIP
11 September 2017
1 May 2020
0
215,000
215,000
Outstanding subject to performance
3 May 2016
3 May 2019
222,000
222,000
Outstanding subject to performance
1 Aug 2015
1 Aug 2018
129,000
129,000
Lapses in 2018
Total
351,000
215,000
0
129,000
437,000
Note 1: Released means where shares have been transferred to participants.
Note 2: TSR is measured relative to the constituents of the FTSE World Media
Index for 2015 and 2016 LTIP awards. For the LTIP awards granted in 2017,
TSR is measured relative to the constituents of the FTSE 100.
Note 3: The performance targets for the 2015 award were not met and therefore
this award will lapse in 2018.
Note 4: Coram Williams’ 2015 award was made on his appointment to the
Board on 1 August 2015 and will vest three years from this date on 1 August 2018,
subject to the same performance conditions and holding periods as for
other Executives.
Note 5: The share price did not reach the 2014 worldwide save for shares option
priceof£8.112duringthematurityperiodsoJohnFallon’sawardexercisablein
2017 lapsed.
Performance targets for outstanding awards under the Long-Term Incentive Plan (LTIP)
The status of outstanding awards under the Long-Term Incentive Plan (LTIP) as described in the table above is set out in the following table.
Date of award
Share price
on date
of award
Vesting
date
Performance
measures Weighting
Performance
period
Payout at
threshold
Payout at
maximum
11 September 2017
586.0p 1 May 2020
Relative TSR
30% 1 Jan 2017 to 31 Dec 2019
25% at median
100% at upper quartile
3 May 2016
805.0p 3 May 2019
Relative TSR
1/6 1 Jan 2016 to 31 Dec 2018
25% at median
100% at upper quartile
ROIC
EPS
30%
40%
2019 15% for ROIC of 4.5%
100% for ROIC of 7.5%
2019
15% for EPS 55p
100% for EPS 75p
ROIC
EPS
1/3
1/2
2018 25% for ROIC of 5.5% 100% for ROIC of 6.7%
2018
25% for EPS 61.4p
100% for EPS 78.3p
Executive Directors’ retirement benefits and entitlements
DetailsoftheDirectors’pensionentitlementsandpension-relatedbenefitsduringtheyearareasfollows:
Director
John Fallon
Coram Williams
Note 1: The accrued pension at 31 December 2017 is the deferred pension
to which the member would be entitled on ceasing pensionable service
on 31 December 2017. It relates to the pension payable from the UK plan.
Normal retirement age is 62.
Note 2: Thevalueofdefinedbenefitovertheperiodcomprisesthedefined
benefitinputvalue,lessinflation,lessindividualcontribution.
Value of defined benefit
over the period
£000s
Other allowances in
lieu of pension
£000s
Total annual
value in 2017
£000s
Accrued pension
at 31 Dec 17
£000s
106
52
203
309
52
103
32
Note 3: Other allowances in lieu of pension represent the cash allowances paid
in lieu of the previous FURBS arrangements.
Note 4: Total annual value is the sum of the previous two columns and is
disclosedinthesinglefigureofremunerationtable.
Pearson plc Annual report and accounts 2017 2017 remuneration report
101
Plans
John Fallon – The Pearson Group Pension Plan
Accrual rate of 1/30th of pensionable salary per annum, restricted to
theplanearningscap(£154,200perannumin2017/18).
In addition, he received a taxable and non-pensionable cash
supplement (of 26% of salary) in lieu of the previous FURBS
arrangement.Therearenoenhancedearlyretirementbenefits.
Johnattainedthemaximumserviceaccrualforthisbenefitwhenhe
reached20years’serviceinOctober2017.Witheffectfromthisdate
hehadaccruedabenefitoftwo-thirdsofhisfinalpensionablesalary
andnofurtherservice-relatedbenefitscanaccrueunderthePlan.
Basedonthe2017/2018earningscapof£154,200,hewillhave
accruedapensionof£102,800perannumatthistime.Whenthe
earnings cap under the Plan rules is increased in the future in line
withincreasesintheUKretailpriceindex,hisfinalsalarypension
benefitwillincreaseaccordingly.
Chairman and Non-Executive Director remuneration*
Coram Williams – The Pearson Group Pension Plan
Accrual rate of 1/60th of pensionable salary per annum, restricted
totheplanearningscap(£154,200perannumin2017/18),with
continuous service with a service gap. There are no enhanced early
retirementbenefits.
TheremunerationpaidtotheChairmanandNon-ExecutiveDirectorsinrespectofthefinancialyearsended31December2017and
31 December 2016 are as follows:
Director
£000s
Salary/
basic fee
Committee
chairmanship
Committee
membership
Salary/
basic fee
Committee
chairmanship
Committee
membership
Sidney Taurel
500
Elizabeth Corley
Vivienne Cox
Josh Lewis
Linda Lorimer
Harish Manwani
Tim Score
Lincoln Wallen
Total
70
70
70
70
70
70
70
990
–
22
10
–
12
–
28
–
72
Taxable
benefits
12
0
3
59
5
4
0
6
SID
–
–
22
–
–
–
–
–
2017
Total
512
112
126
144
102
85
113
97
–
20
21
15
15
11
15
21
500
70
70
70
70
70
70
70
118
22
89
1,291
990
Taxable
benefits
16
0
3
10
4
3
3
3
SID
–
–
22
–
–
–
–
–
2016
Total
516
92
130
95
94
78
111
86
22
42
1,202
–
22
10
–
–
–
28
–
60
–
–
25
15
20
5
10
13
88
Note 1: Aminimumof25%oftheChairman’sandNon-ExecutiveDirectors’basicfeeispaidinshares,effectivefromthe2017AGMpolicyapproval.
Note 2: Taxablebenefitsrefertotravel,accommodationandsubsistenceexpensesincurredwhileattendingBoardmeetingsduring2017thatwerepaidorreimbursed
by the company which are deemed by HMRC to be taxable in the UK. The amounts in the table above include the grossed-up cost of UK tax to be paid by the company
onbehalfoftheDirectors.JoshLewis’staxpositionhaschangednowthathehasbeenanon-executivedirectorofPearsonformorethanfiveyears(asofMarch2016)
withaconsequentialincreaseinthetaxablevalueoftheexpensesheincursvisitingtheUKforboardmeetings.Assuch,thetaxablebenefitsfigureinthetableabove
ismateriallyhigherthanlastyear’sfigureandthefiguresforothernon-executivedirectors.
Payments to former Directors
Executive Directors’ Non-Executive directorships
There were no payments made to former Directors in 2017.
Payments for loss of office
Therewerenopaymentsforlossofofficemadetooragreedfor
Directors in 2017.
Coram Williams is engaged as a NED of Guardian Media Group plc.
Hereceivedfeesof£37,750during2017inrespectofthisrole.His
currentremunerationisattherateof£39,000p.a.since1April2017
when became chair of the audit committee. In accordance with our
policy, Coram is permitted to retain these fees.
Historical performance and remuneration
Total shareholder return performance
We set out on the next page Pearson’s total shareholder return (TSR)
performance relative to the FTSE All-Share index on an annual basis
over the nine-year period 2008 to 2017. This comparison has been
chosen because the FTSE All-Share represents the broad market
index within which Pearson shares are traded. TSR is the measure
of the returns that a company has provided for its shareholders,
reflectingsharepricemovementsandassumingreinvestmentof
dividends (source: Datastream).
In accordance with the reporting regulations, this section also
presentsPearson’sTSRperformancealongsidethesinglefigure
of total remuneration for the CEO over the last nine years and a
summary of the variable pay outcomes relative to the prevailing
maximum at the time.
Section 4 Governance/Remuneration
102
2017 remuneration report
Total shareholder return £
Pearson TSR
FTSE All-share TSR
300
250
200
150
100
50
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
CEO remuneration
Total remuneration
(singlefigure,£000s)
Annual incentive
(% of maximum)
Long-term incentive
(% of maximum)
Marjorie Scardino
John Fallon
6,370
8,466
8,340
5,330
1,727
1,895
1,263
1,518
1,758
91.3%
92.1%
75.7%
24.2%
34.3%
50.5%
Nil
24.4%
44.4%
80.0%
97.5%
68.3%
36.7%
Nil
Nil
Nil
Nil
Nil
Annual incentive is the actual annual incentive received by the incumbent as a percentage of maximum opportunity.
Long-term incentiveisthepayoutofperformance-relatedrestrictedsharesundertheLTIPwheretheyearshownisthefinalyearoftheperformanceperiodfor
thepurposesofcalculatingthesingletotalfigureofremuneration.
Total remunerationisasreflectedinthesingletotalfigureofremunerationtable.
John Fallon’s total remuneration opportunity is lower than that of the previous incumbent. Variable payouts under the annual and Long-Term Incentive Plans
reflectperformancefortherelevantperiods.
Comparative information
The following information is intended to provide additional context
regarding the total remuneration for Executive Directors.
Change in CEO remuneration 2016/17
Relative percentage change in remuneration for CEO
The following table sets out the change between 2016 and 2017
in three elements of remuneration for the CEO, in comparison with
the average for all employees. While the Committee reviews base
pay for the CEO relative to the broader employee population,
benefitsaredrivenbylocalpracticesandeligibilityisdetermined
by level and individual circumstances which do not lend themselves
to comparison.
Base salary
Allowances and benefits
Annual incentives
no change
47% (see note 1)
82%
Change in employee remuneration 2016/17
Base salary
Allowances and benefits
Annual incentives
2%
5%
45% (see note 2)
Note 1: TheabovepercentagesrelatingtotheCEOreflectthefiguresasshown
inthesinglefiguretableonpage96.Iftheriskbenefitsareexcludedfromthe
allowancesandbenefitsfigurefor2016(seethenotestothesinglefiguretable
on page 96), the relevant percentage would be -10%.
Note 2: Thefiguresforallemployeesreflectaveragesalariesandaverage
employee numbers each year at constant exchange rates. The change in annual
incentivesisanaggregatefigurewhichincludesallincentivearrangements
across the company, including sales incentives. The equivalent year-on-year
figureforthestaffannualincentiveplanforthoseeligiblein2017was+127%.
Pearson plc Annual report and accounts 2017 2017 remuneration report
103
Relative importance of pay spend
The Remuneration Committee in 2017
The Committee considers Directors’ remuneration in the context of
thecompany’sallocationanddisbursementofresourcestodifferent
stakeholders.Inparticular,wechoseoperatingprofitbecausethis
is a measure of our ability to reinvest in the company. We include
dividends because these constitute an important element of our
return to shareholders.
Role
Name
Title
Chairman
Elizabeth Corley
Josh Lewis
Tim Score
Independent
Non-Executive Directors
Sidney Taurel
Chairman of the Board
Change
Internal attendeesJohn Fallon
Chief Executive
All figures in £ millions
Adjustedoperatingprofit
Dividends
2017
576
318
2016
635
424
Total wages and salaries
1,567
1,661
£m
-59
-106
-94
%
-9%
-25%
-6%
Note 1: Adjustedoperatingprofitisassetoutinthefinancialstatements.
Note 2: Wages and salaries include continuing operations only and include
Directors. Average employee numbers for continuing operations for 2017
were 30,339 (2016: 32,719). Further details are set out in note 5 to the
financialstatementsonp138.
Dilution and use of equity
Pearson can use existing shares bought in the market, treasury
shares or newly issued shares to satisfy awards under the
company’s various share plans. For restricted stock awards under
the LTIP, the company would normally expect to use existing shares.
There are limits on the amount of new-issue equity we can use.
In any rolling ten-year period, no more than 10% of Pearson equity
will be issued, or be capable of being issued, under all Pearson’s
share plans, and no more than 5% of Pearson equity will be issued,
or be capable of being issued, under Executive or discretionary
plans. The headroom available for all Pearson plans, executive or
discretionary, and shares held in trust is as follows:
Headroom
All Pearson plans
Executive or discretionary plans
Shares held in trust
2017
8.4%
5%
4.3%
Coram Williams
ChiefFinancialOfficer
Melinda Wolfe
Kate Bishop
Chief Human Resources
Officer(toMay2017)
Interim Chief Human
ResourcesOfficer
(from June 2017)
Stuart Nolan
SVP, Reward
Stephen Jones
Company Secretary
External advisers Willis Towers Watson
(to June 2017)
Deloitte LLP (appointed
in July 2017)
Sidney Taurel was a member of the Committee throughout 2017
as permitted under the UK Corporate Governance Code.
Advisers to the Remuneration Committee
During 2017, the Remuneration Committee undertook a formal
tender process, the outcome of which resulted in Deloitte LLP
being appointed as independent Remuneration Committee advisers
in July 2017. Deloitte LLP supplied the Committee with advice on
current market trends and developments, incentive plan design
and target setting, investor engagement and other general
executive remuneration matters. In respect of their services to
the Committee, Deloitte LLP were paid fees, which were charged
onatimespentbasis,of£165,000.DeloitteLLPwerefounding
members of the Remuneration Consultants’ Group and adhere
to its code of conduct.
During the year, Deloitte LLP also provided Pearson PLC with certain
tax and other advisory and consultancy services.
The Committee also received advice from Willis Towers Watson,
which supplied survey data and advice on market trends, long-term
incentives and other general remuneration matters. During the year,
Willis Towers Watson was paid fees for advice to the Committee,
whichwerechargedonatimespentbasis,of£87,000.WillisTowers
Watsonalsoadvisedthecompanyonhealthandwelfarebenefitsin
the US and provided consulting advice directly to certain Pearson
operating companies.
TheCommitteeremainssatisfiedthatadviceprovidedby
both Deloitte LLP and Willis Towers Watson was objective and
independent and that the provision of other services in no way
compromised their independence.
Section 4 Governance/Remuneration 104
2017 remuneration report
Remuneration Committee meeting focus during 2017
Area of
responsibility
Market
Performance
Activities
Noted Willis Towers Watson’s
and subsequently Deloitte’s
overview of the current
remuneration and
governance environment.
Received input from the Audit
Committee, Internal Audit and
from management on the
financialperformanceofthe
business and progress against
strategic measures. Received
input from Investor Relations on
market consensus expectations.
Implementation Reviewed and approved a
pay freeze for 2017 for the
Executive Directors and annual
salary increases for Pearson
executive management and
senior leaders.
Received a number of updates
on changes to the corporate
governance environment for
executive compensation.
Noted and reviewed the status
of outstanding long-term
incentive awards based on the
current view of likely Pearson
financialperformance.
Reviewed the approach to
the Annual Incentive Plan for
Pearson executive management
and the Management Incentive
Plan for senior leaders.
Noted and reviewed the status
of the 2016–2017 talent retention
arrangements and impact on
voluntary turnover.
Reviewed and approved 2016
annual incentive plan payouts
for the Executive Directors,
Pearson executive management
and senior leaders.
Reviewed and approved 2017
individual annual incentive
opportunities for the Executive
Directors and Pearson
Executive management.
Reviewed and approved 2017
Pearson annual incentive plan
targets including a detailed
reviewoffinancialand
non-financialtargets.
Approved nil payout under 2014
long-term incentive plan awards.
Reviewed and approved 2017
long-term incentive awards
for the Executive Directors
and Pearson executive
management, including the
quantum of awards.
Noted 2017 long-term incentive
awards for senior leaders and
managers below Pearson
executive management
Noted remuneration packages
for new appointments to the
Pearson executive management
team and termination
arrangements for leavers
Noted the deployment of
2016-17 retention arrangements
andeffectivenessofthe
arrangements in the retention
of critical talent.
Considered shareholder feedback
and market consensus for
setting 2017 long-term incentive
performance conditions.
Further consideration of
investor feedback and experience
prior to granting of awards.
Governance
Noted the activity of the
standing Committee of the
Board in relation to the operation
of the company’s equity-based
reward programmes.
Noted company’s use of equity
for employee share plans.
Conducted an evaluation of
the Committee’s performance.
Conducted a formal process
to review the provision of
external independent advice
to the Committee.
Policy
Considered the Director’s
Remuneration Policy for approval
by shareholders at the 2017 AGM.
Disclosure and
engagement
Reviewedandreconfirmedthe
operation of the Policy for 2018.
Considered feedback from
Committee Chairman’s
meetings with key shareholders
and proxy bodies during 2017.
Reviewed and approved 2016
Directors’ remuneration report
Noted shareholder feedback
on 2016 Directors’
remuneration report.
Reviewed 2017 Annual
General Meeting season,
shareholder voting and
engagement strategy.
Noted template and outline
of 2017 Directors’ remuneration
report and shareholder
engagement strategy.
Pearson plc Annual report and accounts 2017 2017 remuneration report
105
Terms of reference
Committee evaluation
The Committee’s full charter and terms of reference are available
on the Governance page of the company’s website. A summary of
the Committee’s responsibilities is set out below.
Committee responsibilities:
Determine and review policy
Determine and regularly review the remuneration policies for
the Executive Directors, the presidents and other members of the
Pearson Executive management (who report directly to the CEO),
and overview the approach for the senior leadership group.
These policies include base salary, annual and long-term incentives,
pensionarrangements,anyotherbenefitsandtermination
of employment.
Shareholder engagement
Ensure the company maintains an appropriate level of engagement
with its shareholders and shareholder representative bodies in
relation to the remuneration policy and its implementation.
Review and approve implementation
Regularly review the implementation and operation of the
remuneration policy for Executive management and approve
theindividualremunerationandbenefitspackagesofthe
Executive Directors.
Approve performance related plans
Approve the design of, and determine targets for, any performance-
related pay plans operated by the Group for Pearson Executive
management and approve the total payments to be made under
such plans.
Review long-term plans
Review the design of the company’s long-term incentive and other
share plans operated by the Group and where relevant recommend
such plans for approval by the Board and shareholders.
Set termination arrangements
Adviseanddecideongeneralandspecificarrangements
in connection with the termination of employment of
Executive Directors.
Review targets
Review and approve corporate goals and objectives relevant to
Executive Directors’ remuneration and evaluate the Executive
Directors’ performance in light of those goals and objectives.
Determine Chairman’s remuneration
Delegated responsibility for determining the remuneration and
benefitspackageoftheChairmanoftheBoard.
Appoint remuneration consultants
Appoint and set the terms of engagement for any remuneration
consultants who advise the Committee and monitor the cost of
such advice.
In 2017, the Committee evaluation was undertaken by Heidrick &
Struggles JCA Group as part of the wider board evaluation process.
TheresponsesillustratedaneffectiveCommittee,whichusesits
time well and has an appropriate focus on the key issues. The key
findingswere:
TheCommitteeisseentobeworkingeffectivelyonthewhole,
led well by its Chair with an appropriate agenda and a strong
work ethic from each member of the Committee.
Meetings are run well and in a disciplined manner.
Succession for the role of Committee chair should be borne
in mind with future Non-Executive Director appointments,
although this is not immediately pressing.
Some consideration might be given to ensuring there is minimal
duplication with other Committees (e.g. gender pay could fall under
both Reputation & Responsibility Committee and the
Remuneration Committee depending on the outcomes of the
UK Corporate Governance Code review), or how duplication will
be handled so as not to create any unnecessary work.
Voting at the 2017 AGM
The following table summarises the details of votes cast in respect
of the remuneration resolutions at the 2017 AGM.
% of votes cast for
% of votes cast
against
Votes withheld
2017 Remuneration
Policy vote
68.8%
(404,615,934)
31.2%
(183,100,737)
Annual remuneration
votes
34.4%
(202,512,759)
65.6%
(385,996,157)
43,738,267
42,945,685
Following the 2017 AGM result, as part of our commitment to an
ongoing dialogue, we have continued to engage actively with our
investors to seek feedback on the reasons for the voting outcome.
A number of our shareholders believed that there was a disconnect
betweenpayandperformancefor2016andthiswasreflectedin
the voting outcome on the resolutions on remuneration. Since last
year’s AGM, Pearson has sought to address this in a number of ways
that are explained in the remuneration overview section of this
report. We appreciate and have acknowledged that feedback and
are grateful to those shareholders who engaged with us.
The Directors’ remuneration report has been approved by the
Board on 14 March 2018 and signed on its behalf by:
Elizabeth Corley
Chairman of Remuneration Committee
Section 4 Governance/Remuneration 106
Additional disclosures
Pages 62–109 of this document comprise the Directors’ report
for the year ended 31 December 2017.
Set out below is other statutory and regulatory information
that Pearson is required to disclose in its Directors’ report.
Going concern
The Directors have made an assessment of the Group’s ability
to continue as a going concern and consider it appropriate to
adopt the going concern basis of accounting.
Viability statement
As set out on p60, the Board has also reviewed the prospects
of Pearson over the three-year period to December 2020 taking
account of the company’s strategic plans, a ‘severe but plausible’
downside case and further stress testing based on the principal
risks set out on p50–60.
Based on the results of these procedures, and considering the
company’s strong balance sheet, the Directors have a reasonable
expectation that Pearson will be able to continue in operation and
meet its liabilities as they fall due over the three-year period ending
December 2020. Further details of the Group’s liquidity are shown
in Financial review (see p34–40).
Share capital
Details of share issues and cancellations are given in note 27 to
the consolidated financial statements on p170. The company has
a single class of shares which is divided into ordinary shares of 25p
each. The ordinary shares are in registered form. As at 31 December
2017, 802,053,752 ordinary shares were in issue. At the AGM held
on 5 May 2017, the company was authorised, subject to certain
conditions, to acquire up to 82,258,685 ordinary shares by market
purchase. Shareholders will be asked to renew this authority at
the AGM on 4 May 2018.
Share buyback
In July, we announced the sale of a 22% stake in Penguin Random
House to Bertelsmann and recapitalisation of the business,
generating total net proceeds of approximately $1bn.
The partial divestment of our stake in Penguin Random House
was in line with our strategy for simplification and allowed us
to crystallise some of the significant shareholder value created
through our successful partnership with Bertelsmann over the
prior four years.
We have set out clear capital allocation priorities as follows:
In line with those priorities, the Board decided that we would use the
proceeds from the transaction to maintain a strong balance sheet
and invest in our business in addition to returning £300m of surplus
capital to shareholders following the closing of the transaction.
The Board considered investor views on preferred methods of cash
return, the amount being returned and other factors and concluded
a share buyback was the most appropriate methodology to return
that capital to our shareholders at that time.
We launched a £300m share buyback, beginning on 18 October
2017 and completed the programme on 16 February 2018
repurchasing a total of 42,835,577 shares at an average price of
700p. The reduction in average shares outstanding as a result of
the buyback increased 2017 adjusted earnings per share (EPS) by
less than 1%, but will have a larger impact on 2018 adjusted EPS.
Major shareholders
Information provided to the company pursuant to the Financial
Conduct Authority’s Disclosure and Transparency Rules (DTR) is
published on a Regulatory Information Service and on the
company’s website.
As at 31 December 2017, the company had been notified under
DTR 5 of the following holders of significant voting rights in
its shares.
Schroders plc
Silchester International Investors LLP
Lindsell Train Limited
Ameriprise Financial, Inc. and its group
Libyan Investment Authority1
Number
of voting
rights
Percentage
as at date of
notification
108,691,682
89,160,115
41,393,237
41,236,375
24,431,000
13.63%
11.18%
5.17%
5.02%
3.01%
1. Based on notification to the Company dated 7 June 2010. We have been
notified of no change to this holding since that date. Assets belonging to,
or owned, held or controlled on 16 September 2011 by the Libyan Investment
Authority and located outside Libya on that date, are frozen in accordance
with Article 5(4) of Regulation 2016/44 of the Council of the European Union.
Between 31 December 2017 and 14 March 2018, being the latest
practicable date before the publication of this report, the company
received further notifications under DTR 5, with the most recent
positions being as follows:
Schroders plc disclosed a holding of 14.04%
Silchester International Investors LLP disclosed a holding
of 11.14%.
1. Maintaining a strong balance sheet and solid investment
Annual General Meeting
grade credit ratings through an appropriate capital structure.
Accordingly, we intend to maintain a year end net debt/EBITDA
of less than 1.5x
2. Simplifying our portfolio and investing in the business to
drive sustainable organic growth
3. Delivering shareholder returns through a sustainable and
progressive dividend policy, returning surplus cash to
shareholders where appropriate through buybacks or
special dividends.
The notice convening the AGM, to be held at 12 noon on
Friday 4 May 2018 at IET London, 2 Savoy Place, London
WC2R 0BL, is contained in a circular to shareholders to be
dated 28 March 2018.
Registered auditors
In accordance with section 489 of the Act, a resolution proposing
the reappointment of PricewaterhouseCoopers LLP as auditors
to the company will be proposed at the AGM, at a level
of remuneration to be agreed by the Audit Committee.
Pearson plc Annual report and accounts 2017 Additional disclosures
107
Amendment to Articles of Association
Voting at general meetings
Any amendments to the Articles of Association of the company
(the Articles) may be made in accordance with the provisions of
the Act by way of a special resolution.
Rights attaching to shares
The rights attaching to the ordinary shares are defined in the
Articles. A shareholder whose name appears on the company’s
register of members can choose whether his/her shares are
evidenced by share certificates (i.e. in certificated form) or held
electronically (i.e. uncertificated form) in CREST (the electronic
settlement system in the UK).
Subject to any restrictions below, shareholders may attend
any general meeting of the company and, on a show of hands,
every shareholder (or his/her representative) who is present at
a general meeting has one vote on each resolution and, on a poll,
every shareholder (whether an individual or a corporation) present
in person or by proxy shall have one vote for every 25p of nominal
share capital held. A resolution put to the vote at a general meeting
is decided on a show of hands unless before, or on the declaration
of the result of, a vote on a show of hands, a poll is demanded. A poll
can be demanded by the Chairman of the meeting, or by at least
three shareholders (or their representatives) present in person
and having the right to vote, or by any shareholders (or their
representatives) present in person having at least 10% of the total
voting rights of all shareholders, or by any shareholders (or their
representatives) present in person holding ordinary shares on which
an aggregate sum has been paid up of at least 10% of the total sum
paid up on all ordinary shares. At this year’s AGM, voting will again
be conducted on a poll, consistent with best practice.
Shareholders can declare a final dividend by passing an ordinary
resolution but the amount of the dividend cannot exceed the
amount recommended by the Board. The Board can pay interim
dividends on any class of shares of the amounts and on the dates
and for the periods they decide. In all cases the distributable profits
of the company must be sufficient to justify the payment of the
relevant dividend.
The Board may, if authorised by an ordinary resolution of the
shareholders, offer any shareholder the right to elect to receive
new ordinary shares, which will be credited as fully paid, instead
of their cash dividend.
Any dividend which has not been claimed for 12 years after it
became due for payment will be forfeited and will then belong
to the company, unless the Directors decide otherwise.
If the company is wound up, the liquidator can, with the sanction
of a special resolution passed by the shareholders, divide among
the shareholders all or any part of the assets of the company and
he/she can value assets and determine how the division shall be
carried out as between the shareholders or different classes of
shareholders. The liquidator can also, with the same sanction,
transfer the whole or any part of the assets to trustees upon
such trusts for the benefit of the shareholders.
Any form of proxy sent by the shareholders to the company in
relation to any general meeting must be delivered to the company
(via its registrars), whether in written or electronic form, not less
than 48 hours before the time appointed for holding the meeting
or adjourned meeting at which the person named in the
appointment proposes to vote.
The Board may decide that a shareholder is not entitled to attend or
vote either personally or by proxy at a general meeting or to exercise
any other right conferred by being a shareholder if he/she or any
person with an interest in shares has been sent a notice under
section 793 of the Act (which confers upon public companies the
power to require information with respect to interests in their voting
shares) and he/she or any interested person failed to supply the
company with the information requested within 14 days after
delivery of that notice. The Board may also decide, where the
relevant shareholding comprises at least 0.25% of the nominal
value of the issued shares of that class, that no dividend is payable
in respect of those default shares and that no transfer of any
default shares shall be registered.
Pearson operates an employee benefit trust to hold shares,
pending employees becoming entitled to them under the company’s
employee share plans. There were 5,993,536 shares held as at
31 December 2017. The trust has an independent trustee which
has full discretion in relation to the voting of such shares. A dividend
waiver operates on the shares held in the trust.
Pearson also operates two nominee shareholding arrangements
which hold shares on behalf of employees. There were 2,561,000
shares held in the Sharestore account and 432,375 shares held in
the Global Nominee account as at 31 December 2017. The beneficial
owners of shares held in Sharestore are invited to submit voting
instructions online at www.shareview.co.uk and Global Nominee
participants are invited to submit voting instructions by e-mail to
nominee@equiniti.com. If no instructions are given by the beneficial
owner by the date specified, the trustees holding these shares will
not exercise the voting rights.
Transfer of shares
The Board may refuse to register a transfer of a certificated share
which is not fully paid, provided that the refusal does not prevent
dealings in shares in the company from taking place on an open
and proper basis. The Board may also refuse to register a transfer
of a certificated share unless: (i) the instrument of transfer is lodged,
duly stamped (if stampable), at the registered office of the company
or any other place decided by the Board, and is accompanied by the
certificate for the share to which it relates and such other evidence
as the Board may reasonably require to show the right of the
transferor to make the transfer; (ii) it is in respect of only one class
of shares; and (iii) it is in favour of not more than four transferees.
Transfers of uncertificated shares must be carried out using
CREST and the Board can refuse to register a transfer of an
uncertificated share in accordance with the regulations governing
the operation of CREST.
Section 4 Governance/Additional disclosures 108
Additional disclosures
Variation of rights
If at any time the capital of the company is divided into different
classes of shares, the special rights attaching to any class may be
varied or revoked either:
(i) With the written consent of the holders of at least 75% in nominal
value of the issued shares of the relevant class or
Notwithstanding the provisions of the Articles, the Board has
resolved that all Directors should offer themselves for re-election
annually, in accordance with the Code.
The company may by ordinary resolution remove any Director
before the expiration of his/her term of office. In addition, the
Board may terminate an agreement or arrangement with any
Director for the provision of his/her services to the company.
(ii) With the sanction of a special resolution passed at a separate
general meeting of the holders of the shares of the relevant class.
Powers of the Directors
Without prejudice to any special rights previously conferred on the
holders of any existing shares or class of shares, any share may be
issued with such preferred, deferred or other special rights, or such
restrictions, whether in regard to dividend, voting, return of capital
or otherwise as the company may from time to time by ordinary
resolution determine.
Subject to the Articles, the Act and any directions given by special
resolution, the business of the company will be managed by the
Board who may exercise all the powers of the company, including
powers relating to the issue and/or buying back of shares by the
company (subject to any statutory restrictions or restrictions
imposed by shareholders in general meeting).
Appointment and replacement of Directors
Significant agreements
The Articles contain the following provisions in relation to Directors:
Directors shall be no less than two in number. Directors may be
appointed by the company by ordinary resolution or by the Board.
A Director appointed by the Board shall hold office only until the
next AGM and shall then be eligible for reappointment, but shall
not be taken into account in determining the Directors or the
number of Directors who are to retire by rotation at that meeting.
The Board may from time to time appoint one or more Directors to
hold Executive office with the company for such period (subject to
the provisions of the Act) and upon such terms as the Board may
decide and may revoke or terminate any appointment so made.
The Articles provide that, at every AGM of the company, at least
one-third of the Directors shall retire by rotation (or, if their number
is not a multiple of three, the number nearest to one-third). The first
Directors to retire by rotation shall be those who wish to retire and
not offer themselves for re-election. Any further Directors so to
retire shall be those of the other Directors subject to retirement
by rotation who have been longest in office since they were last
re-elected but, as between persons who became or were last
re-elected on the same day, those to retire shall (unless they
otherwise agree among themselves) be determined by lot.
In addition, any Director who would not otherwise be required
to retire shall retire by rotation at the third AGM after they
were last re-elected.
The following significant agreements contain provisions entitling
the counterparties to exercise termination or other rights in the
event of a change of control of the company:
Under the $1,750,000,000 revolving credit facility agreement
dated August 2014 which matures in August 2021 between,
among others, the company, Barclays Bank plc (Agent) and
the banks and financial institutions named therein as lenders
(the Facility), any such bank may, upon a change of control of the
company, require its outstanding advances, together with accrued
interest and any other amounts payable in respect of such Facility,
and its commitments, to be cancelled, each within 60 days of
notification to the banks by the Agent. For these purposes, a ‘change
of control’ occurs if the company becomes a subsidiary of any other
company, or one or more persons acting either individually or in
concert obtains control (as defined in section 1124 of the
Corporation Tax Act 2010) of the company.
Shares acquired through the company’s employee share plans
rank pari passu with shares in issue and have no special rights.
For legal and practical reasons, the rules of these plans set out
the consequences of a change of control of the company.
Pearson plc Annual report and accounts 2017 Additional disclosures
109
Other statutory information
Other information that is required by the Companies Act 2006
(the Act) to be included in the Directors’ report, and which is
incorporated by reference, can be located as follows:
Summary disclosures index
Dividend recommendation
See more
p35
Financial instruments and financial risk management
p156–158
Important events since year end
Future development of the business
Research and development activities
Employment of disabled persons
Employee involvement
Greenhouse gas emissions
p40
p8–32
p22–23
p28
p25–28
p29
With the exception of the dividend waiver described on p107,
there is no information to be disclosed in accordance with
Listing Rule 9.8.4.
The Audit Committee is also available to advise the Board on
certain aspects of the report, to enable the Directors to fulfil
their responsibility in this regard. The Directors consider that the
annual report and accounts, taken as a whole, is fair, balanced
and understandable and provides the information necessary for
shareholders to assess the company’s position and performance,
business model and strategy.
The Directors also confirm that, for each Director in office at the
date of this report:
So far as the Director is aware, there is no relevant audit
information of which the Group and company’s auditors
are unaware
They have taken all the steps that they ought to have taken as
Directors in order to make themselves aware of any relevant
audit information and to establish that the Group and the
company’s auditors are aware of that information.
Directors in office
No political donations or contributions were made or expenditure
incurred by the company or its subsidiaries during the year.
The following Directors were in office during the year and up until
signing of the financial statements:
Fair, balanced and understandable reporting and disclosure
of information
As required by the Code, we have established arrangements to
ensure that all information we report to investors and regulators
is fair, balanced and understandable. A process and timetable for
the production and approval of this year’s report was agreed by
the Board at its meeting in December 2017. The full Board then had
opportunity to review and comment on the report as it progressed.
Representatives from financial reporting, corporate affairs,
company secretarial, legal and internal audit, compliance and risk
are involved in the preparation and review of the annual report
to ensure a cohesive and balanced approach and, as with all of
our financial reporting, our Verification Committee conducts
a thorough verification of narrative and financial statements.
We also have procedures in place to ensure the timely release of
inside information, through our Market Disclosure Committee.
E P L Corley
V Cox
J J Fallon
S J Lewis
L K Lorimer
H Manwani
T Score
S Taurel
L Wallen
C Williams
M M Lynton (appointed 1 February 2018)
The Directors’ report has been approved by the Board on 14 March
2018 and signed on its behalf by:
Stephen Jones
Company Secretary
Section 4 Governance/Additional disclosures 110
Statement of Directors’ responsibilities
Each of the Directors, whose names and functions are listed on
p64–65, confirms that, to the best of their knowledge:
The Group financial statements, which have been prepared
in accordance with IFRSs as adopted by the European Union,
give a true and fair view of the assets, liabilities, financial position
and profit of the Group
The strategic report contained in the annual report includes a fair
review of the development and performance of the business and
the position of the Group and company, together with a description
of the principal risks and uncertainties that it faces.
