P
H
O
E
N
I
X
G
R
O
U
P
H
O
L
D
I
N
G
S
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
5
O P E N
… to finding innovative ways
to deliver value
Phoenix Group Holdings
Annual Report and Accounts 2015
2015 key performance indicators
£225m
Operating
companies’
cash generation
£324m
IFRS operating
profit
£2,513m
Group MCEV
£205m
Incremental
MCEV
£1.3bn
Solvency II surplus
(estimated)
£0.6bn
PLHL ICA surplus
(estimated)
£1.5bn
IGD surplus
(estimated)
37.8%
Financial leverage
96%
Customer
satisfaction score
18%
FOS overturn rate
11 days
Speed of pension
transfer payouts
– ORIGO
78%
Employee
engagement index
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIALS
ADDITIONAL INFORMATION
Shareholder information
Glossary
222
225
Chairman’s introduction
Board structure
Board of Directors
Executive management team
Corporate governance report
Directors’ remuneration report
Directors’ report
Group at a glance
Chairman’s statement
Group Chief Executive Officer’s
report
Operating structure
The marketplace
Our business model
Value generation
Our strategy and KPIs
Financial performance
Cash generation
Group IFRS
Group MCEV
Capital management
Capital resources
Risk management
Environmental reporting
04
06
08
12
13
14
15
16
24
24
26
29
31
33
34
40
42
43
44
46
47
57
81
Statement of Directors’
responsibilities
Independent Auditor’s report
IFRS consolidated
financial statements
Notes to the IFRS consolidated
financial statements
Parent company accounts
Notes to the parent company
financial statements
Asset disclosures
Additional Life Company
asset disclosures
86
87
95
102
188
192
198
199
MCEV supplementary information
206
Statement of Directors’
responsibilities
Independent Auditor’s report
MCEV financial statements
Notes to the MCEV
financial statements
207
208
209
213
C L O S E D
funds represent the whole of
our business. Because of this
we are able to focus all our energy
and expertise on improving
their performance without
being distracted by the need
to win new customers.
We aim to be recognised
as the ‘industry solution’
for the safe, innovative
and profitable management
of closed life funds.
S
O
L
U
T
I
O
N
L O N G
T E R
M
As closed funds run off over the
long term we believe that a specialist
operating model is critical for
providing policyholders with a
secure, stable and efficient service.
04
PHOENIX GROUP
AT A GLANCE
Phoenix is the UK’s largest specialist closed
life and pension fund consolidator, looking
after c. 4.5 million policyholders.
c. 4.5m
Policyholders
OUR MISSION
To improve returns
for policyholders
while delivering value
to shareholders.
OUR VISION
To be the saver-
friendly, industry
solution for the
safe, innovative
and profitable
management of
closed life funds.
£47bn
Life company
assets
18%
Total shareholder
return in 2015
Our operating structure
GROUP FUNCTIONS
The Group functions provide services to
Phoenix Life and manage corporate and
strategic activity. Based both in Wythall,
Birmingham and Juxon House, London,
the Group is led by the Group Chief
Executive Officer, Clive Bannister.
PHOENIX
GROUP
GROUP FUNCTIONS
Manage corporate and strategic activity
PHOENIX LIFE
Phoenix Life is the Group’s core business
segment and is responsible for the
management of the Group’s life funds.
Based in Wythall, Birmingham, it is led by
its Chief Executive Officer, Andy Moss.
LIFE COMPANIES
Hold the financial assets
of our policyholders
MANAGEMENT
SERVICES COMPANIES
Responsible for providing
life companies with all required
management services
OUTSOURCE PARTNERS
Used by the management
services companies to provide
policy administration services
12
Read more about our
operating structure
Phoenix Group Holdings Annual Report and Accounts 2015 05
What we do
HOW WE
CREATE VALUE
We create value for our
customers by maximising
policyholder returns through
our specialist expertise and
innovative management of
closed life funds. We create
value for our shareholders
by generating profits from
the growth of our funds
and releasing excess capital
as dividends.
HOW WE
MANAGE RISK
We operate a comprehensive
risk management framework
which identifies, assesses
and mitigates the risks facing
our Group.
HOW WE
GOVERN OUR
BUSINESS
We operate a robust
governance structure
embedded in an experienced
management team, with
independent Boards and
Committees for the Group.
15
Read more about how
we create value
34
Read more about how
we manage risk
42
Read more about how
we govern our business
Our strategy
WE HAVE FOUR AREAS OF STRATEGIC FOCUS:
DRIVE
VALUE
In order to drive value, the Group
looks to undertake management
actions which reduce costs,
release capital, accelerate cash
flows or enhance economic value.
MANAGE
CAPITAL
The effective management
of our risks and the efficient
allocation of capital against
them is critical in allowing us
to achieve our strategic and
operational objectives.
01
02
04
03
IMPROVE
CUSTOMER
OUTCOMES
Improving customer
outcomes is central to our
vision of being the saver-
friendly ‘industry solution’
for closed life funds.
ENGAGE
PEOPLE
Our people underpin
everything that we do.
The Group specifically
targets, recruits and
develops top quality people
to support the achievement
of its strategic and
operational objectives.
16
Read more about
our strategy and KPIs
Our history
The following shows the
Group’s original entities, their
various acquisitions and key
achievements over the years:
1782 Phoenix Assurance established
1806 London Life established
1835 NPI established
1836 Edinburgh & Glasgow
Assurance established
1837 Scottish Provident established
1857 Pearl Loan Company established
1905 Britannic Assurance Company
established
1996 Royal & Sun Alliance established
1999 Britannic acquires Alba Life
2001 Abbey National acquires
Scottish Provident
2004 Resolution Life Group
acquires UK life operations
of Royal & Sun Alliance
Britannic acquires life
operations of Allianz Cornhill
2005 Pearl Group created
Resolution Life Group acquires
Swiss Life (UK) plc
Britannic acquires Century
Group and merges with
Resolution Life Group to form
Resolution plc
2006 Resolution plc acquires
Abbey National’s life business
2008 Pearl Group acquires
Resolution plc
2009 Liberty Acquisition Holdings
(International) acquires
Pearl Group
2010 Pearl Group renamed Phoenix
Group Holdings and achieves
Premium Listing on London
Stock Exchange
2012 Transferred approximately
£5 billion annuity liabilities to
Guardian Assurance
Transferred business of NPI
Limited to Phoenix Life Limited
and London Life Limited to
Phoenix Life Assurance Limited
2013 Successful debt re-terming and
equity raising of £250 million
2014 Divestment of Ignis Asset
Management
Refinanced the Group’s
remaining senior bank debt and
PIK notes into a single £900
million facility
Issued £300 million unsecured
7 year bond
2015 Investment grade credit rating
achieved from Fitch Ratings
Solvency II full internal
model approved
Exchange of Tier 1 bonds into
new subordinated notes
Phoenix Group Holdings Annual Report and Accounts 2015Strategic report 06
CHAIRMAN’S
STATEMENT
HENRY STAUNTON
CHAIRMAN
The UK life insurance industry is
undergoing significant change at
present and Phoenix Group is well
positioned to take full advantage.”
Phoenix Group Holdings Annual Report and Accounts 2015 07
The Board has recommended a final dividend for 2015 of 26.7p per
share. This brings the total dividend for the 2015 financial year to
53.4p per share, in line with the dividend paid in respect of the 2014
financial year. Given the long-term run-off nature of the Group’s
business, the Board believes it is prudent to maintain a stable,
sustainable dividend while the Group builds its financial flexibility
to execute its growth strategy and meet external challenges.
I can also announce that Tom Cross Brown will be stepping down
from the Board at the time of the Annual General Meeting. Tom has
been a Director of Phoenix Group Holdings since 2009 and has been
involved with the Group in its various guises since 2005, helping
to guide Phoenix through a number of restructurings to its present
position at the forefront of the closed life fund industry. His expertise
and knowledge of asset management and corporate transactions have
been of enormous value to the Group during a period of rapid change.
I would like to thank Tom both for his contribution to Phoenix over
the past years and his personal help and support during my first few
months as Chairman of the Group.
FinalIy, I would like to thank all my colleagues at Phoenix for their hard
work and commitment. The ability of the Group to continue to meet
its targets for cash generation and value creation is a testament to their
dedication. I believe that the Group can look forward to 2016 with great
confidence as it seeks to be a leading player in the consolidation of the
UK closed life market.
HENRY STAUNTON
CHAIRMAN
22 MARCH 2016
I have joined Phoenix Group as Chairman at a time of great change for
the UK life insurance sector. Over the past few months, the Group has
seen the introduction of the new Solvency II capital regime as well as
the publication of the Financial Conduct Authority’s (‘FCA’) thematic
review of the fair treatment of long-standing customers in life insurance.
Adapting to this regulatory change has involved a considerable amount
of work for the Group, in particular in relation to Solvency II. It was
therefore very pleasing when the Group received regulatory approval
for its Internal Model application under the new capital regime.
There were a number of further important achievements by Phoenix
during the course of the year. Most notably, the Group achieved an
investment grade credit rating from Fitch Ratings, reducing the cost
of our bank debt and broadening our access to the debt capital markets
in future. In addition, we have navigated the new pension freedom
changes, expanding the financial options available to our customers
whilst continuing to offer a fair and timely service.
Phoenix Group has also remained focused on financial delivery and
has continued its record of meeting or exceeding publicly stated targets.
The Group has been particularly successful in continuing to add value
for both customers and shareholders through management actions
and I look forward to further progress in the coming years.
In November we sponsored an independent report by the Pensions
Institute, titled ‘The Meaning of Life’, that considered the future of the
traditional life company business model in the UK. As described in the
report, recent changes to the regulation of pension provision, including
the new pension freedom rules, were unanticipated and market
participants have had little time to adapt. It is therefore far from certain
what the future market will look like from the perspective of the industry
as a whole, for the individual providers and for our customers. As the
UK’s largest specialist consolidator of closed life funds, we believe
that Phoenix has a key role to play in supporting customers through
these changes.
It is also clear that the traditional life company business model must
continue to adapt. We concur with the conclusions of the Pensions
Institute that there will be further consolidation in the UK life sector as
existing providers struggle with issues such as heightened regulatory
scrutiny, increased capital requirements and shortages of skilled
personnel to manage complex legacy products. Phoenix Group has
the expertise and operating model in place to take advantage of this
changing environment and I look forward to the Group examining
further opportunities to grow the business. However, we will only make
acquisitions that are value accretive, would at least sustain our current
dividend per share and would support our investment grade credit rating.
Phoenix Group Holdings Annual Report and Accounts 2015Strategic report 08
GROUP CHIEF EXECUTIVE
OFFICER’S REPORT
INTRODUCTION
Phoenix Group achieved two significant milestones in 2015, both
of which were the result of several years of hard work by the Group.
First, the progress we have made over the past years in reducing
leverage and simplifying the Group’s structure culminated in
Fitch Ratings assigning the Group an investment grade credit rating
in August. This marks the achievement of an ambition set out in 2014
and reflects the Group’s strong capital position, cash flows and track
record. With a wider potential investor universe the Group now has
greater flexibility in future debt issuance, both with regards to the
type and maturity of instruments; and an improved ability to issue
regulatory compliant subordinated debt. In addition, we have agreed a
revised bank facility, further reducing our interest costs and extending
the maturity of the Group’s debt.
Second, in December the Prudential Regulation Authority (‘PRA’)
approved the Group’s Internal Model application under Solvency II.
The application was the result of significant effort across multiple areas
of our business and the PRA approval provides the Group with greater
clarity and control over its future capital position. As part of our 2015
financial results, we have provided our estimated capital position under
the new Solvency II regime which shows the Group to be in robust
financial health.
This positive activity for the Group has been completed against a
backdrop of uncertainty for the broader insurance industry, with the
introduction of new pension freedom rules from 6 April 2015 providing
greater flexibility for our customers in their retirement planning but also
increasing the complexity of their decision making process.
Phoenix Group is well positioned to benefit from the evolving UK life
insurance industry. We have the right platform as the largest UK
specialist consolidator of closed life funds, with a scalable operating
model and strong outsource partner relationships, and we have also
demonstrated our ability to enhance value for our customers and
shareholders through management actions. There remains a significant
opportunity for Phoenix Group to generate further value from future
acquisitions in the coming years.
CLIVE BANNISTER
GROUP CHIEF EXECUTIVE OFFICER
2015 has
been another
exceptionally
busy year, and
the Group has
continued to
meet its targets.”
Phoenix Group Holdings Annual Report and Accounts 2015 09
FINANCIAL HIGHLIGHTS
DELIVERY OF FINANCIAL TARGETS
Phoenix Group has continued its track record of meeting or exceeding
its financial targets.
2015 was a transitional year to the new Solvency II capital regime and
our 2015 cash generation target incorporated assumptions regarding
how the final Solvency II regulations were likely to be implemented.
Against a full year cash generation target of £200 million to £250 million,
the Group has generated £225 million of cash in 2015, meeting the
target range. Against our long-term cash generation target of £2.8 billion
for the period from 2014 to 2019, we have already delivered £1.2 billion.
Our MCEV decreased by £134 million to £2,513 million at 31 December
2015, versus £2,647 million at 31 December 2014. The decrease
primarily reflects the payment of dividends in 2015, negative impacts
from actions taken to optimise the Group’s Solvency II capital position
and market movements during the last quarter of 2015, in particular
widening credit spreads. However, these negative impacts have been
partly offset by management actions that have enhanced MCEV.
In March 2015, we announced an increased cumulative target of
£400 million incremental embedded value from management actions
between 2014 and 2016. The Group generated £205 million of
incremental MCEV during 2015 and, having now achieved £466 million
from management actions since 2014, has met this increased target a
year ahead of schedule.
SOLVENCY II AND OUR CAPITAL POSITION
The new Solvency II regime applies to the Group from 1 January
2016 and therefore the Solvency I Group capital measures, PLHL ICA
and IGD, are no longer regulatory measures and will not be reported
in future.
At 31 December 2015, our PLHL ICA surplus was estimated to
be £0.6 billion, with headroom over our capital policy of £0.5 billion
(2014: £0.7 billion surplus, £0.6 billion headroom). Our estimated
IGD surplus was £1.5 billion at 31 December 2015, with headroom
over our IGD capital policy of £0.7 billion (2014: £1.2 billion surplus,
£0.5 billion headroom).
The PRA approved the Group’s Internal Model Application in
December, and therefore the Group will report its Solvency II capital
position based on the Internal Model and as calculated at the level
of Phoenix Life Holdings Limited (‘PLHL’). In addition, the PRA also
approved the Group’s use of matching adjustments and transitional
measures in 2015.
Our estimated Solvency II surplus as at 31 December 2015 is
£1.3 billion. This is the surplus over the Group’s Solvency Capital
Requirement and demonstrates the resilience of the Group’s capital
position under the new regime. Unlike open life businesses, we do not
need to hold significant additional capital to support the writing of new
insurance products. The Group’s Solvency II position is also relatively
insensitive to market movements.
In addition, we have £706 million of cash at the holding company level,
providing further support for our stable and sustainable dividend policy.
IFRS OPERATING PROFIT
The Group achieved IFRS operating profits of £324 million in 2015
(2014: £483 million), reflecting the divestment of Ignis in 2014 and a
reduced impact from management actions.
OPERATIONAL HIGHLIGHTS
Despite the changes impacting the UK life insurance industry,
Phoenix Group continued to streamline its business and create value.
Key actions taken during 2015 include:
Ɛ The Part VII transfer of the business of National Provident Life Limited
into Phoenix Life Assurance Limited. This fund merger reduces the
number of UK life insurance companies within the Group to two and
the Group will examine the possible merger of the remaining two life
companies in due course.
Ɛ The recapture by Phoenix Life Assurance Limited of £1.4 billion of
reinsured annuities from Opal Re, the Group’s captive Bermudan
reinsurance company, and entering into a new reinsurance
agreement with an external reinsurer which covers the bulk
of the recaptured liabilities. This action significantly enhanced
our Solvency II capital efficiency by reducing our exposure to
longevity risk.
Ɛ An exchange offer of the Group’s Tier 1 notes into new subordinated
notes with a maturity of 2025, with a 99% take-up rate
by noteholders.
Ɛ The simplification of the Group’s corporate structure following the
single silo bank facility put in place during 2014, with Impala Holdings
Limited now 100% owned by PLHL. This Group simplification
provided a more appropriate Group structure for the Solvency II
capital regime.