This responsibility statement has been approved by the Board
on 14 March 2018 and signed on its behalf by:
Coram Williams
Chief Financial Officer
Statement of Directors’ responsibilities
The Directors are responsible for preparing the annual report
and the financial statements in accordance with applicable law
and regulation.
Company law requires the Directors to prepare financial statements
for each financial year. Under that law the Directors have prepared
the Group and company financial statements in accordance with
International Financial Reporting Standards (IFRSs) as adopted by
the European Union. Under company law the Directors must not
approve the financial statements unless they are satisfied that they
give a true and fair view of the state of affairs of the Group and
company and of the profit or loss of the Group and company for
that period. In preparing the financial statements, the Directors
are required to:
Select suitable accounting policies and then apply
them consistently
State whether applicable IFRSs as adopted by the European
Union have been followed for the Group and company financial
statements, subject to any material departures disclosed and
explained in the financial statements
Make judgements and accounting estimates that are reasonable
and prudent
Prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and
company will continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
company’s transactions and disclose with reasonable accuracy
at any time the financial position of the Group and company
and enable them to ensure that the financial statements and the
Directors’ Remuneration Report comply with the Companies Act
2006 and, as regards the group financial statements, Article 4 of
the IAS Regulation.
The Directors are also responsible for safeguarding the assets of
the Group and company and hence for taking reasonable steps
for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Pearson plc Annual report and accounts 2017 Section 5 Financial statements
111
111
Financial
Financial
statements
statements
In this section
Consolidated financial statements
159 20 Intangible assets – pre-publication
112 Independent auditor’s report to the
159 21 Inventories
members of Pearson plc
118 Consolidated income statement
119 Consolidated statement of
comprehensive income
120 Consolidated balance sheet
122 Consolidated statement of changes
in equity
160 22 Trade and other receivables
161 23 Provisions for other liabilities
and charges
161 24 Trade and other liabilities
162 25 Retirement benefit and other
post-retirement obligations
168 26 Share-based payments
123 Consolidated cash flow statement
170 27 Share capital and share premium
Notes to the consolidated financial statements
171 29 Other comprehensive income
170 28 Treasury shares
124
132
136
136
138
138
139
141
143
1 Accounting policies
2 Segment information
3 Restructuring costs
4 Operating expenses
5 Employee information
6 Net finance costs
7 Income tax
8 Earnings per share
9 Dividends
143 10 Property, plant and equipment
144 11 Intangible assets
148 12 Investments in joint ventures
and associates
150 13 Deferred income tax
151 14 Classification of financial instruments
153 15 Other financial assets
153 16 Derivative financial instruments
154 17 Cash and cash equivalents
(excluding overdrafts)
155 18 Financial liabilities – borrowings
156 19 Financial risk management
172 30 Business combinations
172 31 Disposals including business closures
173 32 Held for sale
174 33 Cash generated from operations
175 34 Contingencies
176 35 Commitments
176 36 Related party transactions
177 37 Events after the balance sheet date
177 38 Accounts and audit exemptions
Company financial statements
178 Company balance sheet
179 Company statement of changes in equity
180 Company cash flow statement
181 Notes to the company financial statements
190 Five-year summary
192 Financial key performance indicators
196 Shareholder information
112
Independent auditor’s report to the members
of Pearson plc
Report on the audit of the financial statements
Independence
Our opinion
In our opinion, Pearson Plc’s Group financial statements and
parent company financial statements (the “financial statements”):
give a true and fair view of the state of the Group’s and of the
parent company’s affairs as at 31 December 2017 and of the
Group’s profit and the Group’s and the parent company’s cash
flows for the year then ended;
have been properly prepared in accordance with IFRSs as adopted
by the European Union and, as regards the parent company’s
financial statements, as applied in accordance with the provisions
of the Companies Act 2006; and
have been prepared in accordance with the requirements of
the Companies Act 2006 and, as regards the Group financial
statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within
the Annual Report and accounts (the “Annual Report”), which
comprise: the Group and parent company balance sheets as at
31 December 2017; the Group’s income statement and statement of
comprehensive income, the Group and parent company statements
of cash flows, and the Group and parent company statements of
changes in equity for the year then ended; and the notes to the
financial statements, which include a description of the significant
accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (“ISAs (UK)”) and applicable law.
Our responsibilities under ISAs (UK) are further described in the
Auditors’ responsibilities for the audit of the financial statements
section of our report. We believe that the audit evidence we
have obtained is sufficient and appropriate to provide a basis
for our opinion.
We remained independent of the Group in accordance with the
ethical requirements that are relevant to our audit of the financial
statements in the UK, which includes the FRC’s Ethical Standard, as
applicable to listed public interest entities, and we have fulfilled our
other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit
services prohibited by the FRC’s Ethical Standard were not provided
to the Group or the parent company.
Other than those disclosed in note 4 to the financial statements,
we have provided no non-audit services to the Group or the parent
company in the period from 1 January 2017 to 31 December 2017.
The scope of our audit
As part of designing our audit, we determined materiality and
assessed the risks of material misstatement in the financial
statements. In particular, we looked at where the directors made
subjective judgements, for example in respect of significant
accounting estimates that involved making assumptions and
considering future events that are inherently uncertain.
We gained an understanding of the legal and regulatory framework
applicable to the Group and the industry in which it operates, and
considered the risk of acts by the Group which were contrary to
applicable laws and regulations, including fraud. We designed audit
procedures to respond to the risk, recognising that the risk of not
detecting a material misstatement due to fraud is higher than the
risk of not detecting one resulting from error, as fraud may involve
deliberate concealment by, for example, forgery or intentional
misrepresentations, or through collusion. We designed audit
procedures that focused on the risk of non-compliance related
to the Companies Act 2006, the Listing Rules, and applicable tax
legislation in the countries in which Pearson operates. Our tests
included, but were not limited to, review of the financial statement
Our audit approach
Overview
Materiality
Audit scope
Areas of
focus
Overall Group materiality: £22m (2016: £23m), based on 4% of adjusted operating profit,
adjusted for net finance costs.
Overall parent company materiality: £20m (2016: £21m), 1% of net assets capped below
Group materiality
We conducted work in four key territories: US, UK, Brazil and China. In addition, we obtained an
audit opinion on the financial information reported by the associate Penguin Random House.
The territories where we conducted audit procedures, together with work performed at
corporate functions and at the consolidated Group level, accounted for approximately: 67% of
the Group’s revenue; 62% of the Group’s profit before tax; and 60% of the Group’s adjusted
profit before tax.
Revenue recognition including risk of fraud (Group).
Carrying values of goodwill and intangible assets (Group).
Returns provisions (Group).
Nature and presentation of non-trading items (Group).
Provisions for uncertain tax liabilities (Group).
Recoverability of pre-publication assets (Group).
Major transactions (Group and parent).
Retirement benefits and other post-retirement obligations (Group).
Pearson plc Annual report and accounts 2017 Independent auditor’s report to the members of Pearson plc
113
disclosures to underlying supporting documentation, review of
correspondence with legal advisors and tax authorities, enquiries
of management, review of significant component auditors’ work
and review of internal audit reports in so far as they related to the
financial statements. We did not identify any key audit matters
relating to irregularities, including fraud. As in all of our audits
we also addressed the risk of management override of internal
controls, including testing journals and evaluating whether there
was evidence of bias by the directors that represented a risk of
material misstatement due to fraud.
Key audit matters
Key audit matters are those matters that, in the auditors’
professional judgement, were of most significance in the audit of
the financial statements of the current period and include the most
significant assessed risks of material misstatement (whether or not
due to fraud) identified by the auditors, including those which had
the greatest effect on: the overall audit strategy; the allocation of
resources in the audit; and directing the efforts of the engagement
team. These matters, and any comments we make on the results
of our procedures thereon, were addressed in the context of our
audit of the financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these
matters. This is not a complete list of all risks identified by our audit.
Key audit matter
How our audit addressed the key audit matter
Revenue recognition including risk of fraud
There are two types of complex contracts that require significant
judgements and estimates, which could be subject to either
accidental errors or deliberate fraud:
Multiple element arrangements, such as the sale of physical
textbooks accompanied by digital content or supplementary
workbooks, where revenue is recognised for each element as
if it were an individual contractual arrangement requiring the
estimation of its relative fair value;
Certain long-term contracts that span year end, where revenue
is recognised using estimated percentage of completion based
on costs. These include contracts to design, develop and deliver
testing and accreditation, and contracts to secure students and
support the online delivery of their teaching.
These complex contracts generate material deferred revenue
and accrued income balances and are areas where misstatements
in the underlying assumptions or estimation calculations could
have a material effect on the financial statements.
In addition, there are material shipments towards the period
end from major distribution locations giving rise to the
potential risk of a cut-off error.
Carrying values of goodwill and intangible assets
The Group recorded goodwill of £2,030m and intangible assets
of £934m at 31 December 2017, including software, acquired
customer lists, contracts and relationships, acquired trademarks
and brands and acquired publishing rights.
The Group recorded an impairment charge of £2,548m at
31 December 2016 against the North America CGU. The carrying
values of goodwill and intangible assets are dependent on future
cash flows of the underlying CGUs and there is a risk that if
management does not achieve these cash flows it could give
rise to further impairment. This risk increases in periods when
the Group’s trading performance and projections do not meet
prior expectations, such as in 2016.
The impairment reviews performed by management contain a
number of significant judgements and estimates. Changes in
these assumptions can result in materially different impairment
charges or available headroom.
Where books are sold together with workbooks delivered later or companion digital
materials available online, we assessed the basis for allocation of the purchase price
between each element based on individual contractual arrangements, and then tested
the detailed calculations supporting the revenue deferral calculations. This included
validating adjustments for the extent of user take up in relation to digital content to
underlying support. We found the revenue deferrals to be based on reasonable
estimates of the relative fair value of each element and to be properly and
consistently calculated.
For a selection of the larger, more judgemental and more recent long-term contracts,
covering both testing activities and online delivery of teaching, we read the contracts
and assessed the accounting methodologies being applied to calculate the proportion
of revenue being recognised. We also tested costs incurred to date and management’s
estimates of forecast costs and revenues by reference to historical experience and
current contract status.
Additionally, we have performed manual journals testing focusing on unusual or
unexpected entries to revenue as well as unexpected users.
Our testing showed that revenue recognition practices are in accordance with Group
policies and related accounting standards with appropriate methods for calculating
the revenue recognised. Refer to the returns provision areas of focus for our work
over the risk of cut-off.
We obtained management’s fair value less costs of disposal impairment model
and tested and evaluated the reasonableness of key assumptions, including CGU
identification; operating cash flow forecasts and key inputs to these forecasts;
the appropriateness of the inclusion of restructuring cost savings; perpetuity growth
rates; and discount rates.
We tested the mathematical integrity of the forecasts and carrying values in
management’s impairment model and confirmed that management’s estimate of
each CGU’s recoverable amount is appropriately based on the higher of fair value less
costs of disposal and value-in-use. Our procedures have been focused on the North
America and Core CGUs.
We agreed the forecast cash flows to board-approved budgets, assessed how
these budgets are compiled and understood key judgements and estimates within
them, including short-term growth rates, cost allocations and restructuring costs
and related savings.
We used valuations specialists to assess the perpetuity growth rate and discount rate
for each CGU by comparison with third-party information, past performance and
relevant risk factors. We also considered management’s estimate of disposal costs
for reasonableness.
We performed our own sensitivity analyses to understand the impact of reasonable
changes in the key assumptions. We agree with management’s decision to provide
additional disclosures and sensitivities in note 11 of the financial statements, in relation
to the North America and Core CGUs.
Section 5 Financial statements 114
Independent auditor’s report to the members of Pearson plc
Key audit matter
Returns provisions
The Group has provided £170m for sales returns at 31 December
2017. The most significant exposure to potential returns within
Pearson arises in the US higher education courseware business.
Trends in this business, such as the growth of textbook rentals and
the availability of free on-line content continue to affect this market
and have the potential to impact returns levels if shipping practices
and arrangements with retailers are not managed by Pearson in
response to these trends: for example, returns in the first half of
2016 were higher and more volatile than had been anticipated.
Management provides for returns based on past experience
by customer and channel, using a three year average method.
Nature and presentation of non-trading items
In May 2017, management announced a further three year
restructuring plan to the one announced in 2016, to continue
to simplify the business and focus further on their global
education strategy. As a result, management recorded a
restructuring charge of £79m during 2017.
Given the significance of this programme, management has
excluded these costs from their adjusted profit measure in
addition to certain other items which have been excluded
on a consistent basis with prior years.
There is a risk that inappropriate costs might be excluded from the
underlying operating cost base in such a restructuring programme,
and that the disclosures around the items excluded from adjusted
performance measures might not be clear and transparent.
Provisions for uncertain tax liabilities
How our audit addressed the key audit matter
We assessed management’s evaluation of the trends in the market and their responses
(including changed incentive arrangements and shipping practices) and considered
whether management’s methodology and three year averaging remained appropriate.
We were satisfied that this was the case. We tested the returns provision calculations
at 31 December 2017 and agreed inputs such as historical sales and returns experience
to underlying records
We performed detailed testing over shipment and returns levels around the year end
in particular at major shipping locations in the US and UK and evaluated whether these
gave rise to an increased risk of future returns. We concluded that management had
adopted methods and reached estimates for future returns that were supportable
and appropriate.
We identified no material adjustments in relation to the recording of the restructuring
costs. We noted that for the majority of these items there was clear evidence to support
the fact that they have arisen as a direct consequence of the Group’s restructuring plans.
There are certain costs where the classification as restructuring is subjective due to the
circumstances in which they have arisen. Based on the audit evidence obtained, we have
been able to conclude that, although subjective, there are valid arguments for associating
these costs with the restructuring activities undertaken and therefore the classification
is reasonable.
We also considered the extent and clarity of the Group’s reconciliations between the
statutory and adjusted measures and the related explanations. We were satisfied that
these were appropriate and consistent with the nature of the underlying items.
The Group is subject to several tax regimes due to the
geographical diversity of its businesses. At 31 December
2017 the Group had provisions for uncertain tax positions of
£280m (see note 7).
We engaged our tax experts in support of our audit of tax and obtained an
understanding of the Group’s tax strategy and risks. We recalculated the Group’s
tax provisions and determined whether the treatments adopted were in line with
the Group’s tax policies and had been applied consistently.
Management is required to exercise significant judgement in
determining the appropriate amount to provide in respect
of potential tax exposures and uncertain tax provisions.
The most significant of these relate to US tax.
We evaluated the key underlying assumptions, particularly in the US and UK. In doing
this, we considered the status of tax authority audits and enquiries. We considered the
basis and support, in particular for provisions not subject to tax audit, in comparison
with our experience for similar situations.
Changes in assumptions about the views that might be taken
by tax authorities can materially impact the level of provisions
recorded in the financial statements.
We also evaluated the consistency of management’s approach to establishing or
changing prior provision estimates and validated that changes in prior provisions
reflected a change in facts and circumstances.
We are satisfied that management’s provision estimates for uncertain tax positions
were prepared on a consistent basis with the prior year and were adequately supported.
We also evaluated the disclosures in note 7 in relation to uncertain tax provisions,
and were satisfied that the disclosures were consistent with the underlying positions
and with the requirements of IAS 1.
Recoverability of pre-publication assets
The Group has £988m of pre-publication assets at 31 December
2017 including £247m recorded in businesses classified as held
for sale (see below). Pre-publication assets represent direct
costs incurred in the development of education platforms,
programmes and titles prior to their public release.
We assessed the appropriateness of capitalisation and amortisation policies and
selected a sample of costs deferred to the balance sheet as pre-publication assets to
test their magnitude and appropriateness for capitalisation and the appropriateness
of amortisation profiles against sales forecasts, including considering the impact of the
transition towards digital products.
Judgement is required to assess the recoverability of the carrying
value of these assets; this is further complicated by the transition
to digital as the Group invests in new, less proven, inter-linked
digital content and platforms.
We challenged the carrying value of certain pre-publication assets where products are
yet to be launched, are less proven, or where sales are lower than originally anticipated.
We assessed forecast cash flows against historical experience and obtained supporting
evidence for management’s explanations. Where the pre-publication assets formed
part of a held for sale business we also considered the evidence supporting the
expected disposal proceeds exceeding the carrying value of those assets.
We found the Group’s policies to be appropriate and consistently applied. Whilst the
carrying value of some assets depends on future sales growth, overall we considered
the year end carrying values to be supported and in line with the Group’s policy.
Pearson plc Annual report and accounts 2017 Independent auditor’s report to the members of Pearson plc
115
Key audit matter
Major transactions
How our audit addressed the key audit matter
The Group has disposed of both a 22% share in its investment
in the Penguin Random House associate and Global Education
during 2017. Pre-tax gains on disposal of £96m and £44m have
been recorded respectively on these disposals. Pearson
continues to hold a 25% share in Penguin Random House.
We obtained and reviewed the sale agreements and evidence of proceeds received for
both disposals. We also reviewed the contractual agreements to assess the accounting
treatment and classification of proceeds and the gains on disposal of both Penguin
Random House and Global Education. We consider the accounting treatment to be
appropriate and the gains to have been appropriately calculated and disclosed.
Additionally, at 31 December 2017 the K-12 and Wall Street English
businesses have been classified as held for sale. Therefore assets
of £760m and liabilities of £588m have been classified as held
for sale on the face of the balance sheet. Management have
recorded the held for sale assets at the lower of carrying value
and fair value less costs to dispose. No impairments were
recorded on classification of the businesses as held for sale.
We have obtained evidence to support the held for sale determination including
(for WSE) a signed sale agreement and (for K-12) supporting Board approval and
evidence in support of a well advanced sales process. From the evidence we have
obtained we were satisfied that both K-12 and Wall Street English have been
appropriately measured and classified as held for sale at 31 December 2017.
Retirement benefits and other post-retirement obligations
The Group operates a number of defined benefit and defined
contribution retirement plans throughout the world. The total
fair value of plan assets is £3,492m and the total present value
of defined benefit obligations is £2,973m. The largest plan is the
Pearson Group Pension Plan in the UK (UK Group plan) which
has a net surplus of £545m.
There have been a number of changes to the UK Group plan
in the period including increased contributions; an update
to certain actuarial assumptions; and the purchase of two
insurance buy-in policies covering approximately £1.2bn of
its total liabilities. Given the size of the UK Group plan, changes
of this nature have a material impact on the net surplus.
We assessed the appropriateness of key assumptions supporting the Group’s valuation
of retirement benefit obligations with the support of our own actuarial specialists
and undertook work to validate the valuation of assets.
We considered the consistency of management’s methodology with prior periods.
Where changes to the basis of assumptions were made we obtained evidence in
support of the revised basis, and where relevant to the changes in circumstances.
Our assessment included benchmarking assumptions against our independent
expected range and with other FTSE 100 companies with plans of similar duration.
We consider the changes to be supportable and appropriate.
We have circularised fund managers and custodians to confirm existence of pension
assets and have performed independent valuation procedures. We have not identified
any significant adjustments in relation to this work.
We have reviewed contractual information and advice received from external advisers
in relation to the insurance buy-in policies. We have confirmed that the accounting for
these transactions is consistent with agreements entered into.
We also evaluated the disclosures in note 25 and were satisfied that they appropriately
addressed key changes in the period.
How we tailored our audit scope
Materiality
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for materiality.
These, together with qualitative considerations, helped us to
determine the scope of our audit and the nature, timing and extent of
our audit procedures on the individual financial statement line items
and disclosures and in evaluating the effect of misstatements, both
individually and in aggregate on the financial statements as a whole.
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the financial
statements as a whole, taking into account the structure of the
Group and the parent company, the accounting processes and
controls, and the industry in which they operate.
Overall Group materiality: £22m, which represents 4% of adjusted
operating profit, adjusted for net finance costs as disclosed in note 8 to
the consolidated financial statements. Refer to p116 for further details.
We conducted work in four key territories: US, UK, Brazil and China.
In addition, we obtained an audit opinion on the financial information
reported by the associate Penguin Random House.
The territories where we conducted audit procedures, together
with work performed at corporate functions and at the consolidated
Group level, accounted for approximately: 67% of the Group’s
revenue; 62% of the Group’s profit before tax; and 60%% of the
Group’s adjusted profit before tax.
Section 5 Financial statements
116
Independent auditor’s report to the members of Pearson plc
Based on our professional judgement, we determined materiality
for the financial statements as a whole as follows:
Group financial statements
£22m (2016: £23m).
Overall
materiality
How we
determined it
4% of adjusted operating profit, adjusted
for net finance costs
Rationale for
benchmark
applied
Note 8 of the financial statements explains
that the Group’s principal measure of
performance is adjusted operating profit
(£576m), which excludes the cost of
major restructuring, other net gains and
losses and acquired intangible asset
amortisation, in order to present results
from operating activities on a consistent
basis. From adjusted operating profit we
deducted net finance costs of £30m (see
note 8) because these mainly reflect
recurring finance charges. To the resulting
number we then applied 4% (rather than
the usual 5%) as our materiality calculation
was based on an adjusted measure.
Parent company
financial
statements
£20m
(2016: £21m).
1% of net assets
capped below
Group
materiality
We consider net
assets to be
an appropriate
benchmark for a
Group holding
company.
However we
have capped
this below
overall Group
materiality.
For each component in the scope of our Group audit, we allocated
a materiality that is less than our overall Group materiality.
The range of materiality allocated across components was
between £3m and £18m.
We agreed with the Audit Committee that we would report to them
misstatements identified during our audit above £2m (Group audit)
(2016: £2m) and £2m (Parent company audit) (2016: £2m) as well as
misstatements below those amounts that, in our view, warranted
reporting for qualitative reasons.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything
material to add or draw attention to in respect
of the directors’ statement in the financial
statements about whether the directors
considered it appropriate to adopt the going
concern basis of accounting in preparing the
financial statements and the directors’
identification of any material uncertainties to
the Group’s and the parent company’s ability
to continue as a going concern over a period
of at least twelve months from the date of
approval of the financial statements.
We are required to report if the directors’
statement relating to Going Concern in
accordance with Listing Rule 9.8.6R (3) is
materially inconsistent with our knowledge
obtained in the audit.
We have nothing
material to add or
to draw attention to.
However, because
not all future events
or conditions can be
predicted, this
statement is not a
guarantee as to the
Group’s and parent
company’s ability
to continue as a
going concern.
We have nothing
to report.
Reporting on other information
The other information comprises all of the information in the Annual
Report other than the financial statements and our auditors’ report
thereon. The directors are responsible for the other information.
Our opinion on the financial statements does not cover the other
information and, accordingly, we do not express an audit opinion or,
except to the extent otherwise explicitly stated in this report,
any form of assurance thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit, or otherwise appears to be materially misstated. If we identify
an apparent material inconsistency or material misstatement,
we are required to perform procedures to conclude whether there is
a material misstatement of the financial statements or a material
misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement
of this other information, we are required to report that fact.
We have nothing to report based on these responsibilities.
With respect to the Strategic Report and Governance report, we also
considered whether the disclosures required by the UK Companies
Act 2006 have been included.
Based on the responsibilities described above and our work
undertaken in the course of the audit, the Companies Act 2006,
(CA06), ISAs (UK) and the Listing Rules of the Financial Conduct
Authority (FCA) require us also to report certain opinions and
matters as described below (required by ISAs (UK) unless
otherwise stated).
Strategic Report and Governance report
In our opinion, based on the work undertaken in the course of the
audit, the information given in the Strategic Report and Governance
report for the year ended 31 December 2017 is consistent with the
financial statements and has been prepared in accordance with
applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and
parent company and their environment obtained in the course of
the audit, we did not identify any material misstatements in the
Strategic Report and Governance report. (CA06)
The directors’ assessment of the prospects of the Group and
of the principal risks that would threaten the solvency or
liquidity of the Group
We have nothing material to add or draw attention to regarding:
The directors’ confirmation on pages 60 and 106 of the Annual
Report that they have carried out a robust assessment of the
principal risks facing the Group, including those that would
threaten its business model, future performance, solvency
or liquidity.
The disclosures in the Annual Report that describe those risks
and explain how they are being managed or mitigated.
The directors’ explanation on pages 60 and 106 of the Annual
Report as to how they have assessed the prospects of the Group,
over what period they have done so and why they consider that
period to be appropriate, and their statement as to whether they
have a reasonable expectation that the Group will be able to
Pearson plc Annual report and accounts 2017 Independent auditor’s report to the members of Pearson plc
117
continue in operation and meet its liabilities as they fall due over
the period of their assessment, including any related disclosures
drawing attention to any necessary qualifications or assumptions.
We have nothing to report having performed a review of the
directors’ statement that they have carried out a robust assessment
of the principal risks facing the group and statement in relation to
the longer-term viability of the Group. Our review was substantially
less in scope than an audit and only consisted of making inquiries
and considering the directors’ process supporting their statements;
checking that the statements are in alignment with the relevant
provisions of the UK Corporate Governance Code (the “Code”);
and considering whether the statements are consistent with the
knowledge and understanding of the group and parent company
and their environment obtained in the course of the audit.
(Listing Rules)
Other Code Provisions
We have nothing to report in respect of our responsibility to
report when:
The statement given by the directors, on page 110, that they
consider the Annual Report taken as a whole to be fair, balanced
and understandable, and provides the information necessary
for the members to assess the Group’s and parent company’s
position and performance, business model and strategy is
materially inconsistent with our knowledge of the Group and
parent company obtained in the course of performing our audit.
The section of the Annual Report on page 76 describing the work
of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
The directors’ statement relating to the parent company’s
compliance with the Code does not properly disclose a departure
from a relevant provision of the Code specified, under the Listing
Rules, for review by the auditors.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to
be audited has been properly prepared in accordance with the
Companies Act 2006. (CA06)
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of directors’
responsibilities, the directors are responsible for the preparation
of the financial statements in accordance with the applicable
framework and for being satisfied that they give a true and fair view.
The directors are also responsible for such internal control as they
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether
due to fraud or error.
In preparing the financial statements, the directors are responsible
for assessing the Group’s and the parent company’s ability to
continue as a going concern, disclosing as applicable, matters
related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the
Group or the parent company or to cease operations, or have
no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the
financial statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditors’ report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and only
for the parent company’s members as a body in accordance with
Chapter 3 of Part 16 of the Companies Act 2006 and for no other
purpose. We do not, in giving these opinions, accept or assume
responsibility for any other purpose or to any other person to
whom this report is shown or into whose hands it may come save
where expressly agreed by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if,
in our opinion:
we have not received all the information and explanations we
require for our audit; or
adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been received
from branches not visited by us; or
certain disclosures of directors’ remuneration specified by law
are not made; or
the parent company financial statements and the part of the
Directors’ Remuneration Report to be audited are not in agreement
with the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit Committee, we
were appointed by the members on 6 February 1996 to audit the
financial statements for the year ended 31 December 1996 and
subsequent financial periods. The period of total uninterrupted
engagement is 22 years, covering the years ended 1 January 1996
to 31 December 2017.
Stuart Newman
(Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
14 March 2018
Section 5 Financial statements
118
Consolidated income statement
Year ended 31 December 2017
All figures in £ millions
Continuing operations
Sales
Cost of goods sold
Gross profit
Operating expenses
Other net gains and losses
Impairment of intangible assets
Share of results of joint ventures and associates
Operating profit/(loss)
Finance costs
Finance income
Profit/(loss) before tax
Income tax
Profit/(loss) for the year
Attributable to:
Equity holders of the company
Non-controlling interest
Notes
2017
2016
2
4
4
4
11
12
2
6
6
7
4,513
(2,066)
2,447
(2,202)
128
–
78
451
(110)
80
421
(13)
408
406
2
4,552
(2,093)
2,459
(2,480)
(25)
(2,548)
97
(2,497)
(97)
37
(2,557)
222
(2,335)
(2,337)
2
Earnings per share/(loss) attributable to equity holders of the company during the year
(expressed in pence per share)
– basic
– diluted
8
8
49.9p
49.9p
(286.8)p
(286.8)p
Pearson plc Annual report and accounts 2017 Consolidated statement of comprehensive income
119
Year ended 31 December 2017
All figures in £ millions
Profit/(loss) for the year
Items that may be reclassified to the income statement
Net exchange differences on translation of foreign operations – Group
Net exchange differences on translation of foreign operations – associates
Currency translation adjustment disposed
Attributable tax
Fair value gain on other financial assets
Attributable tax
Items that are not reclassified to the income statement
Remeasurement of retirement benefit obligations – Group
Remeasurement of retirement benefit obligations – associates
Attributable tax
Other comprehensive (expense)/income for the year
Total comprehensive income/(expense) for the year
Attributable to:
Equity holders of the company
Non-controlling interest
Notes
7
7
25
7
29
2017
408
(158)
(104)
(51)
9
13
(4)
175
7
(42)
(155)
253
251
2
2016
(2,335)
910
3
–
(5)
–
–
(268)
(8)
58
690
(1,645)
(1,648)
3
Section 5 Financial statements 120
Consolidated balance sheet
As at 31 December 2017
All figures in £ millions
Assets
Non-current assets
Property, plant and equipment
Intangible assets
Investments in joint ventures and associates
Deferred income tax assets
Financial assets – derivative financial instruments
Retirement benefit assets
Other financial assets
Trade and other receivables
Current assets
Intangible assets – pre-publication
Inventories
Trade and other receivables
Financial assets – marketable securities
Cash and cash equivalents (excluding overdrafts)
Assets classified as held for sale
Total assets
Liabilities
Non-current liabilities
Financial liabilities – borrowings
Financial liabilities – derivative financial instruments
Deferred income tax liabilities
Retirement benefit obligations
Provisions for other liabilities and charges
Other liabilities
Notes
2017
2016
10
11
12
13
16
25
15
22
20
21
22
14
17
32
18
16
13
25
23
24
281
2,964
398
95
140
545
77
103
343
3,442
1,247
451
171
158
65
104
4,603
5,981
741
148
1,110
8
518
2,525
1,024
235
1,357
10
1,459
4,085
760
–
7,888
10,066
(1,066)
(2,424)
(140)
(164)
(104)
(55)
(133)
(264)
(466)
(139)
(79)
(422)
(1,662)
(3,794)
Pearson plc Annual report and accounts 2017 Consolidated balance sheet continued
As at 31 December 2017
121
All figures in £ millions
Current liabilities
Trade and other liabilities
Financial liabilities – borrowings
Current income tax liabilities
Provisions for other liabilities and charges
Liabilities classified as held for sale
Total liabilities
Net assets
Equity
Share capital
Share premium
Treasury shares
Capital redemption reserve
Fair value reserve
Translation reserve
Retained earnings
Total equity attributable to equity holders of the company
Non-controlling interest
Total equity
Notes
2017
2016
24
18
23
32
27
27
28
(1,342)
(1,629)
(19)
(231)
(25)
(44)
(224)
(27)
(1,617)
(1,924)
(588)
–
(3,867)
4,021
200
2,602
(61)
5
13
592
662
4,013
8
4,021
(5,718)
4,348
205
2,597
(79)
–
–
905
716
4,344
4
4,348
These financial statements have been approved for issue by the Board of Directors on 14 March 2018 and signed on its behalf by
Coram Williams
Chief Financial Officer
Section 5 Financial statements 122
Consolidated statement of changes in equity
Year ended 31 December 2017
Equity attributable to equity holders of the company
Capital
redemption
reserve
Fair value
reserve
Translation
reserve
Retained
earnings
All figures in £ millions
At 1 January 2017
Profit for the year
Other comprehensive
income/(expense)
Total comprehensive
income/(expense)
Equity-settled transactions
Issue of ordinary shares under
share option schemes
Buyback of equity
Purchase of treasury shares
Release of treasury shares
Changes in non-controlling interest
Dividends
Share
capital
Share
premium
Treasury
shares
205
2,597
(79)
–
–
–
–
–
(5)
–
–
–
–
–
–
–
–
5
–
–
–
–
–
–
–
–
–
–
–
–
18
–
–
At 31 December 2017
200
2,602
(61)
All figures in £ millions
At 1 January 2016
Loss for the year
Other comprehensive
income/(expense)
Total comprehensive
income/(expense)
Equity-settled transactions
Issue of ordinary shares under
share option schemes
Buyback of equity
Purchase of treasury shares
Release of treasury shares
Changes in non-controlling interest
Dividends
Share
capital
Share
premium
Treasury
shares
205
2,590
(72)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7
–
–
–
–
–
–
–
–
–
–
–
(27)
20
–
–
At 31 December 2016
205
2,597
(79)
905
–
716
406
Total
4,344
406
(313)
145
(155)
(313)
–
–
–
–
–
–
–
551
33
251
33
–
5
(300)
(300)
–
(18)
(2)
(318)
662
–
–
(2)
(318)
4,013
Total
6,414
3,698
(7)
–
(2,337)
(2,337)
912
(223)
689
912
(2,560)
(1,648)
–
–
–
–
–
–
–
905
22
22
–
–
–
(20)
–
(424)
716
7
–
(27)
–
–
(424)
4,344
Non-
controlling
interest
4
2
–
2
–
–
–
–
–
2
–
8
Non-
controlling
interest
4
2
1
3
–
–
–
–
–
(3)
–
4
Total
equity
4,348
408
(155)
253
33
5
(300)
–
–
–
(318)
4,021
Total
equity
6,418
(2,335)
690
(1,645)
22
7
–
(27)
–
(3)
(424)
4,348
–
–
13
13
–
–
–
–
–
–
–
–
–
–
–
–
–
5
–
–
–
–
5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
13
592
Equity attributable to equity holders of the company
Capital
redemption
reserve
Fair value
reserve
Translation
reserve
Retained
earnings
The capital redemption reserve reflects the nominal value of shares cancelled in the Group’s share buyback programme. The fair value
reserve arises on revaluation of other financial assets. The translation reserve includes exchange differences arising from the translation
of the net investment in foreign operations and of borrowings and other currency instruments designated as hedges of such investments.
Pearson plc Annual report and accounts 2017 Consolidated cash flow statement
Year ended 31 December 2017
All figures in £ millions
Cash flows from operating activities
Net cash generated from operations
Interest paid
Tax paid
Net cash generated from operating activities
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired
Purchase of investments
Purchase of property, plant and equipment
Purchase of intangible assets
Disposal of subsidiaries, net of cash disposed
Proceeds from sale of associates
Proceeds from sale of investments
Proceeds from sale of property, plant and equipment
Proceeds from sale of liquid resources
Loans (advanced)/repaid by related parties
Investment in liquid resources
Interest received
Dividends received from joint ventures and associates
Net cash generated from/(used in) investing activities
Cash flows from financing activities
Proceeds from issue of ordinary shares
Buyback of equity
Purchase of treasury shares
Proceeds from borrowings
Repayment of borrowings
Finance lease principal payments
Transactions with non-controlling interest
Dividends paid to company’s shareholders
Net cash used in financing activities
Effects of exchange rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
123
Notes
2017
2016
33
30
31
31
33
27
27
28
9
17
462
(89)
(75)
298
(11)
(3)
(82)
(150)
19
411
–
–
20
(13)
(18)
20
458
651
5
(149)
–
2
(1,294)
(5)
–
(318)
(1,759)
16
(794)
1,424
630
522
(67)
(45)
410
(15)
(6)
(88)
(157)
(54)
4
92
4
42
14
(24)
16
131
(41)
7
–
(27)
4
(249)
(6)
(2)
(424)
(697)
81
(247)
1,671
1,424
Section 5 Financial statements 124
Notes to the consolidated financial statements
General information
Pearson plc (the company), its subsidiaries and associates (together
the Group) are international businesses covering educational
courseware, assessments and services, and consumer publishing
through its associate interest in Penguin Random House.
The company is a public limited company incorporated and
domiciled in England. The address of its registered office is
80 Strand, London WC2R 0RL.
The company has its primary listing on the London Stock Exchange
and is also listed on the New York Stock Exchange.
These consolidated financial statements were approved for issue
by the Board of Directors on 14 March 2018.
1. Accounting policies
The principal accounting policies applied in the preparation of these
consolidated financial statements are set out below.
a. Basis of preparation
These consolidated financial statements have been prepared on the
going concern basis and in accordance with International Financial
Reporting Standards (IFRS) and IFRS Interpretations Committee
(IFRS IC) interpretations as adopted by the European Union (EU)
and with those parts of the Companies Act 2006 applicable to
companies reporting under IFRS. In respect of the accounting
standards applicable to the Group; there is no difference between
EU-adopted and IASB-adopted IFRS.
These consolidated financial statements have been prepared under
the historical cost convention as modified by the revaluation of
financial assets and liabilities (including derivative financial
instruments) at fair value through profit or loss.
1. Interpretations and amendments to published standards
effective 2017 The following amendments and interpretations
were adopted in 2017:
Amendments to IFRS 12 Disclosure of Interests in
Other Entities – Annual Improvements 2014-2016 cycle
Amendments to IAS 7 Statement of Cash Flows –
Disclosure Initiative
Amendments to IAS 12 Income Taxes – Recognition of
Deferred Tax Assets for Unrealised Losses
The adoption of these new pronouncements from 1 January
2017 does not have a material impact on the consolidated
financial statements. Additional disclosure has been given
where relevant.
2. Standards, interpretations and amendments to published
standards that are not yet effective New accounting standards and
interpretations have been published that are not mandatory for
the year ended 31 December 2017. The Group has elected not to
early-adopt these new standards and interpretations. The Group’s
assessment of the impact of these new standards is set out below.
IFRS 9 ‘Financial Instruments’, effective for annual reporting periods
beginning on or after 1 January 2018. The standard, which replaces
IAS 39 ‘Financial Instruments: Recognition and Measurement’,
addresses the classification, measurement and derecognition of
financial assets and financial liabilities, introduces new hedge
accounting rules and a new impairment model for financial assets.
The Group will adopt IFRS 9 as at 1 January 2018 and apply the new
rules retrospectively, with the practical expedients permitted in the
standard. Comparatives for 2017 will not be restated. The Group
has assessed the impact of adopting IFRS 9 and is expecting the
following impact:
Classification and measurement The Group has reviewed its
financial assets and liabilities and does not expect any changes in
classification or measurement as a result of adopting IFRS 9. Trade
receivables will continue to be measured at amortised cost as they
are held to collect contractual cash flows which represent solely
payments of principal and interest, in accordance with the business
model. There will be no impact on classification and measurement
of financial liabilities as the new requirements only affect the
accounting for financial liabilities which are designated at fair value
through the profit and loss account, and the Group does not have
any such liabilities. Derivative assets and liabilities will continue to
be recognised at fair value with movements recognised in finance
income or costs, unless the hedging strategy determines otherwise.
The Group’s equity financial investments will continue to be
recognised at fair value and the Group has elected the option to
recognise all movements in fair value in other comprehensive
income (FVOCI). Gains or losses realised on the subsequent sale of
these financial assets will no longer be recycled through the profit
and loss account, but instead reclassified from the FVOCI reserve
to retained earnings. During 2017, £nil of such gains/losses were
recycled to the profit and loss account in relation to the disposal
of available-for-sale assets.
Impairment IFRS 9 introduces a new impairment model which
requires the recognition of impairment provisions based on
expected credit losses rather than only incurred credit losses,
as is the case under IAS 39. The Group expects this new impairment
model will lead to a small increase in its provision for losses against
trade debtors, representing anticipated losses (evidenced by both
historical recovery rates and forward-looking indicators) where
there has been no triggering event to suggest any impairment
incurred to date. The Group expects its provision for losses against
trade debtors as at 1 January 2018 to increase by an amount
approximating 1% of gross trade debtors as a result of adopting the
expected credit loss model for impairments. The Group does not
anticipate the expected credit loss model having a material impact
on profit before tax for 2018 unless market conditions or other
factors change the outlook for credit losses.
Hedge accounting IFRS 9 introduces a new, simpler hedge
accounting model with a principles-based approach designed to
align the accounting result with the economic hedging strategy.
The group currently uses fair value hedge relationships to hedge
interest rate risk and currency risk on its bond borrowings and also
uses net investment hedging relationships to hedge currency
re-translation risk on its overseas assets. The Group has confirmed
that its current hedge relationships will continue to qualify as
hedges upon the adoption of IFRS 9. The Group does not currently
undertake any cash flow hedging, but is reviewing its strategy
with regard to currency risk. Should the Group decide to expand
its hedging strategy in this area, changes in fair value relating to
forward points or currency basis may, subject to hedge designation,
be deferred in a cost of hedging reserve and recognised against the
related hedge transaction when it occurs.
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
125
1. Accounting policies continued
a. Basis of preparation continued
IFRS 9 also requires additional disclosure which will be incorporated
in the 2018 annual report.
IFRS 15 ’Revenue from Contracts with Customers’, effective for
annual reporting periods beginning on or after 1 January 2018.
The standard, which replaces IAS 18 covering contracts for goods
and services, and IAS 11 covering construction contracts, addresses
the recognition of revenue. The new standard is based on the
principle that revenue is recognised to depict the transfer of
promised goods or services to customers in an amount that reflects
the consideration to which the Group expects to be entitled in
exchange for those goods or services. The Group will adopt the
new standard as at 1 January 2018 and apply the modified
retrospective approach. Comparatives for 2017 will not be restated
and the cumulative impact of adoption will be recognised in
retained earnings as at 1 January 2018.
The Group has reviewed the impact of adopting IFRS 15 across
its various geographies and lines of business, with reference to
underlying contractual terms and business practices, and has
identified four areas of impact, as follows:
Unexercised customer rights (or breakage) The Group sells rights
to future performance to customers which may go unexercised.
While the customer has paid for future performance, usage is at the
customer’s discretion and those rights may expire prior to usage,
or never be used. The Group maintains historical customer data
to understand usage patterns over time (i.e. redemption rates).
Where the Group expects to have no future obligation (based on
these redemption rates), revenue has historically been recognised
immediately for this portion of the sale. Under IFRS 15, where the
Group currently recognises this breakage element on subscriptions,
revenue instead will be recognised evenly over the period of use.
Where breakage relates to sales of tests or vouchers, revenue will be
recognised when the underlying tests are delivered. This revised
treatment in respect of breakage primarily affects the school and
higher education businesses in North America and will result in
higher deferred revenue upon adoption on 1 January 2018.
Online Program Management (OPM) marketing Historically the
OPM (Embanet) business recognised revenue for the pre-semester
costs of marketing and recruitment as a separate performance
obligation from course delivery during the semester (i.e. revenue
was recognised in line with the marketing costs incurred). Under
IFRS 15, revenue will be recognised on a straight-line basis over
the semester with no revenue recognised up front for pre-semester
recruitment and marketing costs based on management’s
judgement under the new standard’s requirements assessing
the start of the Group’s contract and determining the Group’s
performance obligations. This revised treatment of pre-semester
costs only affects the OPM business in North America and will
result in a lower trade receivable balance upon adoption on
1 January 2018.
Administration fees This relates to non-refundable upfront
administration fees charged to customers which do not relate to
the transfer of a promised good or service to the customer. Rather
these fees are charged to cover internal costs, such as registration
fees for testing candidate exams. Historically administration fees
have been recognised in revenue up front when charged. Under
IFRS 15, such fees must be deferred and recognised over the period
over which services are provided as they do not relate to a specific
performance obligation. This revised treatment primarily affects
the UK Assessments business and will result in higher deferred
revenue upon adoption on 1 January 2018.
Commissions This relates to incremental costs of obtaining
customer contracts, such as sales incentive plans or sales
commissions specifically linked to obtaining new contracts.
Historically such commissions have been charged to the profit
and loss account as incurred. Under IFRS 15, sales commissions
in respect of customer transactions with an accounting period of
greater than one year will be capitalised and amortised over that
accounting period, using practical expedients permissible under the
new standard. This revised treatment affects the US Assessments
business and will result in a higher contract asset upon adoption on
1 January 2018.
IFRS 15 also requires increased disclosure, in particular analysis
of disaggregated revenues, contract balances and transaction price
allocated to remaining performance obligations. This disclosure
will be incorporated in the 2018 annual report.
Had the Group been applying IFRS 15 during 2017, both sales and
profit before tax would have been around £2m higher, with the
balance sheet impact at the beginning and end of the year being
similar. The impact on sales and profit before tax for 2018 is not
expected to be materially different to 2017, assuming a like-for-like
business portfolio. The cumulative pre-tax impact of adopting
IFRS 15 on 1 January 2018 is expected to reduce retained earnings
by around £143m, with deferred revenue increasing by £106m,
trade receivables reducing by £38m and contract assets increasing
by £1m.
IFRS 16 ‘Leases’, effective for annual reporting periods beginning
on or after 1 January 2019. Early adoption is permitted. The new
standard replaces IAS 17 ‘Leases’ and related interpretations and
details the requirements for the classification, measurement and
recognition of lease arrangements. Adoption of the new standard
is likely to have a material impact on the Group. Management
continues to assess this impact but cannot reasonably estimate this
impact due to judgements which are required to be made for each
lease and the adoption methods available. The actual impact of
applying IFRS 16 will depend on the composition of the Group’s lease
portfolio at the adoption date and the extent to which the Group
chooses to use practical expedients and recognition exemptions.
The Group plans to apply IFRS 16 on 1 January 2019, and anticipates
using the modified retrospective approach. Under this approach,
the cumulative effect of adopting IFRS 16 will be recognised as
an adjustment to the opening balance of retained earnings on
1 January 2019, with no restatement of comparative information.
Section 5 Financial statements 126
Notes to the consolidated financial statements
1. Accounting policies continued
a. Basis of preparation continued
Although the Group has not completed its detailed assessment,
the following changes to lessee accounting are likely to have a
material impact:
Currently no lease assets are included on the Group’s consolidated
balance sheet for operating leases. Under IFRS 16 right-of-use
assets will be recorded on the balance sheet for assets that are
leased by the Group
Currently no lease liabilities are included on the Group’s
consolidated balance sheet for future operating lease payments;
these are disclosed as commitments. Under IFRS 16 liabilities will
be recorded for future lease payments. As at 31 December 2017,
the Group’s future aggregate minimum lease payments under
non-cancellable operating leases amounted to £1,201m, on an
undiscounted basis (see note 35)
Currently operating lease rentals, net of any incentives received,
are expensed to the income statement on a straight-line basis
over the period of the lease. Under IFRS 16 the lease expense
will represent the depreciation of the right-of-use asset together
with interest charged on lease liabilities
Currently operating lease cash flows are included within operating
cash flows in the Group’s consolidated cash flow statement.
Under IFRS 16 these cash flows will be recorded as cash flows
from financing activities being the repayment of lease liabilities
and related interest
Lessor accounting under IFRS 16 is similar to IAS 17 accounting and
is not expected to have a material impact on the Group.
In June 2015, the IASB issued an exposure draft ED/2015/5
‘Remeasurement on a Plan Amendment, Curtailment or Settlement/
Availability of a Refund from a Defined benefit Plan (Proposed
Amendments to IAS 19 and IFRIC 14)’. The proposed amendments
to IFRIC 14, which may have restricted the Group’s ability to
recognise a pension asset in respect of pension surpluses in its
UK defined benefit plan, have now been withdrawn.
A number of other new standards and amendments to standards
and interpretations are effective for annual periods beginning
after 1 January 2017, and have not been applied in preparing these
financial statements. None of these is expected to have a material
impact on the consolidated financial statements.
3. Critical accounting assumptions and judgements The preparation
of financial statements in conformity with IFRS requires the
use of certain critical accounting assumptions. It also requires
management to exercise its judgement in the process of applying
the Group’s accounting policies. The areas requiring a higher degree
of judgement or complexity, or areas where assumptions and
estimates are significant to the consolidated financial statements,
are discussed in the relevant accounting policies under the following
headings and in the notes to the accounts where appropriate:
Consolidation: Business combinations – classification of investments
(see note 1b(1))
Intangible assets: Goodwill (see note 1e(1))
Intangible assets: Pre-publication assets (see note 1e(5))
Taxation (see note 1m)
Revenue recognition including provisions for returns (see note 1p)
Employee benefits: Pensions (see note 1n(1))
Consolidation: Business combinations – determination of fair
values (where relevant) (see note 1b(1))
b. Consolidation
1. Business combinations The acquisition method of accounting is
used to account for business combinations.
The consideration transferred for the acquisition of a subsidiary
is the fair value of the assets transferred, the liabilities incurred
and the equity interest issued by the Group. The consideration
transferred includes the fair value of any asset or liability resulting
from a contingent consideration arrangement. Acquisition-related
costs are expensed as incurred in the operating expenses line of
the income statement. Identifiable assets acquired and identifiable
liabilities and contingent liabilities assumed in a business
combination are measured initially at their fair values at the
acquisition date. The determination of fair values often requires
significant judgements and the use of estimates, and, for material
acquisitions, the fair value of the acquired intangible assets is
determined by an independent valuer. The excess of the
consideration transferred, the amount of any non-controlling
interest in the acquiree and the acquisition date fair value of any
previous equity interest in the acquiree over the fair value of the
identifiable net assets acquired is recorded as goodwill (see note 30).
See note 1e(1) for the accounting policy on goodwill. If this is less
than the fair value of the net assets of the subsidiary acquired,
in the case of a bargain purchase, the difference is recognised
directly in the income statement.
On an acquisition-by-acquisition basis, the Group recognises any
non-controlling interest in the acquiree either at fair value or at
the non-controlling interest’s proportionate share of the acquiree’s
net assets.
IFRS 3 ‘Business Combinations’ has not been applied retrospectively
to business combinations before the date of transition to IFRS.
Management exercises judgement in determining the classification
of its investments in its businesses, in line with the following:
2. Subsidiaries Subsidiaries are entities over which the Group has
control. The Group controls an entity when the Group is exposed to,
or has rights to, variable returns from its involvement with the entity
and has the ability to affect those returns through its power over the
entity. Subsidiaries are fully consolidated from the date on which
control is transferred to the Group. They are deconsolidated from
the date that control ceases.
3. Transactions with non-controlling interests Transactions with
non-controlling interests that do not result in loss of control are
accounted for as equity transactions, that is, as transactions with
the owners in their capacity as owners. Any surplus or deficit arising
from disposals to a non-controlling interest is recorded in equity.
For purchases from a non-controlling interest, the difference
between consideration paid and the relevant share acquired of
the carrying value of the subsidiary is recorded in equity.
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
127
1. Accounting policies continued
b. Consolidation continued
4. Joint ventures and associates Joint ventures are entities in which
the Group holds an interest on a long-term basis and has rights
to the net assets through contractually agreed sharing of control.
Associates are entities over which the Group has significant
influence but not the power to control the financial and operating
policies, generally accompanying a shareholding of between 20%
and 50% of the voting rights. Ownership percentage is likely to be
the key indicator of investment classification; however, other factors,
such as Board representation, may also affect the accounting
classification. Judgement is required to assess all of the qualitative
and quantitative factors which may indicate that the Group does,
or does not, have significant influence over an investment. Penguin
Random House is the Group’s only material associate – see note 12
for further details on the judgements involved in its accounting
classification. Investments in joint ventures and associates are
accounted for by the equity method and are initially recognised
at the fair value of consideration transferred.
The Group’s share of its joint ventures’ and associates’ post-
acquisition profits or losses is recognised in the income statement
and its share of post-acquisition movements in reserves is
recognised in reserves.
The Group’s share of its joint ventures’ and associates’ results is
recognised as a component of operating profit as these operations
form part of the core publishing business of the Group and are an
integral part of existing wholly-owned businesses. The cumulative
post-acquisition movements are adjusted against the carrying
amount of the investment. When the Group’s share of losses in
a joint venture or associate equals or exceeds its interest in the joint
venture or associate, the Group does not recognise further losses
unless the Group has incurred obligations or made payments on
behalf of the joint venture or associate.
5. Contribution of a subsidiary to an associate or joint venture
The gain or loss resulting from the contribution or sale of a
subsidiary to an associate or a joint venture is recognised in full.
Where such transactions do not involve cash consideration,
significant judgements and estimates are used in determining
the fair values of the consideration received.
c. Foreign currency translation
1. Functional and presentation currency Items included in the
financial statements of each of the Group’s entities are measured
using the currency of the primary economic environment in which
the entity operates (the functional currency). The consolidated
financial statements are presented in sterling, which is the
company’s functional and presentation currency.
2. Transactions and balances Foreign currency transactions are
translated into the functional currency using the exchange rates
prevailing at the dates of the transactions. Foreign exchange gains
and losses resulting from the settlement of such transactions and
from the translation at year-end exchange rates of monetary assets
and liabilities denominated in foreign currencies are recognised in
the income statement, except when deferred in equity as qualifying
net investment hedges.
3. Group companies The results and financial position of all Group
companies that have a functional currency different from the
presentation currency are translated into the presentation
currency as follows:
i) Assets and liabilities are translated at the closing rate at the date
of the balance sheet
ii) Income and expenses are translated at average exchange rates
iii) All resulting exchange differences are recognised as a separate
component of equity.
On consolidation, exchange differences arising from the translation
of the net investment in foreign entities, and of borrowings
and other currency instruments designated as hedges of such
investments, are taken to shareholders’ equity. The Group treats
specific inter-company loan balances, which are not intended to
be repaid in the foreseeable future, as part of its net investment.
When a foreign operation is sold, such exchange differences are
recognised in the income statement as part of the gain or loss
on sale.
The principal overseas currency for the Group is the US dollar.
The average rate for the year against sterling was $1.30
(2016: $1.33) and the year-end rate was $1.35 (2016: $1.23).
d. Property, plant and equipment
Property, plant and equipment are stated at historical cost less
depreciation. Cost includes the original purchase price of the asset
and the costs attributable to bringing the asset to its working
condition for intended use. Land is not depreciated. Depreciation
on other assets is calculated using the straight-line method to
allocate their cost less their residual values over their estimated
useful lives as follows:
Buildings (freehold):
20–50 years
Buildings (leasehold):
over the period of the lease
Plant and equipment:
3–10 years
The assets’ residual values and useful lives are reviewed,
and adjusted if appropriate, at each balance sheet date.
The carrying value of an asset is written down to its recoverable
amount if the carrying value of the asset is greater than its
estimated recoverable amount.
e. Intangible assets
1. Goodwill For the acquisition of subsidiaries made on or after
1 January 2010, goodwill represents the excess of the consideration
transferred, the amount of any non-controlling interest in the
acquiree and the acquisition date fair value of any previous equity
interest in the acquiree over the fair value of the identifiable net
assets acquired. For the acquisition of subsidiaries made from the
date of transition to IFRS to 31 December 2009, goodwill represents
the excess of the cost of an acquisition over the fair value of the
Group’s share of the net identifiable assets acquired. Goodwill on
acquisitions of subsidiaries is included in intangible assets. Goodwill
on acquisition of associates and joint ventures represents the excess
of the cost of an acquisition over the fair value of the Group’s share
of the net identifiable assets acquired. Goodwill on acquisitions
of associates and joint ventures is included in investments in
associates and joint ventures.
Section 5 Financial statements 128
Notes to the consolidated financial statements
1. Accounting policies continued
e. Intangible assets continued
Goodwill is tested at least annually for impairment and carried at
cost less accumulated impairment losses. An impairment loss is
recognised to the extent that the carrying value of goodwill exceeds
the recoverable amount. The recoverable amount is the higher of
fair value less costs of disposal and value in use. These calculations
require the use of estimates in respect of forecast cash flows and
discount rates and significant management judgement in respect
of CGU and cost allocation. A description of the key assumptions
and sensitivities is included in note 11. Goodwill is allocated to
aggregated cash-generating units for the purpose of impairment
testing. The allocation is made to those aggregated cash-generating
units that are expected to benefit from the business combination in
which the goodwill arose.
Gains and losses on the disposal of an entity include the carrying
amount of goodwill relating to the entity sold.
2. Acquired software Software separately acquired for internal
use is capitalised at cost. Software acquired in material business
combinations is capitalised at its fair value as determined by
an independent valuer. Acquired software is amortised on a
straight-line basis over its estimated useful life of between
three and eight years.
3. Internally developed software Internal and external costs
incurred during the preliminary stage of developing computer
software for internal use are expensed as incurred. Internal and
external costs incurred to develop computer software for internal
use during the application development stage are capitalised if
the Group expects economic benefits from the development.
Capitalisation in the application development stage begins once
the Group can reliably measure the expenditure attributable to
the software development and has demonstrated its intention
to complete and use the software. Internally developed software
is amortised on a straight-line basis over its estimated useful life
of between three and eight years.
4. Acquired intangible assets Acquired intangible assets include
customer lists, contracts and relationships, trademarks and
brands, publishing rights, content, technology and software rights.
These assets are capitalised on acquisition at cost and included in
intangible assets. Intangible assets acquired in material business
combinations are capitalised at their fair value as determined by
an independent valuer. Intangible assets are amortised over their
estimated useful lives of between two and 20 years, using an
amortisation method that reflects the pattern of their consumption.
5. Pre-publication assets Pre-publication assets represent direct
costs incurred in the development of educational programmes
and titles prior to their publication. These costs are recognised as
current intangible assets where the title will generate probable
future economic benefits and costs can be measured reliably.
Pre-publication assets are amortised upon publication of the
title over estimated economic lives of five years or less, being an
estimate of the expected operating lifecycle of the title, with
a higher proportion of the amortisation taken in the earlier years.
The investment in pre-publication assets has been disclosed as
part of cash generated from operations in the cash flow statement
(see note 33).
The assessment of the recoverability of pre-publication assets
involve a significant degree of judgement based on historical trends
and management estimation of future potential sales. An incorrect
amortisation profile could result in excess amounts being carried
forward as intangible assets that would otherwise have been
written off to the income statement in an earlier period.
Reviews are performed regularly to estimate recoverability of
pre-publication assets. The carrying amount of pre-publication
assets is set out in note 20.
f. Other financial assets
Other financial assets, designated as available for sale investments,
are non-derivative financial assets measured at estimated fair
value. Changes in the fair value are recorded in equity in the fair
value reserve. On the subsequent disposal of the asset, the net
fair value gains or losses are taken to the income statement.
g. Inventories
Inventories are stated at the lower of cost and net realisable value.
Cost is determined using the first in first out (FIFO) method. The cost
of finished goods and work in progress comprises raw materials,
direct labour, other direct costs and related production overheads.
Net realisable value is the estimated selling price in the ordinary
course of business, less estimated costs necessary to make the
sale. Provisions are made for slow-moving and obsolete stock.
h. Royalty advances
Advances of royalties to authors are included within trade and other
receivables when the advance is paid less any provision required to
adjust the advance to its net realisable value. The realisable value
of royalty advances relies on a degree of management judgement in
determining the profitability of individual author contracts. If the
estimated realisable value of author contracts is overstated, this
will have an adverse effect on operating profits as these excess
amounts will be written off.
The recoverability of royalty advances is based upon an annual
detailed management review of the age of the advance, the
future sales projections for new authors and prior sales history
of repeat authors.
The royalty advance is expensed at the contracted or effective
royalty rate as the related revenues are earned. Royalty advances
which will be consumed within one year are held in current assets.
Royalty advances which will be consumed after one year are held
in non-current assets.
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
129
1. Accounting policies continued
i. Cash and cash equivalents
Cash and cash equivalents in the cash flow statement include cash
in hand, deposits held on call with banks, other short-term highly
liquid investments with original maturities of three months or less,
and bank overdrafts. Bank overdrafts are included in borrowings
in current liabilities in the balance sheet.
Short-term deposits and marketable securities with maturities
of greater than three months do not qualify as cash and cash
equivalents and are reported as financial assets. Movements on
these financial assets are classified as cash flows from financing
activities in the cash flow statement where these amounts are
used to offset the borrowings of the Group or as cash flows from
investing activities where these amounts are held to generate an
investment return.
j. Share capital
Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of new shares
or options are shown in equity as a deduction, net of tax, from
the proceeds.
Where any Group company purchases the company’s equity share
capital (treasury shares), the consideration paid, including any
directly attributable incremental costs, net of income taxes, is
deducted from equity attributable to the company’s equity holders
until the shares are cancelled, reissued or disposed of. Where
such shares are subsequently sold or reissued, any consideration
received, net of any directly attributable transaction costs and
the related income tax effects, is included in equity attributable
to the company’s equity holders.
Ordinary shares purchased under a buyback programme are
cancelled and the nominal value of the shares is transferred to a
capital redemption reserve.
k. Borrowings
Borrowings are recognised initially at fair value, which is proceeds
received net of transaction costs incurred. Borrowings are
subsequently stated at amortised cost with any difference between
the proceeds (net of transaction costs) and the redemption value
being recognised in the income statement over the period of the
borrowings using the effective interest method. Accrued interest is
included as part of borrowings. Where a debt instrument is in a fair
value hedging relationship, an adjustment is made to its carrying
value in the income statement to reflect the hedged risk.
l. Derivative financial instruments
Derivatives are recognised at fair value and remeasured at each
balance sheet date. The fair value of derivatives is determined by
using market data and the use of established estimation techniques
such as discounted cash flow and option valuation models.
Changes in the fair value of derivatives are recognised immediately
in finance income or costs. However, derivatives relating to
borrowings and certain foreign exchange contracts are designated
as part of a hedging transaction. The accounting treatment is
summarised as follows:
Typical reason
for designation
Net investment hedge
The derivative creates a
foreign currency liability
which is used to hedge
changes in the value
of a subsidiary which
transacts in that
currency.
Fair value hedges
The derivative
transforms the interest
profile on debt from
fixed rate to floating rate.
Changes in the value of
the debt as a result of
changes in interest rates
are offset by equal and
opposite changes in the
value of the derivative.
When the Group’s debt
is swapped to floating
rates, the contracts used
are designated as fair
value hedges.
Reporting of gains
and losses on effective
portion of the hedge
Reporting of gains and
losses on disposal
On disposal, the
accumulated value
of gains and losses
reported in other
comprehensive income
is transferred to the
income statement.
If the debt and
derivative are disposed
of, the value of the
derivative and the debt
(including the fair value
adjustment) are reset
to zero. Any resultant
gain or loss is
recognised in
finance income or
finance costs.
Recognised in other
comprehensive
income.
Gains and losses
on the derivative
are reported in finance
income or finance
costs. However, an
equal and opposite
change is made to the
carrying value of the
debt (a ‘fair value
adjustment’) with the
benefit/cost reported
in finance income or
finance costs. The net
result should be a zero
charge on a perfectly
effective hedge.
Non-hedge accounted contracts
No hedge accounting
applies.
These are not designated
as hedging instruments.
Typically these are short-
term contracts to convert
debt back to fixed rates
or foreign exchange
contracts where a
natural offset exists.
m. Taxation
Current tax is recognised at the amounts expected to be paid
or recovered under the tax rates and laws that have been enacted
or substantively enacted at the balance sheet date.
Deferred income tax is provided, using the balance sheet liability
method, on temporary differences arising between the tax bases
of assets and liabilities and their carrying amounts. Deferred income
tax is determined using tax rates and laws that have been enacted
or substantively enacted by the balance sheet date and are
expected to apply when the related deferred tax asset is realised
or the deferred income tax liability is settled.
Deferred tax assets are recognised to the extent that it is probable
that future taxable profit will be available against which the
temporary differences can be utilised.
Deferred income tax is provided in respect of the undistributed
earnings of subsidiaries, associates and joint ventures other than
where it is intended that those undistributed earnings will not be
remitted in the foreseeable future.
Section 5 Financial statements 130
Notes to the consolidated financial statements
1. Accounting policies continued
m. Taxation continued
Current and deferred tax are recognised in the income statement,
except when the tax relates to items charged or credited directly
to equity or other comprehensive income, in which case the tax
is also recognised in equity or other comprehensive income.
The Group is subject to income taxes in numerous jurisdictions.
Significant judgement is required in determining the estimates
in relation to the worldwide provision for income taxes. There
are many transactions and calculations for which the ultimate tax
determination is uncertain during the ordinary course of business.
The Group recognises tax provisions when it is considered probable
that there will be a future outflow of funds to a tax authority.
The provisions are based on management’s best judgement of the
application of tax legislation and best estimates of future settlement
amounts (see note 7). Where the final tax outcome of these matters
is different from the amounts that were initially recorded, such
differences will impact the income tax and deferred tax provisions
in the period in which such determination is made.
Deferred tax assets and liabilities require management judgement
in determining the amounts to be recognised. In particular,
significant judgement is used when assessing the extent to which
deferred tax assets should be recognised with consideration given
to the timing and level of future taxable income together with any
future tax planning strategies (see note 13).
n. Employee benefits
1. Pensions The retirement benefit asset and obligation recognised
in the balance sheet represents the net of the present value of the
defined benefit obligation and the fair value of plan assets at the
balance sheet date. The defined benefit obligation is calculated
annually by independent actuaries using the projected unit credit
method. The present value of the defined benefit obligation is
determined by discounting estimated future cash flows using
yields on high-quality corporate bonds which have terms to
maturity approximating the terms of the related liability.
When the calculation results in a potential asset, the recognition
of that asset is limited to the asset ceiling – that is the present value
of any economic benefits available in the form of refunds from the
plan or a reduction in future contributions. Management uses
judgement to determine the level of refunds available from the
plan in recognising an asset.
The determination of the pension cost and defined benefit
obligation of the Group’s defined benefit pension schemes depends
on the selection of certain assumptions, which include the discount
rate, inflation rate, salary growth and longevity (see note 25).
Obligations for contributions to defined contribution pension
plans are recognised as an operating expense in the income
statement as incurred.
2. Other post-retirement obligations The expected costs of post-
retirement medical and life assurance benefits are accrued over
the period of employment, using a similar accounting methodology
as for defined benefit pension obligations. The liabilities and costs
relating to significant other post-retirement obligations are assessed
annually by independent qualified actuaries.
3. Share-based payments The fair value of options or shares granted
under the Group’s share and option plans is recognised as an
employee expense after taking into account the Group’s best
estimate of the number of awards expected to vest. Fair value is
measured at the date of grant and is spread over the vesting period
of the option or share. The fair value of the options granted is
measured using an option model that is most appropriate to the
award. The fair value of shares awarded is measured using the
share price at the date of grant unless another method is more
appropriate. Any proceeds received are credited to share capital
and share premium when the options are exercised.
o. Provisions Provisions are recognised if the Group has a present
legal or constructive obligation as a result of past events, it is more
likely than not that an outflow of resources will be required to settle
the obligation and the amount can be reliably estimated. Provisions
are discounted to present value where the effect is material.
The Group recognises a provision for deferred consideration.
Where this is contingent on future performance or a future event,
judgement is exercised in establishing the fair value.
The Group recognises a provision for onerous lease contracts when
the expected benefits to be derived from a contract are less than
the unavoidable costs of meeting the obligations under the contract.
The provision is based on the present value of future payments for
surplus leased properties under non-cancellable operating leases,
net of estimated sub-leasing income.
p. Revenue recognition
The Group’s revenue streams are courseware, assessments and
services. Courseware includes curriculum materials provided in
book form and/or via access to digital content. Assessments
includes test development, processing and scoring services
provided to governments, educational institutions, corporations
and professional bodies. Services includes the operation of schools,
colleges and universities, including sistemas in Brazil and English
language teaching centres around the world as well as the provision
of online learning services in partnership with universities and other
academic institutions.
Actuarial gains and losses arising from experience adjustments and
changes in actuarial assumptions are charged or credited to equity
in other comprehensive income in the period in which they arise.
Revenue comprises the fair value of the consideration received
or receivable for the sale of goods and services net of sales taxes,
rebates and discounts, and after eliminating sales within the Group.
The service cost, representing benefits accruing over the year, is
included in the income statement as an operating cost. Net interest
is calculated by applying the discount rate to the net defined benefit
obligation and is presented as finance costs or finance income.
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
131
1. Accounting policies continued
q. Leases
p. Revenue recognition continued
Revenue from the sale of books is recognised when title passes.
A provision for anticipated returns is made based primarily on
historical return rates, customer buying patterns and retailer
behaviours including stock levels (see note 22). If these estimates do
not reflect actual returns in future periods then revenues could be
understated or overstated for a particular period.
Revenue from the sale of off-the-shelf software is recognised on
delivery or on installation of the software where that is a condition
of the contract. In certain circumstances, where installation is
complex, revenue is recognised when the customer has completed
their acceptance procedures. Where software is provided under
a term licence, revenue is recognised on a straight-line basis over
the period of the licence.
Revenue from the provision of services to academic institutions,
such as programme development, student acquisition, education
technology and student support services, is recognised as
performance occurs. Revenue from multi-year contractual
arrangements, such as contracts to process qualifying tests for
individual professions and government departments, is recognised
as performance occurs. The assumptions, risks and uncertainties
inherent to long-term contract accounting can affect the amounts
and timing of revenue and related expenses reported. Certain of
these arrangements, either as a result of a single service spanning
more than one reporting period or where the contract requires the
provision of a number of services that together constitute a single
project, are treated as long-term contracts with revenue recognised
on a percentage of completion basis. Percentage of completion is
calculated on a cost basis using the proportion of the total estimated
costs incurred to date. Losses on contracts are recognised in the
period in which the loss first becomes foreseeable. Contract losses
are determined to be the amount by which estimated total costs
of the contract exceed the estimated total revenues that will
be generated.
Where a contractual arrangement consists of two or more separate
elements that can be provided to customers either on a stand-alone
basis or as an optional extra, such as the provision of supplementary
materials or online access with textbooks and multiple deliverables
within testing or service contracts, revenue is recognised for each
element as if it were an individual contractual arrangement. This
requires judgement regarding the identification of the individual
elements as well as the estimation of its relative fair value.