Ɛ The divestment of the Group’s Irish subsidiary, Scottish Mutual
International (‘SMI’), for £14 million. The small scale of SMI, which
had only 3,000 remaining policyholders, had become inefficient and
the divestment further simplified the Group’s structure.
Ɛ The acquisition of a £0.3 billion portfolio of equity release mortgages,
in line with the strategy to diversify the asset portfolio by investing in
new asset classes to support the Group’s annuity liabilities.
This is a strong list of achievements and we will continue to seek ways
to add value for customers and shareholders alike during 2016.
REGULATORY AND LEGISLATIVE CHANGES
2015 saw a number of key regulatory changes to the UK life
insurance sector.
The ending of compulsory annuitisation of pension pots, announced
at the time of the 2014 Budget, continues to have a significant impact
across the UK life insurance industry. Phoenix Group only provides
annuities for its own vesting policyholders and wrote a total of
£485 million of annuities in 2015 compared with £545 million in 2014,
a decline of 11%. £344 million of the annuities written in 2015 had
guaranteed annuity rates (‘GARs’) that are often well above currently
available market rates, with the remaining £141 million being non-GAR
annuities. We continue to believe that the life-long certainty of income
provided by annuities will remain an attractive option for certain
customers and Phoenix Group aims to offer our customers an average
non-GAR annuity rate that is at least 97.5% of the average of the top
five open market providers.
Phoenix Group Holdings Annual Report and Accounts 2015Strategic report 10
GROUP CHIEF EXECUTIVE
OFFICER’S REPORT
Continued
To ensure that Phoenix Life customers have access to the range of
options available under the new pension freedom rules, Phoenix
Life agreed a wider partnership agreement with Just Retirement.
This provides customers with a range of products, including the ability
to ‘shop around’ for standard and enhanced annuities as well as offering
a drawdown pension product. Access to enhanced annuities can
increase the annuity income received by up to 40% and customers
are strongly encouraged to investigate these and other options
before making a final decision. The new partnership therefore also
offers customers the ability to access financial advice as they plan
for their retirement.
There remains the risk of fraudsters targeting our customers and we
therefore continue to take action to identify possible incidences of
pension fraud where possible. Phoenix Group prevented policyholders
from losing around £10 million to fraudulent schemes during 2015 and
we have also been active in publicising the risk of pension fraud through
specific campaigns in the media.
Despite all the changes implemented during the year, Phoenix Life has
maintained a high level of customer service. We continue to deliver
our Pensions Transfers and Open Market Options payments made
through the Origo Faster Transfers system in under 11 days on average.
Complaint handling is also a key area of focus and this is demonstrated
by the level of overall volumes of incoming servicing complaints being
only 0.3% of transactions, as well as a customer satisfaction rating of
96% for the year. With regard to the number of our decisions that are
referred to and subsequently overturned by the Financial Ombudsman
Service (‘FOS’), our overturn rate of 18% is the best performance
recorded by Phoenix since FOS started publishing data in 2009.
The customer strategy at Phoenix Group is focused on improving
customer outcomes. Security of our customer assets is foremost,
followed by our aim to maximise returns wherever possible but
primarily through enhanced distribution of the estate within the
life funds. We delivered an additional £68 million of distributable estate
through management actions, £18 million above our 2015 target, and
have therefore directly benefited our with-profit policyholders through
increased future bonuses.
The FCA released its thematic review of the fair treatment of
long-standing customers in life insurance earlier this month and, as
the UK’s largest specialist closed life fund consolidator, we welcome
the focus the review brings to the fair treatment of policyholders.
Our customers and the outcomes of their policies are fundamental
to our business model. However, we continue to seek ways to
improve and we look forward to working with the FCA and industry
as part of the subsequent consultation process.
There are also a number of ongoing reviews, including the recently
announced FCA consultation on early exit charges. Over 80% of our
unitised policies have no exit charge at all and to date we have seen no
evidence that any of our customers incurring an exit charge is deterred
from taking advantage of pension freedoms before their selected
retirement date. However, we will work closely with the FCA as part of
their consultation on the implementation of an appropriate cap on exit
charges. In total, these charges amount to approximately £22 million
for Phoenix policyholders over the age of 55, an average of only around
0.25% of unitised assets.
Finally, Phoenix Life has fully embraced the establishment of an
Independent Governance Committee for contract-based workplace
pensions. Consistent with the continuing focus on product governance
within Phoenix, the Committee is reviewing data and considering
proposals to ensure that customers in our workplace pension schemes
are being treated fairly.
CUSTOMERS
The most important change impacting our customers this year has
undoubtedly been the introduction of the new pension freedom
rules from 6 April 2015. Phoenix Life has put in place an overarching
Retirement Strategy in reaction to the new pensions legislation, with the
aim of being in a position to meet the future demands of our customers.
As expected, the number of customer calls increased upon the
introduction of the new rules. However, we were very pleased that the
actions we took in advance to increase our capacity such as increasing
resource levels, extending contact centre opening hours, providing
online retirement packs and outbound calling ensured a good customer
experience was maintained.
During 2015, around 43,000 customers requested full encashment of
their pension savings, with an average pot size of £13,000. Phoenix Life
provided detailed information to customers on their options as well as
promoting the availability of the Government’s Pension Wise service.
In addition, we continue to remind customers of the value of guaranteed
annuity rates within their products and encourage them to take financial
advice before making important decisions on their pension savings.
Phoenix Group Holdings Annual Report and Accounts 2015 11
PEOPLE
Phoenix Group’s ability to attract, retain and motivate outstanding
talent was, for the fourth year in succession, formally recognised in
2015 through our accreditation as one of the ‘UK’s Top Employers’.
Employee engagement is essential for Phoenix Group, as retaining the
actuarial and financial skills to manage closed life funds is critical for the
execution of the Group’s strategy. The maintenance of our employee
engagement survey result at 78% positions the Group positively against
the Financial Services benchmark in 2015.
The Group’s Corporate Responsibility programme continues to be a key
component of our business proposition. Employees take great personal
responsibility and involve themselves in many varied initiatives. I am
pleased to report that in excess of £174,000 was raised by the Group
for charities in 2015. Of this, over £168,000 was donated to the Group’s
main corporate charity partners – Midlands Air Ambulance Charity and
London’s Air Ambulance – which has made a significant contribution
to support their vital life-saving work. We very much look forward to
working with the Air Ambulance charities during our third partnership
year. The Group’s future Corporate Responsibility programme
will continue to focus on the physical and mental wellbeing of our
employees and our community programme will also play a key role in
the engagement of staff, who can volunteer their time to a wide range
of community projects.
2016 OUTLOOK AND PROSPECTS
The potential remains for our business to be impacted by economic
headwinds and the uncertain and evolving regulatory environment.
However, the Group’s financial performance during 2015 and the
strength of our business model give me confidence in the resilience
of the Group’s long-term cash flows and our ability to deliver value for
all our stakeholders.
Now that Solvency II is in place, we have set a 2016 annual cash
generation target of between £350 million and £450 million, a
significant increase on 2015. We have also set a new, five year cash
generation target of £2.0 billion from 2016 to 2020, matching the
maturity of our revised bank facility. Furthermore, we expect a further
£3.2 billion of cash generation from 2021 onwards. This is a clear
demonstration of the long-term cash flow potential of the Group and
how we seek to increase value over time.
We also continue to maintain robust Group solvency levels and have
£706 million of cash at the holding company level, providing further
support for our stable and sustainable dividend policy.
Finally, we continue to look for opportunities to simplify the Group
and improve its resilience. This will include seeking to further diversify
away from senior bank debt to longer-term, subordinated debt. This will
allow the Group to both match its debt profile to its long-term cash
flows whilst offering the opportunity to simplify the holding company
structure further, reducing costs and complexity.
Following the removal of the requirement to publish Interim
Management Statements, we will no longer formally release quarterly
information on cash generation and the Group’s capital position.
However, we will continue to ensure investors are kept properly
informed on the Group’s development on a regular basis.
CONCLUSION
I believe that the impact of regulatory developments will change
the landscape of the UK life insurance industry, providing Phoenix
with a number of acquisition opportunities. Open life companies will
reappraise their business models and strategies for their legacy policies.
Following the achievement of the investment grade credit rating and
continued financial delivery against our targets, the Group is well
positioned to take advantage of these industry changes. I believe there
are a number of potential acquisition and consolidation opportunities in
the UK closed life sector and we will continue to review options within
the framework of our existing commitment to stakeholders.
Irrespective of the wider ongoing challenges, our focus will remain
on the continued delivery of strong organic performance across all
of our key financial metrics and targets. We have consistently met or
exceeded all of our public financial targets and this is a track record that
we are committed to continuing.
I would like to thank my colleagues for their hard work during
an exceptionally busy year. They have delivered strong financial
performance, at the same time achieving a number of key milestones
that have enhanced the Group’s strategic position. I look forward to
capitalising on our renewed strength and firmly believe that we can
continue to deliver value for all our stakeholders.
CLIVE BANNISTER
GROUP CHIEF EXECUTIVE OFFICER
22 MARCH 2016
Phoenix Group Holdings Annual Report and Accounts 2015Strategic report 12
OPERATING
STRUCTURE
The Phoenix Group’s operating structure is integral
to its success in the closed life fund market.
GROUP FUNCTIONS
LIFE COMPANIES
The Group functions provide services to Phoenix Life and manage
corporate and strategic activity. The Group functions include Group
Finance, Treasury, Group Tax, Group Actuarial, Group Risk, Legal
Services, HR, Corporate Communications, Strategy and Corporate
Development, Investor Relations, Company Secretariat and Internal
Audit. Based both in Wythall, Birmingham and Juxon House,
London, the Group is led by the Group Chief Executive Officer,
Clive Bannister.
PHOENIX LIFE
Phoenix Life is responsible for the management of the Group’s
life funds. Its experienced and focused management team is
led by its Chief Executive Officer, Andy Moss. Based in Wythall,
Birmingham, it has a track record of successfully integrating
life assurance businesses and has developed a leading-edge
model and infrastructure into which future acquired funds can
be integrated.
PHOENIX GROUP
GROUP FUNCTIONS
Manage corporate and strategic activity
Group strategy including mergers and acquisitions
External positioning with regulators, lenders and shareholders
Debt refinancing
LIFE COMPANIES
Hold the financial assets
of our policyholders
Two life companies
and multiple funds
Improved services
for policyholders.
MANAGEMENT
SERVICES COMPANIES
Provides our life companies
with all required management
services
Operational risk transfer
Synergies for future
acquisitions
Cost certainty.
OUTSOURCE PARTNERS
Used by the management
services companies to provide
policy administration services
Competitive advantage
through scale
Scalable and efficient
operating platforms
Enhanced risk and control
environment.
Following a series of life company consolidations, the latest of which
being the transfer of the business of National Provident Life Limited into
Phoenix Life Assurance Limited in the first half of 2015, the Group now
has two operating UK life companies, being Phoenix Life Limited and
Phoenix Life Assurance Limited. Together, they comprise 14 with-profit
funds and 2 non-profit funds. The Group will examine the possible
merger of the remaining two life companies in due course. The Group
also completed the divestment of an Irish operating life company,
Scottish Mutual International Limited (‘SMI’), in December 2015.
By bringing together separate life companies and funds, the Group’s
business model is simplified, which releases capital and reduces
complexity. Fund transfers enable the Group to make more efficient
use of the capital in its life companies and result in administrative
expense savings and increased consistency of management practices
and principles across the Group.
MANAGEMENT SERVICES COMPANIES
The Group’s management services companies are charged with the
efficient provision of financial and risk management services, sourcing
strategies and delivering all administrative services required by the
Group’s life companies. By using management services companies,
the life companies benefit from price certainty and a transfer of some
operational risks.
OUTSOURCE PARTNERS
A key role of the management service companies is the management
of relationships with the outsource partners on behalf of the life
companies. As the number of policies held by the Group gradually
declines over time, the fixed cost base of our operations as a proportion
of policies will increase. Our management services team manages this
risk by putting in place long-term arrangements for third party policy
administration. By paying a fixed price per policy to our outsource
partners, we reduce this fixed cost element of our operations and
convert to a variable cost structure. This allows our management
services companies to generate profits by managing costs efficiently.
These outsource partners have scale and common processes,
often across multiple clients, which provide several benefits for the
Group, including reducing investment requirements, improving the
technology used within our administrative capability, and reducing our
operational risk.
Specialist roles such as finance, actuarial, risk and compliance and
oversight of the outsource partners are retained in-house, ensuring
Phoenix Life retains full control over the core capabilities necessary
to manage and integrate closed life funds.
Phoenix Group Holdings Annual Report and Accounts 2015 THE
MARKETPLACE
13
The economic, regulatory, legislative and competitive
landscape which the Group operates in is evolving at
an unprecedented pace.
Economic landscape
Whilst the first half of 2015 showed positive investment market returns
due to improving economic performance and an expectation of an
eventual normalisation of monetary policy, gains seen in the first six
months of the year were offset in the second half by a slowdown in
the Chinese economy, falling oil prices and concerns over a potential
rise in interest rates in the United States. The UK equity market index
(FTSE All Share Total Return) closed 1.0% ahead of the 2014 position
reflecting a relatively flat return.
Modest increases in UK gilt yields across all durations during 2015
positively impacted the Group’s IFRS results given short asset positions
compared to the longer-term IFRS basis liabilities. On an MCEV basis,
the increase in yields had a minor adverse impact. Credit spreads
widened in the year which had a detrimental impact on the Group’s
IFRS and MCEV results.
Regulatory and legislative landscape
The Solvency II prudential framework which came into force on
1 January 2016, has updated, among other things, the existing EU life,
non-life, reinsurance and insurance groups directives. The main aim
of the framework is to protect policyholders through establishing
prudential requirements better matched to the true risks of the
business, taking into account other regulatory objectives of ensuring the
financial stability of the insurance industry and stability of the markets.
In December 2015, the PRA approved the Group’s Internal Model
Application under Solvency II which provided the Group with greater
clarity and control over its future capital position. Our 2015 estimated
capital position under the new Solvency II regime shows the Group
to be in robust financial health.
The FCA released its thematic review of the fair treatment of
long-standing customers in life insurance earlier this month. As the UK’s
largest specialist closed life fund consolidator, we welcome the focus the
review brings to the fair treatment of policyholders as our customers and
the outcomes of their policies are fundamental to our business model.
Competitive landscape
The Group estimates the market size of the UK closed life industry
to be over £300 billion. One conclusion noted in the Pensions
Institute’s independent report, titled “The Meaning of Life”, was that
there will be further consolidation in the UK life sector as existing
providers struggle with issues such as heightened regulatory scrutiny,
increased capital requirements and shortages of skilled personnel to
manage complex legacy products. Clearly, the traditional life company
business model must continue to adapt and Phoenix Group has
the expertise and business model in place to take advantage of this
changing environment.
The Group’s 2015 results have also been adversely impacted by
amendments to economic assumptions arising from a number
of changes to asset portfolios undertaken to optimise the Group’s
Solvency II capital position ahead of the implementation of the
new regime.
The persistently low interest rate environment remained a challenge
for the industry in 2015 but the Group has been proactive in mitigating
against this by for example, matching the duration of assets and
liabilities where practicable and entering into interest rate hedging
arrangements where appropriate. In practice, the Group maintains a
mix of fixed and variable rate instruments which it reviews regularly
to ensure the overall exposure to interest rate risk is kept within the
agreed profile for each fund.
Such regular monitoring is a key part of the Group’s management
of its exposure to investment risks, and its importance has again
been highlighted by the investment market volatility experienced
in the early part of 2016.
The ending of compulsory annuitisation of pension pots and the
introduction of new pension freedoms rules from 6 April 2015 has
provided greater flexibility for our customers in their retirement planning
but has also increased the complexity of their decision-making process.
Phoenix has put in place a full product range for our customers, either
provided directly or through partners, and our current experience
demonstrates that our assumptions underpinning our financial planning
in respect of take-up rates for vesting annuities remain appropriate.
There are also a number of ongoing reviews, including the recently
announced FCA consultation on early exit charges and we will work
closely with the FCA as part of their consultation on the implementation
of an appropriate cap on exit charges.
SUMMARY
Overall, the potential remains for our business to be impacted
by economic headwinds and the uncertain and evolving
regulatory and legislative environment. Whilst the impact
of these changes will change the landscape of the UK life
insurance industry, it will also provide Phoenix with a number
of consolidation opportunities, as open life companies are forced
to reappraise their business models and strategies for their
legacy policies.