On certain contracts, where the Group acts as agent, only
commissions and fees receivable for services rendered are
recognised as revenue. Any third-party costs incurred on behalf
of the principal that are rechargeable under the contractual
arrangement are not included in revenue.
Income from recharges of freight and other activities which are
incidental to the normal revenue-generating activities is included
in other income.
Leases of property, plant and equipment where the Group has
substantially all the risks and rewards of ownership are classified as
finance leases. Finance leases are capitalised at the commencement
of the lease at the lower of the fair value of the leased property
and the present value of the minimum lease payments. Each lease
payment is allocated between the liability and finance charges
to achieve a constant rate on the finance balance outstanding.
The corresponding rental obligations, net of finance charges, are
included in financial liabilities – borrowings. The interest element of
the finance cost is charged to the income statement over the lease
period to produce a constant periodic rate of interest on the
remaining balance of the liability for each period. The property,
plant and equipment acquired under finance leases are depreciated
over the shorter of the useful life of the asset or the lease term.
Leases where a significant portion of the risks and rewards of
ownership are retained by the lessor are classified as operating
leases by the lessee. Payments made under operating leases (net of
any incentives received from the lessor) are charged to the income
statement on a straight-line basis over the period of the lease.
r. Dividends
Final dividends are recorded in the Group’s financial statements
in the period in which they are approved by the company’s
shareholders. Interim dividends are recorded when paid.
s. Discontinued operations
A discontinued operation is a component of the Group’s business
that represents a separate major line of business or geographical
area of operations that has been disposed of or meets the criteria
to be classified as held for sale.
Discontinued operations are presented in the income statement
as a separate line and are shown net of tax.
t. Assets and liabilities held for sale
Assets and liabilities are classified as held for sale and stated at the
lower of carrying amount and fair value less costs to sell if it is highly
probable that the carrying amount will be recovered principally
through a sale transaction rather than through continuing use.
No depreciation is charged in respect of non-current assets
classified as held for sale. Amounts relating to non-current assets
and liabilities held for sale are classified as discontinued operations
in the income statement where appropriate.
u. Trade receivables
Trade receivables are stated at fair value after provision for bad and
doubtful debts and anticipated future sales returns (see also note 1p).
Section 5 Financial statements 132
Notes to the consolidated financial statements
2. Segment information
The primary segments for management and reporting are geographies as outlined below. In addition, the Group separately discloses the
results from the Penguin Random House associate.
The chief operating decision-maker is the Pearson executive.
North America Courseware, Assessments and Services businesses in the US and Canada.
Core Courseware, Assessments and Services businesses in more mature markets including UK, Australia and Italy.
Growth Courseware, Assessments and Services businesses in emerging markets including Brazil, China, India and South Africa.
For more detail on the services and products included in each business segment refer to the strategic report.
All figures in £ millions
Sales
Adjusted operating profit
Cost of major restructuring
Intangible charges
Other net gains and losses
Impact of US tax reform
Operating profit
Finance costs
Finance income
Profit before tax
Income tax
Profit for the year
Segment assets
Joint ventures
Associates
Total assets
Other segment items
Share of results of joint ventures
and associates
Capital expenditure
Pre-publication investment
Depreciation
Amortisation
Impairment
Core
Growth
Penguin
Random
House
Corporate
Notes
North
America
2,929
394
(60)
(89)
(3)
–
242
815
50
(11)
(12)
–
–
27
769
38
(8)
(37)
35
–
28
6
6
7
12
12
12
10, 11
20
10
11, 20
11
4,116
1,914
667
–
4
–
3
3
–
4,120
1,917
670
5
162
218
56
348
–
1
35
84
13
103
–
1
43
59
21
110
–
–
94
–
(28)
96
(8)
154
–
–
388
388
71
–
–
–
–
–
–
–
–
–
–
–
–
2017
Group
4,513
576
(79)
(166)
128
(8)
451
(110)
80
421
(13)
408
793
7,490
–
–
3
395
793
7,888
–
–
–
–
–
–
78
240
361
90
561
–
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
2. Segment information continued
All figures in £ millions
Sales
Adjusted operating profit
Cost of major restructuring
Intangible charges
Other net gains and losses
Operating (loss)/profit
Finance costs
Finance income
Loss before tax
Income tax
Loss for the year
Segment assets
Joint ventures
Associates
Total assets
Other segment items
Share of results of joint ventures
and associates
Capital expenditure
Pre-publication investment
Depreciation
Amortisation
Impairment
Notes
North
America
Core
Growth
Penguin
Random
House
Corporate
2,981
420
(172)
(2,684)
(12)
(2,448)
803
57
(62)
(16)
(12)
(33)
4,859
1,461
–
1
–
4
4,860
1,465
6
6
7
12
12
12
10, 11
20
10
11, 20
(1)
153
235
56
394
11
2,548
1
42
92
12
109
–
768
29
(95)
(33)
(1)
(100)
859
2
–
861
(1)
51
68
27
116
–
–
129
(9)
(36)
–
84
–
–
–
–
–
–
–
–
1,240
1,240
1,640
–
–
1,640
98
–
–
–
–
–
–
–
–
–
–
–
133
2016
Group
4,552
635
(338)
(2,769)
(25)
(2,497)
(97)
37
(2,557)
222
(2,335)
8,819
2
1,245
10,066
97
246
395
95
619
2,548
There were no material inter-segment sales in either 2017 or 2016.
For additional detailed information on the calculation of adjusted
operating profit as shown in the above tables, see p192-195
(Financial key performance indicators).
date relating to this new programme were £79m at the end of 2017
and related to cost efficiencies in higher education and enabling
functions together with further rationalisation of the property
portfolio. The costs of this new programme have also been excluded
from adjusted operating profit (see note 3).
Adjusted operating profit is shown in the above tables as it is the
key financial measure used by management to evaluate the
performance of the Group and allocate resources to business
segments. The measure also enables investors to more easily,
and consistently, track the underlying operational performance of
the Group and its business segments by separating out those items
of income and expenditure relating to acquisition and disposal
transactions and major restructuring programmes.
Cost of major restructuring In January 2016, the Group announced
that it was embarking on a restructuring programme to simplify
the business, reduce costs and position the Group for growth in its
major markets. The costs of this programme of £338m in 2016 were
significant enough to exclude from the adjusted operating profit
measure so as to better highlight the underlying performance.
These costs included costs associated with headcount reductions,
property rationalisation and closure or exit from certain systems,
platforms, products and supplier and customer relationships.
A new programme of restructuring, announced in May 2017, to run
between 2017 and 2019, began in the second half of 2017 and is
expected to drive further significant cost savings. Costs incurred to
Intangible charges These represent charges in respect of goodwill,
including impairment, and intangible assets acquired through
business combinations and the direct costs of acquiring those
businesses. These charges are excluded as they reflect past
acquisition activity and do not necessarily reflect the current year
performance of the Group. In 2016, intangible charges included an
impairment of goodwill in the Group’s North America business of
£2,548m (see note 11). There was no impairment in 2017.
Other net gains and losses These represent profits and losses on the
sale of subsidiaries, joint ventures, associates and other financial
assets and are excluded from adjusted operating profit as they
distort the performance of the Group as reported on a statutory
basis. Other net gains of £128m in 2017 largely relate to the sale of
the test preparation business in China which resulted in a profit on
sale of £44m and the part sale of the Group’s share in Penguin
Random House which resulted in a profit of £96m (see note 31).
In 2016, the net losses in the Core segment mainly relate to the
closure of the Group’s English language schools in Germany and in
the North America segment relate to the sale of the Pearson English
Business Solutions business.
Section 5 Financial statements 134
Notes to the consolidated financial statements
2. Segment information continued
Impact of US tax reform In 2017, as a result of US tax reform, the
Group’s share of profit from associates was adversely impacted by
£8m. This amount has been excluded from adjusted operating profit
as it is considered to be a transition adjustment that is not expected
to recur in the near future.
Corporate costs are allocated to business segments on an
appropriate basis depending on the nature of the cost and therefore
the total segment result is equal to the Group operating profit.
Segment assets, excluding corporate assets, consist of property,
plant and equipment, intangible assets, inventories, receivables,
deferred taxation and other financial assets and exclude cash
and cash equivalents and derivative assets. Corporate assets
comprise cash and cash equivalents, marketable securities and
derivative financial instruments. Capital expenditure comprises
additions to property, plant and equipment and software
(see notes 10 and 11).
Property, plant and equipment and intangible assets acquired
through business combination were £nil (2016: £10m)
(see note 30).
The following tables analyse the Group’s revenue streams.
Courseware includes curriculum materials provided in book form
and/or via access to digital content. Assessments includes test
development, processing and scoring services provided to
governments, educational institutions, corporations and
professional bodies. Services includes the operation of schools,
colleges and universities, including sistemas in Brazil and English
language teaching centres around the world as well as the provision
of online learning services in partnership with universities and
other academic institutions.
All figures in £ millions
Sales:
Courseware
School Courseware
Higher Education Courseware
English Courseware
Assessments
School and Higher Education Assessments
Clinical Assessments
Professional and English Certification
Services
School Services
Higher Education Services
English Services
North
America
Core
Growth
Group
2017
394
1,146
20
1,560
355
146
341
842
274
253
–
527
171
93
60
324
256
46
138
440
5
34
12
51
139
63
102
304
23
–
60
83
54
32
296
382
704
1,302
182
2,188
634
192
539
1,365
333
319
308
960
Total
2,929
815
769
4,513
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
2. Segment information continued
All figures in £ millions
Sales:
Courseware
School Courseware
Higher Education Courseware
English Courseware
Assessments
School and Higher Education Assessments
Clinical Assessments
Professional and English Certification
Services
School Services
Higher Education Services
English Services
135
2016
North
America
Core
Growth
Group
418
1,147
21
1,586
378
143
333
854
259
269
13
541
173
92
65
330
268
40
112
420
6
29
18
53
127
60
97
284
21
–
49
70
54
46
314
414
718
1,299
183
2,200
667
183
494
1,344
319
344
345
1,008
Total
2,981
803
768
4,552
The Group operates in the following main geographic areas:
All figures in £ millions
UK
Other European countries
US
Canada
Asia Pacific
Other countries
Total
2017
384
262
Sales
2016
393
255
Non-current assets
2017
796
128
2016
946
134
2,770
2,829
2,247
3,351
126
643
328
118
632
325
240
151
184
268
205
232
4,513
4,552
3,746
5,136
Sales are allocated based on the country in which the customer is located. This does not differ materially from the location where the order
is received. The geographical split of non-current assets is based on the subsidiary’s country of domicile. This is not materially different to
the location of the assets. Non-current assets comprise property, plant and equipment, intangible assets, investments in joint ventures and
associates and trade and other receivables.
Section 5 Financial statements 136
Notes to the consolidated financial statements
3. Restructuring costs
An analysis of restructuring costs is as follows:
All figures in £ millions
By nature:
Product costs
Employee costs
Depreciation and amortisation
Property and facilities
Technology and communications
Professional and outsourced services
General and administrative costs
Total restructuring – operating expenses
Share of associate restructuring
Total
2017
2016
15
11
13
24
2
12
2
79
–
79
32
139
29
43
7
31
48
329
9
338
In January 2016, the Group announced that it was embarking on a restructuring programme to simplify the business, reduce costs and
position the Group for growth in its major markets. The costs of this programme in 2016 were significant enough to exclude from the adjusted
operating profit measure so as to better highlight the underlying performance (see note 8). A new programme of restructuring, the 2017-2019
restructuring programme announced in May 2017, began in the second half of 2017 and is expected to drive further significant cost savings.
The costs of this new programme have also been excluded from adjusted operating profit.
4. Operating expenses
All figures in £ millions
By function:
Cost of goods sold
Operating expenses
Distribution costs
Selling, marketing and product development costs
Administrative and other expenses
Restructuring costs
Other income
Total net operating expenses
Other net gains and losses
Impairment of intangible assets
Total
Notes
2017
2016
2,066
2,093
84
896
88
908
1,207
1,240
79
(64)
2,202
(128)
–
4,140
329
(85)
2,480
25
2,548
7,146
3
11
Included in other income is service fee income from Penguin Random House of £3m (2016: £4m). Included in administrative and other
expenses are research and efficacy costs of £14m (2016: £23m). In addition to the restructuring costs shown above, there were restructuring
costs in Penguin Random House of £nil (2016: £9m).
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
4. Operating expenses continued
All figures in £ millions
By nature:
Royalties expensed
Other product costs
Employee benefit expense
Contract labour
Employee-related expense
Promotional costs
Depreciation of property, plant and equipment
Amortisation of intangible assets – pre-publication
Amortisation of intangible assets – software
Amortisation of intangible assets – other
Impairment of intangible assets
Property and facilities
Technology and communications
Professional and outsourced services
Other general and administrative costs
Costs capitalised to intangible assets
Other net gains and losses
Other income
Total
During the year the Group obtained the following services from the Group’s auditors:
All figures in £ millions
The audit of parent company and consolidated financial statements
The audit of the company’s subsidiaries
Total audit fees
Other assurance services
Other non-audit services
Total other services
Total non-audit services
Total
Reconciliation between audit and non-audit service fees is shown below:
All figures in £ millions
Group audit fees including fees for attestation under section 404 of the Sarbanes-Oxley Act
Non-audit fees
Total
137
Notes
2017
2016
246
564
264
616
5
1,805
1,888
10
20
11
11
11
152
127
229
90
338
85
138
–
202
218
322
140
(324)
(128)
(64)
206
122
217
95
350
84
185
2,548
243
188
378
140
(318)
25
(85)
4,140
7,146
2017
2016
4
2
6
1
1
2
2
8
5
2
7
1
1
2
2
9
2017
2016
6
2
8
7
2
9
Fees for attestation under section 404 of the Sarbanes-Oxley Act are allocated between fees payable for the audits of consolidated and
subsidiary accounts.
Included in non-audit fees are amounts related to carve-out audits for disposals of £1m (2016: £1m).
Section 5 Financial statements 138
Notes to the consolidated financial statements
5. Employee information
All figures in £ millions
Employee benefit expense
Wages and salaries (including termination costs)
Social security costs
Share-based payment costs
Retirement benefits – defined contribution plans
Retirement benefits – defined benefit plans
Other post-retirement medical benefits
Total
Notes
2017
2016
1,567
130
1,661
124
33
57
19
(1)
22
67
16
(2)
1,805
1,888
26
25
25
25
The details of the emoluments of the Directors of Pearson plc are shown in the report on Directors’ remuneration.
Average number employed
Employee numbers
North America
Core
Growth
Other
Total
6. Net finance costs
All figures in £ millions
Interest payable
Net foreign exchange losses
Finance costs associated with transactions
Derivatives not in a hedge relationship
Finance costs
Interest receivable
Net finance income in respect of retirement benefits
Net foreign exchange gains
Derivatives not in a hedge relationship
Derivatives in a hedge relationship
Finance income
Net finance costs
Analysed as:
Net interest payable reflected in adjusted earnings
Other net finance income/(costs)
Total net finance costs
Notes
25
2017
2016
16,295
16,841
5,291
8,268
485
5,664
9,868
346
30,339
32,719
2017
(99)
–
(6)
(5)
(110)
20
3
44
12
1
80
2016
(74)
(21)
–
(2)
(97)
15
11
1
10
–
37
(30)
(60)
(79)
49
(30)
(59)
(1)
(60)
Included in interest receivable is £1m (2016: £1m) of interest receivable from related parties. There was a net movement of £1m on fair value
hedges in 2017 (2016: £nil), comprising a gain of £37m (2016: loss of £4m) on the underlying bonds, offset by a loss of £36m (2016: gain of
£4m) on the related derivative financial instruments.
For further information on adjusted measures above, see note 8.
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
7. Income tax
All figures in £ millions
Current tax
Charge in respect of current year
Adjustments in respect of prior years
Total current tax charge
Deferred tax
In respect of temporary differences
Other adjustments in respect of prior years
Total deferred tax credit
Total tax (charge)/credit
139
Notes
2017
2016
(121)
(2)
(123)
96
14
110
(13)
(66)
27
(39)
277
(16)
261
222
13
The adjustments in respect of prior years in both 2017 and 2016 primarily arise from revising the previous year’s reported tax provision to
reflect the tax returns subsequently filed. This results in a change between deferred and current tax as well as an absolute benefit to the
total tax charge.
The tax on the Group’s profit/(loss) before tax differs from the theoretical amount that would arise using the UK tax rate as follows.
Information for 2016 has been re-presented to give additional disclosure.
All figures in £ millions
Profit/(loss) before tax
Tax calculated at UK rate (2017: 19.25%, 2016: 20%)
Effect of overseas tax rates
Joint venture and associate income reported net of tax
Intangible impairment not subject to tax
Intra-group financing benefit
Movement in provisions for tax uncertainties
Impact of US tax reform
Net expense not subject to tax
Gains and losses on sale of businesses not subject to tax
Utilisation of previously unrecognised tax losses and credits
Unrecognised tax losses
Adjustments in respect of prior years
Total tax (charge)/credit
UK
Overseas
Total tax (charge)/credit
Tax rate reflected in earnings
2017
421
(81)
15
15
–
26
49
(1)
(39)
8
(1)
(16)
12
(13)
(36)
23
(13)
2016
(2,557)
511
424
19
(722)
34
(37)
–
(8)
15
–
(25)
11
222
46
176
222
3.1%
8.7%
The impact of US tax reform includes a benefit from revaluation of deferred tax balances to the reduced federal rate of £5m and a
repatriation tax charge of £6m. The Group continues to analyse the detail of new legislation and this may result in revisions to these impacts.
Factors which may affect future tax charges include changes in tax legislation, transfer pricing regulations, the level and mix of profitability
in different countries, and settlements with tax authorities.
The movement in provisions for tax uncertainties primarily reflects releases due to the expiry of relevant statutes of limitation. The current
tax liability of £231m (2016: £224m) includes £280m (2016: £322m) of provisions for tax uncertainties principally in respect of a number
of issues in the US, the UK and China. The issues provided for include the allocation between territories of proceeds of historic business
disposals, and the potential disallowance of intra-group recharges and interest expense. The Group is currently under audit in a number
of countries, and the timing of any resolution of these audits is uncertain. Of the balance of £280m, £38m relates to 2013 and earlier and is
mostly under audit. In most countries tax years up to and including 2013 are now statute barred from examination by tax authorities. Of the
remaining balance, £70m relates to 2014, £86m to 2015, £57m to 2016 and £29m to 2017. If relevant enquiry windows pass with no audit,
management believes it is reasonably possible that provision levels will reduce by an estimated £60m within the next 12 months.
Section 5 Financial statements 140
Notes to the consolidated financial statements
7. Income tax continued
In 2016 the Group impaired US goodwill (see note 11). The majority of this impairment charge is not deductible for tax purposes.
The tax rate reflected in adjusted earnings is calculated as follows:
All figures in £ millions
Profit/(loss) before tax
Adjustments:
Cost of major restructuring
Other net gains and losses
Intangible charges
Other net finance (income)/costs
Impact of US tax reform
Adjusted profit before tax
Total tax (charge)/credit
Adjustments:
Tax benefit on cost of major restructuring
Tax charge/(benefit) on other net gains and losses
Tax benefit on intangible charges
Tax charge on other net finance (income)/costs
Impact of US tax reform
Tax amortisation benefit on goodwill and intangibles
Adjusted income tax charge
Tax rate reflected in adjusted earnings
For further information on adjusted measures above, see note 8.
The tax (charge)/benefit recognised in other comprehensive income is as follows:
All figures in £ millions
Net exchange differences on translation of foreign operations
Fair value gain on other financial assets
Remeasurement of retirement benefit obligations
2017
421
79
(128)
166
(49)
8
497
2016
(2,557)
338
25
2,769
1
–
576
(13)
222
(26)
20
(85)
9
1
39
(55)
(84)
(14)
(255)
–
–
36
(95)
11.1%
16.5%
2017
2016
9
(4)
(42)
(37)
(5)
–
58
53
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
141
8. Earnings per share
Basic
Basic earnings per share is calculated by dividing the profit attributable to equity shareholders of the company by the weighted average
number of ordinary shares in issue during the year, excluding ordinary shares purchased by the company and held as treasury shares.
Diluted
Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares to take account of all dilutive potential
ordinary shares and adjusting the profit attributable, if applicable, to account for any tax consequences that might arise from conversion of
those shares.
All figures in £ millions
Earnings/(loss) for the year
Non-controlling interest
Earnings/(loss) attributable to equity holders of the company
Weighted average number of shares (millions)
Effect of dilutive share options (millions)
Weighted average number of shares (millions) for diluted earnings
Earnings/(loss) per share
Basic
Diluted
Adjusted
For additional detailed information on the calculation of adjusted
measures, see p192-195 (Financial key performance indicators).
See note 2 for details of specific items excluded from or included
in adjusted operating profit in 2017 and 2016.
In order to show results from operating activities on a consistent
basis, an adjusted earnings per share is presented. The Group’s
definition of adjusted earnings per share may not be comparable
with other similarly titled measures reported by other companies.
Adjusted earnings is a non-GAAP (non-statutory) financial measure
and is included as it is a key financial measure used by management
to evaluate the performance of the Group and allocate resources
to business segments. The measure also enables investors to
more easily, and consistently, track the underlying operational
performance of the Group and its business segments by separating
out those items of income and expenditure relating to acquisition
and disposal transactions, and major restructuring programmes.
Adjusted earnings per share is calculated as adjusted earnings
divided by the weighted average number of shares in issue on
an undiluted basis. The following items are excluded from or
included in adjusted earnings:
Cost of major restructuring In January 2016, the Group announced
that it was embarking on a restructuring programme to simplify
the business, reduce costs and position the Group for growth in its
major markets. The costs of this programme in 2016 were significant
enough to exclude from the adjusted operating profit measure so as
to better highlight the underlying performance. A new programme
of restructuring, announced in May 2017, began in the second half
of 2017 and is expected to drive further significant cost savings.
The costs of this new programme have also been excluded from
adjusted operating profit. See note 3 for an analysis of these costs.
2017
408
(2)
406
813.4
0.3
813.7
2016
(2,335)
(2)
(2,337)
814.8
–
814.8
49.9p
49.9p
(286.8)p
(286.8)p
Other net gains and losses These represent profits and losses on the
sale of subsidiaries, joint ventures, associates and other financial
assets and are excluded from adjusted earnings as they distort the
performance of the Group as reported on a statutory basis.
Intangible charges These represent charges in respect of goodwill,
including impairment, and intangible assets acquired through
business combinations and the direct costs of acquiring those
businesses. These charges are excluded as they reflect past acquisition
activity and do not necessarily reflect the current year performance
of the Group.
Other net finance income/costs These include finance costs in
respect of retirement benefits, finance costs of deferred
consideration and foreign exchange and other gains and losses.
Finance income relating to retirement benefits is excluded as
management does not believe that the consolidated income
statement presentation under IAS 19 reflects the economic
substance of the underlying assets and liabilities. Finance costs
associated with transactions are excluded as these relate to future
earn-outs or acquisition expenses and are not part of the underlying
financing. Foreign exchange and other gains and losses are excluded
as they represent short-term fluctuations in market value and are
subject to significant volatility. Other gains and losses may not be
realised in due course as it is normally the intention to hold the
related instruments to maturity. In 2017 and 2016, the foreign
exchange gains and losses largely relate to foreign exchange
differences on unhedged US dollar and euro loans, cash and
cash equivalents.
Section 5 Financial statements 142
Notes to the consolidated financial statements
8. Earnings per share continued
Adjusted continued
Impact of US tax reform In 2017, as a result of US tax reform, the Group’s share of profit from associates was adversely impacted by £8m.
This amount has been excluded from adjusted earnings as it is considered to be a transition adjustment that is not expected to recur in
the near future.
Tax Tax on the above items is excluded from adjusted earnings. Where relevant the Group also excludes the benefit from recognising
previously unrecognised pre-acquisition and capital losses. As a result of US tax reform in 2017, the reported tax charge on a statutory basis
includes a benefit from the revaluation of deferred tax balances to the reduced federal rate of £5m and a repatriation tax charge of £6m.
This amount has been excluded from adjusted earnings as it is considered to be a transition adjustment that is not expected to recur in the
near future. The tax benefit from tax deductible goodwill and intangibles is added to the adjusted income tax charge as this benefit more
accurately aligns the adjusted tax charge with the expected rate of cash tax payments.
Non-controlling interest Non-controlling interest for the above items is excluded from adjusted earnings.
The following tables reconcile the statutory income statement to the adjusted income statement.
Statutory
income
statement
Cost of
major
restructuring
Other net
gains and
losses
Intangible
charges
Other net
finance
income/
costs
Impact of US
tax reform
Tax
amortisation
benefit
Adjusted
income
statement
2017
451
(30)
421
(13)
408
(2)
406
79
–
79
(26)
53
–
53
(128)
–
(128)
20
(108)
–
(108)
166
–
166
(85)
81
–
81
–
(49)
(49)
9
(40)
–
(40)
8
–
8
1
9
–
9
–
–
–
39
39
–
39
All figures in £ millions
Operating profit/(loss)
Net finance costs
Profit/(loss) before tax
Income tax
Profit/(loss) for the year
Non-controlling interest
Earnings/(loss)
Weighted average number of shares (millions)
813.4
Weighted average number of shares (millions)
for diluted earnings
Earnings per share (basic)
Earnings per share (diluted)
813.7
49.9p
49.9p
576
(79)
497
(55)
442
(2)
440
813.4
813.7
54.1p
54.1p
2016
All figures in £ millions
Operating (loss)/profit
Net finance costs
(Loss)/profit before tax
Income tax
(Loss)/profit for the year
Non-controlling interest
(Loss)/earnings
Weighted average number of shares (millions)
Weighted average number of shares (millions)
for diluted earnings
(Loss)/earnings per share (basic)
(Loss)/earnings per share (diluted)
Statutory
income
statement
Cost of
major
restructuring
Other net
gains and
losses
Intangible
charges
Other net
finance
income/
costs
Impact of US
tax reform
Tax
amortisation
benefit
Adjusted
income
statement
(2,497)
(60)
(2,557)
222
(2,335)
(2)
(2,337)
814.8
814.8
(286.8)p
(286.8)p
338
–
338
(84)
254
–
254
25
–
25
(14)
11
–
11
2,769
–
2,769
(255)
2,514
–
2,514
–
1
1
–
1
–
1
–
–
–
–
–
–
–
–
–
–
36
36
–
36
635
(59)
576
(95)
481
(2)
479
814.8
814.8
58.8p
58.8p
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
9. Dividends
All figures in £ millions
Final paid in respect of prior year 34.0p (2016: 34.0p)
Interim paid in respect of current year 5.0p (2016: 18.0p)
143
2017
277
41
318
2016
277
147
424
The Directors are proposing a final dividend in respect of the financial year ended 31 December 2017 of 12.0p per share which will absorb an
estimated £93m of shareholders’ funds. It will be paid on 11 May 2018 to shareholders who are on the register of members on 6 April 2018.
These financial statements do not reflect this dividend.
10. Property, plant and equipment
All figures in £ millions
Cost
At 1 January 2016
Exchange differences
Additions
Disposals
Disposal through business disposal
Reclassifications
At 31 December 2016
Exchange differences
Additions
Disposals
Disposal through business disposal
Reclassifications
Transfer to intangible assets
Transfer to assets classified as held for sale
At 31 December 2017
All figures in £ millions
Depreciation
At 1 January 2016
Exchange differences
Charge for the year
Disposals
Reclassifications
At 31 December 2016
Exchange differences
Charge for the year
Disposals
Disposal through business disposal
Transfer to assets classified as held for sale
At 31 December 2017
Carrying amounts
At 1 January 2016
At 31 December 2016
At 31 December 2017
Land and
buildings
Plant and
equipment
Assets in
course of
construction
359
44
26
(26)
(1)
(4)
398
(20)
26
(13)
(11)
5
–
(55)
330
508
83
59
(100)
(2)
12
560
(29)
40
(34)
(5)
8
(11)
(2)
527
22
2
4
–
–
(8)
20
(2)
24
–
–
(13)
–
–
29
Land and
buildings
Plant and
equipment
Assets in
course of
construction
(192)
(26)
(34)
22
1
(229)
12
(35)
9
6
40
(377)
(62)
(61)
95
(1)
(406)
23
(55)
26
3
1
(197)
(408)
167
169
133
131
154
119
–
–
–
–
–
–
–
–
–
–
–
–
22
20
29
Total
889
129
89
(126)
(3)
–
978
(51)
90
(47)
(16)
–
(11)
(57)
886
Total
(569)
(88)
(95)
117
–
(635)
35
(90)
35
9
41
(605)
320
343
281
Section 5 Financial statements 144
Notes to the consolidated financial statements
10. Property, plant and equipment continued
Depreciation expense of £23m (2016: £21m) has been included in the income statement in cost of goods sold and £67m (2016: £74m)
in operating expenses.
The Group leases certain equipment under a number of finance lease agreements. The net carrying amount of leased plant and
equipment included within property, plant and equipment was £9m (2016: £10m).
11. Intangible assets
All figures in £ millions
Cost
At 1 January 2016
Exchange differences
Impairment
Additions – internal development
Additions – purchased
Disposals
Acquisition through business combination
Disposal through business disposal
Transfer to intangible assets – pre-publication
At 31 December 2016
Exchange differences
Impairment
Additions – internal development
Additions – purchased
Disposals
Disposal through business disposal
Transfer from property, plant and equipment
Transfer to assets classified as held for sale
At 31 December 2017
Acquired
customer
lists,
contracts and
relationships
Acquired
trademarks
and brands
Acquired
publishing
rights
Other
intangibles
acquired
Goodwill
Software
4,134
752
(2,548)
–
–
–
3
–
–
2,341
(148)
–
–
–
–
–
–
(163)
2,030
619
85
–
132
25
(49)
–
–
(14)
798
(46)
–
133
17
(23)
(4)
11
(4)
860
157
–
–
–
(37)
–
(6)
–
974
(74)
–
–
–
–
(9)
–
(2)
882
889
281
65
180
31
–
–
–
–
7
–
–
353
(26)
–
–
–
–
(19)
–
(27)
281
–
–
–
–
–
–
–
211
(6)
–
–
–
–
–
–
(21)
184
509
135
–
–
–
–
3
(47)
–
600
(50)
–
–
–
–
(27)
–
(34)
489
Total
6,583
1,225
(2,548)
132
25
(86)
13
(53)
(14)
5,277
(350)
–
133
17
(23)
(59)
11
(251)
4,755
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
145
11. Intangible assets continued
All figures in £ millions
Amortisation
At 1 January 2016
Exchange differences
Charge for the year
Disposals
Disposal through business disposal
Transfer to intangible assets – pre-publication
At 31 December 2016
Exchange differences
Charge for the year
Disposals
Disposal through business disposal
Transfer to assets classified as held for sale
At 31 December 2017
Carrying amounts
At 1 January 2016
At 31 December 2016
At 31 December 2017
Goodwill
Acquired
customer
lists,
contracts and
relationships
Goodwill
Software
Acquired
trademarks
and brands
Acquired
publishing
rights
Other
intangibles
acquired
Total
–
–
–
–
–
–
–
–
–
–
–
–
–
(357)
(430)
(60)
(84)
38
–
2
(461)
30
(85)
21
2
–
(83)
(85)
37
6
–
(555)
43
(77)
–
8
1
(155)
(32)
(22)
–
–
–
(163)
(27)
(8)
–
–
–
(314)
(1,419)
(75)
(70)
–
47
–
(277)
(269)
75
53
2
(209)
(198)
(412)
(1,835)
13
(18)
–
18
16
4
(3)
–
–
19
36
(40)
–
22
34
126
(223)
21
50
70
(493)
(580)
(180)
(178)
(360)
(1,791)
4,134
2,341
2,030
262
337
389
430
419
309
126
144
101
17
13
6
195
188
129
5,164
3,442
2,964
The goodwill carrying value of £2,030m relates to acquisitions
completed after 1 January 1998. Prior to 1 January 1998 all
goodwill was written off to reserves on the date of acquisition.
For acquisitions completed between 1 January 1998 and
31 December 2002, no value was ascribed to intangibles other
than goodwill which was amortised over a period of up to 20 years.
On adoption of IFRS on 1 January 2003, the Group chose not to
restate the goodwill balance and at that date the balance was frozen
(i.e. amortisation ceased). If goodwill had been restated, then a
significant value would have been ascribed to other intangible
assets, which would be subject to amortisation, and the carrying
value of goodwill would be significantly lower. For acquisitions
completed after 1 January 2003, value has been ascribed to other
intangible assets which are amortised.
Other intangible assets
Other intangibles acquired include content, technology and
software rights.
Intangible assets are valued separately for each acquisition and
the primary method of valuation used is the discounted cash
flow method. The majority of acquired intangibles are amortised
using an amortisation profile based on the projected cash flows
underlying the acquisition date valuation of the intangible asset,
which generally results in a larger proportion of amortisation being
recognised in the early years of the asset’s life. The Group keeps
the expected pattern of consumption under review.
Amortisation of £17m (2016: £17m) is included in the income
statement in cost of goods sold and £206m (2016: £252m) in
operating expenses.
Section 5 Financial statements 146
Notes to the consolidated financial statements
11. Intangible assets continued
Other intangible assets continued
The range of useful economic lives for each major class of intangible asset (excluding goodwill and software) is shown below:
Class of intangible asset
Acquired customer lists, contracts and relationships
Acquired trademarks and brands
Acquired publishing rights
Other intangibles acquired
The expected amortisation profile of acquired intangible assets is shown below:
All figures in £ millions
Class of intangible asset
Acquired customer lists, contracts and relationships
Acquired trademarks and brands
Acquired publishing rights
Other intangibles acquired
2017
Useful economic life
3-20 years
2-20 years
5-20 years
2-20 years
One to
five years
Six to
ten years
More than
ten years
215
56
5
97
75
31
1
32
19
14
–
–
2017
Total
309
101
6
129
Impairment tests for cash-generating units (CGUs) containing goodwill
Impairment tests have been carried out where appropriate as described below. Goodwill was allocated to CGUs, or an aggregation of
CGUs, where goodwill could not be reasonably allocated to individual business units. Impairment reviews were conducted on these
CGUs. The recoverable amount for each unit exceeds its carrying value therefore there is no impairment in 2017. The carrying value of
the goodwill in each of the CGUs is summarised below:
All figures in £ millions
North America
Core
Growth (includes Brazil, China, India and South Africa)
Pearson VUE
Total
2017
1,013
641
–
376
2016
1,295
633
–
413
2,030
2,341
The recoverable amount of each aggregated CGU is based on fair value less costs of disposal. Goodwill is tested at least annually for
impairment. Other than goodwill there are no intangible assets with indefinite lives. The goodwill is generally denominated in the currency
of the relevant cash flows and therefore the impairment review is not materially sensitive to exchange rate fluctuations.
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
147
11. Intangible assets continued
Key assumptions
For the purpose of estimating the fair value less costs of disposal
of the CGUs, management has used an income approach based on
present value techniques. The calculations use cash flow projections
based on financial budgets approved by management covering
a five-year period, management’s best estimate about future
developments and market assumptions. The fair value less costs
of disposal measurement is categorised as Level 3 on the fair value
hierarchy. The key assumptions used by management in the fair
value less costs of disposal calculations were:
Discount rates The discount rate is based on the risk-free rate
for government bonds, adjusted for a risk premium to reflect the
increased risk in investing in equities. The risk premium adjustment
is assessed for each specific CGU. The average post-tax discount
rates range from 8.4% to 14.3%. Discount rates are lower for those
businesses which operate in more mature markets with low
inflation and higher for those operating in emerging markets
with higher inflation.
Perpetuity growth rates A perpetuity growth rate of 2.0% was
used for cash flows subsequent to the approved budget period for
CGUs operating in mature markets. This perpetuity growth rate is a
conservative rate and is considered to be lower than the long-term
historical growth rates of the underlying territories in which the
CGU operates and the long-term growth rate prospects of the
sectors in which the CGU operates. CGU growth rates between
3.0% and 6.9% were used for cash flows subsequent to the
approved budget period for CGUs operating in emerging markets
with high inflation. These growth rates are also below the long-term
historical growth rates in these markets.
The key assumptions used by management in setting the financial
budgets for the initial five-year period were as follows:
Forecast sales growth rates Forecast sales growth rates are
based on past experience adjusted for the strategic direction and
near-term investment priorities within each CGU. Key assumptions
include growth in Online Program Management, Online Blended
Learning and Professional Certification, stabilisation in UK
Qualifications and US Assessments, and ongoing pressures in
the US higher education courseware market. The five-year sales
forecasts use average nominal growth rates between 3% and 6%
for mature markets and between 5% and 14% for emerging
markets with high inflation.
Operating profits Operating profits are forecast based on historical
experience of operating margins, adjusted for the impact of changes
to product costs and cost-saving initiatives, including the impact of
the implementation of our cost efficiency programme.
Cash conversion Cash conversion is the ratio of operating cash
flow to operating profit. Management forecasts cash conversion
rates based on historical experience.
Sensitivities
The Group’s impairment review is sensitive to a change in
assumptions used, most notably the discount rates and the
perpetuity growth rates.
The carrying value of goodwill in the Growth market CGUs was
written down to £nil in 2015.
A 0.1% increase in discount rates would cause the fair value
less costs of disposal of the North America CGU to reduce
by £50m, the Core GGU by £17m and the VUE CGU by £21m.
A 0.1% reduction in perpetuity growth rates would cause the fair
value less costs of disposal of the North America CGU to reduce
by £39m, the Core CGU by £14m and the VUE CGU by £17m.
The Core CGU is highly sensitive to any reductions in short-term
cash flows, whether driven by lower sales growth, lower operating
profits or lower cash conversion. A 5% reduction in total annual
operating profits, spread evenly across all CGUs, would give rise to
an impairment of £66m in the Core CGU. An increase in discount
rates or a reduction in perpetuity growth rates would also give rise
to an impairment in the Core CGU. The North America CGU is no
longer considered to be highly sensitive to changes in impairment
assumptions, with increased headroom when compared to 2016.
2016 impairment tests
At the end of 2016, following trading in the final quarter of the year,
it became clear that the underlying issues in the US higher education
courseware business market were more severe than anticipated.
These issues related to declining student enrolments, changes in
buying patterns of students and correction of inventory levels by
distributors and bookshops. As a result, in January 2017, strategic
plans and estimates for future cash flows were revised and we
determined during the goodwill impairment review that the fair
value less costs of disposal of the North America CGU no longer
supported the carrying value of this goodwill and as a consequence
impaired goodwill by £2,548m.
Section 5 Financial statements 148
Notes to the consolidated financial statements
12. Investments in joint ventures and associates
The amounts recognised in the balance sheet are as follows:
All figures in £ millions
Associates
Joint ventures
Total
The amounts recognised in the income statement are as follows:
All figures in £ millions
Associates
Joint ventures
Total
Investment in associates
The Group has the following material associates:
Penguin Random House Ltd
Penguin Random House LLC
On 1 July 2013, Penguin Random House was formed, upon the
completion of an agreement between Pearson and Bertelsmann
to merge their respective trade publishing companies, Penguin
and Random House, with the parent companies owning 47% and
53% of the combined business respectively. On 5 October 2017,
Pearson sold a 22% stake in Penguin Random House to
Bertelsmann, retaining a 25% share (see note 31 for more
information on disposal of associates). Pearson owns its 25%
interest in Penguin Random House via 25% interests in each of the
two entities listed in the table above. Despite the separate legal
structures of the two Penguin Random House entities, Pearson
regards Penguin Random House as one combined global business.
Consequently, Pearson discloses Penguin Random House as one
single operating segment and presents disclosures related to its
interests in Penguin Random House on a combined basis.
2017
395
3
398
2016
1,245
2
1,247
2017
2016
77
1
78
98
(1)
97
Principal place
of business
Ownership
interest
Nature of
relationship
Measurement
method
UK/Global
25% See below
US
25% See below
Equity
Equity
The shareholder agreement includes protective rights for
Pearson as the minority shareholder, including rights to dividends.
Management considers ownership percentage, Board composition
and the additional protective rights, and exercises judgement to
determine that Pearson has significant influence over Penguin
Random House and Bertelsmann has the power to direct the
relevant activities and therefore control. Following the transaction
in 2017 the assessment of significant influence has not changed.
Penguin Random House does not have a quoted market price.
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
12. Investments in joint ventures and associates continued
Investment in associates continued
The summarised financial information of the material associate is detailed below:
All figures in £ millions
Assets
Non-current assets
Current assets
Liabilities
Non-current liabilities
Current liabilities
Net assets
Sales
Profit for the year
Other comprehensive expense
Total comprehensive income
Dividends received from associate in relation to profits
Re-capitalisation dividends received from associate
149
2017
2016
Penguin
Random
House
Penguin
Random
House
1,048
1,758
(859)
(1,579)
368
1,267
1,587
(394)
(1,074)
1,386
2,693
2,620
171
(60)
111
146
312
209
(14)
195
131
–
The information above reflects the amounts presented in the financial statements of the associate, adjusted for fair value and similar
adjustments. The tax on Penguin Random House LLC is settled by the partners. For the purposes of clear and consistent presentation,
the tax has been shown in the associate line items in the consolidated income statement and consolidated balance sheet, recording the
Group’s share of profit after tax consistently for the Penguin Random House associates.
A reconciliation of the summarised financial information to the carrying value of the material associate is shown below:
All figures in £ millions
Opening net assets
Exchange differences
Profit for the year
Other comprehensive expense
Dividends, net of tax paid
Tax adjustments in relation to disposals
Closing net assets
Share of net assets
Goodwill
Carrying value of associate
2017
2016
Penguin
Random
House
1,386
(18)
171
(60)
(1,167)
56
368
92
296
388
Penguin
Random
House
1,206
179
209
(14)
(194)
–
1,386
651
589
1,240
Section 5 Financial statements 150
Notes to the consolidated financial statements
12. Investments in joint ventures and associates continued
Investment in associates continued
Information on other individually immaterial associates is detailed below:
All figures in £ millions
Profit for the year
Total comprehensive income
Transactions with material associates
2017
2016
7
7
–
–
The Group has loans to Penguin Random House which are unsecured and interest is calculated based on market rates. The amount
outstanding at 31 December 2017 was £46m (2016: £33m). The loans are provided under a working capital facility and fluctuate during the
year. The loan outstanding at 31 December 2017 was repaid in its entirety in January 2018.
The Group also has a current asset receivable of £19m (2016: £21m) from Penguin Random House and a current liability payable of £3m
(2016: £nil) arising from the provision of services. Included in other income (note 4) is £3m (2016: £4m) of service fees. In addition, the Group
will receive a further re-capitalisation dividend of £49m in April 2018, which was triggered by the Group’s decision to sell a 22% stake in
Penguin Random House in 2017.
Investment in joint ventures
Information on joint ventures, all of which are individually immaterial, is detailed below:
All figures in £ millions
Profit/(loss) for the year
Total comprehensive income/(expense)
13. Deferred income tax
All figures in £ millions
Deferred income tax assets
Deferred income tax liabilities
Net deferred income tax
2017
2016
1
1
2017
95
(164)
(69)
(1)
(1)
2016
451
(466)
(15)
Substantially all of the deferred income tax assets are expected to be recovered after more than one year.
Deferred income tax assets and liabilities shall be offset when there is a legally enforceable right to offset current income tax assets with
current income tax liabilities and where the deferred income taxes relate to the same fiscal authority. At 31 December 2017, the Group
has unrecognised deferred income tax assets of £32m (2016: £32m) in respect of UK losses, £18m (2016: £18m) in respect of US losses and
approximately £86m (2016: £95m) in respect of losses in other territories. The UK losses are capital losses. The US losses relate to state taxes
and therefore have expiry periods of between five and 20 years. Other deferred tax assets of £12m (2016: £9m) have not been recognised.
Deferred tax assets of £75m (2016: £95m) have been recognised in countries that reported a loss in either the current or preceding year.
The majority arises in Brazil in respect of tax deductible goodwill. It is considered more likely than not that there will be sufficient future
taxable profits to realise these assets.
The recognition of the deferred income tax assets is supported by management’s forecasts of the future profitability of the relevant countries.
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
151
13. Deferred income tax continued
The movement in deferred income tax assets and liabilities during the year is as follows:
All figures in £ millions
Deferred income tax assets/(liabilities)
At 1 January 2016
Exchange differences
Income statement (charge)/benefit
Disposal through business disposal
Tax benefit in other comprehensive income
At 31 December 2016
Exchange differences
Income statement (charge)/benefit
Disposal through business disposal
Tax charge in other comprehensive income
Transfer to assets/(liabilities) classified as held for sale
At 31 December 2017
Trading
losses
Returns
provisions
Retirement
benefit
obligations
Deferred
revenue
Goodwill and
intangibles
Other
Total
19
3
–
–
–
22
(2)
(11)
–
–
–
9
43
7
(15)
–
–
35
(3)
6
–
–
(4)
34
(9)
10
(4)
–
40
37
(4)
7
–
(84)
–
(44)
55
15
50
(3)
–
117
(8)
(9)
–
–
(73)
27
(348)
(84)
144
(7)
–
(295)
19
118
–
–
3
(155)
(44)
27
86
–
–
69
(8)
(1)
(3)
(5)
8
60
(284)
(22)
261
(10)
40
(15)
(6)
110
(3)
(89)
(66)
(69)
Other deferred income tax items include temporary differences in respect of share-based payments, provisions, depreciation and royalty
advances.
14. Classification of financial instruments
The accounting classification of each class of the Group’s financial assets and their carrying values, is as follows:
2017
2016
Fair value
Amortised
cost
Fair value
Amortised
cost
Notes
Available
for sale
Derivatives
held for
trading
Derivatives
in hedge
relationship
Loans and
receivables
Total
carrying
value
Available
for sale
Derivatives
held for
trading
Derivatives
in hedge
relationship
Loans and
receivables
Total
carrying
value
15
17
32
16
22
77
–
–
8
–
–
–
85
–
–
–
–
3
–
–
3
–
–
–
–
137
–
–
–
518
127
–
–
760
77
518
127
8
140
760
22
22
137
1,427
1,652
65
–
–
10
–
–
–
75
–
–
–
–
3
–
–
3
–
–
–
–
168
–
–
–
65
1,459
1,459
–
–
–
982
–
10
171
982
–
–
168
2,441
2,687
All figures in £ millions
Investments in unlisted
securities
Cash and cash equivalents
Cash and cash equivalents –
within assets classified as held
for sale
Marketable securities
Derivative financial
instruments
Trade receivables
Trade receivables – within
assets classified as held for
sale
Total financial assets
The carrying value of the Group’s financial assets is equal to, or approximately equal to, the market value.
Section 5 Financial statements 152
Notes to the consolidated financial statements
14. Classification of financial instruments continued
The accounting classification of each class of the Group’s financial liabilities, together with their carrying values and market values,
is as follows:
Fair value
Amortised
cost
Fair value
Amortised
cost
2017
2016
All figures in £ millions
Notes
Derivatives
held for
trading
Derivatives
in hedge
relationship
Other
liabilities
Total
carrying
value
Total
market
value
Derivatives
held for
trading
Derivatives
in hedge
relationship
Other
liabilities
Total
carrying
value
Total
market
value
Derivative financial liabilities
Trade payables
Trade payables – within
liabilities classified as held for
sale
Liability to purchase own
shares
Bank loans and overdrafts
Other borrowings due within
one year
Borrowings due after more
than one year
Total financial liabilities
Fair value measurement
16
24
24
18
18
18
–
–
–
–
–
–
–
–
(140)
–
–
–
–
–
–
–
(265)
(140)
(265)
(140)
(265)
(20)
(20)
(20)
(151)
(15)
(151)
(15)
(151)
(15)
(4)
(4)
(4)
(1,066)
(1,066)
(1,070)
(7)
–
–
–
–
–
–
(257)
–
–
–
–
–
–
–
(333)
(264)
(333)
(264)
(333)
–
–
–
–
–
–
(39)
(39)
(39)
(5)
(5)
(5)
(2,424)
(2,424)
(2,385)
(140)
(1,521)
(1,661)
(1,665)
(7)
(257)
(2,801)
(3,065)
(3,026)
As shown above, the Group’s derivative assets and liabilities, unlisted securities and marketable securities are held at fair value. Financial
instruments that are measured subsequently to initial recognition at fair value are grouped into levels 1 to 3, based on the degree to which
the fair value is observable, as follows:
Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 fair value measurements are those derived from inputs, other than quoted prices included within level 1, that are observable for
the asset or liability, either directly (as prices) or indirectly (derived from prices).
Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
The Group’s derivative assets valued at £140m (2016: £171m) and derivative liabilities valued at £140m (2016: £264m) are classified as level 2.
The Group’s marketable securities valued at £8m (2016: £10m) are classified as level 2. The Group’s investments in unlisted securities are
valued at £77m (2016: £65m) and are classified as level 3.
The following table analyses the movements in level 3 fair value remeasurements:
All figures in £ millions
At beginning of year
Exchange differences
Acquisition of investments
Fair value movements
Disposal of investments
At end of year
2017
2016
Investments
in unlisted
securities
Investments
in unlisted
securities
65
(4)
3
13
–
77
143
8
6
–
(92)
65
The fair value of the investments in unlisted securities is determined by reference to the financial performance of the underlying asset,
recent funding rounds and amounts realised on the sale of similar assets.
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
15. Other financial assets
All figures in £ millions
At beginning of year
Exchange differences
Acquisition of investments
Fair value movements
Disposal of investments
At end of year
153
2016
143
8
6
–
(92)
65
2017
65
(4)
3
13
–
77
Other financial assets comprise unlisted securities of £77m (2016: £65m).
16. Derivative financial instruments
The Group’s approach to the management of financial risks is set out in note 19. The Group’s outstanding derivative financial instruments
are as follows:
All figures in £ millions
Interest rate derivatives – in a fair value hedge relationship
Interest rate derivatives – not in a hedge relationship
Cross-currency rate derivatives – in a hedge relationship
Total
Analysed as expiring:
In less than one year
Later than one year and not later than five years
Later than five years
Total
Gross notional
amounts
Assets
Liabilities
Gross notional
amounts
Assets
Liabilities
2017
2016
799
429
1,522
2,750
–
1,638
1,112
2,750
23
3
114
140
–
65
75
140
–
–
(140)
(140)
–
(95)
(45)
(140)
2,157
1,187
1,622
4,966
162
2,776
2,028
4,966
68
3
100
171
–
86
85
171
(4)
(7)
(253)
(264)
–
(157)
(107)
(264)
The Group has issued both euro and US dollar fixed rate debt.
The fixed rate euro debt is converted to either a fixed or floating
rate US dollar exposure using interest rate and cross-currency
swaps. The Group’s remaining fixed rate US dollar debt is held as
fixed rate instruments.
At the end of 2017, the currency split of the mark-to-market values
of rate derivatives, including the exchange of principal on cross
currency rate derivatives, was US dollar £(869)m, sterling £12m
and euro £857m (2016: US dollar £(1,051)m, sterling £19m and
euro £939m).
The Group’s portfolio of rate derivatives is diversified by maturity,
counterparty and type. Natural offsets between transactions
within the portfolio and the designation of certain derivatives as
hedges significantly reduce the risk of income statement volatility.
The sensitivity of the portfolio to changes in market rates is set out
in note 19.
The Group receives interest under its euro debt related swap
contracts to match the interest on the bonds (ranging from a receipt
of 1.375% on its euro 2025 notes to 1.875% on its euro 2021 notes)
and, in turn, pays US dollar interest at rates ranging between
US Libor + 0.84% to US Libor + 1.35%.
Interest rate swaps are then used to fix an element of the interest
charge, in line with the Group’s interest rate hedging policy,
which requires a proportion of the Group’s gross debt to be fixed
in line with the Group’s hedging policy. During 2017 Pearson
executed a number of floating interest rate swaps to match the
maturity of the 2021 and 2025 euro bonds mitigating the exposure
to interest rate increases. The all-in rates (including the Libor spread)
that the Group pays are between 2.78% and 3.58%. At 31 December
2017, the Group had contracts to fix $579m of debt over the next
12 months and $331m of outstanding fixed rate bonds bringing
the total fixed rate debt to $910m.
Section 5 Financial statements 154
Notes to the consolidated financial statements
16. Derivative financial instruments continued
Derivative financial assets and liabilities subject to offsetting arrangements are as follows:
All figures in £ millions
Counterparties in an asset position
Counterparties in a liability position
Total as presented in the balance sheet
2017
2016
Gross
derivative
assets
Gross
derivative
liabilities
Net derivative
assets/
liabilities
Gross
derivative
assets
Gross
derivative
liabilities
Net derivative
assets/
liabilities
103
37
140
(78)
(62)
(140)
25
(25)
–
30
141
171
(11)
(253)
(264)
19
(112)
(93)
All of the Group’s derivative financial instruments are subject to
enforceable netting arrangements with individual counterparties,
allowing net settlement in the event of default of either party. Offset
arrangements in respect of cash balances are described in note 17.
Counterparty exposure from all derivatives is managed, together
with that from deposits and bank account balances, within credit
limits that reflect published credit ratings and by reference to other
market measures (e.g. market prices for credit default swaps) to
ensure that there is no significant risk to any one counterparty.
17. Cash and cash equivalents (excluding overdrafts)
All figures in £ millions
Cash at bank and in hand
Short-term bank deposits
Cash at bank and in hand – within assets classified as held for sale
In accordance with IAS 39 ‘Financial Instruments: Recognition and
Measurement’, the Group has reviewed all of its material contracts
for embedded derivatives that are required to be separately
accounted for if they do not meet certain requirements, and has
concluded that there are no material embedded derivatives.
2017
361
157
518
127
645
2016
570
889
1,459
–
1,459
Short-term bank deposits are invested with banks and earn interest at the prevailing short-term deposit rates.
At the end of 2017, the currency split of cash and cash equivalents was US dollar 36% (2016: 34%), sterling 8% (2016: 40%), euro 7%
(2016: 3%), renminbi 20% (2016: 10%) and other 29% (2016: 13%). At the end of 2017, a significant proportion of the renminbi cash
relates to assets held for sale.
Cash and cash equivalents have fair values that approximate to their carrying value due to their short-term nature. Cash and cash
equivalents include the following for the purpose of the cash flow statement:
All figures in £ millions
Cash and cash equivalents
Cash and cash equivalents – within assets classified as held for sale
Bank overdrafts
2017
518
127
(15)
630
2016
1,459
–
(35)
1,424
The Group has certain cash pooling arrangements in US dollars, sterling, euro and Canadian dollars where both the company and
the bank have a legal right of offset. At 31 December 2017, the offsetting amounts are presented gross in the balance sheet.
Offset arrangements in respect of derivatives are shown in note 16.
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
18. Financial liabilities – borrowings
The Group’s current and non-current borrowings are as follows:
All figures in £ millions
Non-current
6.25% Global dollar bonds 2018 (nominal amount $550m)
4.625% US dollar notes 2018 (nominal amount $300m)
1.875% euro notes 2021 (nominal amount €500m)
3.75% US dollar notes 2022 (nominal amount $117m; 2016: nominal amount $500m)
3.25% US dollar notes 2023 (nominal amount $94m; 2016: nominal amount $500m)
1.375% euro notes 2025 (nominal amount €500m)
Finance lease liabilities
Current
Due within one year or on-demand:
Bank loans and overdrafts
Finance lease liabilities
Total borrowings
155
2017
2016
–
–
463
85
69
445
4
469
254
453
407
402
435
4
1,066
2,424
15
4
19
39
5
44
1,085
2,468
Included in the non-current borrowings above is £10m of accrued interest (2016: £18m). Included in the current borrowings above is £nil of
accrued interest (2016: £nil).
The maturity of the Group’s non-current borrowing is as follows:
All figures in £ millions
Between one and two years
Between two and five years
Over five years
The carrying amounts and market values of borrowings are as follows:
2017
3
549
514
1,066
All figures in £ millions
Bank loans and overdrafts
6.25% Global dollar bonds 2018
4.625% US dollar notes 2018
1.875% euro notes 2021
3.75% US dollar notes 2022
3.25% US dollar notes 2023
1.375% euro notes 2025
Finance lease liabilities
Effective
interest rate
Carrying
value
Market
value
Effective
interest rate
Carrying
value
2017
n/a
n/a
n/a
2.04%
3.94%
3.36%
1.44%
n/a
15
–
–
463
85
69
445
8
15
–
–
467
87
67
445
8
n/a
6.46%
4.69%
2.04%
3.94%
3.36%
1.44%
n/a
39
469
254
453
407
402
435
9
2016
726
454
1,244
2,424
2016
Market
value
39
468
250
454
396
381
432
9
The market values stated above are based on clean market prices at the year end or, where these are not available, on the quoted market
prices of comparable debt issued by other companies. The effective interest rates above relate to the underlying debt instruments.
1,085
1,089
2,468
2,429
Section 5 Financial statements 156
Notes to the consolidated financial statements
18. Financial liabilities – borrowings continued
The carrying amounts of the Group’s borrowings before the effect of derivatives (see notes 16 and 19 for further information on the
impact of derivatives) are denominated in the following currencies:
All figures in £ millions
US dollar
Sterling
Euro
Other
2017
172
1
911
1
2016
1,559
13
892
4
1,085
2,468
The Group has $1.75bn (£1.3bn) of undrawn capacity on its committed borrowing facilities as at 31 December 2017 (2016: $1.75bn (£1.4bn)
undrawn). In addition, there are a number of short-term facilities that are utilised in the normal course of business.
All of the Group’s borrowings are unsecured. In respect of finance lease obligations, the rights to the leased asset revert to the lessor
in the event of default.
The maturity of the Group’s finance lease obligations is as follows:
All figures in £ millions
Finance lease liabilities – minimum lease payments
Not later than one year
Later than one year and not later than two years
Later than two years and not later than three years
Later than three years and not later than four years
Later than four years and not later than five years
Later than five years
Future finance charges on finance leases
Present value of finance lease liabilities
The present value of the Group’s finance lease obligations is as follows:
All figures in £ millions
Not later than one year
Later than one year and not later than five years
Later than five years
The carrying amounts of the Group’s lease obligations approximate their fair value.
2017
2016
4
3
1
–
–
–
–
8
5
3
1
–
–
–
–
9
2017
2016
4
4
–
8
5
4
–
9
19. Financial risk management
The Group’s approach to the management of financial risks together
with sensitivity analyses of its financial instruments is set out below.
Treasury policy
Pearson’s treasury function has primary responsibility for managing
certain financial risks to which the Group is exposed. The Group’s
treasury policies are approved by the Board of Directors annually
and the Audit Committee receives regular reports on the Group’s
treasury activities, policies and procedures. The Group’s treasury
function is not run as a profit centre and does not enter into any
transactions for speculative purposes.
The treasury function is permitted to use derivatives for risk
management purposes which may include interest rate swaps,
rate caps and collars, currency rate swaps and forward foreign
exchange contracts, of which interest rate swaps and forward
foreign exchange swaps are the most commonly used.
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
157
19. Financial risk management continued
Capital risk
The Group’s primary objective when managing capital is to safeguard its ability to continue as a going concern and retain financial flexibility
by maintaining a strong balance sheet. The Group aims to maintain net debt at a level less than 1.5 times EBITDA, which is consistent with a
solid investment grade rating (assuming no material deterioration in trading performance) and provides comfortable headroom against
covenants. This should permit the business to invest in organic growth. Shareholder returns are made through a sustainable and
progressive dividend policy. Any surplus cash is returned to shareholders via share buybacks or special dividends.
The Group is currently rated BBB (negative outlook) with Standard and Poor’s and Baa2 (negative outlook) with Moody’s.
Net debt
The Group’s net debt position is set out below:
All figures in £ millions
Cash and cash equivalents
Marketable securities
Derivative financial instruments
Bank loans and overdrafts
Bonds
Finance lease liabilities
Net debt
2017
645
8
–
(15)
2016
1,459
10
(93)
(39)
(1,062)
(2,420)
(8)
(432)
(9)
(1,092)
Interest and foreign exchange rate management
The Group’s principal currency exposure is to the US dollar which
represents more than 60% of the Group’s sales.
The Group’s long-term debt is primarily held in US dollars to provide
a natural hedge of this exposure, which is achieved through issued
US dollar debt or by converting euro debt to US dollars using
cross-currency swaps.
As at 31 December 2017, £674m of the Group’s debt is held at
fixed rates (2016: £650m), with £411m held at floating rates
(2016: £1,818m), partially offset by US dollar cash balances which
attract floating rate interest. As at 31 December 2017, a 1%
movement in US dollar interest rates for one year would result
in a £2m movement in the interest charge (2016: £13m).
Overseas profits are converted to sterling to satisfy sterling cash
outflows such as dividends at the prevailing spot rate at the time
of the transaction. To the extent the Group has sufficient sterling,
US dollars may be held as dollar cash to provide a natural offset
to the Group’s debt or to satisfy future US dollar cash outflows.
The Group does not have significant cross border foreign exchange
transactional exposures.
As at 31 December 2017, the sensitivity of the carrying value of the
Group’s financial instruments to fluctuations in interest rates and
exchange rates is as follows:
All figures in £ millions
Investments in unlisted securities
Cash and cash equivalents
Marketable securities
Derivative financial instruments
Bonds
Other borrowings
Liability to purchase own shares
Other net financial assets
Total financial instruments
Carrying
value
Impact of 1%
increase in
interest rates
Impact of 1%
decrease in
interest rates
Impact of 10%
strengthening
in sterling
Impact of 10%
weakening in
sterling
77
645
8
–
(1,062)
(23)
(151)
497
(9)
–
–
–
(26)
45
–
–
–
19
–
–
–
26
(48)
–
–
–
(22)
(6)
(54)
–
1
97
2
–
(41)
(1)
7
66
–
(1)
(118)
(2)
–
50
2
The table shows the sensitivities of the fair values of each class of financial instruments to an isolated change in either interest rates
or foreign exchange rates. Other net financial assets comprises trade receivables less trade payables. A significant proportion of the
movements shown above would impact equity rather than the income statement due to the location and functional currency of the entities
in which they arise and the availability of net investment hedging.
Section 5 Financial statements 158
Notes to the consolidated financial statements
19. Financial risk management continued
Interest and foreign exchange rate management continued
The Group’s income statement is reported at average rates for the
year while the balance sheet is translated at the year-end closing
rate. Differences between these rates can distort ratio calculations
such as debt to EBITDA and interest cover. Adjusted operating profit
translated at year-end closing rates would be £22m lower than the
reported figure of £576m at £554m (2016: £55m higher if translated
at the year-end 2016 rate instead of the 2016 average rate at £690m
compared with a reported figure of £635m). EBITDA translated at
year-end closing rates would be £25m lower than the reported
figure of £738m at £713m (2016: £63m higher if translated at the
year-end 2016 rate instead of the 2016 average rate, at £848m,
compared with a reported figure of £785m).
Liquidity and re-financing risk management
The Group regularly reviews the level of cash and debt facilities
required to fund its activities. This involves preparing a prudent
cash flow forecast for the next three to five years, determining
the level of debt facilities required to fund the business, planning
for shareholder returns and repayments of maturing debt, and
identifying an appropriate amount of headroom to provide a
reserve against unexpected outflows.
At 31 December 2017, the Group had cash of £0.6bn and an
undrawn US dollar denominated revolving credit facility due 2021
of $1.75bn (£1.3bn). At 31 December 2016, the Group had cash of
£1.5bn and an undrawn US dollar denominated revolving credit
facility due 2021 of $1.75bn (£1.4bn).
The $1.75bn facility contains interest cover and leverage covenants
which the Group has complied with for the year ended
31 December 2017.
At the end of 2017, the currency split of the Group’s trade payables
was US dollar £137m, sterling £58m and other currencies £90m
(2016: US dollar £164m, sterling £67m and other currencies £102m) .
Trade payables are all due within one year (2016: all due within
one year).
The following table analyses the Group’s bonds and derivative
assets and liabilities into relevant maturity groupings based on
the remaining period at the balance sheet date to the contractual
maturity date. The amounts disclosed in the table are the
contractual undiscounted cash flows (including interest) and as
such may differ from the amounts disclosed on the balance sheet.
All figures in £ millions
At 31 December 2017
Bonds
Rate derivatives – inflows
Rate derivatives – outflows
Total
At 31 December 2016
Bonds
Rate derivatives – inflows
Rate derivatives – outflows
Total
Analysed by maturity
Analysed by currency
Later than
one year but
less than five
years
Less than
one year
Five years
or more
Total
USD
GBP
Other
Total
20
(38)
48
30
82
(103)
82
61
601
(975)
1,060
686
1,308
(1,086)
1,202
1,424
533
(684)
667
516
1,292
(867)
891
1,316
1,154
(1,697)
1,775
1,232
2,682
(2,056)
2,175
2,801
184
(53)
1,003
1,134
1,732
(239)
1,308
2,801
–
(751)
751
–
–
(838)
838
–
970
(893)
21
98
950
(979)
29
–
1,154
(1,697)
1,775
1,232
2,682
(2,056)
2,175
2,801
Financial counterparty risk management
Counterparty credit limits, which take published credit rating and other factors into account, are set to cover the Group’s total aggregate
exposure to a single financial institution. The limits applicable to published credit rating bands are approved by the Chief Financial Officer
within guidelines approved by the board. Exposures and limits applicable to each financial institution are reviewed on a regular basis.
Cash deposits and derivative transactions are made with approved counterparties up to pre-agreed limits. To manage counterparty risk
associated with cash and cash equivalents, the Group uses a mixture of money market funds as well as bank deposits. As at 31 December
2017, 58% of cash and cash equivalents was held with investment grade bank counterparties, 38% with AAA money market funds and 4%
held with non-investment grade bank counterparties. As at 31 December 2017, the Group had a net exposure of £24m with investment
grade counterparties for derivative transactions.
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
20. Intangible assets – pre-publication
All figures in £ millions
Cost
At beginning of year
Exchange differences
Additions
Disposal through business disposal
Disposals
Transfer from intangible assets
Transfer to assets classified as held for sale
At end of year
Amortisation
At beginning of year
Exchange differences
Charge for the year
Disposal through business disposal
Disposals
Transfer from intangible assets
Transfer to assets classified as held for sale
At end of year
Carrying amounts
At end of year
159
2017
2016
2,417
(168)
362
(1)
(248)
–
(508)
1,854
2,201
380
395
(8)
(565)
14
–
2,417
(1,393)
(1,360)
109
(338)
–
248
–
261
(250)
(350)
4
565
(2)
–
(1,113)
(1,393)
741
1,024
Included in the above are pre-publication assets amounting to £504m (2016: £694m) which will be realised in more than one year.
Amortisation is included in the income statement in cost of goods sold.
21. Inventories
All figures in £ millions
Raw materials
Work in progress
Finished goods
2017
2016
4
2
142
148
5
6
224
235
The cost of inventories recognised as an expense and included in the income statement in cost of goods sold amounted to £324m
(2016: £340m). In 2017, £38m (2016: £48m) of inventory provisions was charged in the income statement. None of the inventory is pledged
as security.
Section 5 Financial statements 160
Notes to the consolidated financial statements
22. Trade and other receivables
All figures in £ millions
Current
Trade receivables
Royalty advances
Prepayments
Accrued income
Other receivables
Non-current
Trade receivables
Royalty advances
Prepayments
Accrued income
Other receivables
2017
2016
739
8
82
1
280
1,110
21
20
15
10
37
961
22
124
15
235
1,357
21
10
13
31
29
103
104
The carrying value of the Group’s trade and other receivables approximates its fair value. Trade receivables are stated net of provisions for
bad and doubtful debts and anticipated future sales returns. The movements in the provision for bad and doubtful debts are as follows:
All figures in £ millions
At beginning of year
Exchange differences
Income statement movements
Utilised
Disposal through business disposal
Transfer to assets classified as held for sale
At end of year
2017
(112)
7
(38)
21
1
5
2016
(64)
(17)
(53)
22
–
–
(116)
(112)
Concentrations of credit risk with respect to trade receivables are limited due to the Group’s large number of customers, who are
internationally dispersed.
The ageing of the Group’s trade receivables is as follows:
All figures in £ millions
Within due date
Up to three months past due date
Three to six months past due date
Six to nine months past due date
Nine to 12 months past due date
More than 12 months past due date
Total trade receivables
Less: provision for sales returns
Net trade receivables
2017
661
187
48
18
13
3
930
(170)
760
2016
812
232
55
21
14
7
1,141
(159)
982
The Group reviews its bad debt provision at least twice a year following a detailed review of receivable balances and historical payment
profiles. Management believes all the remaining receivable balances are fully recoverable.
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
23. Provisions for other liabilities and charges
All figures in £ millions
At 1 January 2017
Exchange differences
Charged to income statement
Released to income statement
Utilised
Disposal through business disposal
At 31 December 2017
Analysis of provisions:
All figures in £ millions
Current
Non-current
Current
Non-current
161
Total
106
(7)
4
(7)
(16)
–
80
2017
Total
25
55
80
2016
27
79
106
Deferred
consideration
Property
Disposals
and closures
Legal
and other
56
(5)
–
–
(6)
–
45
4
–
–
–
–
(1)
3
10
–
–
–
(2)
3
11
36
(2)
4
(7)
(8)
(2)
21
Deferred
consideration
Property
Disposals
and closures
Legal
and other
5
40
45
6
50
56
1
2
3
1
3
4
11
–
11
8
2
10
8
13
21
12
24
36
Deferred consideration primarily relates to the formation of a venture in a North America business in 2011. The provision will be utilised over
a number of years as payments are based on a royalty rate. Disposals and closures include liabilities related to the disposal of Penguin with
the provisions utilised as the disposals and closures are completed. Legal and other includes legal claims, contract disputes and potential
contract losses with the provisions utilised as the cases are settled. Restructuring provisions were not material in either 2017 or 2016.