Phoenix Group Holdings Annual Report and Accounts 2015Strategic report 14
OUR BUSINESS
MODEL
We seek to generate value for all our stakeholders and the
delivery of our value generation strategy is intrinsically
linked to our specialist closed life fund model.
The Group’s competitive advantage…
CLOSED LIFE FUND
OUTSOURCER MODEL
PUBLICLY QUOTED
EXPERIENCED AND SKILLED
Strategic focus on our closed
life fund specialism.
Low cost, scalable
outsourcer model.
Publicly quoted Group
with proven access to
debt and equity markets.
Experienced and skilled
management team with a proven
track record of target delivery.
Underpinned by The Phoenix Way…
OPERATIONAL
MANAGEMENT
Standardising, streamlining and
innovating the key processes
and platforms across the
Group improves efficiency and
generates value.
RISK MANAGEMENT
RESTRUCTURING
EFFECTIVE PARTNERSHIPS
Managing and mitigating risk
within appetite and exercising
robust governance, supports
policyholder security and
delivers the Group’s strategy.
Simplifying the Group’s
operating structure through life
company consolidation and fund
mergers reduces complexity
and releases capital.
Utilising external outsource
partners and fund managers with
proven track records provides
access to expert knowledge and
delivers a scalable cost base,
maximising returns.
Delivers value for all our stakeholders…
POLICYHOLDERS
Focused customer
offering and improved
customer outcomes.
SHAREHOLDERS
EMPLOYEES
SOCIETY
Profits from participation in
investment returns, policyholder
charges and management fees
earned on assets.
Challenging work environment,
career development opportunities
and commensurate reward
and benefits.
Reduced environmental footprint,
support for local communities
and our charity partners.
96%
customer satisfaction
18%
TSR in 2015
Top Employer
certification 2015
£68m
increase in
distributable estate
£174,000+
raised for a range
of charities
Phoenix Group Holdings Annual Report and Accounts 2015 15
As a standalone business and in the absence of further acquisitions
which meet our target criterion, Phoenix is expected to continue
to generate strong and predictable cash flows from the operating
companies to support commitments at the holding companies
including pension scheme contributions, debt servicing and shareholder
dividends. However, in order to grow and maximise value for all
stakeholders, we will continue to pursue opportunities which meet the
criteria set out above as and when they arise.
VALUE GENERATION THROUGH MANAGEMENT ACTIONS
Management actions are one of the key areas of focus for Phoenix Life
and another key source of value generation.
The Phoenix Way, which includes activities related to operational
management, risk management, restructuring and effective
partnerships, is the methodology used to deliver this value.
Some actions which the Group has delivered in the past including
funds mergers and the consolidation of our actuarial modelling into
one platform, have not only generated value but led to significant
improvements in the operations of our business.
Value from acquisitions combined with our ability to add value
through management actions, are fundamental drivers of shareholder
value accretion.
VALUE
GENERATION
PHOENIX GROUP’S ACQUISITION STRATEGY
Phoenix Group is well placed to find solutions for a range of sellers
of life insurance businesses due to the Group’s flexible approach
to acquisitions, in particular the Group’s appetite to acquire either
life companies, funds or portfolios of businesses, and all product types
across the with-profit, non-profit and unit-linked spectrums.
The UK life insurance sector is evolving and we believe the changing
environment may result in sellers looking to dispose of various
portions of their business. We are able to be flexible about the size
and structure of any acquisition, which should provide us with a variety
of opportunities.
Phoenix Group will assess potential acquisitions in light of the financial
condition of the Group. The criteria we would target in making an
acquisition are:
Ɛ Closed life. Any acquisition would focus on the closed life fund
sector within the UK
Ɛ Value accretive
Ɛ Help to sustain dividends
Ɛ Gearing level supportive of an investment grade rating.
VALUE GENERATION THROUGH ACQUISITION
AND CONSOLIDATION
Ɛ When a life company makes an acquisition, part of the purchase price
represents the value of the insurance contracts which are anticipated
to be released over a period of time.
Ɛ This Value in Force (‘VIF’) is the present value of future profits
expected on the acquired portfolio.
Ɛ Cash flow is generated from the emergence of VIF into free surplus
and the release of capital as the risk profile reduces over time.
Ɛ Phoenix can increase the value of the VIF and/or accelerate the
release of capital through a variety of management actions. It can
also further replenish VIF and cash flows through future acquisitions
and the extraction of synergies.
Phoenix Group’s value generation model
Potential value and source of cash
acceleration and value generation
will vary depending on specific target
or management action
VALUE CREATION THROUGH
MANAGEMENT ACTIONS
Internal
sources/equity
financing
Debt financing
Net economic
value
Debt
Gearing level
to support
investment
grade rating
Pre-acquisition
economic value
Acquisition
Operational
management
Risk
management
Restructuring
Effective
partnerships
Post-acquisition
economic value
Phoenix Group Holdings Annual Report and Accounts 2015Strategic report 16
OUR STRATEGY
AND KPIs
We have four areas of strategic focus which support the
fulfilment of our mission and the realisation of our vision.
Our initiatives and key performance indicators demonstrate
how we have delivered against these strategic areas.
01
02
04
03
DRIVE
VALUE
In order to drive value, the Group looks to identify and
undertake management actions, which release capital,
accelerate cash flows or enhance economic value.
These actions are undertaken across four areas:
operational management, risk management, restructuring
and effective partnerships. By improving the efficiency of
operational management through the standardisation and
streamlining of key processes across the Group, this will
in turn reduce costs, improve efficiency and drive value.
Although the life companies are closed and generally
do not write new business, they do accept additional
policyholder contributions on in-force policies, such as
pension savings plans to be reinvested at maturity into
annuities. The new pension freedom rules that came into
effect during 2015 promise to have a significant impact
on the UK life industry but the Group continues to expect
a significant stream of internal annuities to vest. This is
particularly the case where such vestings have valuable
guaranteed annuity rates, as was the case for over 71%
of≈such premiums written by the Group in 2015.
Additional value can be generated from further acquisitions
of closed life books of business.
KEY INITIATIVES AND PROGRESS IN 2015
Ɛ We continued to streamline the Group’s actuarial
modelling systems, simplifying modelling process
and ensuring consistent capital management across
the business.
Ɛ We delivered £205 million of incremental embedded
value in 2015, giving a cumulative figure of £466 million
since 2014. The Group has therefore exceeded its target
of £400 million between 2014 and 2016 one year early.
Ɛ We acquired a £0.3 billion portfolio of equity release
mortgages, in line with our strategy to diversify the asset
portfolio by investing in new asset classes which create
value and drive capital efficiencies.
PRIORITIES FOR 2016
Ɛ Review future investment opportunities to generate
capital efficiencies.
Ɛ Continued focus on capital enhancement which will
drive cash flows.
Ɛ Further growth through mergers and acquisitions.
Phoenix Group Holdings Annual Report and Accounts 2015 17
How we measure delivery
OPERATING COMPANIES’ CASH GENERATION
IFRS OPERATING PROFIT
0
1
8
7
1
8
0
9
6
£225m
2014: £567m
24
Read more about
cash generation
7
6
5
5
2
2
9
2
4
9
3
4
7
8
3
3
8
4
4
2
3
£324m
2014: £483m
26
Read more about
IFRS operating profit
2011 2012 2013 2014 2015
2011 2012 2013 2014 2015
WHY IS IT
IMPORTANT?
Group IFRS operating
profit is considered a more
representative measure
of performance than
Group IFRS profit before
tax as it provides long-term
performance information
unaffected by short-term
economic volatility.
ANALYSIS
Group IFRS operating
profit has decreased
by £159 million to
£324 million principally
due to the lower
impact of management
actions compared to
the previous period.
WHY IS IT
IMPORTANT?
Maintaining strong cash
flow delivery underpins
debt servicing and
repayment as well as
shareholder dividends.
ANALYSIS
With cash generation
of £225 million, the
Group met its full year
cash generation target
for 2015 of £200 million
to £250 million.
TARGET
To generate cash flows
of £2 billion between
2016 and 2020, of
which £350 million
to £450 million to be
generated in 2016.
Cash remitted reflects
free surplus within the
life companies and the
benefit of management
actions implemented in
the period. The reduction
from the prior period
reflects the retention
of capital in the life
companies in advance of
the transition to the new
Solvency II capital regime.
GROUP MCEV
7
4
6
,
2
3
1
5
,
2
8
7
3
,
2
8
1
1
,
2
2
2
1
,
2
£2,513m
2014: £2,647m
29
Read more about
Group MCEV
2011 2012 2013 2014 2015
WHY IS IT
IMPORTANT?
MCEV has provided a
consistent means of
assessing our ability
to increase value through
the delivery of incremental
management actions.
Following the
implementation of
Solvency II, this is the last
time we will report MCEV.
ANALYSIS
With cumulative
incremental embedded
value from management
actions of £466 million,
the Group has exceeded
the cumulative
incremental embedded
value target of
£400 million from
2014 – 2016.
The reduction of Group
MCEV from the prior
period primarily reflects
dividend and financing
costs, the adverse
impacts of economic
conditions and changes
in asset portfolios ahead
of Solvency II
implementation, partly
offset by management
actions.
Phoenix Group Holdings Annual Report and Accounts 2015Strategic report 18
OUR STRATEGY AND KPIs
Continued
01
02
04
03
MANAGE
CAPITAL
As a Group we continue to focus on the effective
management of our risks and the efficient
allocation of capital against those risks.
Ɛ PLAL recaptured £1.4 billion of reinsured annuities from
the Group’s Bermudan reinsurer, Opal Reassurance
Limited (‘Opal’), and we entered into a new reinsurance
agreement with an external reinsurer in November 2015.
Ɛ In December 2015, the Group received PRA approval
of our Solvency II full internal model, transitional
adjustment and matching adjustment applications.
In line with approvals received from the PRA, the Group
will continue to monitor and measure its solvency
position at the PLHL level.
Ɛ We resolved a number of legacy tax issues during the
year which have further reduced risk and uncertainty and
facilitated the release of capital.
PRIORITIES FOR 2016
Ɛ Continued enhancement of the Group’s capital position
under Solvency II through the implementation of
new management actions and further review of the
investment portfolio allocation.
Ɛ Exploring opportunities to further enhance our capital
structure through the continued diversification of the
Group’s debt structure.
We focus on optimising our capital structure while
addressing the diverse needs of various stakeholders,
including policyholders, shareholders, lending banks,
bondholders and regulators.
We aim to ensure that unrewarded exposure to market
volatility is minimised or the risks from market movements
are managed through hedging.
In addition, regular re-balancing of asset and liability
positions is required to ensure that only those assets which
deliver appropriate risk-adjusted returns are held within
life funds, taking into account any policyholder guarantees.
KEY INITIATIVES AND PROGRESS IN 2015
Ɛ In January 2015, we completed an exchange offer of
the Group’s Tier 1 notes into new subordinated notes
with a maturity of 2025, with a 99% take-up rate by
noteholders. The new notes meet the requirements of
Tier 2 capital under Solvency II, at the PLHL level.
Ɛ We achieved an investment grade credit rating by
Fitch Ratings in August 2015. This provides a lower
interest margin on the Group’s bank debt and broader
access to the capital markets improving our ability to
issue regulatory compliant subordinated debt to support
the Group’s capital position.
Ɛ We completed a Part VII transfer of the business
of National Provident Life Limited into Phoenix Life
Assurance Limited. This fund merger reduces the
number of UK life insurance companies to two, resulting
in greater capital efficiencies within the Group.
Ɛ We continued to simplify the Group’s corporate
structure following the single silo bank facility put in place
during 2014, with Impala Holdings Limited now 100%
owned by PLHL. This Group simplification provides a
more appropriate Group structure for the Solvency II
capital regime.
Ɛ We further simplified the Group’s capital structure
with the divestment of the Group’s Irish subsidiary,
Scottish Mutual International (‘SMI’) which had become
inefficient due to its small scale.
Phoenix Group Holdings Annual Report and Accounts 2015 19
How we measure delivery
SOLVENCY II SURPLUS (ESTIMATED)
PLHL ICA SURPLUS (ESTIMATED)
3
.
1
£1.3bn
32
Read more about
Solvency II
2
.
1
0
.
1
7
.
0
6
.
0
£0.6bn
2014: £0.7bn
31
Read more about
PLHL ICA surplus
2014 2015
WHY IS IT
IMPORTANT?
The Solvency II surplus is
the regulatory assessment
of capital adequacy at the
PLHL level, implemented
on 1 January 2016.
ANALYSIS
Our opening Solvency II
surplus of £1.3 billion
represents a robust and
resilient capital position.
2012 2013 2014 2015
WHY IS IT
IMPORTANT?
The PLHL Group’s measure
of capital adequacy on
an economic basis until
31 December 2015.
This measure is replaced
by the Solvency II surplus
from 1 January 2016.
ANALYSIS
The PLHL ICA surplus
decreased during the
period as capital
generation items,
including management
actions, were offset by
dividend payments, debt
financing and repayments
and the adverse impact of
management actions
undertaken to enhance
the Solvency II position.
IGD SURPLUS (ESTIMATED)
FINANCIAL LEVERAGE
5
.
1
4
.
1
3
.
1
2
.
1
2
.
1
£1.5bn
2014: £1.2bn
31
Read more about
IGD surplus
%
3
.
2
6
%
7
.
9
5
%
6
.
9
4
%
3
.
9
3
%
8
.
7
3
37.8%
2014: 39.3%
33
Read more about
financial leverage
2011 2012 2013 2014 2015
2011 2012 2013 2014 2015
WHY IS IT
IMPORTANT?
The Pillar I regulatory
assessment of capital
adequacy at the PLHL
level until 31 December
2015. Again, this measure
is replaced by the
Solvency II surplus from
1 January 2016.
ANALYSIS
IGD surplus increased
to £1.5 billion at
31 December 2015
mainly reflecting
simplification of the
Group’s corporate
structure, with Impala
Holdings Limited now
100% owned by PLHL.
ANALYSIS
Financial leverage
decreased to 37.8%
at 31 December 2015
reflecting repayments
of £190 million made
in respect of the PGH
Capital facility during
the period.
WHY IS IT
IMPORTANT?
The ratio provides an
indicator of the Group’s
financial strength as it
measures the level of
debt as a percentage of
the Group’s gross MCEV.
Following achievement
of the investment grade
credit rating and the
discontinuance of MCEV
reporting, this is the last
time we will report
financial leverage.
Phoenix Group Holdings Annual Report and Accounts 2015Strategic report 20
OUR STRATEGY AND KPIs
Continued
01
02
04
03
IMPROVE
CUSTOMER
OUTCOMES
Improving customer outcomes is central
to our vision of being the saver-friendly
‘industry solution’ for closed life funds.
Ɛ Our Financial Ombudsman Service (‘FOS’) overturn rate
was the lowest yearly overturn rate to date. The FOS
overturn rate is the percentage of resolved cases where
the FOS, upon reviewing a complaint, make a change to
our original decision in favour of the customer.
Ɛ We beat the industry target related to the speed of
pension transfer payouts in 2015. This is measured in
the time in calendar days taken from when a transfer
request is put on Origo (an electronic pension transfer
system) to when the transfer is cleared and the receiving
scheme receives the money in its bank account.
PRIORITIES FOR 2016
Ɛ Make ongoing improvements to customer outcomes,
with a particular focus on strengthening communications
with our customers.
Ɛ Continue to take actions to support customers as they
approach retirement age, so that they are able to make
fully informed decisions at the right time.
Ɛ Enhancement of our website, to encourage customer
engagement with the products they hold with Phoenix.
Ɛ Ensure our products continue to deliver appropriate
outcomes for our customers.
We have six key areas of focus related to our
customer offering:
Ɛ Security: ensuring all policy promises and guarantees
are delivered.
Ɛ Improving value and effective with-profits fund run-off:
through accelerating estate distribution where possible
and providing appropriate investment exposure.
Ɛ Effective service delivery: using our outsourced model
to leverage expertise and ensure costs run off in line
with policy volumes.
Ɛ Clear and effective communication: recognising the
importance of clarity and simplicity for what can be
complex products.
Ɛ Product governance: including a rolling review of our
products to ensure they continue to deliver appropriate
outcomes for our customers.
Ɛ Customer journey: improving customer experience
wherever possible.