24. Trade and other liabilities
All figures in £ millions
Trade payables
Social security and other taxes
Accruals
Deferred income
Interest payable
Liability to purchase own shares
Other liabilities
Less: non-current portion
Accruals
Deferred income
Other liabilities
Current portion
2017
265
21
447
322
45
151
224
1,475
26
35
72
133
1,342
2016
333
25
507
883
31
–
272
2,051
17
319
86
422
1,629
The carrying value of the Group’s trade and other liabilities approximates its fair value.
The deferred income balance comprises advance payments in assessment, testing and training businesses; subscription income in school
and college businesses; and obligations to deliver digital content in future periods.
The liability to purchase own shares relates to a liability arising under a buyback agreement for the purchase of the company’s own shares
(see note 27).
Section 5 Financial statements 162
Notes to the consolidated financial statements
25. Retirement benefit and other post-retirement obligations
Background
The Group operates a number of defined benefit and defined
contribution retirement plans throughout the world.
The largest plan is the Pearson Group Pension Plan (UK Group plan)
in the UK, which is sectionalised to provide both defined benefit and
defined contribution pension benefits. The defined benefit section
was closed to new members from 1 November 2006. The defined
contribution section, opened in 2003, is open to new and existing
employees. Finally, there is a separate section within the UK Group
plan set up for auto-enrolment. The defined benefit section of the
UK Group plan is a final salary pension plan which provides benefits
All figures in %
Defined benefit
Defined contribution
Total
The other major defined benefit plans are based in the US.
These are also final salary pension plans which provide benefits
to members in the form of a guaranteed pension payable for life,
with the level of benefits dependent on length of service and
final pensionable pay. The majority of the US plans are funded.
The Group also has several post-retirement medical benefit plans
(PRMBs), principally in the US. PRMBs are unfunded but are
accounted for and valued similarly to defined benefit pension plans.
The defined benefit schemes expose the Group to actuarial risks,
such as life expectancy, inflation risks, and investment risk including
asset volatility and changes in bond yields. The Group is not exposed
to any unusual, entity-specific or plan-specific risks.
to members in the form of a guaranteed level of pension payable
for life. The level of benefits depends on the length of service and
final pensionable pay. The UK Group plan is funded with benefit
payments from trustee-administered funds. The UK Group plan
is administered in accordance with the Trust Deed and Rules in
the interests of its beneficiaries by Pearson Group Pension
Trustee Limited.
At 31 December 2017, the UK Group plan had approximately
24,000 members, analysed in the following table:
Active
Deferred
Pensioners
1
8
9
26
30
56
35
–
35
Total
62
38
100
The defined contribution section of the UK Group plan operates a
Reference Scheme Test (RST) pension underpin for its members.
Where a member’s fund value is insufficient to purchase the RST
pension upon retirement, the UK Group plan is liable for the
shortfall to cover the member’s RST pension. During the year,
the UK Group plan revised its approach to securing the RST
underpin by converting a member’s fund value into a pension in
the UK Group plan rather than purchasing an annuity with an
insurer. A liability of £32m (2016: £181m) in respect of the underpin
is included in the UK Group plan’s defined benefit obligation,
calculated as the present value of projected payments less the
fund value. The UK Group plan’s conversion factors are lower than
the respective insurer annuity values and this has driven a reduction
in the underpin liability, resulting in an actuarial gain through
other comprehensive income and an increase in the surplus at
31 December 2017. From 1 January 2018, members who have
sufficient funds to purchase an RST pension will be able to convert
their fund value into a pension in the UK Group plan as an
alternative to purchasing an annuity with an insurer. The Group
does not recognise the assets and liabilities for members of the
defined contribution section of the UK Group plan whose fund
values are expected to be sufficient to purchase an RST pension
without assistance from the UK Group plan. The defined
contribution section of the UK Group plan had gross assets
of £442m at 31 December 2017.
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
25. Retirement benefit and other post-retirement obligations continued
Assumptions
The principal assumptions used for the UK Group plan and the US PRMB are shown below. Weighted average assumptions have been
shown for the other plans, which primarily relate to US pension plans.
All figures in %
Inflation
Rate used to discount plan liabilities
Expected rate of increase in salaries
Expected rate of increase for pensions in payment and deferred
pensions
Initial rate of increase in healthcare rate
Ultimate rate of increase in healthcare rate
UK Group
plan
Other
plans
3.2
2.5
3.7
2.1 to 5.1
–
–
1.6
3.0
3.0
–
–
–
2017
PRMB
1.5
3.0
3.0
–
6.5
5.0
UK Group
plan
Other
plans
3.3
2.5
3.8
2.2 to 5.1
–
–
1.6
3.8
3.0
–
–
–
163
2016
PRMB
1.5
3.9
3.0
–
6.8
5.0
The UK discount rate is based on corporate bond yields adjusted to reflect the duration of liabilities. In 2017, the Group revised the portfolio
of corporate bonds used to exclude bonds with an implicit government guarantee. Under the previous methodology, the 2017 UK discount
rate would have been lower by around 0.1%.
The US discount rate is set by reference to a US bond portfolio matching model.
The inflation rate for the UK Group plan of 3.2% reflects the RPI rate. In line with changes to legislation in 2010, certain benefits have been
calculated with reference to CPI as the inflationary measure and in these instances a rate of 2.2% has been used.
The expected rate of increase in salaries has been set at 3.7% for 2017 with a short-term assumption of 2.0% for three years.
For the UK plan, the mortality base table assumptions have been updated and are derived from the SAPS S2 for males and females,
adjusted to reflect the observed experience of the plan, with CMI model improvement factors. A 1.5% long-term rate improvement on
the CMI model is applied for both males and females.
For the US plans, the mortality table (RP – 2017) and 2017 improvement scale (MP – 2017) with generational projection for male and
female annuitants has been adopted.
Using the above tables, the remaining average life expectancy in years of a pensioner retiring at age 65 on the balance sheet date for the
UK Group plan and US plans is as follows:
All figures in years
Male
Female
2017
23.6
25.7
UK
2016
23.5
25.6
2017
20.8
22.8
US
2016
21.2
23.2
The remaining average life expectancy in years of a pensioner retiring at age 65, 20 years after the balance sheet date, for the UK and US
Group plans is as follows:
All figures in years
Male
Female
2017
25.7
27.9
UK
2016
25.5
27.8
2017
22.5
24.4
US
2016
22.9
24.9
Although the Group anticipates that plan surpluses will be utilised during the life of the plan to address member benefits, the Group
recognises its pension surplus in full in respect of the UK Group plan on the basis that it is management’s judgement that there are no
substantive restrictions on the return of residual plan assets in the event of a winding up of the plan after all member obligations have
been met.
Section 5 Financial statements 164
Notes to the consolidated financial statements
25. Retirement benefit and other post-retirement obligations continued
Financial statement information
The amounts recognised in the income statement are as follows:
All figures in £ millions
Current service cost
Administration expenses
Total operating expense
Interest on plan assets
Interest on plan liabilities
Net finance (income)/expense
Net income statement charge
All figures in £ millions
Current service cost
Curtailments
Administration expenses
Total operating expense
Interest on plan assets
Interest on plan liabilities
Net finance (income)/expense
Net income statement charge
UK Group
plan
Defined
benefit
other
Sub-total
Defined
contribution
PRMB
Total
2017
8
9
17
(84)
77
(7)
10
1
1
2
(5)
7
2
4
9
10
19
(89)
84
(5)
14
57
–
57
–
–
–
57
(1)
–
(1)
–
2
2
1
65
10
75
(89)
86
(3)
72
2016
UK Group
plan
Defined
benefit
other
Sub-total
Defined
contribution
PRMB
Total
8
–
6
14
(104)
89
(15)
(1)
2
–
–
2
(6)
7
1
3
10
–
6
16
(110)
96
(14)
2
67
–
–
67
–
–
–
67
–
(2)
–
(2)
–
3
3
1
77
(2)
6
81
(110)
99
(11)
70
2016
Total
3,497
(3,386)
111
(77)
(15)
19
158
(139)
The amounts recognised in the balance sheet are as follows:
All figures in £ millions
Fair value of plan assets
Present value of defined
benefit obligation
Net pension asset/(liability)
Other post-retirement medical
benefit obligation
Other pension accruals
Net retirement benefit asset
Analysed as:
Retirement benefit assets
Retirement benefit obligations
UK Group
plan
Other funded
plans
3,337
155
(2,792)
545
(161)
(6)
Other
unfunded
plans
–
(20)
(20)
UK Group
plan
Other funded
plans
3,339
158
(3,181)
158
(183)
(25)
Other
unfunded
plans
–
(22)
(22)
2017
Total
3,492
(2,973)
519
(67)
(11)
441
545
(104)
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
25. Retirement benefit and other post-retirement obligations continued
Financial statement information continued
The following gains/(losses) have been recognised in other comprehensive income:
All figures in £ millions
Amounts recognised for defined benefit plans
Amounts recognised for post-retirement medical benefit plans
Total recognised in year
The fair value of plan assets comprises the following:
2017
175
–
175
All figures in %
Insurance
Equities
Bonds
Property
Pooled asset investment funds
Other
UK Group
plan
Other
funded plans
29
1
–
8
44
14
–
1
3
–
–
–
2017
Total
29
2
3
8
44
14
UK Group
plan
Other
funded plans
–
2
9
8
67
12
–
1
1
–
–
–
The plan assets do not include any of the Group’s own financial instruments, or any property occupied by the Group. The table below
further disaggregates the UK Group plan assets into additional categories and those assets which have a quoted market price in an
active market and those that do not:
165
2016
(277)
9
(268)
2016
Total
–
3
10
8
67
12
All figures in %
Insurance
Non-UK equities
Fixed-interest securities
Property
Pooled asset investment funds
Other
Total
The liquidity profile of the UK Group plan assets is as follows:
All figures in %
Liquid – call <1 month
Less liquid – call 1–3 months
Illiquid – call >3 months
2017
2016
Quoted
market price
No quoted
market price
Quoted
market price
No quoted
market price
29
–
3
–
44
–
76
–
2
–
8
–
14
24
–
–
10
–
67
–
77
–
3
–
8
–
12
23
2017
2016
50
–
50
75
–
25
Section 5 Financial statements 166
Notes to the consolidated financial statements
25. Retirement benefit and other post-retirement obligations continued
Financial statement information continued
Changes in the values of plan assets and liabilities of the retirement benefit plans are as follows:
All figures in £ millions
Fair value of plan assets
Opening fair value of plan assets
Exchange differences
Interest on plan assets
Return on plan assets excluding interest
Contributions by employer
Benefits paid
Other
Closing fair value of plan assets
Present value of defined benefit obligation
UK Group
plan
Other
plans
2017
Total
UK Group
plan
Other
plans
3,339
–
84
(140)
234
(188)
8
3,337
158
(8)
5
10
8
(18)
–
155
3,497
2,803
(8)
89
(130)
242
(206)
8
3,492
–
104
445
99
(112)
–
3,339
Opening defined benefit obligation
(3,181)
(205)
(3,386)
(2,466)
Exchange differences
Current service cost
Administration expenses
Interest on plan liabilities
Actuarial gains/(losses) – experience
Actuarial gains/(losses) – demographic
Actuarial gains/(losses) – financial
Contributions by employee
Other
Benefits paid
–
(8)
(9)
(77)
126
133
44
–
(8)
188
13
(1)
(1)
(7)
6
1
(5)
–
–
18
13
(9)
(10)
(84)
132
134
39
–
(8)
206
Closing defined benefit obligation
(2,792)
(181)
(2,973)
–
(8)
(6)
(89)
12
(47)
(689)
–
–
112
(3,181)
The weighted average duration of the defined benefit obligation is 16.9 years for the UK and 8.1 years for the US.
2016
Total
2,938
24
110
453
101
(129)
–
3,497
(2,641)
(32)
(10)
(6)
(96)
12
(45)
(697)
–
–
129
135
24
6
8
2
(17)
–
158
(175)
(32)
(2)
–
(7)
–
2
(8)
–
–
17
(205)
(3,386)
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
25. Retirement benefit and other post-retirement obligations continued
Financial statement information continued
Changes in the value of the US PRMB are as follows:
All figures in £ millions
Opening defined benefit obligation
Exchange differences
Current service cost
Curtailments
Interest on plan liabilities
Actuarial gains/(losses) – experience
Actuarial gains/(losses) – demographic
Actuarial gains/(losses) – financial
Benefits paid
Closing defined benefit obligation
Funding
The UK Group plan is self-administered with the plan’s assets being
held independently of the Group in trust. The trustee of the plan
is required to act in the best interest of the plan’s beneficiaries.
The most recent triennial actuarial valuation for funding purposes
was completed as at 1 January 2015 and this valuation revealed
a technical provisions funding shortfall of £27m which was
eliminated by contributions paid during 2015.
As a consequence of the disposal of the FT Group, an agreement
has been made between Pearson and the plan trustee to accelerate
the funding of the plan. As a result, the plan is expected to be fully
funded on a ‘self-sufficiency’ basis by 2019, inclusive of £202m paid
in 2017 in relation to the Penguin Random House merger in 2013.
This is a much higher level of funding than technical provisions.
As a result, the plan expects to be able to provide benefits (in
accordance with the plan rules) with a very low level of reliance
on future funding from Pearson. A commitment has also been
made to maintain that level of funding in future years.
167
2016
(76)
(14)
–
2
(3)
8
2
(1)
5
2017
(77)
5
1
–
(2)
1
1
(2)
6
(67)
(77)
Assets of the plan are divided into two elements: matching assets,
which are assets that produce cash flows that can be expected to
match the cash flows for a proportion of the membership, and
include a liability-driven investment mandate (UK bonds, interest
rate/inflation swaps and other derivative instruments), inflation-
linked property and infrastructure; and return seeking assets,
which are assets invested with a longer-term horizon to generate
the returns needed to provide the remaining expected cash flows
for the beneficiaries, and include diversified growth funds, property
and alternative asset classes. The plan’s long-term investment
strategy allocates 85% to matching assets and 15% to return
seeking assets.
In October 2017, the UK Group plan purchased pensioner buy-in
policies with both Aviva and Legal & General totalling £1.2bn.
The buy-ins cover around a third of its total liabilities and are split
equally between the two insurers. The buy-ins transfer significant
longevity risk to Aviva and Legal & General, reducing the pension
risks being underwritten by the Group and providing additional
security for members.
Regular contributions to the plan in respect of the defined benefit
sections are estimated to be £6m for 2018.
Sensitivities
The effect of a one percentage point increase and decrease in the discount rate on the defined benefit obligation and the total pension
expense is as follows:
All figures in £ millions
Effect:
(Decrease)/increase in defined benefit obligation – UK Group plan
(Decrease)/increase in defined benefit obligation – US plan
2017
1% increase
1% decrease
(423)
(14)
575
16
Section 5 Financial statements
168
Notes to the consolidated financial statements
25. Retirement benefit and other post-retirement obligations continued
Sensitivities continued
The effect of members living one year more or one year less on the defined benefit obligation is as follows:
All figures in £ millions
Effect:
Increase/(decrease) in defined benefit obligation – UK Group plan
Increase/(decrease) in defined benefit obligation – US plan
The effect of a half percentage point increase and decrease in the inflation rate is as follows:
All figures in £ millions
Effect:
Increase/(decrease) in defined benefit obligation – UK Group plan
Increase/(decrease) in defined benefit obligation – US plan
2017
One year
increase
One year
decrease
145
8
(152)
(9)
2017
0.5% increase 0.5% decrease
144
–
(132)
–
The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant, although in practice
this is unlikely to occur and changes in some assumptions may be correlated. When calculating these sensitivities, the same method has
been applied to calculate the defined benefit obligation as has been applied when calculating the liability recognised in the balance sheet.
This methodology is the same as prior periods.
26. Share-based payments
The Group recognised the following charges in the income statement in respect of its equity-settled share-based payment plans:
All figures in £ millions
Pearson plans
The Group operates the following equity-settled employee option
and share plans:
Worldwide Save for Shares Plan Since 1994, the Group has operated
a Save-As-You-Earn plan for UK employees. In 1998, the Group
introduced a Worldwide Save for Shares Plan. Under these plans,
employees can save a portion of their monthly salary over periods
of three or five years. At the end of this period, the employee has the
option to purchase ordinary shares with the accumulated funds at
a purchase price equal to 80% of the market price prevailing at the
time of the commencement of the employee’s participation in the
plan. Options that are not exercised within six months of the end
of the savings period lapse unconditionally.
Employee Stock Purchase Plan In 2000, the Group established an
Employee Stock Purchase Plan which allows all employees in the
US to save a portion of their monthly salary over six-month periods.
At the end of the period, the employee has the option to purchase
American Depository Receipts (ADRs) with their accumulated funds
at a purchase price equal to 85% of the lower of the market prices
prevailing at the beginning or end of the period.
2017
33
2016
22
Long-Term Incentive Plan The plan was first introduced in 2001
and consists of restricted shares. The vesting of restricted shares
is normally dependent on continuing service over a three to
five-year period, and in the case of Executive Directors and senior
management upon the satisfaction of corporate performance
targets over a three-year period. These targets may be based on
market and/or non-market performance criteria. Restricted shares
awarded to Executive Directors in September 2017, and to Executive
Directors and senior management in May 2016, vest dependent on
relative total shareholder return, return on invested capital and
earnings per share growth. Restricted shares awarded to senior
management in March 2016 and March 2017 vest dependent on
earnings per share growth. Other restricted shares awarded in
2016 and 2017 vest depending on continuing service over a
three-year period.
Management Incentive Plan The plan was introduced in 2017
combining the Group’s Annual Incentive Plan and Long-Term
Incentive Plan for senior management. The number of shares to
be granted to participants is dependent on Group performance in
the calendar year preceding the date of grant (on the same basis as
the Annual Incentive Plan). Subsequently, the shares vest dependent
on continuing service over a three-year period, and additionally in
the case of Pearson Executive Management upon satisfaction of
non market-based performance criteria as determined by the
Remuneration Committee. Restricted shares awarded as part of
the 2017 Management Incentive Plan will be granted in April 2018.
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
169
26. Share-based payments continued
The number and weighted average exercise prices of share options granted under the Group’s plans are as follows:
Outstanding at beginning of year
Granted during the year
Exercised during the year
Forfeited during the year
Expired during the year
Outstanding at end of year
Options exercisable at end of year
2017
2016
Number of share
options
000s
Weighted average
exercise price
£
Number of share
options
000s
Weighted average
exercise price
£
2,978
1,619
(9)
(1,451)
(156)
2,981
350
8.14
5.50
7.00
8.04
9.09
6.84
8.18
3,250
1,544
(49)
(1,695)
(72)
2,978
247
9.24
6.94
7.07
9.14
8.95
8.14
9.06
Options were exercised regularly throughout the year. The weighted average share price during the year was £6.71 (2016: £8.23).
Early exercises arising from redundancy, retirement or death are treated as an acceleration of vesting and the Group therefore recognises
in the income statement the amount that otherwise would have been recognised for services received over the remainder of the original
vesting period.
The options outstanding at the end of the year have weighted average remaining contractual lives and exercise prices as follows:
Range of exercise prices
£
0–5
5–10
>10
Number of
share options 000s
2017
Weighted average
contractual life
Years
Number of
share options 000s
2016
Weighted average
contractual life
Years
–
2,697
284
2,981
–
2.52
1.24
2.40
–
2,548
430
2,978
–
2.31
2.25
2.31
In 2017 and 2016, options were granted under the Worldwide Save for Shares Plan. The weighted average estimated fair value for the
options granted was calculated using a Black–Scholes option pricing model.
The weighted average estimated fair values and the inputs into the Black–Scholes model are as follows:
Fair value
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividend yield
Forfeiture rate
2017
Weighted average
2016
Weighted average
£1.24
£6.83
£5.50
34.75%
3.7 years
0.20%
7.61%
3.2%
£1.01
£7.85
£6.94
27.38%
3.7 years
0.58%
7.49%
3.2%
The expected volatility is based on the historical volatility of the company’s share price over the previous three to seven years depending on
the vesting term of the options.
The following shares were granted under restricted share arrangements:
Long-Term Incentive Plan
6,453
6.61
6,833
8.24
2017
2016
Number of
shares
000s
Weighted average fair
value
£
Number of
shares
000s
Weighted average fair
value
£
Section 5 Financial statements 170
Notes to the consolidated financial statements
26. Share-based payments continued
The fair value of shares granted under the Long-Term Incentive Plan that vest unconditionally is determined using the share price at the
date of grant. The number of shares expected to vest is adjusted, based on historical experience, to account for potential forfeitures.
Participants under the plan are entitled to dividends during the vesting period and therefore the share price is not discounted.
Restricted shares with a market performance condition were valued by an independent actuary using a Monte Carlo model. Restricted
shares with a non-market performance condition were fair valued based on the share price at the date of grant. Non-market performance
conditions are taken into consideration by adjusting the number of shares expected to vest based on the most likely outcome of the
relevant performance criteria.
27. Share capital and share premium
At 1 January 2016
Issue of ordinary shares – share option schemes
At 31 December 2016
Issue of ordinary shares – share option schemes
Purchase of own shares
At 31 December 2017
Number of
shares
000s
Share
capital
£m
Share
premium
£m
821,068
1,059
822,127
923
(20,996)
802,054
205
–
205
–
(5)
2,590
7
2,597
5
–
200
2,602
The ordinary shares have a par value of 25p per share (2016: 25p per share). All issued shares are fully paid. All shares have the same rights.
The £300m share buyback programme announced in October 2017 was completed on 16 February 2018. In 2017, the Group’s brokers
purchased 21m shares at a value of £153m of which £149m had been cancelled at 31 December 2017. Cash payments of £149m had been
made in respect of the purchases with the outstanding £4m settlement made at the beginning of January 2018. This £4m together with the
remaining value of the buyback programme of £147m was recorded as a liability at 31 December 2017 (see note 24). A further 22m shares
were purchased under the programme in 2018 (see note 37). The shares bought back are being cancelled and the nominal value of these
shares is transferred to a capital redemption reserve. The nominal value of shares cancelled at 31 December 2017 was £5m.
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return
to shareholders through the optimisation of the debt and equity balance.
The capital structure of the Group consists of debt (see note 18), cash and cash equivalents (see note 17) and equity attributable to equity
holders of the parent, comprising issued capital, reserves and retained earnings.
The Group reviews its capital structure on a regular basis and will balance its overall capital structure through payments of dividends,
new share issues as well as the issue of new debt or the redemption of existing debt in line with the financial risk policies outlined in note 19.
28. Treasury shares
At 1 January 2016
Purchase of treasury shares
Release of treasury shares
At 31 December 2016
Purchase of treasury shares
Release of treasury shares
At 31 December 2017
Number of
shares
000s
6,705
3,000
(1,986)
7,719
–
(1,725)
5,994
Pearson plc
£m
72
27
(20)
79
–
(18)
61
The Group holds Pearson plc shares in trust to satisfy its obligations under its restricted share plans (see note 26). These shares,
representing 0.8% (2016: 0.9%) of called-up share capital, are treated as treasury shares for accounting purposes and have a par value
of 25p per share.
The nominal value of Pearson plc treasury shares amounts to £1.5m (2016: £1.9m). Dividends on treasury shares are waived.
At 31 December 2017, the market value of Pearson plc treasury shares was £44m (2016: £63m).
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
29. Other comprehensive income
All figures in £ millions
Items that may be reclassified to the income statement
Net exchange differences on translation of foreign operations – Group
Net exchange differences on translation of
foreign operations – associates
Currency translation adjustment disposed
Attributable tax
Fair value gain on other financial assets
Attributable tax
Items that are not reclassified to the income statement
Remeasurement of retirement benefit obligations – Group
Remeasurement of retirement benefit obligations – associates
Attributable tax
Other comprehensive income/(expense) for the year
All figures in £ millions
Items that may be reclassified to the income statement
Net exchange differences on translation of foreign operations – Group
Net exchange differences on translation of
foreign operations – associates
Currency translation adjustment disposed
Attributable tax
Items that are not reclassified to the income statement
Remeasurement of retirement benefit obligations – Group
Remeasurement of retirement benefit obligations – associates
Attributable tax
Other comprehensive income/(expense) for the year
Attributable to equity holders of the company
Fair value
reserve
Translation
reserve
Retained
earnings
–
–
–
–
13
–
–
–
–
13
(158)
(104)
(51)
–
–
–
–
–
–
(313)
–
–
–
9
–
(4)
175
7
(42)
145
Total
(158)
(104)
(51)
9
13
(4)
175
7
(42)
(155)
Non-
controlling
interest
–
–
–
–
–
–
–
–
–
–
Attributable to equity holders of the company
Fair value
reserve
Translation
reserve
Retained
earnings
–
–
–
–
–
–
–
–
909
3
–
–
–
–
–
–
–
–
(5)
(268)
(8)
58
912
(223)
Total
909
3
–
(5)
(268)
(8)
58
689
Non-
controlling
interest
1
–
–
–
–
–
–
1
171
2017
Total
(158)
(104)
(51)
9
13
(4)
175
7
(42)
(155)
2016
Total
910
3
–
(5)
(268)
(8)
58
690
Section 5 Financial statements 172
Notes to the consolidated financial statements
30. Business combinations
There were no significant acquisitions in 2017 or 2016.
Fair values for the assets and liabilities arising from acquisitions completed in the year are as follows:
All figures in £ millions
Intangible assets
Net assets acquired at fair value
Goodwill
Total
Satisfied by:
Cash
Other liabilities
Total consideration
2017
2016
Notes
Total
fair value
Total
fair value
11
11
–
–
–
–
–
–
–
10
10
3
13
(7)
(6)
(13)
Goodwill of £3m arising on 2016 acquisitions is expected to be deductible for tax purposes.
Intangible assets acquired in 2016 have the following useful economic lives: trademarks and brands 15 years, and other acquired intangibles
six years.
All figures in £ millions
Cash flow on acquisitions
Cash – current year acquisitions
Deferred payments for prior year acquisitions and other items
Acquisition costs and other acquisition liabilities paid
Net cash outflow
31. Disposals including business closures
2017
2016
–
(11)
–
(11)
(7)
(7)
(1)
(15)
In August 2017, the Group completed the sale of the test preparation business in China (GEDU) and in October 2017 the sale of a 22% share
in Penguin Random House, retaining a 25% share (see note 12).
All figures in £ millions
Notes
GEDU
2017
2016
Penguin
Random
House
Other
Total
Total
Disposal of subsidiaries and associates
Property, plant and equipment
Intangible assets
Investments in joint ventures and associates
Net deferred income tax assets
Intangible assets – pre-publication
Inventories
Trade and other receivables
Current income tax receivable
Cash and cash equivalents (excluding overdrafts)
Trade and other liabilities
Cumulative currency translation adjustment
Net assets disposed
Cash received
Costs
Gain/(loss) on disposal
10
11
13
20
29
(7)
(2)
–
(1)
–
(1)
(16)
–
(13)
33
3
(4)
54
(6)
44
–
–
(352)
(2)
–
–
–
(5)
–
–
48
(311)
413
(6)
96
–
(7)
–
–
(1)
(1)
–
–
–
1
–
(8)
1
(5)
(12)
(7)
(9)
(352)
(3)
(1)
(2)
(16)
(5)
(13)
34
51
(323)
468
(17)
128
(3)
–
–
(10)
(4)
–
(6)
–
(9)
21
–
(11)
7
(16)
(20)
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
31. Disposals including business closures continued
All figures in £ millions
Cash flow from disposals
Cash – current year disposals
Cash and cash equivalents disposed
Costs and other disposal liabilities paid
Net cash inflow/(outflow)
Analysed as:
Cash inflow/(outflow) from sale of subsidiaries
Cash inflow from sale of associates
32. Held for sale
173
2017
2016
468
(13)
(25)
430
19
411
11
(9)
(52)
(50)
(54)
4
The assets and liabilities related to Wall Street English language teaching businesses (WSE), part of the Core and Growth segments, and the
K-12 school courseware business (K-12), part of the North America segment, have been presented as held for sale following the approval by
the Group’s management to sell both businesses.
Non-current assets
Property, plant and equipment
Intangible assets
Deferred income tax assets
Trade and other receivables
Current assets
Intangible assets – pre-publication
Inventories
Trade and other receivables
Cash and cash equivalents (excluding overdrafts)
Assets classified as held for sale
Non-current liabilities
Deferred income tax liabilities
Other liabilities
Current liabilities
Trade and other liabilities
Liabilities classified as held for sale
Net assets classified as held for sale
Notes
WSE
K-12
10
11
20
17
16
15
–
4
35
8
–
12
127
147
182
(2)
(10)
(12)
(152)
(152)
(164)
18
–
166
68
23
257
239
46
36
–
321
578
–
(274)
(274)
(150)
(150)
(424)
154
2017
Total
16
181
68
27
292
247
46
48
127
468
760
(2)
(284)
(286)
(302)
(302)
(588)
172
2016
Total
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Section 5 Financial statements 174
Notes to the consolidated financial statements
33. Cash generated from operations
All figures in £ millions
Profit/(loss)
Adjustments for:
Income tax
Depreciation
Amortisation and impairment of acquired intangibles and goodwill
Amortisation of software
Net finance costs
Share of results of joint ventures and associates
Profit on disposal of subsidiaries, associates, investments and fixed assets
Net foreign exchange adjustment from transactions
Share-based payment costs
Pre-publication
Inventories
Trade and other receivables
Trade and other liabilities
Retirement benefit obligations
Provisions for other liabilities and charges
Net cash generated from operations
Dividends from joint ventures and associates
Re-capitalisation dividends from Penguin Random House
Purchase of property, plant and equipment
Purchase of intangible software assets
Proceeds from sale of property, plant and equipment and intangible software assets
Finance lease principal payments
Special pension contribution
Cost of major restructuring paid
Operating cash flow
Operating tax paid
Net operating finance costs paid
Operating free cash flow
Special pension contribution
Cost of major restructuring paid
Non-operating tax received
Free cash flow
Dividends paid (including to non-controlling interests)
Net movement of funds from operations
Acquisitions and disposals
Re-capitalisation dividends from Penguin Random House
Loans (advanced)/repaid (including to related parties)
Purchase of treasury shares
New equity
Buyback of equity
Other movements on financial instruments
Net movement of funds
Exchange movements on net debt
Total movement in net debt
Notes
10
11
11
6
12
26
28
27
2017
408
13
90
138
85
30
(78)
(116)
(26)
33
(35)
24
133
6
(232)
(11)
462
458
(312)
(82)
(150)
–
(5)
227
71
669
(75)
(69)
525
(227)
(71)
–
227
(318)
(91)
416
312
(13)
–
5
(149)
14
494
166
660
2016
(2,335)
(222)
95
2,733
84
60
(97)
40
43
22
(19)
17
156
61
(106)
(10)
522
131
–
(88)
(157)
4
(6)
90
167
663
(63)
(51)
549
(90)
(167)
18
310
(424)
(114)
19
–
14
(27)
7
–
4
(97)
(341)
(438)
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
175
33. Cash generated from operations continued
Net cash generated from operations is translated at an exchange rate approximating the rate at the date of cash flow. The difference
between this rate and the average rate used to translate profit gives rise to a currency adjustment in the reconciliation between net profit
and net cash generated from operations. This adjustment reflects the timing difference between recognition of profit and the related cash
receipts or payments.
Operating cash flow, operating free cash flow and total free cash flow are non-GAAP (non-statutory) measures and have been disclosed
and reconciled in the above table as they are commonly used by investors to measure the cash performance of the Group.
In the cash flow statement, proceeds from sale of property, plant and equipment comprise:
All figures in £ millions
Net book amount
Loss on sale of property, plant and equipment
Proceeds from sale of property, plant and equipment
The movements in the Group’s current and non-current borrowings are as follows:
2017
2016
12
(12)
–
9
(5)
4
Financial liabilities
Non-current borrowings
Current borrowings
Total
2016
Financing
cash flows
Foreign
exchange
movements
Fair value and
other
movements
2,517
(1,292)
9
(7)
2,526
(1,299)
(149)
(1)
(150)
(10)
3
(7)
2017
1,066
4
1,070
Non-current borrowings include bonds, derivative financial instruments and finance leases. Current borrowings include loans repayable
within one year and finance leases, but exclude overdrafts classified within cash and cash equivalents.
34. Contingencies
There are contingent Group liabilities that arise in the normal course of business in respect of indemnities, warranties and guarantees in
relation to former subsidiaries and in respect of guarantees in relation to subsidiaries, joint ventures and associates. In addition, there are
contingent liabilities of the Group in respect of legal claims, contract disputes, royalties, copyright fees, permissions and other rights.
None of these claims are expected to result in a material gain or loss to the Group.
On 24 November 2017, the European Commission published an opening decision that the United Kingdom controlled foreign company
group financing partial exemption (FCPE) constitutes State Aid. No final decision has yet been published, and it may be challenged
by the UK tax authorities. The Group has benefited from FCPE in 2017 and prior periods in total by approximately £90m. At present
the Group believes no provision is required in respect of this issue.
Section 5 Financial statements 176
Notes to the consolidated financial statements
35. Commitments
At the balance sheet date there were no commitments for capital expenditure contracted for but not yet incurred.
The Group leases various offices and warehouses under non-cancellable operating lease agreements. The leases have varying terms
and renewal rights. The Group also leases various plant and equipment under operating lease agreements, also with varying terms.
Lease expenditure charged to the income statement was £178m (2016: £186m).
The future aggregate minimum lease payments in respect of operating leases are as follows:
All figures in £ millions
Not later than one year
Later than one year and not later than two years
Later than two years and not later than three years
Later than three years and not later than four years
Later than four years and not later than five years
Later than five years
2017
156
139
121
100
86
599
2016
174
147
129
115
96
661
1,201
1,322
In the event that the Group has excess capacity in its leased offices and warehouses it will enter into sub-lease contracts in order to offset
costs. The future aggregate minimum sub-lease payments expected to be received under non-cancellable sub-leases are as follows:
All figures in £ millions
Not later than one year
Later than one year and not later than two years
Later than two years and not later than three years
Later than three years and not later than four years
Later than four years and not later than five years
Later than five years
36. Related party transactions
Joint ventures and associates
2017
2016
45
45
40
35
33
138
336
44
46
44
39
34
155
362
Amounts advanced to joint ventures and associates during the year and at the balance sheet date are set out in note 12.
Key management personnel
Key management personnel are deemed to be the members of the Pearson executive (see p11). It is this Committee which had responsibility
for planning, directing and controlling the activities of the Group in 2017. Key management personnel compensation is disclosed below:
All figures in £millions
Short-term employee benefits
Retirement benefits
Share-based payment costs
Total
2017
2016
12
1
2
15
6
1
1
8
There were no other material related party transactions. No guarantees have been provided to related parties.
Pearson plc Annual report and accounts 2017 Notes to the consolidated financial statements
177
37. Events after the balance sheet date
During January 2018, the Group successfully executed market tenders to repurchase €250m of its €500m euro 1.875% notes due May 2021
and €200m of its €500m euro 1.375% notes due May 2025.
On 16 February, the Group completed its £300m share buyback programme. In aggregate between 18 October 2017 and 16 February 2018,
the Group repurchased 42,835,577 shares, including 21,839,676 repurchased since 31 December 2017 at a cost of £151m.
38. Accounts and audit exemptions
The Pearson plc subsidiary companies listed below are exempt from the requirements of the Companies Act 2006 relating to the audit
of individual accounts by virtue of section 479A.
Company number
Company number
Aldwych Finance Limited
Edexcel Limited
04720439
Pearson International Finance Limited
04496750
Pearson Loan Finance No. 3 Limited
Education Development International plc
03914767
Pearson Loan Finance No. 4 Limited
Longman Group (Overseas Holdings) Limited
00690236
Pearson Loan Finance Unlimited
Major123 Limited
05333023
Pearson Management Services Limited
Pearson Affordable Learning Fund Limited
08038068
Pearson Overseas Holdings Limited
Pearson Australia Finance Unlimited
05578463
Pearson Pension Nominees Limited
Pearson Books Limited
02512075
Pearson Pension Trustee Services Limited
Pearson Brazil Finance Limited
08848874
Pearson PRH Holdings Limited
Pearson Canada Finance Unlimited
05578491
Pearson Real Estate Holdings Limited
Pearson Dollar Finance plc
Pearson Dollar Finance Two plc
05111013
Pearson Services Limited
06507766
Pearson Shared Services Limited
Pearson Education Holdings Limited
00210859
TQ Catalis Limited
Pearson Education Investments Limited
08444933
TQ Clapham Limited
Pearson Education Limited
Pearson Funding Four plc
00872828
TQ Global Limited
07970304
02496206
05052661
02635107
05144467
00096263
00145205
10809680
10803853
08561316
09768242
01341060
04623186
07307943
07307925
07802458
Section 5 Financial statements 178
Company balance sheet
As at 31 December 2017
All figures in £ millions
Assets
Non-current assets
Investments in subsidiaries
Amounts due from subsidiaries
Financial assets – derivative financial instruments
Current assets
Amounts due from subsidiaries
Amounts due from related parties
Cash and cash equivalents (excluding overdrafts)
Total assets
Liabilities
Non-current liabilities
Amounts due to subsidiaries
Financial liabilities – borrowings
Financial liabilities – derivative financial instruments
Current liabilities
Amounts due to subsidiaries
Financial liabilities – borrowings
Current income tax liabilities
Other liabilities
Total liabilities
Net assets
Equity
Share capital
Share premium
Treasury shares
Capital redemption reserve
Special reserve
Retained earnings – including loss for the year of £163m (2016: loss of £1,288m)
Total equity attributable to equity holders of the company
Notes
2017
2016
2
6
4
5
6
5
7
7
8
6,691
3,118
140
9,949
209
46
119
374
10,323
7,441
133
171
7,745
4,190
33
867
5,090
12,835
(3,530)
(3,253)
–
(140)
(254)
(264)
(3,670)
(3,771)
(1,739)
(3,470)
(3)
(4)
(158)
(1,904)
(5,574)
4,749
200
2,602
(16)
5
447
1,511
4,749
(13)
(52)
(4)
(3,539)
(7,310)
5,525
205
2,597
(34)
–
447
2,310
5,525
These financial statements have been approved for issue by the Board of Directors on 14 March 2018 and signed on its behalf by
Coram Williams
Chief Financial Officer
Pearson plc Annual report and accounts 2017 Company statement of changes in equity
Year ended 31 December 2017
179
All figures in £ millions
At 1 January 2017
Loss for the year
Issue of ordinary shares under share option schemes*
Buyback of equity
Purchase of treasury shares
Release of treasury shares
Dividends
At 31 December 2017
All figures in £ millions
At 1 January 2016
Loss for the year
Issue of ordinary shares under share option schemes*
Purchase of treasury shares
Release of treasury shares
Dividends
At 31 December 2016
Equity attributable to equity holders of the company
Share
capital
Share
premium
Treasury
shares
205
2,597
(34)
–
–
(5)
–
–
–
–
5
–
–
–
–
200
2,602
–
–
–
–
18
–
(16)
Capital
redemption
reserve
Special
reserve
Retained
earnings
–
–
–
5
–
–
–
5
447
–
–
–
–
–
–
2,310
(163)
–
(300)
–
(18)
(318)
447
1,511
Total
5,525
(163)
5
(300)
–
–
(318)
4,749
Equity attributable to equity holders of the company
Share
capital
Share
premium
Treasury
shares
205
2,590
(27)
–
–
–
–
–
–
7
–
–
–
205
2,597
–
–
(27)
20
–
(34)
Capital
redemption
reserve
Special
reserve
Retained
earnings
–
–
–
–
–
–
–
447
–
–
–
–
–
4,042
(1,288)
–
–
(20)
(424)
447
2,310
Total
7,257
(1,288)
7
(27)
–
(424)
5,525
The capital redemption reserve reflects the nominal value of shares cancelled in the Group’s share buyback programme. The special reserve
represents the cumulative effect of cancellation of the company’s share premium account.
Included within retained earnings is an amount of £162m (2016: £162m) relating to profit on intra-Group disposals that is not distributable.
* Full details of the share-based payment plans are disclosed in note 26 to the consolidated financial statements.
Section 5 Financial statements 180
Company cash flow statement
As at 31 December 2017
All figures in £ millions
Cash flows from operating activities
Net loss
Adjustments for:
Income tax
Net finance costs
Disposals, liquidations and impairment charges
Amounts due (to)/from subsidiaries
Net cash (used in)/generated from operations
Interest paid
Tax received
Net cash (used in)/generated from operating activities
Cash flows from investing activities
Loans (advanced to )/repaid by related parties
Interest received
Net cash (used in)/received from investing activities
Cash flows from financing activities
Proceeds from issue of ordinary shares
Buyback of equity
Net purchase of treasury shares
Repayment of borrowings
Dividends paid to company’s shareholders
Net cash used in financing activities
Effects of exchange rate changes on cash and cash equivalents
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Notes
2017
2016
(163)
(1,288)
70
26
790
(748)
(25)
(21)
9
(37)
(13)
7
(6)
5
(149)
–
(243)
(318)
(705)
10
(738)
854
116
(80)
7
1,337
748
724
(15)
24
733
14
11
25
7
–
(27)
(30)
(424)
(474)
(18)
266
588
854
7
4
Pearson plc Annual report and accounts 2017 Notes to the company financial statements
181
1. Accounting policies
3. Financial risk management
The financial statements on p178-189 comprise the separate
financial statements of Pearson plc.
As permitted by section 408 of the Companies Act 2006, only the
consolidated income statement and statement of comprehensive
income have been presented.
The company has no employees.
The accounting policies applied in the preparation of these company
financial statements are the same as those set out in note 1 to the
consolidated financial statements with the addition of the following:
Investments
Investments in subsidiaries are stated at cost less provision for
impairment, with the exception of certain hedged investments
that are held in a foreign currency and revalued at each balance
sheet date.
2. Investments in subsidiaries
All figures in £ millions
At beginning of year
Subscription for share capital in subsidiaries
Disposals/liquidations
Impairments
Currency revaluations
At end of year
2017
7,441
164
(430)
(360)
(124)
6,691
2016
7,744
800
–
(1,337)
234
7,441
In 2017, impairments, disposals and liquidations relate to
restructuring of intermediate holding companies. Impairments are
largely offset by dividends received. In 2016, impairments relate to
the carrying value of intermediate holding company investments
following impairment reviews and the subsequent impairment of
assets in the Pearson plc Group (see note 11 in the Group
consolidated financial statements for further details).
The company’s financial instruments comprise amounts due
to/from subsidiary undertakings, cash and cash equivalents,
derivative financial instruments, a liability to purchase own shares
(included within other liabilities) and current and non-current
borrowings. Derivative financial instruments are held at fair
value, with all other financial instruments held at amortised cost,
which approximates fair value. The company’s approach to the
management of financial risks is consistent with the Group’s
treasury policy, as discussed in note 19 to the consolidated financial
statements. The company believes the value of its financial assets
to be fully recoverable.
The company designates certain qualifying derivative financial
instruments as hedges of the fair value of its bonds (fair value
hedges). Changes in the fair value of these derivative financial
instruments are recorded in the income statement, together with
any change in the fair value of the hedged liability attributable to
the hedged risk.
The carrying value of the company’s financial instruments is
exposed to movements in interest rates and foreign currency
exchange rates (primarily US dollars). The company estimates that
a 1% increase in interest rates would result in an £26m decrease in
the carrying value of its financial instruments, with a 1% decrease
in interest rates resulting in a £26m increase in their carrying value.
The company also estimates that a 10% strengthening in sterling
would decrease the carrying value of its financial instruments
by £140m, while a 10% weakening in the value of sterling would
increase the carrying value by £183m. These increases and
decreases in carrying value would be recorded through the income
statement. Sensitivities are calculated using estimation techniques
such as discounted cash flow and option valuation models. Where
modelling an interest rate decrease of 1% led to negative interest
rates, these points on the yield curve were adjusted to 0%.
Section 5 Financial statements 182
Notes to the company financial statements
3. Financial risk management continued
The following table analyses the company’s bonds and derivative assets and liabilities into relevant maturity groupings based on the
remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual
undiscounted cash flows (including interest) and as such may differ from the amounts disclosed on the balance sheet.
All figures in £ millions
At 31 December 2017
Bonds
Rate derivatives – inflows
Rate derivatives – outflows
Total
At 31 December 2016
Bonds
Rate derivatives – inflows
Rate derivatives – outflows
Total
Analysed by maturity
Analysed by currency
Later than
one year but
less than five
years
Less than
one year
Five years or
more
Total
USD
GBP
Other
Total
–
(38)
48
10
12
(103)
82
(9)
–
(975)
1,060
85
–
(684)
667
(17)
–
(1,697)
1,775
78
249
–
261
(1,086)
(867)
(2,056)
1,202
365
891
24
2,175
380
–
(53)
1,003
950
261
(239)
1,308
1,330
–
(751)
751
–
–
(838)
838
–
–
–
(893)
(1,697)
21
(872)
–
(979)
29
(950)
1,775
78
261
(2,056)
2,175
380
All cash flow projections shown above are on an undiscounted basis. Any cash flows based on a floating rate are calculated using interest
rates as set at the date of the last rate reset. Where this is not possible, floating rates are based on interest rates prevailing at 31 December
in the relevant year. All derivative amounts are shown gross, although the company net settles these amounts wherever possible.
Any amounts drawn under revolving credit facilities and commercial paper are assumed to mature at the maturity date of the relevant
facility, with interest calculated as payable in each calendar year up to and including the date of maturity of the facility.
4. Cash and cash equivalents (excluding overdrafts)
All figures in £ millions
Cash at bank and in hand
Short-term bank deposits
2017
2
117
119
2016
4
863
867
Short-term bank deposits are invested with banks and earn interest at the prevailing short-term deposit rates.
At the end of 2017, the currency split of cash and cash equivalents was US dollar 82% (2016: 38%), sterling 17% (2016: 62%) and other 1%
(2016: 0%).
Cash and cash equivalents have fair values that approximate their carrying amounts due to their short-term nature.
Cash and cash equivalents include the following for the purpose of the cash flow statement:
All figures in £ millions
Cash and cash equivalents
Bank overdrafts
2017
119
(3)
116
2016
867
(13)
854
Pearson plc Annual report and accounts 2017 Notes to the company financial statements
5. Financial liabilities – borrowings
All figures in £ millions
Non-current
4.625% US dollar notes 2018 (nominal amount $300m)
Current
Due within one year or on demand:
Bank loans and overdrafts
Total borrowings
183
2017
2016
–
–
3
3
3
254
254
13
13
267
Movements in non-current borrowings during the year (including derivative financial instruments) comprise financing cash outflows of
£243m, exchange gains of £124m and fair value and other movements of £(20)m. Current borrowings in both years are classified within
cash and cash equivalents and do not give rise to financing cash flows.
The maturity of the company’s non-current borrowings is as follows:
All figures in £ millions
Between one and two years
Between two and five years
Over five years
2017
–
–
–
–
The carrying amounts and market values of borrowings are as follows:
All figures in £ millions
Bank loans and overdrafts
4.625% US dollar notes 2018
2017
Effective
interest rate
Carrying
amount
Market
value
Effective
interest rate
Carrying
amount
n/a
n/a
3
–
3
n/a
4.69%
3
–
3
13
254
267
The market values are based on clean market prices at the year end or, where these are not available, on the quoted market prices of
comparable debt issued by other companies. The effective interest rates above relate to the underlying debt instruments.
The carrying amounts of the company’s borrowings are denominated in the following currencies:
2016
254
–
–
254
2016
Market
value
13
250
263
All figures in £ millions
US dollar
Sterling
Euro
2017
–
3
–
3
2016
254
8
5
267
Section 5 Financial statements 184
Notes to the company financial statements
6. Derivative financial instruments
The company’s outstanding derivative financial instruments are as follows:
All figures in £ millions
Interest rate derivatives – in a fair value hedge relationship
Interest rate derivatives – not in a hedge relationship
Cross-currency derivatives
Total
Analysed as expiring:
In less than one year
Later than one year and not later than five years
Later than five years
Total
Gross notional
amounts
Assets
Liabilities
Gross notional
amounts
Assets
Liabilities
2017
2016
–
1,228
1,389
2,617
–
1,545
1,072
2,617
–
26
114
140
–
64
76
140
–
–
(140)
(140)
–
(97)
(43)
(140)
244
3,100
1,622
4,966
162
2,776
2,028
4,966
10
61
100
171
–
86
85
171
–
(11)
(253)
(264)
–
(157)
(107)
(264)
The carrying value of the above derivative financial instruments equals their fair value. Fair values are determined by using market data
and the use of established estimation techniques such as discounted cash flow and option valuation models.
7. Share capital and share premium
At 1 January 2016
Issue of ordinary shares – share option schemes
At 31 December 2016
Issue of ordinary shares – share option schemes
Purchase of own shares
At 31 December 2017
Number of
shares
000s
Share
capital
£m
Share
premium
£m
821,068
1,059
822,127
923
(20,996)
802,054
205
–
205
–
(5)
2,590
7
2,597
5
–
200
2,602
The ordinary shares have a par value of 25p per share (2016: 25p per share). All issued shares are fully paid. All shares have the same rights.
The £300m share buyback programme announced in October 2017 was completed on 16 February 2018. In 2017, the Group’s brokers
purchased 21m shares at a value of £153m of which £149m had been cancelled at 31 December 2017. Cash payments of £149m had been
made in respect of the purchases with the outstanding £4m settlement made at the beginning of January 2018. This £4m together with
the remaining value of the buyback programme of £147m was recorded as a liability at 31 December 2017. A further 22m shares were
purchased under the programme in 2018. The shares bought back are being cancelled and the nominal value of these shares is transferred
to a capital redemption reserve. The nominal value of shares cancelled at 31 December 2017 was £5m.
Pearson plc Annual report and accounts 2017
Notes to the company financial statements
8. Treasury shares
At 1 January 2016
Purchase of treasury shares
Release of treasury shares
At 31 December 2016
Purchase of treasury shares
Release of treasury shares
At 31 December 2017
185
£m
27
27
(20)
34
–
(18)
16
Number of
shares
000s
6,705
3,000
(1,986)
7,719
–
(1,725)
5,994
The company holds its own shares in trust to satisfy its obligations under its restricted share plans. These shares are treated as treasury
shares for accounting purposes and have a par value of 25p per share. The nominal value of the company’s treasury shares amounts to
£1.5m (2016: £1.9m). At 31 December 2017, the market value of the company’s treasury shares was £44m (2016: £63m). The gross book value
of the shares at 31 December 2017 amounts to £61m. This value has been netted off with contributions received from operating companies
of £45m, resulting in a net debit value of £16m.
9. Contingencies
Associates
There are contingent liabilities that arise in the normal course of
business in respect of indemnities, warranties and guarantees in
relation to former subsidiaries and in respect of guarantees in
relation to subsidiaries. In addition, there are contingent liabilities
in respect of legal claims. None of these claims are expected to
result in a material gain or loss to the company.
Amounts due from related parties, disclosed on the face of the
company balance sheet, relate to loans to Penguin Random House,
an associate of the Group. These loans are unsecured and interest
is calculated based on market rates. The amount outstanding at
31 December 2017 was £46m (2016: £33m). The loans are provided
under a working capital facility and fluctuate during the year.
Key management personnel
Key management personnel are deemed to be the members of
the Pearson executive.
It is this committee which had responsibility for planning,
directing and controlling the activities of the company in 2017.
Key management personnel compensation is disclosed in
note 36 to the consolidated financial statements.
There were no other material related party transactions.
No guarantees have been provided to related parties.
10. Audit fees
Statutory audit fees relating to the company were £35,000
(2016: £35,000).
11. Related party transactions
Subsidiaries
The company transacts and has outstanding balances with its
subsidiaries. Amounts due from subsidiaries and amounts due to
subsidiaries are disclosed on the face of the company balance sheet.
These loans are generally unsecured and interest is calculated based
on market rates. The company has interest payable to subsidiaries
for the year of £122m (2016: £138m) and interest receivable from
subsidiaries for the year of £111m (2016: £109m). Management fees
payable to subsidiaries in respect of centrally provided services
amounted to £42m (2016: £118m). Management fees receivable
from subsidiaries in respect of centrally provided services amounted
to £69m (2016: £76m). Dividends received from subsidiaries were
£701m (2016: £87m).
Section 5 Financial statements 186
Notes to the company financial statements
12. Group companies
In accordance with section 409 of the Companies Act 2006 a full list of subsidiaries, partnerships, associates, joint ventures and joint
arrangements, the country of incorporation, the registered address and the effective percentage of equity owned, as at 31 December 2017
is disclosed below. Unless otherwise stated, the shares are all indirectly held by Pearson plc. Unless otherwise stated, all wholly-owned and
partly-owned subsidiaries are included in the consolidation and all associated undertakings are included in the Group’s financial statements
using the equity method of accounting. Principal Group companies are identified in bold.
Wholly-owned subsidiaries
Registered company name
Country
of Incorp.
Reg
office
A Plus Education Solutions Private Limited*
IN
Addison Wesley Longman, Inc.
US
Addison-Wesley Educational Publishers Inc. US
AEL (S) PTE Limited
Aldwych Finance Limited
America’s Choice, Inc.
ATI Professional Development LLC
Atkey Finance Limited
Axis Finance Inc.
Beijing Wall Street English Training Centre
Company Limited
Blue Wharf Limited*
Camsaw, Inc.
CAMSAWUSA, Inc.
Casapsi Livraria e Editora Ltda
Centro Cultural Americano Franquias e
Comércio Ltda.
Century Consultants Ltd.
Certiport China Holding, LLC
Certiport, Inc.
Cogmed Systems AB
Connections Academy of Alaska, LLC
Connections Academy of Arizona, LLC
Connections Academy of Arkansas, LLC
Connections Academy of DC, LLC
Connections Academy of Florida, LLC
Connections Academy of Georgia, LLC
Connections Academy of Indiana, LLC
Connections Academy of Iowa, LLC
Connections Academy of Kansas, LLC
Connections Academy of Kentucky, LLC
Connections Academy of Louisiana, LLC
Connections Academy of Maine, LLC
Connections Academy of Maryland, LLC
SG
UK
US
US
IE
US
CN
UK
US
US
BR
BR
US
US
US
SE
US
US
US
US
US
US
US
US
US
US
US
US
US
Connections Academy of Massachusetts LLC US
Connections Academy of Minnesota, LLC
Connections Academy of Missouri, LLC
Connections Academy of Nevada, LLC
Connections Academy of New Jersey, LLC
Connections Academy of New Mexico, LLC
Connections Academy of New York, LLC
US
US
US
US
US
US
Connections Academy of North Carolina, LLC US
Connections Academy of Oregon, LLC
US
Connections Academy of Pennsylvania LLC US
Connections Academy of South Carolina, LLC US
Connections Academy of Tennessee, LLC
Connections Academy of Texas, LLC
Connections Academy of Virginia, LLC
Connections Education LLC
Connections Education of Florida, LLC
Connections Education, Inc.
CTI Education Group (Pty) Limited
Dominie Press, Inc.
Dorian Finance Limited
US
US
US
US
US
US
ZA
US
IE
Dorling Kindersley Australasia Pty Limited
AU
2
3
4
5
1
4
4
7
4
9
6
4
11
12
13
14
4
4
15
16
17
18
21
22
23
25
26
27
28
29
30
31
3
32
33
34
14
35
36
37
40
41
42
43
44
46
4
22
4
50
19
7
51
Country
of Incorp.
Reg
office
Registered company name
Country
of Incorp.
Reg
office
Registered company name
EBNT Canada Holdings ULC
EBNT Holdings Limited
EBNT USA Holdings Inc.
eCollege.com
Edexcel Limited†
Edexcel South Africa Pty Ltd*
Éditions Du Renouveau Pédagogique Inc.
Education Development International Plc†
Education Resources (Cyprus) Limited
Educational Management Group, Inc.
Educational Resources (HK) Limited*
Embanet ULC
Embanet-Compass Knowledge Group Inc.
Embankment Finance Limited*
English Language Learning and
Instruction System, Inc.
Escape Studios Limited*
Falstaff Holdco Inc.
Falstaff Inc.
FBH, Inc.
Franchise Support & Services, SL
Gamma Master China, Limited
Global Elite Education & Technology
(Shanghai) Co. Limited
Global George I Limited
Global George II limited
Global English India Private Limited
Globe Fearon Inc.
Green Wharf Limited*
Guangzhou Crescent Software Co., Ltd
Heinemann Education Botswana
(Publishers) (Proprietary) Limited
Icodeon Limited*
IndiaCan Education Private Limited
Integral 7, Inc.
INTELLIPRO, INC.
CA
CA
US
US
UK
ZA
CA
UK
CY
US
CN
CA
US
UK
US
UK
US
US
US
ES
CN
CN
KY
CN
IN
US
UK
CN
BW
UK
IN
US
US
J M Soluções Exportação e Importação Ltda BR
Kagiso Education Pty Ltd*
Knowledge Analysis Technologies, LLC
LCCI International Qualifications (Malaysia)
Sdn. Bhd.*
LCCIEB Training Consultancy., Ltd
LessonLab, Inc.
Lignum Oil Company
Linx Brasil Distribuidora Ltda.
Longman (Malawi) Limited
Longman Australasia Pty Ltd
ZA
US
MY
CN
US
US
BR
MW
AU
Longman Group(Overseas Holdings) Limited UK
Longman Indochina Acquisition, L.L.C.
Longman Kenya Limited
Longman Mocambique Ltda
Longman Swaziland (Pty) Limited
Longman Tanzania Limited*
Longman Zambia Educational Publishers
Pty Ltd
Longman Zambia Limited
US
KE
MZ
SZ
TZ
ZM
ZM
127
128
Longman Zimbabwe (Private) Ltd
Longmaned Ecuador S.A.
4
4
52
50
53
1
54
55
56
47
22
6
57
6
4
58
4
60
61
63
8
56
2
19
6
64
65
6
2
4
14
67
50
20
68
69
19
4
13
70
71
1
4
72
45
73
74
75
75
Major123 Limited
MeasureUp, LLC
Modern Curriculum Inc.
Multi Treinamento e Editora Ltda
National Computer Systems Japan Co. Ltd
NCS Information Services Technology
(Beijing) Co Ltd
NCS Pearson Pty Ltd
NCS Pearson Puerto Rico, Inc.
NCS Pearson, Inc.
Ordinate Corporation
Pearson (Beijing) Management Consulting
Co., Ltd.
Pearson (Guizhou) Education Technology
Co., Ltd.
Pearson Affordable Learning Fund Limited
Pearson America LLC
Pearson Amsterdam B.V.
Pearson Australia Finance Unlimited
Pearson Australia Group Pty Ltd
Pearson Australia Holdings Pty Ltd
Pearson Australia Pty Ltd
Pearson Benelux B.V.
Pearson Books Limited†
Pearson Brazil Finance Limited
Pearson Business (Asia Pacific) Pte. Ltd.
Pearson Business Services Inc.
Pearson Canada Assessment Inc
Pearson Canada Finance Unlimited
Pearson Canada Holdings Inc
Pearson Canada Inc.
Pearson Central Europe Spółka z
ograniczoną odpowiedzialnością
Pearson Charitable Foundation
Pearson College Limited
Pearson DBC Holdings Inc.
Pearson Desarrollo y Capacitación
Profesional Chile Limitada
Pearson Deutschland GmbH
Pearson Digital Learning Puerto Rico, Inc.
Pearson Dollar Finance plc†
Pearson Dollar Finance Two Limited
Pearson Educacion de Chile Limitada
Pearson Educacion de Colombia S A S
Pearson Educacion de Mexico, S.A. de C.V.
Pearson Educacion de Panama SA
Pearson Educacion de Peru S.A.
Pearson Educacion SA
Pearson Education (Singapore) Pte Ltd
Pearson Education Africa (Pty) Ltd
Pearson Education and Assessment, Inc.
Pearson Education Asia Limited
Pearson Education Botswana
(Proprietary) Limited
ZW
EC
UK
US
US
BR
JP
CN
AU
PR
US
US
CN
CN
UK
US
NL
UK
AU
AU
AU
NL
UK
UK
SG
US
CA
UK
CA
CA
PL
US
UK
US
CL
DE
PR
UK
UK
CL
CO
MX
PA
PE
ES
SG
ZA
US
CN
BW
76
77
78
4
19
79
80
81
51
82
32
19
83
84
1
4
85
1
51
51
51
85
1
1
5
4
86
1
86
86
126
57
1
4
87
88
82
1
1
89
90
91
92
93
94
5
50
4
56
65
Pearson plc Annual report and accounts 2017 Notes to the company financial statements
187
Registered company name
Pearson Education do Brasil S.A
Pearson Education Hellas SA
Pearson Education Holdings Inc.
Pearson Education Holdings Limited†
Pearson Education Indochina Limited
Pearson Education Investments Limited
Pearson Education Korea Limited
Pearson Education Limited
Pearson Education Namibia (Pty) Limited
Pearson Education Publishing Limited
Pearson Education S.A.
Pearson Education SA
Pearson Education South Africa (Pty) Ltd
Pearson Education South Asia Pte. Ltd.
Pearson Education Taiwan Ltd
Pearson Education, Inc.
Pearson Educational Measurement
Canada, Inc.
Pearson Educational Publishers, LLC
Pearson Egitim Cozumleri Tikaret
Limited Sirketi
Pearson Falstaff (Holdings) Inc.
Pearson Falstaff Holdco LLC
Pearson France
Pearson Funding Five plc†
Pearson Funding Four plc†
Pearson Funding Two Limited*†
Pearson Holdings Inc.
Pearson Holdings Southern Africa
(Pty) Limited
Pearson in Practice Holdings Limited*
Pearson in Practice Skills Based
Learning Limited*
Pearson in Practice Technology Limited*
Pearson Inc.
Pearson India Education Services
Private Limited
Pearson Institute of Higher Education
Pearson International Finance Limited†
Pearson Investment Holdings, Inc.
Pearson IOKI Spółka z ograniczoną
odpowiedzialnością
Pearson Italia S.p.A
Pearson Japan KK
Pearson Lanka (Private) Limited
Pearson Learning China (HK) Limited
Pearson Lesotho (Pty) Ltd
Pearson Loan Finance No. 3 Limited
Pearson Loan Finance No. 4 Limited
Pearson Loan Finance No.2 Unlimited*
Pearson Loan Finance Unlimited
Pearson Longman LLC
Pearson Longman Uganda Limited
Pearson Malaysia Sdn. Bhd.
Pearson Management Services Limited†
Pearson Management Services
Philippines Inc.
Pearson Netherlands B.V.
Pearson Netherlands Holdings B.V.
Pearson Nominees Limited†
Pearson Online Tutoring LLC
Pearson Overseas Holdings Limited†
Pearson PEM P.R., Inc.
Pearson Pension Nominees Limited
Pearson Pension Property Fund Limited
Country
of Incorp.
Reg
office
Registered company name
Country
of Incorp.
Reg
office
Subsidiary addresses
BR
GR
US
UK
TH
UK
KR
UK
NA
NG
UY
AR
ZA
SG
TW
US
CA
US
TR
US
US
FR
UK
UK
UK
US
ZA
UK
UK
UK
US
IN
ZA
UK
US
PL
IT
JP
LK
CN
LS
UK
UK
UK
UK
US
UG
MY
UK
PH
NL
NL
UK
US
UK
PR
UK
UK
129
122
4
1
95
1
96
1
97
98
99
100
50
5
101
4
39
4
102
4
4
103
1
1
6
4
50
6
6
6
4
2
50
1
4
104
105
106
107
56
66
1
1
6
1
4
108
62
1
109
85
85
1
4
1
82
1
1
Pearson Pension Trustee Limited
UK
Pearson Pension Trustee Services Limited† UK
Pearson PRH Holdings Limited
UK
Pearson Professional Assessments Limited UK
Pearson Real Estate Holdings Inc.
Pearson Real Estate Holdings Limited†
Pearson Schweiz AG
Pearson Services Limited†
Pearson Shared Services Limited†
Pearson Strand Finance Limited†
Pearson Sweden AB
Pearson VUE Philippines, Inc.
Peisheng Yucai (Beijing) Technology
Development Limited*
Penguin Capital, LLC
Phumelela Publishers (Pty) Ltd*
PN Holdings Inc.
US
UK
CH
UK
UK
UK
SE
PH
CN
US
ZA
US
Prentice-Hall Hispanoamericana SA de CV
MX
ProctorCam, Inc.
PT Efficient English Services
Reading Property Holdings LLC
Rebus Planning Associates, Inc.
Reston Publishing Company, Inc.
Rycade Capital Corporation
Shanghai AWL Education Software Ltd
Silver Burdett Ginn Inc.
Skylight Training and Publishing Inc.
Smarthinking, Inc.
Sound Holdings Inc.
Spear Insurance Company Limited†
Stark Verlag GmbH
Sunnykey International Holdings
Limited (BVI)
Tecquipment Services Limited*
Testchange Limited*†
The Financial Times (I) Pvt Ltd
The Learning Edge International pty Ltd
The SIOP Institute LLC
The Waite Group Inc
TQ Catalis Limited
TQ Clapham Limited
TQ Education and Training Limited
TQ Education and Training Limited
TQ Global Limited
TQ Group Limited
TQ Holdings Limited
USLS Holdings LLC
Vue Testing Services Israel Ltd
Vue Testing Services Korea Limited
Wall Street English Training Centre
(Shanghai) Company Limited
Wall Street Institute Kft.
Wall Street Institute Master Italia Srl
WSE Hong Kong Limited
WSE Training Centre (Guangdong) Co., Ltd.
WSI Education GmbH
WSI International, Inc.
*
In liquidation
† Directly owned by Pearson plc
US
ID
US
US
US
US
CN
US
US
US
US
BM
DE
VG
UK
UK
IN
AU
US
US
UK
UK
UK
SA
UK
UK
UK
US
IL
KR
CN
HU
IT
CN
CN
DE
US
1
1
1
1
4
1
110
1
1
1
15
111
112
4
50
4
91
113
114
115
10
4
4
116
4
55
4
4
48
88
117
6
6
24
71
118
19
78
78
78
59
1
78
1
4
49
38
119
120
121
61
123
124
125
The following list includes all Pearson
registered offices worldwide. Please see
wholly-owned subsidiaries list opposite
for each subsidiary’s registered office code.
Registered office address
1
2
3
4
5
6
7
80 Strand, London, WC2R 0RL, England
4th Floor Software Block, Elnet Software City, TS 140
Block 2 & 9, Rajiv Gandhi Salai, Taramani, Chennai,
TN, 600113, India
C T Corporation System, 155 Federal St., Suite 700,
Boston, MA, 02110, United States
The Corporation Trust Company, Corporation Trust
Center, 1209 Orange Street, Wilmington, New Castle,
DE, 19801, United States
9, #13-05/06, North Buona Vista Drive,
The Metropolis Tower One, 138588, Singapore
Acre House, 11-15 William Road, London,
NW1 3ER, England
1st Floor Riverview House, 21/23 City Quay, Dublin,
D02FP21, Ireland
8 Maples Corporate Services Limited P.O. Box 309,
Ugland House, South Church Street, George Town,
Grand Cayman, KY!-1104, Cayman Islands
9
3F, Building R2 China Merchants Tower, No.118 Jianguo
Road, Chaoyang District, Beijing, China
10 The Corporation Company, 40600 Ann Arbor Rd
E Suite 201, Plymouth, MI, 48170, United States
11 The Prentice-Hall Corporation System, MA, 7 St. Paul
Street, Suite 1660, Baltimore, MD, 21202, United States
12 No 15000, Francisco Matarazzo Avenue, Cj. 51 –
Bloco 1 – Edificio New York, City of São Paulo, São Paulo,
05001-100, Brazil
13 Comendador Aladino Selmi Avenue, 4630, Galpao 1,
Sala 1, Parque Cidade Campinas, City of Campinas,
São Paulo 13069-036, Brazil
14 820, Bear Tavern Road, West Trenton, Mercer,
NJ, 08628, United States
15 Gustavslundsvägen 137, 167 51 Bromma,
Stockholm, Sweden
16 C T Corporation System, 9360 Glacier Hwy Suite 202,
Juneau, AK, 99801, United States
17 C T Corporation System, 3800 N Central Ave Suite 460,
Phoenix, AZ, 85012, United States
18 The Corporation Company, 124 West Capitol Avenue,
Suite 1900, Little Rock, AR, 72201, United States
19 C T Corporation System, 818 West Seventh Street,
Suite 930, Los Angeles, CA, 90017, United States
20 The Corporation Company, 7700 E Arapahoe Rd
Suite 220, Centennial, CO, 80112-1268, United States
21 C T Corporation System, 1015 15th Street 10th Floor,
Washington, DC, 20005, United States
22 1200, South Pine Island Road, Plantation, FL, 33324,
United States
23 1201, Peachtree Street, NE, Atlanta, GA, 30361,
United States
24 Plot No. 3, Bharti Colony Vikas Marg, New Dehli,
DL 110092, India
25 CT Corporation System, 150 West Market Street,
Suite 800, Indianapolis, IN, 46204, United States
26 C T Corporation System, 400 E Court Ave,
Des Moines, IA, 50309, United States
27 The Corporation Company, Inc., 112 SW 7th Street,
Suite 3C, Topeka, KS, 66603, United States
28 CT Corporation System, 306 W. Main Street, Suite 512,
Frankfort, KY, 40601, United States
29 3867, Plaza Tower, 1st Floor, Baton Rouge, LA, 70816,
United States
30 C T Corporation System, 128 State St #3, Augusta,
ME, 04330, United States
31 7 St. Paul Street, Suite 1660, Baltimore, MD, 21202
Section 5 Financial statements 188
Notes to the company financial statements
Registered office address
Registered office address
Registered office address
32 C T Corporation System Inc., 1010 Dale St N, St Paul,
MN, 55117-5603, United States
33 120, 400, South Central Avenue, Clayton, MO, 63105,
United States
34 The Corporation Trust Company of Nevada,
701 S Carson St, Suite 200, Carson City, NV, 89701,
United States
68 Unit 621, 6th Floor, Block A, Kelana Centre Point.
No 3, Jalan SS7/9, Kelana Jaya 47301 Petaling Jaya,
Selangor Darul Ehsan, Malaysia
69 Room 305, Building 2, 65555 Shangchuan Road,
Pudong District, Shanghai, China
70 Parkway House, Hannover Avenue, Blantyre, Malawi
71 707 Collins Street, Docklands, Melbourne, VIC,
35 C T Corporation System, 206 S Coronado Ave, Espanola,
3008, Australia
NM, 87532-2792, United States
36 CT Corporation, 111 Eighth Avenue, New York,
NY 10011, United States
37 CT Corporation System, 160 Mine Lake Ct Suite 200,
Raleigh, NC, 27615, United States
38 21, Mugyo-ro Jung-gu, Seoul, Republic of Korea
72 Queensway House, Kaunda Street, Nairobi, Kenya
73 Robinson Bertram, 3rd Floor, Sokhzmlilio Bldg,
Mbabane, Swaziland
74 P O Box 45, IPS Building, Maktaba Street,
Dar es Salaam, Tanzania
75 Mlungushi Conference Centre, Centre Annex,
39 199 Bay Street, Commerce Court West, Suite 2800,
Great East Road, Lusaka, Zambia
Toronto, ON, M5L1A9, Canada
76 Stand 1515, Cnr Tourle Road/Harare Drive,
40 C T Corporation System, 388 State St Suite 420,
Ardbennie, Harare, Zimbabwe
Salem, OR, 97301, United States
41 C T Corporation System, 116 Pine Street, Suite 320,
Harrisburg, Dauphin, PA, 17101, United States
77 Andalucía y cordero E12-35. Edificio CYEDE
piso 1, Oficina 11, Sector “La Floresta”, Quito,
Pichincha, Ecuador
42 C T Corporation System, 2 Office Park Court,
Suite 103, Columbia, SC, 29223, United States
78 The Pearson Academy of Vocational Training, Bangrave
Road, Corby, Northamptonshire, NN17 1NN, England
106 1-5-15, Kanda-Sarugakucho, Chiyoda-ku, Tokyo, Japan
107 Orion City, Irgel Building #752, Colombo, 09, Sri Lanka
108 Plot 8, Berkley Road, Old Kampala, Uganda
109 7/F North Tower, Rockwell Business Center COR.