KEY INITIATIVES AND PROGRESS IN 2015
Ɛ We completed an enormous amount of work to
implement the new pension freedom rules introduced
by the Government. Our customers now have access
to all of the new freedoms either within Phoenix Life
or via one of our specialist partners.
Ɛ In March we established an Independent Governance
Committee (‘IGC’) charged with overseeing the
fair treatment of our customers in workplace pensions
arrangements. During the course of the year, we have
worked with the IGC to understand where those
customers are at risk of receiving poor value from their
products and formulated proposals seeking to address
those areas.
Ɛ We have again achieved a positive customer satisfaction
score based on the results of the satisfaction survey
managed by Ipsos MORI (an external research firm).
Customers surveyed were asked to give a satisfaction
rating of between 1 and 5 to a number of questions
asked (with a rating of 3 or above regarded as satisfied)
and 96% was the percentage of all questions scoring
a rating of 3 or above.
Phoenix Group Holdings Annual Report and Accounts 2015 21
How we measure delivery
CUSTOMER SATISFACTION SCORE
FOS OVERTURN RATE
%
3
9
%
6
9
96%
2014: 93%
%
1
2
%
1
2
%
8
1
18%
2014: 21%
2014 2015
WHY IS IT
IMPORTANT?
This is an externally
calculated measure of
how satisfied customers
are with Phoenix’s
servicing proposition.
TARGET
To maintain a customer
satisfaction score
of 90%.
ANALYSIS
The Group achieved a
satisfaction score of
96% reflecting our
commitment to ensuring
customers are satisfied
with our products
and services.
2013 2014 2015
WHY IS IT
IMPORTANT?
This is an independent
view of how firms are
handling complaints.
It provides us with an
opportunity to review
and adjust our complaint
handling proposition in line
with best industry practice.
ANALYSIS
The FOS overturn rate
of 18% is the lowest
yearly FOS overturn
rate to date.
TARGET
To maintain a FOS
overturn target of
less than 33%.
SPEED OF PENSION TRANSFER PAYOUTS – ORIGO
8
8
.
0
1
3
8
.
9
7
9
.
0
1
11 days
2014: 9.83 days
ANALYSIS
The Group’s pension
transfer times are
again better than the
industry target.
TARGET
12 days in line with the
industry stated target for
Origo Pension Transfers.
2013 2014 2015
WHY IS IT
IMPORTANT?
This is a recognised
industry measure for
the speed of processing
Pension Transfers,
Open Market Options
and Immediate Vesting
Personal Pensions.
It allows us to benchmark
performance and our
overall servicing and
claims proposition against
our peers.
Phoenix Group Holdings Annual Report and Accounts 2015Strategic report 22
OUR STRATEGY AND KPIs
Continued
01
02
04
03
ENGAGE
PEOPLE
Ensuring our workforce is engaged is central to
the success of the Group. In 2015, we maintained
our focus on ensuring our people were challenged,
motivated and rewarded through opportunities
for growth, both professionally and personally.
For the fourth consecutive year, we were listed as one of
the UK’s Top Employers, an accreditation awarded to the
best companies to work for in the UK. We also achieved
fourth place in the mid-sized category in Britain’s Healthiest
Workplace (a benchmark in association with Pru Health,
Mercer and The Telegraph).
Ɛ Our Corporate Responsibility agenda played a key
part in the engagement of our people and in 2015,
we expanded our community programme to provide
opportunities for teamwork and leadership development.
Ɛ Our employees contributed a total of 1,942 volunteering
hours to charity and community projects.
We maintained an employee engagement index of 78%.
This index is an aggregation of scores against a number
of questions considered the most important for staff
engagement and was completed by 88% of employees.
KEY INITIATIVES AND PROGRESS IN 2015
Ɛ We continued to grow our development offering
for all employees with an increased emphasis on
management and leadership development.
Ɛ The first cohort of our Open University Executive
Education programme successfully completed
90-day business challenges. Set by our Executive
Committee, the challenges delivered genuine business
improvements as a result of delegates’ learning.
Ɛ We continued to build partnerships with prestigious
business schools, including Ashridge and the
London Business School, and a number of our
most senior employees attended development
programmes with them.
Ɛ Over 1,000 learning requests were supported by the
Group which included professional qualifications,
coaching and continuing professional development.
Ɛ Staff-led fundraising activity during 2015 raised a total
of over £174,000 for both our corporate partners
and for other charities. Employees elected to extend
our corporate charity partnership with Midlands Air
Ambulance Charity and London’s Air Ambulance for a
further two years and, during the first two years of the
extended partnership, we have raised over £402,000.
PRIORITIES FOR 2016
Ɛ Continue to attract and retain the very best talent by
focusing on developing our people and strengthening
our internal succession pipeline through targeted
management and leadership development intervention,
with particular emphasis on increasing the number of
high-potential female managers undertaking formal
management development activity.
Ɛ Build upon our efforts to support the physical and mental
wellbeing of our employees.
Ɛ Maintain support to our communities through employee
volunteering, fundraising and engagement with
community projects.
Go online for the Group’s full Corporate Responsibility Report
www.thephoenixgroup.com/CRreport2015
Phoenix Group Holdings Annual Report and Accounts 2015 23
How we measure delivery
EMPLOYEE ENGAGEMENT INDEX
%
4
7
%
3
7
%
6
7
%
8
7
%
8
7
78%
2014: 78%
2011 2012 2013 2014 2015
ANALYSIS
The group maintained its
employee engagement
index at 78%.
TARGET
To maintain an employee
engagement index
above 72%.
WHY IS IT
IMPORTANT?
We aim to ensure
employees understand the
purpose of their role and
feel that their contribution is
valued. The index provides
an indicator of how well we
are performing against
these aims.
DIVERSITY
We are committed to all forms of diversity and want to see greater
equality of opportunity for all our employees. A key focus for 2016 will
be to progress actions aimed, over time, at increasing the number of
females in senior positions.
Key employee metrics and diversity statistics are summarised below.
Total workforce
Male
Female
Directors (includes
Non‑Executive Directors)
Male
Female
Senior Managers
Male
Female
2015
741
433
308
10
8
2
8
7
1
2014
748
424
324
10
8
2
8
7
1
Workforce that is of Black, Asian or
Minority Ethnic background
115
107
Phoenix Group Holdings Annual Report and Accounts 2015Strategic report 24
FINANCIAL
PERFORMANCE
Cash generation
The Group has delivered a strong
set of results and has met all of its
published financial targets.”
JAMES MCCONVILLE
GROUP FINANCE DIRECTOR
22 MARCH 2016
CASH GENERATION
RECURRING CASH OUTFLOWS
Operating expenses of £26 million (2014: £29 million) decreased as a
result of reduced corporate office costs, primarily staff costs.
Pension scheme contributions of £55 million (2014: £88 million) are in
line with the latest triennial funding agreement, the decrease reflects
that 2014 included a one-off £5 million payment to the PGL Pension
Scheme and a scheduled step-down in the funding of the Pearl Group
Staff Pension Scheme.
Debt interest increased to £91 million (2014: £80 million), mainly
reflecting the coupon payment in relation to the new PGH Capital
subordinated notes which replaced the Tier 1 notes in January 2015.
This was partially offset by lower principal balances on the PGH Capital
facility following repayments made during the period.
NON-RECURRING CASH OUTFLOWS
Non-recurring cash outflows of £25 million (2014: £46 million) reflect
Group restructuring and corporate related projects. The decrease
compared to the prior period reflects that £14 million of consent
fees were paid in 2014 in respect of refinancing of the Group’s
banking facilities.
DEBT REPAYMENTS AND SHAREHOLDER DIVIDEND
Debt repayments of £190 million were made in respect of the PGH
Capital facility, including prepayments of £70 million in respect of
payments due in 2016 and £30 million in respect of payments due
in 2017.
The shareholder dividend of £120 million comprises the payment of the
2014 final and 2015 interim dividend.
The Group’s cash flows are generated from the interest earned
on capital, the release of excess capital as the life funds run off
and policyholder charges earned on assets under management.
The Group’s closed life funds provide predictable fund maturity
and liability profiles, creating stable long-term cash flows for
distribution to shareholders and for repayment of outstanding debt.
Although investment returns are less predictable, some of the
investment risk is borne by policyholders.
HOLDING COMPANIES’ CASH FLOWS
The statement of cash flows prepared in accordance with IFRS
combines cash flows relating to shareholders and cash flows relating
to policyholders, but the practical management of cash within the
Group maintains a distinction between the two. For this reason, the
following analysis of cash flows focuses on the holding companies’
cash flows, which reflect cash flows relating only to shareholders
and which are, therefore, more representative of the cash that could
potentially be distributed as dividends or used for the prepayment
of debt, the payment of debt interest, Group expenses and pension
contributions (subject to the Group’s liquidity policy, regulatory and other
restrictions on the availability and transferability of capital). This cash
flow analysis reflects the cash paid by the operating companies to the
holding companies, as well as the uses of those cash receipts.
In 2015, the Group delivered cash flows from its operating subsidiaries
of £225 million, including cash flows of £20 million from management
actions. The latter increased cash flows through operational
enhancements and de-risking activities.
Cash receipts
Cash remitted by Phoenix Life during 2015 was £225 million
(2014: £567 million excluding Ignis divestment proceeds) including the
£20 million impact of management actions implemented in the period.
The reduction from the prior period reflects the retention of capital in the
life companies in advance of the transition to the new Solvency II capital
regime. The prior period also included cash receipts from Ignis Asset
Management of £32 million which was disposed of in the second half
of 2014 and other cash receipts of £89 million which included the sale
of BA(GI) Limited and a one-off benefit relating to the restructure of the
PGL pension scheme.
The Group met its cash generation target range of between
£200 million to £250 million for the year ended 31 December 2015.
Phoenix Group Holdings Annual Report and Accounts 2015 25
Year ended
31 December 2015
£m
Year ended
31 December 2014
£m
988
225
–
–
225
–
225
(26)
(55)
(91)
(172)
(25)
(197)
(190)
(120)
(507)
706
995
446
32
89
567
390
957
(29)
(88)
(80)
(197)
(46)
(243)
(601)
(120)
(964)
988
Cash and cash equivalents at 1 January
Operating companies’ cash generation:
Cash receipts from Phoenix Life
Cash receipts from Ignis Asset Management
Other cash receipts
Total receipts of cash by holding companies1
Proceeds from the divestment of Ignis Asset Management
Total receipts
Uses of cash:
Operating expenses
Pension scheme contributions
Debt interest
Total recurring outflows
Non-recurring outflows
Uses of cash before debt repayments and shareholder dividend
Debt repayments
Shareholder dividend
Total uses of cash
Cash and cash equivalents at 31 December 2
1 Includes amounts received by the holding companies in respect of tax losses surrendered to the operating companies of £71 million (2014: £43 million).
2 Closing balance at 31 December 2015 includes required prudential cash buffer of £150 million (31 December 2014: £150 million).
TARGET CASH FLOWS
The previous cumulative cash flow target for 2014 to 2019 is £2.8 billion,
against which £1.2 billion had been achieved by 31 December 2015.
This includes the proceeds received from the divestment of Ignis.
The Group has announced a new five year cumulative cash flow target
for 2016 to 2020 of £2.0 billion, of which £350 million to £450 million is
expected to be achieved in 2016.
Sources of cash flows
Future cash flows:
Emergence of surplus 1,2
Release of capital 1
Operating companies’ cash generation target
1 Includes cash flows from management actions.
2 Assumes transitionals run-off on a linear basis.
The resilience of the cash generation target is demonstrated by the
following stress testing:
Stress testing1
Base: 1 January 2016
1 January 2016 to
31 December 2020
£bn
Following a 20% fall in equity markets
Following a 15% fall in property values
0.9
1.1
2.0
Following a 75bps interest rates rise 1
Following a 75bps interest rates fall 1
Following credit spread widening 2
Following 5% decrease in annuitant
mortality rates3
1 January 2016 to
31 December 2020
£bn
2.0
2.0
2.0
2.1
1.9
1.9
1.8
1 Assumes recalculation of transitionals (subject to PRA approval).
2 Credit stress equivalent to an average 100bps spread widening across ratings,
10% of which is due to defaults/downgrades.
3 Equivalent of 6 months increase in longevity.
One-off shocks would be expected to lead to a deferral of cash
emergence rather than a permanent diminution.
Phoenix Group Holdings Annual Report and Accounts 2015Strategic report 26
FINANCIAL PERFORMANCE
Group IFRS
The with-profit funds where internal capital support has
been provided generated an operating profit of £84 million
(2014: £33 million). This increase in profit reflects the positive impact
of modelling enhancements undertaken in the period of £49 million
(2014: £2 million), including the implementation of the Group’s new
actuarial modelling system by the NPLL with-profit fund.
The operating profit on non-profit and unit-linked funds was £124 million
(2014: £320 million). The decrease compared with the prior period
reflects the lower positive impact from modelling enhancements,
balance sheet, processes and controls reviews of £17 million
(2014: £167 million) together with the negative impact of strengthening
longevity and mortality assumptions.
Also contributing to the reduction in the non-profit and unit-linked
IFRS operating profits is a loss of £4 million generated on annuity new
business (2014: £24 million profit). The loss reflects a decrease in
volumes and the adverse impact on profit margins of market pricing
pressures that followed the implementation of the new rules on
Pension Freedoms from 1 April 2015.
The longer-term return on owners’ funds of £6 million (2014: £9 million)
reflects the asset mix of owners’ funds, primarily cash-based assets
and fixed interest securities. The investment policy for managing these
assets remains prudent.
The operating profit for management services of £30 million
(2014: £36 million) comprises income from the life companies in
accordance with the respective management service agreements less
fees related to the outsourcing of services and other operating costs.
The decrease compared with the prior period reflects the impact of life
company run-off and a reduction in project activity during the period.
IGNIS ASSET MANAGEMENT
The prior period operating profit of the asset management business of
£17 million represents its divisional result for the six months prior to its
divestment from the Group on 1 July 2014.
GROUP COSTS
Group costs in the period were £12 million (2014: £21 million).
The reduction compared to the prior period reflects an increased
return on the higher opening pension scheme surplus for both the
PGL Pension Scheme and the Pearl Group Staff Pension Scheme
and a decrease in operating costs.
GROUP IFRS OPERATING PROFIT
The Group has generated an IFRS operating profit of £324 million
(2014: £483 million).
Group operating profit
Phoenix Life
Ignis Asset Management
– discontinued operations
Group costs
Operating profit before
adjusting items
PHOENIX LIFE
Year ended
31 December
2015
£m
Year ended
31 December
2014
£m
336
487
–
(12)
17
(21)
324
483
Operating profit for Phoenix Life is based on expected investment
returns on financial investments backing shareholder and policyholder
funds over the reporting period, with consistent allowance for the
corresponding expected movements in liabilities (being the release of
prudential margins and the interest cost of unwinding the discount on
the liabilities). The principal assumptions underlying the calculation of
the longer-term investment return are set out in note B2 to the IFRS
consolidated financial statements.
Operating profit includes the effect of variances in experience for
non-economic items, such as mortality and persistency, and the
effect of changes in non-economic assumptions. Changes due to
economic items, for example market value movements and interest
rate changes, which give rise to variances between actual and
expected investment returns, and the impact of changes in economic
assumptions on liabilities, are accounted for outside of operating profit.
Phoenix Life operating profit is net of policyholder finance charges
and policyholder tax.
Phoenix Life operating profit
With-profit
With-profit where internal capital
support provided
Non-profit and unit-linked
Longer-term return on owners’ funds
Management services
Phoenix Life operating profit
before tax
Year ended
31 December
2015
£m
Year ended
31 December
2014
£m
92
84
124
6
30
336
89
33
320
9
36
487
The with-profit operating profit of £92 million represents the
shareholders’ one-ninth share of the policyholder bonuses, which
shows an increase compared to the prior year due to higher bonus
rates (2014: £89 million).
Phoenix Group Holdings Annual Report and Accounts 2015 27
IFRS RESULT AFTER TAX
The IFRS operating result is reconciled to the IFRS result after tax:
Operating profit before adjusting items
Investment return variances and economic assumption changes on long-term business
Variance on owners’ funds
Amortisation of acquired in-force business and customer relationship intangibles
Non-recurring items
Profit before finance costs attributable to owners
Finance costs attributable to owners
Profit before the tax attributable to owners:
From continuing operations
From discontinued operations
Tax credit/(charge) attributable to owners from continuing operations
Tax credit attributable to owners from discontinued operations
Profit for the period attributable to owners
Year ended
31 December 2015
£m
Year ended
31 December 2014
£m
324
13
(12)
(90)
49
284
(99)
185
–
185
64
–
249
483
12
(14)
(103)
126
504
(88)
336
80
416
(22)
12
406
INVESTMENT RETURN VARIANCES AND ECONOMIC
ASSUMPTION CHANGES ON LONG-TERM BUSINESS
AMORTISATION OF ACQUIRED IN-FORCE BUSINESS
AND OTHER INTANGIBLES
Acquired in-force business and other intangibles of £2.7 billion were
recognised on the acquisition of the operating companies in 2009.
The acquired in-force business is being amortised in line with the
run-off of the life companies. Amortisation of acquired in-force
business during the period totalled £75 million (2014: £88 million).
Amortisation of customer relationship intangibles totalled £15 million
in the period (2014: £15 million).
Positive investment return variances of £13 million (2014: £12 million
positive) include the minority share of the result of the consolidated
UKCPT property investment structure of £46 million (2014: £75 million)
and a £19 million gain on the purchase of a portfolio of equity release
mortgages arising from the yield uplift on assets available to back
annuity liabilities. Increases in yields during the period have also had a
positive impact reflecting short asset positions that were held relative
to the longer term IFRS basis liabilities prior to the re-hedging activities
that took place towards the end of 2015. These positive items have
been partly offset by the adverse impacts of changes in asset portfolios
undertaken in preparation for the implementation of the new Solvency II
regime, together with the impact of widening credit spreads during
the period.
VARIANCE ON OWNERS’ FUNDS
The negative variance on owners’ funds of £12 million (2014: £14 million
negative) is principally driven by fair value losses on investments and
hedging positions held by the shareholder funds and holding companies.
Phoenix Group Holdings Annual Report and Accounts 2015Strategic report 28
FINANCIAL PERFORMANCE
Group IFRS
Continued
NON-RECURRING ITEMS
TAX CREDIT ATTRIBUTABLE TO OWNERS
The Group’s approach to the management of its tax affairs is set out
in its Tax Strategy document which has been shared with the UK
Tax Authority and approved by the Board. The Group welcomes the
Government’s initiative for companies to publish their Tax Strategy
which it believes accords with the Group’s own approach to Corporate
Social Responsibility.
Following the recapture of the internal reassurance agreement with
the Group’s Bermudan captive reinsurer, Opal Re, and the disposal of
the Irish subsidiary, SMI, which took place in 2015, all of the Group’s
insurance operations now reside in the UK and are liable to tax in
accordance with applicable UK legislation.
Whilst the Company is a Jersey resident holding company (and
therefore subject to a 0% tax rate), its primary source of income is its
UK subsidiaries. Therefore the tax residency of the parent company has
little impact on the tax payable by the Group.
The Group tax credit for the period attributable to owners from
continuing operations is £64 million (2014: £22 million charge) arising
on a profit (after policyholder tax) of £185 million (2014: £336 million).
The tax credit differs from the expected charge of £37 million (based
on a UK corporate tax rate of 20.25%) as a result of factors including a
prior year tax credit (reflecting the utilisation of unprovided tax losses
brought forward and the release of provisions following the settlement
of previously uncertain tax positions with HMRC), the impact of
enacted future corporate tax rate reductions on the Group’s deferred
tax position, and the impact of profit items that are either non-taxable
or taxed at rates other than 20.25% (including the gain arising on the
Opal Re reassurance recapture transaction and tax payable by the
consolidated UK Commercial Property Trust).
Non-recurring items of £49 million (2014: £126 million) include a
gain of £49 million arising on the reassurance of a portfolio of PLAL
annuities with an external reinsurer (net of a £64 million impairment
of associated acquired in-force business), and a £17 million release of
cost provisions associated with external regulatory changes, including
the cap on workplace pension charges and the pension guidance levy.
These positive items have been partly offset by £11 million of corporate
project costs and negative £3 million of net other items. The prior period
result included the gain on the disposal of Ignis of £107 million and
£68 million of income received by Pearl Group Holdings (No 1) Limited
(‘PGH1’) in relation to the close-out of the PGL Pension Scheme
longevity indemnity agreement with the with-profit funds. This was
partly offset by £17 million of adverse financial impacts associated
with external regulatory changes, corporate project costs of £15 million
and net other one-off items of negative £17 million, including costs
associated with the implementation of Solvency II and systems
transformation projects.
FINANCE COSTS ATTRIBUTABLE TO OWNERS
Bank finance costs
Other finance costs
Finance costs attributable to owners
Year ended
31 December
2015
£m
Year ended
31 December
2014
£m
28
71
99
56
32
88
Bank finance costs have decreased by £28 million, reflecting lower debt
principal balances following the repayments and restructuring activity in
the second half of 2014.
Other finance costs have increased by £39 million mainly reflecting
the recognition of £27 million of finance costs relating to the new
PGH Capital subordinated notes which were exchanged for the Tier 1
notes in January 2015. The coupon payable on the Tier 1 notes was
previously recognised directly in equity and therefore is not included in
finance costs. This has been largely offset by the impact of lower debt
principal balances following debt repayments and the restructuring of
the bank debt.
Phoenix Group Holdings Annual Report and Accounts 2015 FINANCIAL PERFORMANCE
Group MCEV
29
GROUP MCEV REPORTING
Expected existing business contribution
The Group has historically provided supplementary reporting
information on its MCEV basis. Following the implementation of the
Solvency II regulatory regime, this will be the last time the Group
presents MCEV information. As Solvency II will be the primary driver of
the Group’s cash generation, going forward we will focus on regulatory
capital disclosures.
The Group uses long-term investment returns in calculating the
expected existing business contribution. The expected contribution of
£109 million after tax is £28 million lower than in 2014, primarily due to
a decrease in the long-term risk-free rate used to calculate operating
earnings. The long-term risk-free rate is based on the opening position
at 1 January 2015.
New business value
New business value generated from vesting annuities without
guarantees was £2 million (2014: £11 million) after tax. New business
value represents the value of vesting pension policies not reflected
in the opening MCEV. These arise from pension policies which have
no attaching annuity guarantees. The reduction reflects a decrease in
volumes and lower margins following the implementation of the new
rules on Pension Freedoms from 1 April 2015.
The MCEV also includes the value of future profits expected to be
earned on annuities with guaranteed rates, based on long-term profit
margins and projected take-up rate assumptions. As at 31 December
2015, the Group MCEV included £165 million in respect of these
policies (2014: £180 million).
Non-economic experience variances and assumption changes
Non-economic experience variances and assumption changes
increased MCEV by £109 million after tax in the period. The main
driver of the increase is other operating variances of £110 million
(2014: £82 million) which principally comprised the positive impacts
of modelling enhancements undertaken in the period, including
the extended roll-out of the Group’s new actuarial system and
the refinement of actuarial methodologies in a number of areas.
Assumption changes have increased MCEV by £20 million during the
period (2014: £15 million reduction). Changes in expense assumptions
to reflect the implementation of revised agreements with the
Management Services companies and the impact of corporate tax rate
reductions have positively impacted the MCEV. These changes have
more than offset the adverse impacts of the strengthening of longevity
and persistency assumptions. Experience variances in the year were
negative £21 million (2014: £53 million positive), principally reflecting
an increase in claims and a reduction in the value of future profits
expected to be earned on guaranteed rate annuity vestings following
the implementation of the new Pensions Freedoms.
MANAGEMENT SERVICES
Commentary on the management services companies is provided in
the Group IFRS operating profit section.
GROUP COSTS
The Group costs of £26 million (2014: £28 million) have remained
broadly in line with the prior period.
GROUP MCEV OPERATING EARNINGS1
The Group has generated MCEV operating earnings after tax of
£223 million (2014: £288 million), a decrease of £65 million on the
comparative period.
MCEV operating earnings
Life MCEV operating earnings2
Management services operating profit
Ignis operating profit –
discontinued operations
Group costs
Group MCEV operating
earnings before tax
Tax on operating earnings
Group MCEV operating
earnings after tax
Year ended
31 December
2015
£m
Year ended
31 December
2014
£m
274
30
–
(26)
278
(55)
223
341
36
17
(28)
366
(78)
288
1 The Phoenix Group Market Consistent Embedded Value methodology (referred to herein
and in the supplementary information as MCEV) is set out in note 1 to the supplementary
information. The asset management and management services businesses are included in
the Group MCEV at the value of their IFRS net assets. The Group MCEV does not include
the future earnings from their businesses.
2 Life MCEV operating earnings are derived on an after tax basis. For presentational
purposes, Life MCEV operating earnings before tax have been calculated by grossing up
the after tax Life MCEV operating earnings. Life MCEV operating earnings before tax of
£274 million (2014: £341 million) are therefore calculated as £220 million operating earnings
(2014: £268 million) grossed up for tax at 20.25% (2014: 21.50%).
LIFE MCEV OPERATING EARNINGS AFTER TAX
Other than vesting annuities and increments to existing policies,
the Group’s life division is closed to new business. The principal
underlying components of the life MCEV operating earnings are
therefore the expected existing business contribution together with
non-economic experience variances and assumption changes.
Life MCEV operating earnings after tax
Expected existing business contribution
New business value
Non-economic experience variances
and assumption changes:
Experience variances
Assumption changes
Other operating variances
Total non-economic experience
variances and assumption changes
Life MCEV operating
earnings after tax
Year ended
31 December
2015
£m
Year ended
31 December
2014
£m
109
2
(21)
20
110
109
220
137
11
53
(15)
82
120
268
Phoenix Group Holdings Annual Report and Accounts 2015Strategic report 30
FINANCIAL PERFORMANCE
Group MCEV
Continued
RECONCILIATION OF GROUP MCEV OPERATING
EARNINGS TO GROUP MCEV EARNINGS
Group MCEV operating earnings are reconciled to Group MCEV
earnings as follows:
Group MCEV operating earnings after tax
Economic variances on life business
Economic variances on non-life business
Other non-operating variances on
life business
Non-recurring items on non-life business
Finance costs attributable to owners
Tax on non-operating earnings
Group MCEV earnings after tax
Year ended
31 December
2015
£m
Year ended
31 December
2014
£m
223
(221)
(8)
98
(39)
(91)
64
26
288
54
(64)
(94)
317
(90)
–
411
ECONOMIC VARIANCES ON LIFE BUSINESS
Negative economic variances on life business of £221 million before
tax (2014: positive £54 million) include the negative impact of the
difference between actual short-term returns and the long-term
investment return assumptions used to determine operating earnings
and the adverse impact of widening credit spreads during the year.
Also included here is the £98 million adverse impact of changes in
asset portfolios undertaken in preparation for the implementation of the
new Solvency II regime. This has been partly offset by a gain on the
purchase of a portfolio of equity release mortgages and the resultant
increase in liquidity premium, together with positive policyholder tax and
inflation variances.
Non-recurring items in the comparative period included a gain of
£288 million on the divestment of Ignis and £68 million income received
by PGH1 from the with-profit funds in relation to the close-out of the
PGL Pension Scheme longevity indemnity agreement. Partly offsetting
these items was £11 million of Group corporate project costs, debt
issue costs of £16 million, with net other one-off items having a
negative impact of £12 million.
FINANCE COSTS ATTRIBUTABLE TO OWNERS
Bank finance costs
Other finance costs
Tier 1 notes coupon
Finance costs attributable to owners
Year ended
31 December
2015
£m
Year ended
31 December
2014
£m
28
43
20
91
56
8
26
90
Bank finance costs have decreased by £28 million, reflecting lower debt
principal balances following repayments made and the restructuring
activity completed in the second half of 2014.
Other finance costs have increased by £35 million, reflecting a full year
of interest costs on the senior bond issued in July 2014, together with
the finance costs accrued on the new PGH Capital subordinated notes,
which were exchanged for the Tier 1 notes in January 2015.
Finance costs exclude the costs pertaining to the PLL subordinated
debt, which are included in the life division’s result.
GROUP MCEV
The movement from opening to closing Group MCEV is shown below:
ECONOMIC VARIANCES ON NON-LIFE BUSINESS
Economic variances on non-life business are negative £8 million
(2014: negative £64 million), principally driven by a net increase in
the market value of the PGH Capital debt instruments of £4 million
(2014: £24 million). The prior period result included losses of £27 million
relating to an increase in the market value of the Tier 1 notes,
which were exchanged for new PGH Capital subordinated notes in
January 2015.
Movement in Group MCEV
Group MCEV at 1 January
Group MCEV earnings after tax
Other comprehensive expense
Capital and dividend flows
Group MCEV at 30 December
Year ended
31 December
2015
£m
Year ended
31 December
2014
£m
2,647
2,378
26
(40)
(120)
2,513
411
(27)
(115)
2,647
OTHER NON-OPERATING VARIANCES ON LIFE BUSINESS
Other non-operating variances on life business increased Group MCEV
by £98 million (2014: decrease £94 million) and principally comprise
the partial release of provisions associated with external regulatory
changes, including the cap on workplace pension charges and the
pension guidance levy together with the positive impact arising on the
reassurance of a portfolio of PLAL annuities with an external reinsurer
of £19 million.
Other comprehensive expense of £40 million includes pension
contributions of £12 million (net of tax) in respect of the PGL Pension
Scheme (2014: £16 million) and £32 million (net of tax) in respect of the
Pearl Group Staff Pension Scheme (2014: £54 million), partly offset by
a revaluation gain of £4 million on owner occupied property. The prior
year comparative included an actuarial gain of £43 million (net of tax) in
respect of the Pearl Group Staff Pension Scheme that was capped at
the point at which the scheme returned to surplus on an IFRS basis.
NON-RECURRING ITEMS ON NON-LIFE BUSINESS
Non-recurring items on non-life business decreased MCEV by
£39 million before tax (2014: increase £317 million). Non-recurring items
include a loss of £22 million recognised on the exchange of the Tier 1
notes and related transaction expenses, together with corporate project
costs of £13 million. Net negative other one-off items total £4 million.
Planned future contributions will cause a strain to the MCEV as pension
surpluses are not recognised under the Group’s MCEV basis.
Capital and dividend flows in the period include external dividend
payments of £120 million (2014: £120 million).
Phoenix Group Holdings Annual Report and Accounts 2015 FINANCIAL PERFORMANCE
Capital management
31
CAPITAL MANAGEMENT FRAMEWORK
The Group’s capital management framework is designed to achieve
the following objectives:
Ɛ To provide appropriate security for policyholders and meet all
regulatory capital requirements while not retaining unnecessary
excess capital.
Ɛ To ensure sufficient liquidity to meet obligations to policyholders
and other creditors.
The Group’s regulatory capital policy, prior to 1 January 2016, was to
maintain GCR at the PLHL level of:
Ɛ 105% of the with-profit insurance component (‘WPICC’), being an
additional capital requirement of with-profit funds plus; and
Ɛ 145% of the GCRR less the WPICC.
The Group’s headroom above the IGD regulatory capital policy at
31 December 2015 was £0.7 billion (2014: £0.5 billion).
Ɛ To optimise the overall financial leverage ratio to maintain an
PLHL ICA SURPLUS (ESTIMATED)
In accordance with PRA requirements, effective prior to 1 January 2016,
the Group undertook an ICA at the level of the highest EEA insurance
group holding company, which is PLHL. This involved an assessment, on
an economic basis, of the capital resources and requirements arising from
the obligations and risks which exist outside the life companies.
As agreed with the PRA, the Group aimed to ensure that PLHL
maintained an ICA surplus of at least £150 million. The estimated PLHL
ICA position at 31 December 2015 is set out below:
Capital resources 1
Capital resource requirements 2
PLHL ICA surplus (estimated)
Year ended
31 December
2015
£bn
Year ended
31 December
2014
£bn
0.8
(0.2)
0.6
1.0
(0.3)
0.7
1 Capital resources includes the surplus over capital policy in the life companies and the
net assets of the holding companies less pension scheme obligations calculated on an
economic basis.
2 Capital requirements relate to the risks arising outside of the life companies including those
in relation to the Group’s staff pension schemes, offset by Group diversification benefits.
Headroom over the Group’s £150 million capital policy was £0.5 billion
as at 31 December 2015 (2014: £0.6 billion).