Sheridan & United Street, Brgy. Highway Hills,
Mandaluyong, Philippines
110 Chollerstrasse 37, 6300 Zug, Switzerland
111 27/F Trident Tower, 312 Sen. Gil Puyat Avenue,
Makati City, Metro Manila, Philippines
112 Suite 15A11,Tian Xing Jian Commercial Plaza,
No. 47 Fuxing Road, Haidian District, Beijing, China
113 National Registered Agents, inc., 160 Greentree Dr Ste
101, Dover, Kent, DE, 19904, United States
114 30th Floor, Ratu Plaza Office Tower, Jl. Jend. Sudirman
Kav 9, Jakarta, 10270, Indonesia
115 C/O Pearson Education, 501 Bolyston St, Boston,
MA, 02116, United States
116 Suite 3H, No. 6, Block 2, 365 Nong Xin Hua Road,
Changning District, Shanghai City, China
117 Commerce House, Wickhams Cay 1, P.O. Box 3140,
Road Town, Tortola, British Virgin Islands
118 P O BOX 905, Carnelian Bay, CA,
96140, United States
119 Zone 1 3F, Jin Mao Tower, No.88 Century Avenue,
Pilot Free Trade Zone, Shanghai City, China
120 Hermina út 17. 8th floor, Budapest, 1146, Hungary
121 79, Corso Buenos Aires, Milan, 20124, Italy
43 C T Corporation System, 800 S Gay St, Suite 2021,
Knoxville, TN, 37929-9710, United States
44 CT Corporation System, 1999 Bryan Street,
Suite 900, Dallas, TX, 75201, United States
45 Numero 776, Avenida 24 de Julho, Maputo, Mozambique
46 C T Corporation System, 4701 Cox Road, Suite 285,
Glen Allen, Henrico, VA, 23060-0000, United States
47 3500, 855 – 2nd Street, S.W., Calgary, AB,
T2P 4K7, Canada
48 Thistle House, 4 Burnaby Street, Hamilton,
HM11, Bermuda
49 Derech Ben Gurion 2, BSR Building 9th Floor,
Ramat Gan, 52573, Israel
50 Auto Atlantic, 4th Floor, Corner Hertzog Boulevard
and Heerengracht, Cape Town, 8001, South Africa
51 707 Collins Street, Docklands, Melbourne, VIC,
3008, Australia
52 190, High Holborn, London, WC1V 7BH, England
53 1611, Boul. Cremazie Est, 10th Floor, Montréal, PQ,
79 Rodovia Anhanguera, km317, 4, Bloco B, modulo 27,
Jardim Salgado Filho, Ribeirao Preto, São Paulo,
14.079-000, Brazil
80 Teikoku Hotel Tower 18F, 1-1-1 Uchi Saiwai-Cho,
Chiyoda-ku, Tokyo, Japan
81 Suite 1201, Tower 2, No. 36 North Third Rign East Road,
Dongcheng District, Beijing, China
122 21, Amfitheas Avenue, Paleo Faliro Athens,
82 268 Munoz Rivera Avenue, Suite 1400, San Juan,
00918, Puerto Rico
83 Suite 1212, 12/F, Tower 2, No. 36 North Third Rign
East Road, Dongcheng District, Beijing, China
17564, Greece
123 2F, No.118 East Ti Yu Road, Tianhe District,
Guangzhou, China
124 2, Lilienthalstrasse, Hallbergmoos, 85399, Germany
84 Zone B, 1/F, Digital Content Industrial Park,
125 The Corporation Trust Incorporated, 351 West
High Technical & Industrial Development District,
Guiyang City, Guizhou Province, China
85 Gatwickstraat 1, Amsterdam, 1043 GK, Netherlands
Camden Street, Baltimore, MD, 21201, United States
126 Ulica Szamocka 8 01-748, Warszawa, Poland
127 Suite 2600, Three Bentall Centre, P.O. Box 49314,
86 26 Prince Andrew Place, Don Mills, Toronto, ON,
595 Burrard Street, Vancouver, BC, V7X 1L3, Canada
M3C 2T8, Canada
128 44 Chipman Hill, Suite 1000, Saint Jon, NB,
87 Vitacura 5950, Comuna de Vitacura, Santiago, Chile
E2L 4S6, Canada
88 2, Lilienthalstrasse, Hallbergmoos, 85399, Germany
129 Comendador Aladino Selmi Avenue, 4630,
Galpão 1, Sala 3, Parque Cidade Campinas, City of
Campinas,São Paulo, 13069-036, Brazil
130 Comendador Aladino Selmi Avenue, 4630,
Galpão 1, Mezanino, Sala 5, Parque Cidade Campinas,
City of Campinas,São Paulo, 13069-036, Brazil
H2M 2P2, Canada
89 Jose Ananias #505, Macul, Santiago, Chile
54 195, Archbishop Makarios III Avenue, Neocleous House,
90 Carrera 7 Nro 156 – 68, Piso 26, Bogota, Colombia
Limassol, 3030, Cyprus
55 Illinois Corporation Service Company, 700 S 2nd Street,
Springfield, IL, 62703, United States
91 Calle Antonio Dovalijaime #70, Torre B, Piso 6,
Col. Zedec ed Plaza Santa Fe, del. Álvaro Obregon,
Ciudad de Mexico, CP 01210, Mexico
56 28/F, 1063 King’s Road, Quarry Bay, Hong Kong
92 Punta Pacifica, Torres de las Americas,
57 C/o Corporation Service Company, 2711 Centerville
Road, Suite 400, Wilmington, Delaware, 19808,
United States
Torre A Piso 15 Ofic. 1517, Panama, 0832-0588, Panama
93 Calle Río de la Plata N° 152. Piso 5. San Isidro.
Lima – Perú
58 111, 13th Floor, Eighth Avenue, New York, NY, 10011,
94 28, Ribera del Loira, Madrid, 28042, Spain
United States
59 King Fahad Road, Olaya, Riyadh, 58774, 11515,
Saudi Arabia
95 87/1 Capital Tower Building, All Seasons Place unit
1604 – 6 16th floor, Wireless Road, Lumpini,
Pathumwan, Bangkok, Thailand
60 Tuset 20-24, No. 5, Barcelona, 08006, Spain
96 6F Kwanjeong Building, 35, Cheonggyecheon-Ro,
61 Level 54, Hopewell Centre, 183 Queen’s Road East,
Jongno-gu, Seoul, 03188, Republic of Korea
Hong Kong
97 Unit 7 Kingland Park, 98 Nickel Street, Prosperita,
62 Unit 30-01, Level 30, Tower A, Vertical Business Suite,
Windhoek, Namibia
Avenue 3, Bangsar South, No 8, Jalan Kerinchi,
59200 Kuala Lumpur, Malaysia
98 8, Secretariat Road, Obafemi Awolowo Way,
Alausa, Ikeja, Lagos State, Nigeria
63 Room 2001-2, Ambassador Road 18, Yangpu District,
99 Juan Benito Blanco 780 – Plaza Business Center
Shanghai City, China
Montevideo, Uruguay
64 Suite 1503, 1504, 1505, No. 376 Xingang Middle Road,
100 Humboldt 1509 piso 6 (C1414CTM), Ciudad Autonoma
Haizhu District, Guangzhou, China
de Buenos Aires, Argentina
65 Plot 50371, Fairground Office Park, Gaborone, Botswana
101 No 219, Room D, 11F, Sec 3, Beixin Road, New Taipei City,
66 C/o Du Preez, LIebetrau & Co, 252 Kingsway,
Next to USA Embassy, Maseru, Lesotho
67 João Scarparo Netto Avenue, 84, Bloco B,
Ground Floor, Sala 44, Ed Unique Village Offices,
Loteamento Center Santa Genebra, City of Campinas,
São Paulo, 13080-655, Brazil
Xindian District, 23143, Taiwan
102 Barbaros Bulvarı. No:149, Dr. Orhan Birman İş Merkezi
Kat:3, Gayrettepe Beşiktaş, Istanbul, 34349, Turkey
103 3-15, Immeuble Terra Nova II, Rue Henri Rol Tanguy,
Montreuil, 93100, France
104 Ulica Jana Henryka Dąbrowskiego 77A 60-529,
Poznań, Poland
105 16, Corso Trapani, Turin, 10100, Italy
Pearson plc Annual report and accounts 2017 Notes to the company financial statements
189
Partly-owned subsidiaries & associated
undertakings company addresses
Registered office address
1
2
3
4
5
6
7
8
9
Suite 1804, No.99 Huichuan Road, Changning District,
Shanghai City, China
Lalitpur, Sub-Metropolitan City, - 2, Bagmati, Nepal
9-4#, Unit 4, 24 Jintang Street, Yuzhong District,
Chongqing, China
80 Strand, London, WC2R 0RL, England
C T Corporation System, 4701 Cox Road, Suite 285,
Glen Allen, Henrico, VA, 23060-0000, United States
The Corporation Trust Company, Corporation Trust
Center, 1209 Orange Street, Wilmington, New Castle,
DE, 19801, United States
Room 503, 5F, Xin’an Building, No.238 Xinyang Road,
Dao Li District, Harbin, China
Auto Atlantic, 4th Floor, Corner Hertzog Boulevard
and Heerengracht, Cape Town, 8001, South Africa
C/o Corporation Service Company, 2711 Centerville Road,
Suite 400, Wilmington, Delaware, 19808, United States
10 33rd Floor, Tower One & Exchange Plaza, Ayala Triangle,
Ayala Avenue, Makati City, Philippines
11 16 Paschimi Marg, Vasant Vihar, New Delhi, DL, India
12 Office 201, Parktown Quarter, Corner 3rd & 7th Avenue,
Parktown North, Johannesburg 2193. South Africa
13 United Corporate Services, Inc., 874 Walker Road Suite C,
Dover, Kent, DE, 19904, United States
14 P.O. Box No. 6320, 32038 Hawalli, Kuwait City, Kuwait
15 Campbells Corporate Services Limited, Floor 4, Willow
House, Cricket Square, Grand Cayman, KY1-9010,
Cayman Islands
16 3A Dev Regency II, First Main Road, Gandhinagar,
Adyar, Chennai, TN, India
17 2nd Floor OTS Building, off Accra-Winneba Road, Kasoa
second, Kasoa P.O. Box WJ973, Weija, Accra. Ghana
18 Suite 216, No. 127-1 Zhongguancun North Street,
Haidian District, Beijing, China
19 Calz. de la Naranja # 159, Col. Fracc. Industrial Alce
Blanco, Naucalpan de Juarez, Edo. De Mex.,
53370, Mexico
20 10a Hussein Wassef St, Midan Missaha, Dokki Giza,
12311, Egypt
21 Unit No. 404, New Udyog Mandir 2, Mogul Lane,
Mahim(West), Mumbai, MH, 400016, India
22 Incorporating Services, Ltd. 3500 S Dupont Way,
Dover, Kent DE, 19901 United States
Partly-owned subsidiaries
Registered company Name
Country
of Incorp.
%
Owned
Reg
office
Certiport China Co Ltd
CN
50.69 1
CG Manipal Schools Private Limited* NP
Chongqing WSE Training Centre
Co Ltd
Educational Publishers LLP
GED Domains LLC
GED Testing Service LLC
Heilongjiang WSE Training Centre
Co Ltd
Heinemann Publishers (Pty) Ltd
Maskew Miller Longman (Pty)
Limited
Pearson Education Achievement
Solutions (RF) (Pty) Limited
Pearson South Africa (Pty) Ltd
*
In liquidation
CN
UK
US
US
CN
SA
SA
SA
SA
Associated undertakings
51
95
85
70
70
95
75
75
97.3
75
2
3
4
5
6
7
8
8
8
8
Registered company Name
ACT Aspire LLC
Affordable Private Education
Center Inc‡
Avanti Learning Centres Private
Limited‡
eAdvance Proprietary Limited‡
HE Distributions, LLC
Institute for Private Education
& Training KSCC*
Karadi Path learning Company
Private Limited‡
Learn Capital Special
Opportunities Fund I, L.P.‡
Learn Capital Venture
Partners II, L.P.‡
Learn Capital Venture
Partners IIIA, L.P.‡
Country
of Incorp.
%
Owned
Reg
office
US
PH
IN
ZA
US
KU
IN
US
US
KY
50
9
29.36 10
22.54 11
38.01 12
35.3
13
49.02 14
27.64 16
99.59 22
72.93 22
99.00 15
Learn Capital Venture Partners, L.P.‡ US
99.15 22
Omega Schools Franchise Limited
Peking University Pearson (Beijing)
Cultural Development Co., Ltd
Penguin Random House Limited
Penguin Random House LLC
Scala Higher Education , S.C.
Scala Latin America S.A.P.I. de C.V.
Scala Student, S.A. de C.V.
The Egyptian International
Publishing Company-Longman
GH
CN
UK
US
ME
ME
ME
EG
49.05 17
45
18
25
25
45
45
45
49
4
9
19
19
19
20
Zaya Learning Labs Private Limited‡
IN
20
21
*
‡
In liquidation
Accounted for as an ‘Other financial asset’ within
non-current assets
Section 5 Financial statements 190
Five-year summary
All figures in £ millions
Sales: By geography
North America
Core
Growth
Continuing
Discontinued
Total sales
Adjusted operating profit: By geography
North America
Core
Growth
Penguin Random House
Continuing
Discontinued
Total adjusted operating profit
All figures in £ millions
Operating margin – continuing
Adjusted earnings
Total adjusted operating profit
Net finance costs
Income tax
Non-controlling interest
Adjusted earnings
Weighted average number of shares (millions)
Adjusted earnings per share
2013
2014
2015
2016
2017
3,008
1,008
712
4,728
962
5,690
464
103
35
50
652
84
736
2,906
2,940
2,981
2,929
910
724
4,540
343
4,883
444
122
32
69
667
55
722
815
713
4,468
312
4,780
480
105
(3)
90
672
51
723
803
768
815
769
4,552
4,513
–
–
4,552
4,513
420
57
29
129
635
–
635
394
50
38
94
576
–
576
2013
13.8%
2014
14.7%
2015
15.0%
2016
13.9%
2017
12.8%
736
(72)
(97)
(1)
566
807.8
70.1p
722
(64)
(118)
1
541
810.9
66.7p
723
(46)
(105)
–
572
813.3
70.3p
635
(59)
(95)
(2)
479
814.8
58.8p
576
(79)
(55)
(2)
440
813.4
54.1p
Pearson plc Annual report and accounts 2017 Five-year summary
All figures in £ millions
Cash flow
Operating cash flow
Operating cash conversion
Operating free cash flow
Operating free cash flow per share
Free cash flow
Free cash flow per share
Net assets
Net debt
Return on invested capital
Total adjusted operating profit
Operating tax paid
Return
Gross basis:
Average invested capital
Return on invested capital
Net basis:
Average invested capital
Return on invested capital
Dividend per share
191
2013
2014
2015
2016
2017
588
80%
324
40.1p
269
33.3p
649
90%
413
50.9p
413
50.9p
435
60%
255
31.4p
152
18.7p
663
104%
549
67.4p
310
38.0p
669
116%
525
64.5p
227
27.9p
5,706
5,985
6,418
4,348
4,021
1,379
1,639
654
1,092
432
736
(191)
545
10,130
5.4%
10,130
5.4%
722
(163)
559
9,900
5.6%
9,835
5.7%
723
(129)
594
635
(63)
572
576
(75)
501
10,317
11,464
11,568
5.8%
5.0%
4.3%
9,422
6.3%
7,906
7.2%
8,126
6.2%
48.0p
51.0p
52.0p
52.0p
17.0p
Section 5 Financial statements
192
Financial key performance indicators
The following tables and narrative provide further analysis of the financial key performance indicators which are described in the financial
review of the annual report on p34-40 , are shown within the key performance indicators on p2 of the annual report and shown in notes 2
and 8 of the notes to the consolidated financial statements.
Adjusted performance measures
The annual report and accounts reports results and performance on a headline basis which compares the reported results both on a
statutory and on a non-GAAP (non-statutory) basis. The Group’s adjusted performance measures are non-GAAP (non-statutory) financial
measures and are also included in the annual report as they are key financial measures used by management to evaluate performance
and allocate resources to business segments. The measures also enable investors to more easily, and consistently, track the underlying
operational performance of the Group and its business segments by separating out those items of income and expenditure relating to
acquisition and disposal transactions, and major restructuring programmes.
The Group’s definition of adjusted performance measures may not be comparable to other similarly titled measures reported by other
companies. A reconciliation of the adjusted measures to their corresponding statutory measures is shown below.
Sales
Underlying sales movements exclude the impact of portfolio changes arising from acquisitions and disposals and are stated at constant
exchange rates. Portfolio changes are calculated by taking account of the additional contribution (at constant exchange rates) from
acquisitions made in both the current year and the prior year. For acquisitions made in the prior year the additional contribution is calculated
as the sales made in the period of the current year that corresponds to the pre-acquisition period in the prior year. Sales made by businesses
disposed in either the current year or the prior year are also excluded. Constant exchange rates are calculated by assuming the average
exchange rates in the prior year prevailed throughout the current year. These non-GAAP measures enable management and investors to
track more easily, and consistently, the underlying sales performance of the Group.
All figures in £ millions
Statutory sales 2017
Statutory sales 2016
Statutory sales decrease
Comprising:
Underlying decrease
Portfolio changes
Exchange differences
Statutory sales decrease
Statutory decrease
Underlying decrease
Constant exchange rate decrease
2017
4,513
4,552
(39)
(111)
(54)
126
(39)
(1)%
(2)%
(4)%
Pearson plc Annual report and accounts 2017 Financial key performance indicators
193
Adjusted operating profit
Adjusted operating profit excludes the cost of major restructuring; other net gains and losses on the sale of subsidiaries, joint ventures,
associates and other financial assets; intangible charges, including impairment, relating only to goodwill and intangible assets acquired
through business combinations and the direct costs of acquiring those businesses; and the impact of US tax reform in 2017. Further details
are given below under ‘Adjusted earnings per share’. Underlying adjusted operating profit movements exclude the impact of portfolio
changes arising from acquisitions and disposals and are stated at constant exchange rates. Portfolio changes are calculated by taking
account of the additional contribution (at constant exchange rates) from acquisitions made in both the current year and the prior year.
For acquisitions made in the prior year the additional contribution is calculated as the operating profit made in the period of the current
year that corresponds to the pre-acquisition period in the prior year. Operating profit made by businesses disposed in either the current
year or the prior year is also excluded. Constant exchange rates are calculated by assuming the average exchange rates in the prior year
prevailed throughout the current year. This non-GAAP measure enables management and investors to track more easily, and consistently,
the underlying operating profit performance of the Group.
All figures in £ millions
Operating profit/(loss)
Cost of major restructuring
Other net gains and losses
Intangible charges
Impact of US tax reform
Adjusted operating profit
All figures in £ millions
Adjusted operating profit decrease
Comprising:
Underlying decrease
Portfolio changes
Exchange differences
Adjusted operating profit decrease
Underlying decrease
Constant exchange rate decrease
Adjusted earnings per share
2017
451
79
(128)
166
8
576
2016
(2,497)
338
25
2,769
–
635
2017
(59)
(58)
(24)
23
(59)
(9)%
(13)%
Adjusted earnings includes adjusted operating profit and adjusted finance and tax charges. Adjusted earnings is included as a non-GAAP
measure as it is used by management to evaluate performance and allocate resources to business segments and by investors to more
easily, and consistently, track the underlying operational performance of the Group. Adjusted earnings per share is calculated as adjusted
earnings divided by the weighted average number of shares in issue on an undiluted basis.
The following items are excluded from adjusted earnings:
Cost of major restructuring In January 2016 the Group announced that it was embarking on a restructuring programme to simplify the
business, reduce costs and position the Group for growth in its major markets. The costs of this programme in 2016 were significant enough
to exclude from the adjusted earnings measure so as to better highlight the underlying performance. A new programme of restructuring,
announced in May 2017, began in the second half of 2017 and is expected to drive further significant cost savings. The costs of this new
programme have also been excluded from adjusted earnings.
Other net gains and losses These represent profits and losses on the sale of subsidiaries, joint ventures, associates and other financial
assets and are excluded from adjusted earnings as they distort the performance of the Group as reported on a statutory basis.
Intangible charges These represent charges in respect of goodwill, including impairment, and intangible assets acquired through business
combinations and the direct costs of acquiring those businesses. These charges are excluded as they reflect past acquisition activity and
do not necessarily reflect the current year performance of the Group.
Section 5 Financial statements 194
Financial key performance indicators
Other net finance income/costs These include finance costs in respect of retirement benefits, finance costs of deferred consideration and
foreign exchange and other gains and losses. Finance income relating to retirement benefits are excluded as management does not believe
that the consolidated income statement presentation under IAS 19 reflects the economic substance of the underlying assets and liabilities.
Finance costs relating to acquisition transactions are excluded as these relate to future earn outs or acquisition expenses and are not part
of the underlying financing. Foreign exchange and other gains and losses are excluded as they represent short-term fluctuations in market
value and are subject to significant volatility. Other gains and losses may not be realised in due course as it is normally the intention to hold
the related instruments to maturity.
Impact of US tax reform In 2017, as a result of US tax reform, the Group’s share of profit from associates was adversely impacted by £8m.
This amount has been excluded from adjusted earnings as it is considered to be a transition adjustment that is not expected to recur in
the near future.
Tax Tax on the above items is excluded from adjusted earnings. Where relevant the Group also excludes the benefit from recognising
previously unrecognised pre-acquisition and capital losses. The tax benefit from tax deductible goodwill and intangibles is added to the
adjusted income tax charge as this benefit more accurately aligns the adjusted tax charge with the expected rate of cash tax payments.
All figures in £ millions
Profit/(loss) for the year
Non-controlling interest
Cost of major restructuring
Other net gains and losses
Intangible charges
Other net finance income/costs
Impact of US tax reform
Tax
Adjusted earnings
Weighted average number of shares (millions)
Adjusted earnings per share
Return on invested capital
2017
408
(2)
79
(128)
166
(49)
8
(42)
440
813.4
54.1p
2016
(2,335)
(2)
338
25
2,769
1
–
(317)
479
814.8
58.8p
Return on invested capital (ROIC) is included as a non-GAAP measure as it is used by management and investors to track investment returns
and by management to help inform capital allocation decisions within the business. ROIC is calculated as adjusted operating profit less
operating cash tax paid expressed as a percentage of average invested capital. Invested capital includes the original unamortised goodwill
and intangibles. Average values for total invested capital are calculated as the average monthly balance for the year. ROIC is also presented
on a net basis after removing impaired goodwill from the invested capital balance. The net approach assumes that goodwill which has been
impaired is treated consistently to goodwill disposed as it is no longer being used to generate returns.
All figures in £ millions
Adjusted operating profit
Operating tax paid
Return
Average goodwill
Average other non-current intangibles
Average intangible assets – pre-publication
Average tangible fixed assets and working capital
Average invested capital
Return on invested capital
2017
Gross
576
(75)
501
7,236
2,606
995
731
2016
Gross
635
(63)
572
6,987
2,481
926
1,070
11,568
11,464
4.3%
5.0%
2017
Net
576
(75)
501
3,794
2,606
995
731
8,126
6.2%
2016
Net
635
(63)
572
3,429
2,481
926
1,070
7,906
7.2%
Pearson plc Annual report and accounts 2017 Financial key performance indicators
195
Operating cash flow
Operating cash flow is calculated as net cash generated from operations before the impact of items excluded from the adjusted income
statement plus dividends from joint ventures and associates (less the re-capitalisation dividends from Penguin Random House); less
capital expenditure on property, plant and equipment and intangible software assets; plus proceeds from the sale of property, plant and
equipment and intangible software assets; less finance lease principal payments; plus special pension contributions paid; and plus cost of
major restructuring paid. Operating cash flow is included as a non-GAAP measure in order to align the cash flows with the corresponding
adjusted operating profit measures.
All figures in £ millions
Net cash generated from operations
Dividends from joint ventures and associates
Re-capitalisation dividends from Penguin Random House
Purchase of property, plant and equipment
Purchase of intangible software assets
Proceeds from sale of property, plant and equipment and intangible software assets
Finance lease principal payments
Special pension contribution
Cost of major restructuring paid
Operating cash flow
2017
462
458
(312)
(82)
(150)
–
(5)
227
71
669
For information, cash conversion, calculated as operating cash flow as a percentage of adjusted operating profit, is also shown as a
non-GAAP measure as this is used by management and investors to measure underlying cash generation by the Group.
2016
522
131
–
(88)
(157)
4
(6)
90
167
663
2016
635
663
2017
576
669
116%
104%
All figures in £ millions
Adjusted operating profit
Operating cash flow
Cash conversion
For information, operating cash flow, operating free cash flow and total free cash flow, which are non-GAAP measures, are disclosed and
reconciled in note 33 of the notes to the consolidated financial statements as they are commonly used by investors to measure the cash
performance of the Group.
Net debt and earnings before interest, tax, depreciation and amortisation (EBITDA)
For information, the net debt/EBITDA ratio is shown as a non-GAAP measure as it is commonly used by investors to measure balance sheet
strength. EBITDA is calculated as adjusted operating profit less depreciation on property, plant and equipment and less amortisation on
intangible software assets.
All figures in £ millions
Adjusted operating profit
Depreciation (excluding items included in ‘cost of major restructuring’)
Amortisation on intangible software assets (excluding items included in ‘cost of major restructuring’)
EBITDA
Cash and cash equivalents
Marketable securities
Derivative financial instruments
Bank loans and overdrafts
Bonds
Finance lease liabilities
Total
Cash and cash equivalents classified as held for sale
Net debt
Net debt/EBITDA ratio
2017
576
80
82
738
518
8
–
(15)
2016
635
80
70
785
1,459
10
(93)
(39)
(1,062)
(2,420)
(8)
(559)
127
(432)
0.6x
(9)
(1,092)
–
(1,092)
1.4x
Section 5 Financial statements 196
Shareholder information
Pearson ordinary shares are listed on the London Stock Exchange
and on the New York Stock Exchange in the form of American
Depositary Receipts.
A postal dealing service is also available through Equiniti.
Please telephone 0371 384 2248* for details or log on to
www.shareview.co.uk to download a form.
Corporate website
The investors’ section of our corporate website www.pearson.com/
investors.html provides a wealth of information for shareholders.
It is also possible to sign up to receive e-mail alerts for reports and
press releases relating to Pearson at https://www.pearson.com/
news/media/email-alert-signup.html
Shareholder information online
Shareholder information can be found on our website
https://www.pearson.com/investors/investor-information.html
Our registrar, Equiniti, also provides a range of shareholder
information online. You can check your holding and find
practical help on transferring shares or updating your details
at www.shareview.co.uk. For more information, please contact
our registrar, Equiniti, Aspect House, Spencer Road, Lancing,
West Sussex, BN99 6DA. Telephone 0371 384 2233* or,
for those shareholders with hearing difficulties, textphone
number 0371 384 2255*.
Information about the Pearson share price
The company’s share price can be found on our website at
www.pearson.com. It also appears in the financial columns
of the national press.
2017 dividends
Interim
Final
Payment date
Amount per share
15 September 2017
5 pence
11 May 2018
12 pence
Payment of dividends to mandated accounts
Should you elect to have your dividends paid through BACS, this can
be done directly into a bank or building society account, with the tax
voucher sent to the shareholder’s registered address. Equiniti can
be contacted for information on 0371 384 2043*.
Dividend reinvestment plan (DRIP)
The DRIP gives shareholders the right to buy the company’s shares
on the London stock market with their cash dividend. For further
information, please contact Equiniti on 0371 384 2268*.
Individual Savings Accounts (ISAs)
Equiniti offers ISAs in Pearson shares. For more information,
please go to www.shareview.co.uk/dealing or call customer
services on 0345 300 0430*.
Share dealing facilities
Equiniti offers telephone and internet services for dealing in Pearson
shares. For further information, please contact their telephone
dealing helpline on 03456 037 037* or, for online dealing, log on
to www.shareview.co.uk/dealing. You will need your shareholder
reference number as shown on your share certificate.
* Lines open 8.30 am to 5.30 pm Monday to Friday (excluding UK public holidays).
ShareGift
Shareholders with small holdings of shares, whose value makes
them uneconomic to sell, may wish to donate them to ShareGift, the
share donation charity (registered charity number 1052686). Further
information about ShareGift and the charities it has supported
may be obtained from their website, www.ShareGift.org, or by
contacting them at ShareGift, PO Box 72253, London, SW1P 9LQ.
American Depositary Receipts (ADRs)
Pearson’s ADRs are listed on the New York Stock Exchange and
traded under the symbol PSO. Each ADR represents one ordinary
share. For enquiries regarding registered ADR holder accounts
and dividends, please contact Bank of New York Mellon,
Shareholder Correspondence (ADR), PO Box 505000, Louisville,
KY 40233-5000, telephone 1 (866) 259 2289 (toll free within
the US) or 001 201 680 6825 (outside the US). Alternatively, you
may e-mail shrrelations@cpushareownerservices.com
Voting rights for registered ADR holders can be exercised through
Bank of New York Mellon, and for beneficial ADR holders (and/or
nominee accounts) through your US brokerage institution. Pearson
will file with the Securities and Exchange Commission a Form 20-F.
Share register fraud: protecting your investment
Pearson does not contact its shareholders directly to provide
recommendation advice and neither does it appoint third parties
to do so. As required by law, our shareholder register is available
for public inspection but we cannot control the use of information
obtained by persons inspecting the register. Please treat any
approaches purporting to originate from Pearson with caution.
For more information, please log on to our website at
https://www.pearson.com/investors/managing-your-shares/
share-register-fraud.html
Tips on protecting your shares
Keep any documentation that contains your shareholder reference
number in a safe place and shred any unwanted documentation
Inform our registrar, Equiniti, promptly when you change address
Be aware of dividend payment dates and contact the registrar
if you do not receive your dividend cheque or, better still,
make arrangements to have the dividend paid directly into
your bank account
Consider holding your shares electronically in a CREST account
via a nominee.
2018 financial calendar
Ex-dividend date
Record date
Last date for dividend reinvestment election
Annual General Meeting
Payment date for dividend and share purchase date
for dividend reinvestment
5 April
6 April
19 April
4 May
11 May
Pearson plc Annual report and accounts 2017 Reliance on this document
The intention of this document is to provide information to shareholders and is not
designed to be relied upon by any other party or for any other purpose.
Forward-looking statements
This document includes forward-looking statements concerning Pearson’s financial
condition, business and operations and its strategy, plans and objectives. In particular,
all statements that express forecasts, expectations and projections, including trends in
results of operations, margins, growth rates, overall market trends, the impact of interest
or exchange rates, the availability of financing, anticipated cost savings and synergies and
the execution of Pearson’s strategy, are forward-looking statements.
By their nature, forward-looking statements involve known and unknown risks and
uncertainties because they relate to events and depend on circumstances that may occur
in the future. They are based on numerous expectations, assumptions and beliefs
regarding Pearson’s present and future business strategies and the environment in which
it will operate in the future. There are various factors which could cause Pearson’s actual
financial condition, results and development to differ materially from the plans, goals,
objectives and expectations expressed or implied by these forward-looking statements,
many of which are outside Pearson’s control. These include international, national and
local conditions, as well as the impact of competition. They also include other risks detailed
from time to time in Pearson’s publicly-filed documents and, in particular, the risk factors
set out in this document, which you are advised to read. Any forward-looking statements
speak only as of the date they are made and, except as required by law, Pearson gives no
undertaking to update any forward-looking statements in this document whether as a
result of new information, future developments, changes in its expectations or otherwise.
Readers are cautioned not to place undue reliance on such forward-looking statements.
Designed and produced by Friend. www.friendstudio.com
Print: Pureprint Group
Front cover illustrator
Tang Yau Hoong
Photographs
p23 and p41: Jo Moon Price
p19: Chet Strange
p33: Achala Saman
Pearson has supported the planting of 71.5 square metres of new native woodland with
the Woodland Trust, helping to remove 2.052 metric tonnes of carbon dioxide generated
by the production of this report and associated documents.
This report has been printed on Edixion Challenger Offset which is FSC® certified and
made from 100% Elemental Chlorine Free (ECF) pulp. The mill and the printer are both
certified to ISO 14001 environmental management system and registered to EMAS the
eco management Audit Scheme. The report was printed using vegetable-based inks by
a CarbonNeutral® printer.
P
e
a
r
s
o
n
A
n
n
u
a
l
r
e
p
o
r
t
a
n
d
a
c
c
o
u
n
t
s
2
0
1
7
www.pearson.com
@pearson
Principal offices
80 Strand,
London WC2R 0RL, UK
T +44 (0)20 7010 2000
F +44 (0)20 7010 6060
330 Hudson Street,
New York,
NY 10013, USA
T +1 212 390 7100
Pearson plc
Registered number 53723 (England)