The PLHL ICA surplus decreased during the year and reflects:
Ɛ dividend payments, debt financing and repayments of £0.3 billion;
Ɛ the adverse impact of management actions undertaken to enhance
the Group Solvency II position ahead of implementation of the new
regime of £0.2 billion; partly offset by; and
Ɛ capital generation items of £0.4 billion, including the positive impacts
of other management actions delivered in the period of £0.2 billion.
The simplification of the Group structure did not impact the PLHL ICA
surplus as the risk-based calculation has historically recognised 100%
of the capital resources and requirements of Impala Holdings Limited
and its subsidiaries.
investment grade credit rating.
Ɛ To meet the dividend expectations of shareholders as set by the
Group’s dividend policy.
The framework comprises a suite of capital management policies that
govern the allocation of capital throughout the Group to achieve these
objectives under a range of stress conditions. The policy suite is defined
with reference to policyholder security, creditor obligations, dividend
policy and regulatory capital requirements.
Since 1 January 2016, regulatory capital adequacy for the Group is
no longer monitored under the European Union Insurance Groups’
Directive (‘IGD’) or the PRA requirement for an Individual Capital
Assessment (‘ICA’). The Group will now monitor its regulatory capital
adequacy under the new Solvency II regime, details of which are
included below.
REGULATORY CAPITAL REQUIREMENTS
IGD SURPLUS (ESTIMATED)
Each UK life company must maintain sufficient capital at all times to meet
the regulatory capital requirements mandated by the PRA. Under the
Solvency regime effective prior to 1 January 2016, these measures were
aggregated under the European Union Insurance Groups’ Directive (‘IGD’)
to calculate regulatory capital adequacy at a Group level.
The Group’s IGD assessment was made at the level of the highest
EEA insurance group holding company, which is Phoenix Life Holdings
Limited (‘PLHL’), a subsidiary of Phoenix Group Holdings. The estimated
IGD surplus at 31 December 2015 was £1.5 billion (2014: £1.2 billion).
The components of the estimated IGD calculation are shown below:
Year ended
31 December
2015
£bn
Year ended
31 December
2014
£bn
Group capital resources (‘GCR’)
Group capital resource requirement (‘GCRR’)
IGD surplus (estimated)
5.9
(4.4)
1.5
5.5
(4.3)
1.2
The IGD surplus increased by £0.3 billion during the year as a result
of the following factors:
Ɛ £0.3 billion positive impact arising from the simplification of the
Group’s corporate structure, with PLHL now recognising 100% of
the capital resources and requirements of Impala Holdings Limited
and its subsidiaries;
Ɛ capital generation items of £0.3 billion, including capital benefits from
management actions such as the Part VII transfer of the business of
NPLL into PLAL and the acquisition of a portfolio of equity release
mortgages; partly offset by; and
Ɛ dividend payments, debt financing and repayments of £0.3 billion.
Phoenix Group Holdings Annual Report and Accounts 2015Strategic report 32
FINANCIAL PERFORMANCE
Capital management
Continued
PLHL SOLVENCY II SURPLUS (ESTIMATED)
In accordance with European Insurance and Occupational Pension
Authority (‘EIOPA’) and PRA requirements, from 1 January 2016 the
Group now undertakes a Solvency II capital adequacy assessment
at the level of the highest EEA insurance group holding company,
which is PLHL.
This involves a valuation in line with Solvency II principles of the
Group’s own funds and a risk based assessment using an internal
model of the Group’s solvency capital requirements (‘SCR’).
The Group’s own funds differ materially from IFRS equity for a
number of reasons, including the exclusion of the Group’s bank
debt held outside of the PLHL sub-group, the recognition of future
shareholder transfers from the with-profit funds (but not the
shareholder share of the estate), the treatment of certain subordinated
debt instruments as capital items, and a number of valuation
differences, most notably with regard to insurance liabilities and
intangible assets.
The SCR is calibrated so that the likelihood of a loss exceeding the
SCR is less than 0.5% over one year. This ensures that capital is
sufficient to withstand a broadly ‘1 in 200 year event’ and is calculated
in accordance with the Group’s PRA approved internal model. As a
closed fund insurer, the Group does not need to hold capital to fund
the writing of new business.
The estimated PLHL Solvency II surplus position at 31 December
2015 is set out below:
Own funds 1
Solvency capital requirement 2
Solvency II surplus (estimated) 3
Year ended
31 December
2015
£bn
5.8
(4.5)
1.3
1 Own funds includes the net assets of the life and holding companies calculated under
Solvency II rules, pension scheme surpluses calculated on an IAS19 basis not exceeding
the holding companies’ contribution to the Group SCR and qualifying subordinated
liabilities. It is stated net of restrictions for assets which are non-transferrable and fungible
between Group companies within a period of nine months.
2 Solvency capital requirements relate to the risks and obligations, to which the Group is
exposed, calculated using an internal model, offset by Group diversification benefits.
3 Equates to a coverage ratio of 130% as at 31 December 2015.
These figures exclude surpluses arising in the Group’s with-profit
funds and Group pension schemes of £0.5 billion. In the calculation
of the Solvency II surplus, the SCR of the with-profit funds and Group
pension schemes is included, but the related own funds are recognised
only to a maximum of the SCR amount. Surpluses that arise in
with-profit funds and Group pension schemes, whilst not included
in the PLHL Solvency II surplus, are available to absorb economic
shocks. This means that the headline surplus is highly resilient to
economic stresses.
Excluding the SCR and own funds relating to unsupported with-
profit funds and Group pension schemes, the estimated Solvency II
Shareholder Capital coverage ratio is 154% as at 31 December 2015.
BREAKDOWN OF SOLVENCY II POSITION
154%
n
b
8
.
3
£
n
b
3
.
1
£
n
b
5
.
2
£
n
b
5
.
0
£
n
b
5
.
2
£
n
b
0
.
2
£
Surplus
Own funds
SCR
Shareholder
Capital1
Unsupported with-profit funds
and Group pension schemes2
1 The Shareholder Capital surplus excludes own funds and SCR of unsupported
with-profit funds and Group pension schemes.
2 Unsupported with-profit funds and Group pension schemes refer to those
funds whose Solvency II own funds exceed their SCR. Where a with-profit fund
or Group pension scheme cannot cover its SCR, its own funds and SCR are
included within the Shareholder Capital surplus.
SENSITIVITY AND SCENARIO ANALYSIS
As part of the Group’s internal risk management processes, the
regulatory capital requirements are tested against a number of financial
scenarios. The results of that stress testing are provided below and
demonstrate the resilience of the PLHL Solvency II surplus.
Base: 1 January 2016
Following a 20% fall in equity markets
Following a 15% fall in property values
Following a 75bps interest rates rise 1
Following a 75bps interest rates fall 1
Following credit spread widening 2
Following 5% decrease in annuitant
mortality rates3
Estimated
PLHL Solvency II surplus
1 January 2016
£bn
1.3
1.3
1.3
1.4
1.2
1.2
1.1
1 Assumes recalculation of transitionals subject to PRA approval.
2 Credit stress equivalent to an average 100bps spread widening across ratings, 10% of
which is due to defaults/downgrades.
3 Equivalent of 6 months increase in longevity.
Phoenix Group Holdings Annual Report and Accounts 2015 FINANCIAL PERFORMANCE
Capital resources
33
LEVERAGE
In managing capital the Group seeks to optimise the level of debt on
its balance sheet. The Group’s closed book business model allows it
to operate with higher leverage than life companies that are still writing
new business, as it does not need to fund upfront capital requirements
and new business acquisition expenses.
FINANCIAL LEVERAGE RATIO
The Group monitors the level of debt in its statement of consolidated
financial position by reference to the financial leverage ratio.
The financial leverage ratio is used to determine the interest margin
payable on the PGH Capital bank facility.
The financial leverage ratio as at 31 December 2015 decreased to
37.8% reflecting debt repayments in the period.
The financial leverage ratio is calculated as gross shareholder debt1
as a percentage of gross MCEV 2. Following the implementation of
the Solvency II regime, MCEV will not be reported going forwards.
This, together with the Group’s achievement of an investment grade
credit rating during 2015, means that the financial leverage calculation
will also not be reported in future periods.
Gross shareholder debt and shareholder debt (including hybrid debt)
included in MCEV at 31 December 2015 are set out in the table below:
The Group’s gross shareholder debt decreased by £182 million
to £1,552 million in the year. This reduction includes repayments
of £190 million in respect of the PGH Capital facility, including
prepayments of £70 million in respect of payments due in 2016
and £30 million in respect of payments due in 2017.
In January 2015, the Group announced the exchange of 99% of the
Group’s Tier 1 notes for £428 million of new subordinated notes, issued
by PGH Capital. As the new notes mature in 2025, the notes will be
included in the financial leverage calculation at their notional face value
of £396 million, excluding notes with a face value of £32 million held by
Group companies.
In August 2015, Fitch Ratings assigned the Group an investment grade
credit rating, which triggered a further 50bps margin reduction on the
outstanding bank facility effective from 28 August 2015.
In March 2016, the Group agreed an amendment of its £900 million,
5 year unsecured bank facility into a £650 million unsecured revolving
credit facility, maturing in June 2020. There are no mandatory or target
amortisation payments associated with the facility but prepayments
are permissible.
Further detail on shareholder debt is included in note E5 to the IFRS
consolidated financial statements.
PGH Capital facility
PGH Capital senior bond
PGH Capital subordinated notes3
PLL subordinated debt
Tier 1 notes4
Year ended
31 December
2015
£m
Year ended
31 December
2014
£m
650
300
396
200
6
840
300
–
200
394
Gross shareholder debt
1,552
1,734
Adjustments to include the following
items at fair value:
PLL subordinated debt
PGH Capital senior bond
PGH Capital subordinated notes
Tier 1 notes4
12
24
4
–
12
22
–
(7)
Shareholder debt included in MCEV
1,592
1,761
1 Gross shareholder debt is defined as the notional face value of the shareholder and
hybrid debt.
2 Gross MCEV is defined as the sum of Group MCEV and the value of shareholder and hybrid
debt as included in the MCEV.
3 Total face value of the PGH Capital subordinated notes is £428 million (2014: £nil), of which
bonds with a face value of £32 million (2014: £nil) are held by Group companies.
4 Total face value of the Tier 1 notes is £6 million (2014: £425 million), of which bonds with
a face value of £nil (2014: £31 million) are held by Group companies.
Phoenix Group Holdings Annual Report and Accounts 2015Strategic report 34
RISK MANAGEMENT
The Group has an embedded Risk
Management Framework that is
forward-looking and proactive to
manage risk within risk appetite.
Strong risk governance founded on
the three lines of defence supports
policyholder security and the safe
execution of the Group’s strategy.”
WAYNE SNOW
GROUP CHIEF RISK OFFICER
22 MARCH 2016
RISK CULTURE
We seek to embed a culture that is forward-looking and competent in
its assessment and management of risk, a culture where everyone in
the Group is aligned in their goals to deliver better risk based decisions.
This is achieved not by risk avoidance, but through the identification and
management of an acceptable level of risk (its ‘risk appetite’) and by
ensuring that the Group is appropriately rewarded for the risks it takes.
To support this goal, the Group defined a Risk Culture Statement which
sets out the Group’s aspirations for Risk Management.
To ensure that all risks are managed effectively the Group is
committed to:
“The Group has a balanced risk culture, supportive of commercial
risk-taking coupled with strong execution in line with its risk appetite.
Ɛ embedding a risk aware culture;
Ɛ maintaining a strong system of internal controls;
At its core are the Group’s values and behaviours, clarity of
accountability and a healthy tension between the first and second lines
of defence.
Collectively this means people understand the Group’s approach to risk,
take personal responsibility to manage risk in everything they do and
encourage others to follow their example.”
During 2015, Group Risk conducted its third annual Risk Culture survey.
The results of this survey enable us to assess and measure our Risk
Culture over time as well as being able to tailor training programmes to
ensure the continued engagement and development of our employees.
THE GROUP’S RISK MANAGEMENT FRAMEWORK
The Group’s Risk Management Framework (‘RMF’) embeds proactive
and effective risk management across the Group. It seeks to ensure
that all risks are identified and managed effectively and that the Group is
appropriately rewarded for the risks it takes.
During the year, the Group continued to strengthen our RMF to meet
evolving regulatory requirements including Solvency II and the UK
Corporate Governance Code. I was pleased to see our approach to risk
management was recognised in the investment grade rating awarded
by Fitch Ratings.
Further detail on the 10 components of our RMF and the principal risks
facing the Group are provided below.
RISK STRATEGY
The Group’s risk strategy provides an overarching view of how risk
management is incorporated consistently across all levels of the
business, from decision-making to strategy implementation.
It assists the business achieve its strategic objectives by supporting
a more stable, well managed business with improved customer and
shareholder outcomes.
Ɛ enhancing and protecting customer and shareholder value by
continuous and proactive risk management;
Ɛ maintaining an efficient capital structure; and
Ɛ ensuring that risk management is embedded into day-to-day
management and decision-making processes.
RISK MANAGEMENT FRAMEWORK
Risk
strategy
Risk
appetite
Risk
universe
External communication and
stakeholder management
Governance, organisation
and policies
Business performance
and capital management
Risk and
capital
assessment
People and
reward
Management
information
Technology and
infrastructure
Phoenix Group Holdings Annual Report and Accounts 2015 35
RISK APPETITE
The Group’s risk appetite is the level of risk the Group is willing to accept
in pursuit of its strategic objectives. The statements below encapsulate
our risk appetite for policyholder security and conduct, earnings
volatility, liquidity and our control environment:
Ɛ Capital – The Group and each life company will hold sufficient capital
to meet regulatory requirements in a number of asset and liability
stress scenarios.
Ɛ Cash flow – The Group will seek to ensure that it has sufficient
cash flow to meet its financial obligations and will continue to do
this in a volatile business environment.
Ɛ Embedded value – The Group will take action to protect
embedded value.
Ɛ Regulation – The Group and each life company will, at all times,
operate a strong control environment to ensure compliance
with all internal policies and applicable laws and regulations,
in a commercially effective manner.
Ɛ Conduct – Phoenix has zero appetite for deliberate acts of
misconduct, including omissions that result in customer detriment,
reputational damage and/or pose a risk to the Financial Conduct
Authority (‘FCA’) statutory objectives.
The risk appetite and control framework supports the Group in
operating within the boundaries of these statements by limiting
the volatility of key parameters under a range of adverse scenarios
agreed with the Board. Risk appetite limits are chosen which specify
the maximum acceptable likelihood for breaching the agreed limits.
Assessment against these limits is undertaken through extensive
scenario and reverse stress testing.
RISK UNIVERSE
A key element of effective risk management is ensuring that the
business has a complete and robust understanding of the risks it faces.
These risks are defined in the Group’s risk universe.
The risk universe allows the Group to deploy a common risk language,
allowing for meaningful comparisons to be made across the business.
There are three levels of risk universe categories. The highest risk
universe category is Level 1 and includes:
Ɛ strategic risk;
Ɛ customer risk;
Ɛ financial soundness risk;
Ɛ market risk;
Ɛ credit risk;
Ɛ insurance risk; and
Ɛ operational risk.
Embedded within these categories, and Customer risk in particular, are
the conduct risks faced by the Group and its customers. These risks
are separately monitored and reported on across the organisation to
ensure that conduct risk receives appropriate emphasis and oversight.
The Group has developed a PGH Board approved risk appetite
statement to manage Conduct Risk. The appetite statement is
supported by the assessment of all conduct related risks faced by
the Group on a quarterly basis. This regular assessment and reporting
enables us to be forward-looking and proactive in the management
of conduct risk.
EXTERNAL COMMUNICATION AND STAKEHOLDER
MANAGEMENT
The Group has a number of internal and external stakeholders, each
of whom has an active interest in the Group’s performance, including
how risks are managed. Significant effort is made to ensure that our
stakeholders have appropriate, timely and accurate information to
support them in forming views of the Group.
GOVERNANCE, ORGANISATION AND POLICIES
GOVERNANCE
Overall responsibility for approving, establishing and embedding the
RMF rests with the Board. The Board recognises the critical importance
of having an efficient and effective RMF and appropriate oversight
of its operation. There is a clear organisational structure in place with
documented, delegated authorities and responsibilities from the
Group Board to the PLHL Board, the Boards of Phoenix Life and the
Executive Committee.
The RMF is underpinned by the operation of a three lines of defence
model with clearly defined roles and responsibilities for statutory boards
and their committees, management oversight committees, Group Risk
and Group Internal Audit.
First line: Management
Management of risk is delegated from the Board to the Group Chief
Executive Officer, Executive Committee members and through to business
managers. A series of business unit management oversight committees
operate within the Group. They are responsible for implementation of
the RMF, ensuring the risks associated with the business activities are
identified, assessed, controlled, monitored and reported.
Second line: Risk Oversight
Risk oversight is provided by the Group Risk function and the Board Risk
Committee. The Board Risk Committee comprises four independent
Non-Executive Directors. It is supported by the Group Chief Risk Officer
and met six times during 2015. During 2015, the Board further improved
risk oversight with the establishment of a dedicated Risk Committee of
the Phoenix Life Board to provide additional Board Committee focus on
risk matters at Phoenix Life.
Third line: Independent Assurance
Independent verification of the adequacy and effectiveness of the
internal controls and risk management is provided by the Group Internal
Audit function, which is supported by the Board Audit Committee.
ORGANISATION
The Group Chief Risk Officer manages the Group Risk function and has
responsibility for the implementation and oversight of the Group’s RMF.
The Group Risk function has responsibility for oversight over financial,
operational and regulatory risk. The PRA/FCA relationship team
manages the relationship and interactions with our primary regulators
and reports to the Group Chief Risk Officer.
POLICIES
The Group policy framework comprises a set of 30 policies that support
the delivery of the Group’s strategy by establishing operating principles
and expectations for managing the key risks to our business. The policy
set contains the minimum control standards to which each business
unit must adhere to and against which they report compliance.
Phoenix Group Holdings Annual Report and Accounts 2015Strategic report 36
RISK MANAGEMENT
Continued
The policies define:
Ɛ the individual risks the policy is intended to manage;
Ɛ the degree of risk the Group is willing to accept, which is set
out in the policy risk appetite statements;
Ɛ the minimum controls required in order to manage the risk to
an acceptable level; and
Ɛ the frequency of the control’s operation.
Each policy is the responsibility of a member of the Executive Committee
who is charged with overseeing compliance throughout the Group.
The governance framework in operation throughout the Group can be
found in the chart below.
BUSINESS PERFORMANCE AND CAPITAL MANAGEMENT
The Annual Operating Plan is assessed to ensure that the Group
operates within our stated risk appetite. Business performance
is routinely monitored with consolidated reporting against
performance targets.
The Group operates a Capital Management Policy where capital is
allocated across risks where capital is held as a mitigant and, in turn,
to individual risk owners who hold risk capital budgets. The amount of
risk capital required is reviewed regularly to ensure the risk exposure
remains within budget. Any requests to increase budgets are referred
to the Board for approval.
RISK AND CAPITAL ASSESSMENT
The Group operates a standardised assessment framework for the
identification and assessment of the risk it may be exposed to and
how much capital should be held in relation to those exposures.
This framework is applicable across the Group and establishes a
basis, not only for the approach to risk assessment, management and
reporting but also for determining and embedding capital management
at all levels of the Group in line with Solvency II requirements.
Risk assessment activity is a continuous process and is performed
on the basis of identifying and managing the significant risks to the
achievement of the Group’s objectives.
Stress and scenario tests are used extensively to support the
assessment of risk and provide analysis of their financial impact.
Independent reviews conducted by Group Risk provide further
assurance to management and the Board that individual risk exposures
and changes to our risk profile are being effectively managed.
MANAGEMENT INFORMATION
Overall monitoring and reporting against the risk universe takes place
in business unit management committees and Boards. This is then
reported to the Executive Committee, PLHL Board and the Group
Board via regular risk reporting.
The Board Risk Committee receives a consolidated risk report on a
quarterly basis, detailing the risks facing the Group and the overall position
against risk appetite limits. The Board Risk Committee is also provided
with regular reports on the activities of the Group Risk function.
PEOPLE AND REWARD
Effective risk management is central to the Group’s culture and its
values. Processes are operated that seek to measure both individual and
collective performance and discourage incentive mechanisms which
could lead to undue risk taking. Training and development programmes
are in place to support employees in their understanding of the RMF.
TECHNOLOGY AND INFRASTRUCTURE
The Group employs market leading risk systems to support the
assessment and reporting of the risks it faces. This enables management
to document key risks and controls and evidence the assessment of
them at a frequency appropriate to the operation of the control.
RISK MANAGEMENT EFFECTIVENESS
The provisions of the UK Corporate Governance Code require an annual
review of the effectiveness of Risk Management.
Now in its fourth year, this independent assessment provides assurance
to management and the Boards that the RMF has been implemented
consistently and is operating effectively across the Group.
GOVERNANCE FRAMEWORK
PGH Board
d
r
a
o
B
PGH Board
Nomination Committee
PGH Board
Remuneration Committee
PGH Board
Risk Committee
PGH Board
Audit Committee
First line of defence
Second line of defence
Third line of defence
s
e
v
i
t
u
c
e
x
E
t
n
e
m
e
g
a
n
a
M
Group Chief
Executive Officer
Group
Executive Committee
Group Functions
Phoenix Life
Companies
Chief Risk Officer
Group Risk
and Compliance
Group Internal Audit
43
Read more about
our Governance structure
Phoenix Group Holdings Annual Report and Accounts 2015 37
TREND
CHANGE IN RISK
FROM LAST YEAR
Risk Improving
No Change
Risk Deteriorating
PRINCIPAL RISKS AND UNCERTAINTIES
FACING THE GROUP
The Group’s top principal risks and uncertainties are detailed in
the table below, together with their potential impact, mitigating
actions which are in place and changes in the risk profile from last
year. As economic changes occur and the industry and regulatory
environment evolves, the Group will continue to monitor their
potential impact.
Further details of the Group’s exposure to financial and insurance
risks and how these are managed are provided in note E6 of the
IFRS consolidated financial statements.
RISK
IMPACT
MITIGATION
CHANGE FROM LAST YEAR
In times of severe market
turbulence, the Group may
not have sufficient capital
or liquid assets to meet its
cash flow targets or it may
suffer a loss in value.
The emerging cash flows of the Group
may be impacted during periods of severe
market turbulence by the need to maintain
appropriate levels of regulatory capital.
The impact of market turbulence may also
result in a material adverse impact on the
Group’s embedded value.
Significant
counterparty failure.
Adverse changes in
experience versus actuarial
assumptions.
Assets held to meet obligations to
policyholders include debt securities.
Phoenix Life is exposed to deterioration
in the actual or perceived creditworthiness
or default of issuers.
An increase in credit spreads on debt
securities, particularly if it is accompanied
by a higher level of actual or expected
issuer defaults, could adversely impact
the Group’s embedded value.
The Group is also exposed to trading
counterparties failing to meet all or part
of their obligations, such as reinsurers
failing to meet obligations assumed
under reinsurance arrangements.
The Group has liabilities under annuities
and other policies that are sensitive to future
longevity and mortality rates. Changes in
assumptions may lead to changes in the
assessed level of liabilities to policyholders.
The amount of additional capital required
to meet those liabilities could have a
material adverse impact on the Group’s
embedded value, results, financial
condition and prospects.
The Group undertakes regular
monitoring activities in relation
to market risk exposure,
including limits in each asset
class, cash flow forecasting
and stress and scenario
testing. In response to this,
the Group has implemented
de-risking strategies to mitigate
against unwanted customer
and shareholder outcomes.
The Group also maintains
cash buffers in its holding
companies to reduce reliance
on emerging cash flows.
The Group regularly monitors
its counterparty exposure
and has specific limits relating
to individual exposures,
counterparty credit rating,
sector and geography.
Where possible, exposures
are diversified through the
use of a range of counterparty
providers. All material
reinsurance and derivative
positions are appropriately
collateralised and guaranteed.
The Group undertakes regular
reviews of experience and
annuitant survival checks
to identify any variances in
assumptions. The Group has
also entered into a reinsurance
contract to manage this risk
within appetite.
The recent decline in yields
on UK Government debt has
put pressure on the Group’s
excess capital position. Hedging
strategies have been implemented
to limit this impact and the position
is closely managed. However,
under the Solvency II regime the
life companies remain exposed to
further reductions in yields and
swap rates.
During 2015, the Group
recaptured a reinsurance
arrangement between Phoenix
Life Assurance Limited and the
Group’s Bermudian subsidiary
Opal Re. The arrangement was
replaced with a similar reinsurance
agreement with Reinsurance
Group of America (RGA), ISFR
AA- by S&P.
In preparation for Solvency II, the
Group also sold debt securities
valued at £0.8 billion from its
with-profits funds.
There has been no adverse
change in experience over
the year. However, material
strengthening of actuarial
assumptions over 2015 increased
longevity risk capital requirements
and improved resilience.
The arrangement with RGA
referenced above reinsured
£1.3 billion of annuity liabilities
out of the Group.
Phoenix Group Holdings Annual Report and Accounts 2015Strategic report 38
RISK MANAGEMENT
Continued
RISK
IMPACT
MITIGATION
CHANGE FROM LAST YEAR
Changes in the regulatory
and legislative landscape
may impact the way that
Phoenix Life engages with
its customers.
Changes in the retirement
marketplace may result
in poor outcomes for
customers.
The move to the conduct-focused regulator
may see a continued move away from
rules-based regulation with a greater focus
on customer outcomes. This may challenge
the existing approach and/or may result
in remediation exercises where Phoenix
Life cannot demonstrate that it met the
expected customer outcomes in the eyes
of the regulator.
The changes in the retirement marketplace
have opened up a number of new options
for customers. While these options provide
greater flexibility for customers, there is
a need for customers to ensure that they
engage with the process to ensure that they
make informed decisions that are suitable for
their needs. Additionally, providers need to
ensure that their processes facilitate effective
decision-making by customers. Failure to do
this may result in a risk that a customer takes
an option that they do not understand or that
may not be appropriate for them.
The Group puts considerable
effort into managing
relationships with its regulators
so that it is able to maintain
a forward view regarding
potential changes in the
regulatory landscape. The
Group assesses the risks of
regulatory change and the
impact on our operations and
lobbies where appropriate.
In publishing the findings
of the ‘Fair Treatment of
Customers in Closed Books’
review, the FCA has set out their
expectation of firms in relation to
managing conduct risk. This has
enabled Phoenix to benchmark
itself against these expectations
and focus on activities to enhance
its management of conduct risk.
Phoenix Life has made a
number of changes to its
retirement processes to take
account of the changes.
These include ensuring that
appropriate risk warnings
are provided to customers
in advance of them taking a
course of action. This is aligned
to the new rules that the
FCA has outlined in PS15/4.
The retirement changes
went live in April 2015.
Phoenix was operational on day 1
and has been able to offer
customers a range of options.
Phoenix has actively encouraged
customers to utilise Pension Wise.
In addition Phoenix implemented
the FCA risk warnings thus
ensuring that customers have
made informed choices.
PRINCIPAL RISKS AND UNCERTAINTIES FACING
THE GROUP (CONTINUED)
The principal risk relating to the implementation of the Solvency II
Directive has been removed following the approval of the Group’s
Internal Model and related applications.
The current assessment of the residual risk in respect of each of the
Group’s principal risks is illustrated in the chart opposite.
The residual risk is the remaining risk after controls and mitigating
actions have been taken into account.
PRINCIPAL RISKS
h
g
H
i
The Group’s senior management and Board also take emerging risks
into account when considering potentially adverse outcomes and
appropriate management actions prior to the risk crystallising.
Some of the current emerging risks the Group considers are listed
in the table below.
t
c
a
p
m
I
RISK
TITLE
Regulatory
Thematic
Reviews
Pension Exit
Charges
DESCRIPTION
The unknown consequences and the
potential impact, including retrospective
activity, as a result of Thematic Reviews
conducted by the regulators.
The Treasury have asked the FCA to
legislate on a cap for pension products so
that customers can take advantage of the
pension freedoms.
RISK UNIVERSE
CATEGORY
Customer
Customer
w
o
L
Unlikely
B
A
D
C
Almost Certain
Likelihood
RISK
A Market Volatility
B Counterparty Exposure
C Actuarial Assumptions
D Regulatory and
Legislative Changes
RISK
A Market Volatility
B Counterparty Exposure
C Actuarial Assumptions
D Regulatory and
Legislative Changes
h
g
H
i
The FCA have also noted that they are
seeking a ‘voluntary solution’ on exit charges
for other legacy products.
Political Risk
Unexpected changes driven by political
agenda in the run up to, and following, the
European referendum during 2016.
Strategic
t
c
a
p
m
I
B
A
D
C
w
o
L
Unlikely
Almost Certain
Likelihood
Phoenix Group Holdings Annual Report and Accounts 2015
39
VIABILITY STATEMENT
In accordance with the provision of section C.2.2 of the 2014 revision of the UK Corporate
Governance Code, the Board has completed an assessment of the prospects and viability
of the Group over a five-year period to December 2020. The Board has determined that the
five-year period to December 2020 is an appropriate period for the assessment, this being
the period covered by the Group’s Board-approved annual operating plan (‘AOP’).
In making the viability assessment, the Board has undertaken the following process:
Ɛ it reviewed what is mandatory in the context of viability;
Ɛ it reviewed the AOP which considers profits, liquidity, solvency and strategic objectives
and the impacts of management actions on the Group;
Ɛ it completed stress testing to assess viability under severe but plausible scenarios,
including two adverse stresses which represent the key financial risks to the Group
as follows:
1. Market stress – a 1 in 10 year event combined market stress incorporating a fall in
equity, property values and yields, with a widening of credit spreads.
2. Longevity stress – a 1 in 10 year event longevity and credit stress, which implies a
1.3 year increase in life expectancy for a 65 year old male alongside a widening of credit
spreads.
Ɛ it considered the principal risks facing the Group which have the potential to impact on
viability as discussed in the Risk report above.
Ɛ it completed a qualitative assessment of all strategic risks to the Group and contingent
actions available that could be implemented should any risk materialise that threatens the
Group’s resilience.
The Board has also made certain assumptions when making the assessment and these
include the following:
Ɛ the stress occurs on 1 January 2016 with no allowance for any recovery; and
Ɛ that corporate acquisitions are not relevant, as any acquisition would only be progressed
on the basis it was value accretive.
Based on the results of the procedures outlined above, the Board has a reasonable
expectation that the Group will be able to continue in operation and meet its liabilities
as they fall due over the five-year period of assessment.
Phoenix Group Holdings Annual Report and Accounts 2015Strategic report 40
ENVIRONMENTAL
REPORTING
Our Corporate Responsibility programme
supports our commitment to monitoring
and reducing our environmental footprint.
This section includes mandatory reporting of greenhouse gas (‘GHG’)
emissions pursuant to the Companies Act 2006 (Strategic and
Directors’ Reports) Regulations 2013. Emissions disclosed relate to
properties where the Group has operational control. The Group has
no responsibility for any emission sources that are not included in our
consolidated financial statements.
Emissions have arisen principally through the combustion of fuel and
operation of facilities (Scope 1) and the consumption of purchased
electricity, heat, steam and cooling, (Scope 2). Approximately 7% of
2015 emissions are estimated as full year data is not yet available for all
properties. A sample of emissions from fuel use for transport, back-up
generation and fluorinated gases were calculated and were determined
to be non-material to the overall footprint, so have not been included.
The data reported is based on the main requirements of the ISO14064
Part 1 and the GHG Protocol Corporate Accounting and Reporting
Standard (revised edition); data gathered for ongoing reporting against
the UK Carbon Reduction Commitment (‘CRC’) scheme and energy
and fuel consumption data for occupied properties has been used to
calculate the carbon footprint. The Government’s Conversion Factors
for Company Reporting 2015 have been used to convert energy data
into CO2e emissions.
Due to organisational structure changes in 2014 following the
divestment of Ignis Asset Management Limited to Standard Life
Investments (Holdings) Limited, the Group has restated 2014 data to
represent only properties where the Group has operational control.
This is in line with the Greenhouse Gas Protocol’s guidance on
organisational boundaries.
GREENHOUSE GAS EMISSIONS
GLOBAL GHG EMISSIONS DATA IN TONNES OF CO2e
Emissions from:
2015
2014 restated
Combustion of fuel and operation of
facilities (Scope 1)
Electricity, heat, steam and cooling
purchased for own use (Scope 2)
Total Carbon Footprint (tonnes of CO2e)
1,013
1,028
2,939
3,952
3,508
4,536
PHOENIX GROUP’S CHOSEN INTENSITY MEASUREMENT
2015
2014 restated
Emissions reported above normalised
to per m2
0.09 tonnes
CO2e/m2
0.10 tonnes
CO2e/m2
Emissions reported above normalised
to kg per m2
90 kg
CO2e/m2
103 kg
CO2e/m2
Emissions from Group corporate offices
normalised to per FTE
5.4 tonnes
of CO2e/
FTE
6.1 tonnes of
CO2e/FTE
Go online for the Group’s full Corporate Responsibility Report
www.thephoenixgroup.com/CRreport2015
Phoenix Group Holdings Annual Report and Accounts 2015 Phoenix Group Holdings Annual Report and Accounts 2015
41
The Directors of Phoenix Group
Holdings support the high standards
of corporate governance contained in
the UK Corporate Governance Code.
IN THIS SECTION
Chairman’s introduction
Board structure
Board of Directors
Executive management team
Corporate governance report
Directors’ remuneration report
Directors’ report
42
43
44
46
47
57
81
C
O
R
P
O
R
A
T
E
G
O
V
E
R
N
A
N
C
E
42
CHAIRMAN’S
INTRODUCTION
I am very pleased to have been appointed
Chairman of the Board of a Group in
which strong governance is embedded
and supported from top to bottom.
My fellow Directors and I realise that
governance evolves and we must continue
to be proactive in ensuring that robust
governance in Phoenix remains a priority.”
HENRY STAUNTON
CHAIRMAN
BOARD OF DIRECTORS
Our Board of Directors comprises 10 directors, which has consistently
been the number of Directors the last few Board evaluations have
recommended as the right number for our Board to function at its
optimum level. The Board comprises the Chairman, seven independent
Non-Executive Directors and two Executive Directors. The increasing
independence across the Board over the last few years is demonstrated
on the chart opposite.
SHAREHOLDERS
I am gratified that our shareholders responded positively to the actions
we took in response to the votes at our 2014 AGM of 81% and 84% in
favour of our remuneration report and policy respectively. At our 2015
AGM, votes in favour of all 18 resolutions were over 98% of votes
cast. This is our best result since our 2010 London listing and we have
therefore returned to a positive trajectory of AGM resolution approvals
as shown in the table opposite.
In response to a recommendation from the November 2014 externally
facilitated Board evaluation, a Board skills audit was undertaken in early
2015 and this informed our succession planning by considering the skills
and experience required in differing degrees across our Board to pursue
our strategy and govern the Group. In accordance with our Board
succession plan, approved by the Board in April 2015, we are currently
recruiting two Non-Executive Directors to prepare for those scheduled
to leave the Board by the middle of 2017. This includes (as reported
in my opening Chairman’s statement) Tom Cross Brown who will be
leaving the Board at our May 2016 Annual General Meeting following
a long period of excellent service to the Group.
Since my arrival, we have undertaken (in November 2015) an internally
facilitated Board evaluation from which it was concluded that the Board
could function well with between 9 and 11 Directors and that some
overlap between new and departing Directors may be desirable as the
new Directors increase their familiarity with Phoenix Group.
In addition, a strong theme emerging from the Board evaluation was the
desire to spend more time on strategy. We are now including specific
sections of the agenda at each Board meeting devoted to strategy
as well as our annual strategic off-site session and the continued
monitoring of performance against strategy at each Board meeting.
I am convinced that we have a Board equipped to drive our strategy
forward and pursue our M&A agenda.
UK CORPORATE GOVERNANCE CODE
As detailed in the Corporate Governance Report on pages 47 to 55, we
complied in 2015 with the provisions of the UK Corporate Governance
Code (‘the Code’) apart from one unavoidable matter when a Director
was unable to attend our AGM for personal reasons, resulting in a
technical breach of code provision E2.3. This has been our only matter
of non-compliance with the Code in the past four years.
The following sections provide more detail on our Board of Directors,
Executive Management team, operation of governance and
remuneration practices as follows:
Ɛ Board and committee structure
Ɛ Board of Directors
Ɛ Executive Management Team
Ɛ Corporate Governance Report
Ɛ Directors’ Remuneration Report
Ɛ Directors’ Report.
Phoenix Group Holdings Annual Report and Accounts 2015 BOARD
STRUCTURE
43
Phoenix Group Holdings Board and Committees
The main focus of the Phoenix Group Holdings Board is on Group strategy and performance, with input from
board committees. The chart below sets out the composition and main activities of the Phoenix Group Holdings
Board and its committees. More detailed operational and customer-focused matters are addressed at the
subsidiary board and committee level.
PHOENIX GROUP
HOLDINGS BOARD
Henry Staunton (Chair)
Ian Cormack – SID
Rene-Pierre Azria
Clive Bannister*
Alastair Barbour
Tom Cross Brown
Isabel Hudson
James McConville*
Kory Sorenson
David Woods
REMUNERATION
COMMITTEE
RISK
COMMITTEE
Ian Cormack (Chair)
Isabel Hudson
Kory Sorenson
David Woods (Chair)
Rene-Pierre Azria
Alastair Barbour
Tom Cross Brown
NOMINATION
COMMITTEE
Henry Staunton (Chair)
Ian Cormack
Tom Cross Brown
PHOENIX GROUP
HOLDINGS BOARD
REMUNERATION
COMMITTEE
RISK
COMMITTEE
Group Strategy
Group Budget
Group Risk Appetite
Performance Monitoring
External/Shareholder
Reporting
External Debt
Major transactions
Group remuneration
framework
Executive Director
remuneration
Employee share schemes
Risk appetite and high-
level risk matters
The Group’s Risk
Management Framework
NOMINATION
COMMITTEE
Board appointments
Senior executive
appointments
Board and senior
executive succession
planning
AUDIT
COMMITTEE
Alastair Barbour (Chair)
Isabel Hudson
Kory Sorenson
David Woods
AUDIT
COMMITTEE
Financial Reporting
Internal Controls
External Audit
Internal Audit
* Executive Directors
TOTAL NUMBER OF DIRECTORS
4
1
4
1
)
%
0
5
(
7
)
%
0
5
(
7
1
1
)
%
5
5
(
6
0
1
0
1
)
%
0
7
(
7
)
%
0
6
(
6
2011 2012 2013 2014 2015
AGM resolution approvals
Number of
resolutions
Percentage of
votes in favour*
2015 AGM
2014 AGM
2013 AGM
2012 AGM
2011 AGM
Total number of Directors
No/(%) of Independent
Non-Executive Directors
2010 AGM (first AGM)
* All resolutions passed by majority of at least this % of votes cast.
18
19
20
21
24
22
98%
80%
96%
97%
96%
87%
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance
44
BOARD OF
DIRECTORS
The Group is governed by our Board of Directors.
Biographical details of all Directors are shown below.
HENRY STAUNTON
CHAIRMAN
CLIVE BANNISTER
GROUP CHIEF EXECUTIVE OFFICER
RENÉ-PIERRE AZRIA
INDEPENDENT NON-EXECUTIVE DIRECTOR
Committee membership
Ɛ Nomination Committee (Chairman)
Appointed to the Board
28 March 2011
Experience
Clive Bannister joined the Group in February 2011
as Group Chief Executive Officer. Prior to this, Mr
Bannister was Group Managing Director of Insurance
and Asset Management at HSBC Holdings plc.
He joined HSBC in 1994 and held various leadership
roles in planning and strategy in the Investment Bank
(USA) and was Group General Manager and CEO of
HSBC Group Private Banking. He started his career
at First National Bank of Boston and prior to working
at HSBC was a partner in Booz Allen Hamilton in the
Financial Services Practice providing strategic support
to financial institutions including leading insurance
companies, banks and investment banks. Mr Bannister
is also Chairman of the Museum of London.
Appointed to the Board
1 September 2015
Experience
Mr Staunton is Non-Executive Chairman of WH Smith
plc, the leading FTSE250 retail group, and a Non-
Executive Director of Capital & Counties Properties
plc. He is also Non-Executive Chairman of the privately
owned BrightHouse Group, the rent-to-own company,
and a Non-Executive Director of ICBC Standard Bank,
a subsidiary of ICBC.
From 2004 until 2013, Henry Staunton was a Non-
Executive Director, Chairman of the Audit Committee
and latterly Senior Independent Director and Vice
Chairman of Legal & General Group plc, where he
gained significant insight into the life and pensions
industry. From 2008 to 31 December 2014 he was a
Non-Executive Director of Merchants Trust plc, where
he was the Senior Independent Director.
During his executive career he was Finance Director
of ITV plc from 2003 to 2006, and Finance Director of
Granada plc from 1993 to 2003. Prior to that he joined
Price Waterhouse as a graduate trainee, rising to
become a Senior Partner of the audit practice.
Committee membership
Ɛ Risk Committee
Appointed to the Board
2 September 2009
Experience
René-Pierre Azria is a senior partner at LionTree LLC,
a US private advisory firm based in New York and
specialising in strategic analysis and mergers and
acquisitions. Prior to joining LionTree LLC, Mr Azria
founded and managed Tegris LLC, also a mergers and
acquisitions firm based in New York. Prior to founding
Tegris LLC, Mr Azria was a worldwide partner
with Rothschild & Co., based in New York. Prior to
joining Rothschild & Co. in 1996, Mr Azria served
as Managing Director of Blackstone Indosuez and
President of the Financiere Indosuez Inc. in New York.
JAMES MCCONVILLE
GROUP FINANCE DIRECTOR
Appointed to the Board
28 June 2012
Experience
Between April 2010 and December 2011,
Mr McConville was Chief Financial Officer of
Northern Rock plc. Prior to that, between 1988
and 2010, he worked for Lloyds Banking Group
plc (formerly Lloyds TSB Group plc) in a number of
senior finance and strategy related roles, latterly as
Finance Director of Scottish Widows Group and
Director of Finance for the Insurance and Investments
Division. During 2011 and 2012, Mr McConville was
a Non-Executive Director of the life businesses of
Aegon UK. In 2014, Mr McConville joined the board of
Tesco Personal Finance plc as Non-Executive Director.
Mr McConville qualified as a Chartered Accountant
whilst at Coopers and Lybrand.
ALASTAIR BARBOUR
INDEPENDENT NON-EXECUTIVE DIRECTOR
Committee membership
Ɛ Audit Committee (Chairman)
Ɛ Risk Committee
Appointed to the Board
1 October 2013
Experience
Alastair Barbour has over 30 years audit experience
with KPMG where he worked across the full spectrum
of financial services clients from large general insurers
and reinsurers to the life assurance and investment
management sector, working on a range of operational
and strategic issues. Mr Barbour is the former Head
of Financial Services, Scotland for KPMG. He retired
from KPMG in 2011 to build a Non-Executive career.
He is a Director and Audit Committee Chairman of RSA
Insurance Group plc, Standard Life European Private
Equity Trust plc and Liontrust Asset Management plc
(all London Stock Exchange listed companies). He is also
a Director and Audit Committee Chairman of CATCo
Reinsurance Opportunities Fund Ltd, a Bermuda-based
investment company listed on the London Stock
Exchange and of The Bank of N. T. Butterfield & Son
Limited, a company listed in Bermuda.
Phoenix Group Holdings Annual Report and Accounts 2015 45
IAN CORMACK
SENIOR INDEPENDENT DIRECTOR
TOM CROSS BROWN
INDEPENDENT NON-EXECUTIVE DIRECTOR
ISABEL HUDSON
INDEPENDENT NON-EXECUTIVE DIRECTOR
Committee membership
Ɛ Remuneration Committee (Chairman)
Ɛ Nomination Committee
Appointed to the Board
2 September 2009
Committee membership
Ɛ Nomination Committee
Ɛ Risk Committee
Appointed to the Board
24 September 2009
Committee membership
Ɛ Audit Committee
Ɛ Remuneration Committee
Appointed to the Board
18 February 2010
Experience
Mr Cormack is Non-Executive Chairman of Maven
Income & Growth VCT 4 plc, a Senior Independent
Director of both Partnership Assurance Group plc
and Xchanging plc and a Non-Executive Director of
Hastings Insurance Holdings plc. Mr Cormack was
Chief Executive Officer of AIG, Inc. in Europe from
2000 to 2002 and prior to that he spent 32 years
at Citibank where he was Chairman of Citibank
International plc and Co-Head of the Global Financial
Institutions Client Group at Citigroup.
Experience
Tom Cross Brown was Global Chief Executive of ABN
AMRO Asset Management from 2000 to 2003, as
well as Chairman of ABN AMRO Asset Management
in the UK from 1997 to 2003. Prior to this, he spent
21 years with Lazard Brothers in London, latterly as
Chief Executive Officer of Lazard Brothers Asset
Management. Mr Cross Brown is Non-Executive
Chairman of Just Retirement Group plc and is a
Non-Executive Director of Artemis Alpha Trust plc.
Experience
Isabel Hudson is Non-Executive Chairman of the
National House Building Council and a Non-Executive
Director of Standard Life PLC and BT Group plc.
Ms Hudson is a former Non-Executive Director of
MGM Advantage, The Pensions Regulator and QBE
Insurance. Other roles previously held by Ms Hudson
include Chief Financial Officer at Eureko BV and
Executive Director of Prudential Assurance Company.
Ms Hudson is an ambassador to Scope, a UK charity,
and has 34 years of experience in the insurance
industry in the UK and mainland Europe.
KORY SORENSON
INDEPENDENT NON-EXECUTIVE DIRECTOR
DAVID WOODS
INDEPENDENT NON-EXECUTIVE DIRECTOR
Committee membership
Ɛ Audit Committee
Ɛ Remuneration Committee
Appointed to the Board
1 July 2014
Committee membership
Ɛ Risk Committee (Chairman)
Ɛ Audit Committee
Appointed to the Board
18 February 2010
Experience
Kory Sorenson is currently a Non-Executive Director
of SCOR SE, Pernod Ricard SA, UNIQA Group and
Aviva Insurance Limited. She also volunteers as a
Director of the Institut Pasteur foundation in Paris.
Ms Sorenson has over 20 years of financial services
experience, most of which has been focused on
insurance and banking. She was Managing Director,
Head of Insurance Capital Markets of Barclays Capital
from 2005 to 2010 and also held senior positions in
the financial institutions divisions of Credit Suisse,
Lehman Brothers and Morgan Stanley.
Experience
David Woods is a Fellow of the Institute of Actuaries,
Non-Executive Chairman of Standard Life UK Smaller
Companies Trust plc and a Non-Executive Director
of Murray Income Trust plc. He is also Chairman of
the pension fund trustee companies responsible for
the governance of all the UK defined benefits/pension
schemes in the Sopra Steria Group and is a Director
of Santander (UK) Group Pension Trustees Ltd.
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 46
EXECUTIVE
MANAGEMENT TEAM
Executive management of the Group is led by the Group Chief
Executive Officer, Clive Bannister, who is supported by
the Executive Committee (‘ExCo’).
CLIVE BANNISTER
GROUP CHIEF EXECUTIVE
OFFICER
JAMES MCCONVILLE
GROUP FINANCE
DIRECTOR
ANDY MOSS
CHIEF EXECUTIVE,
PHOENIX LIFE
FIONA CLUTTERBUCK
HEAD OF STRATEGY,
CORPORATE DEVELOPMENT
AND COMMUNICATIONS
Roles and responsibilities
Ɛ Supports the Group Chief
Executive Officer in the
formulation of the strategy
and the business planning
for the Group
Ɛ Leads implementation of the
Group’s strategy as regards
any potential acquisitions
or disposals
Roles and responsibilities
Ɛ Leads the development and
delivery of the Phoenix Life
business strategy, including
the continued integration
of life businesses
Ɛ Leads the Phoenix Life
business to optimise outcomes
for customers in terms of both
value and security
Ɛ Ensures Phoenix Life
Ɛ Leads external Group
deploys capital efficiently and
effectively, with due regard
to regulatory requirements,
the risk universe and strategy.
Communications in liaison with
the Group Finance Director and
Head of Investor Relations.
Roles and responsibilities
Ɛ Leads the development of the
Group’s strategy for agreement
by the Board
Roles and responsibilities
Ɛ Develops and delivers the
Group’s financial business plan
in line with strategy
Ɛ Leads and directs the Group’s
Ɛ Ensures the Group’s finances
businesses in delivery of
the Group strategy and
business plan
Ɛ Leads the Group to safeguard
returns for policyholders and
grow shareholder value
Ɛ Embeds a risk-conscious Group
culture which recognises
policyholder obligations in
terms of service and security
Ɛ Manages the Group’s key
external stakeholders.
and capital are managed
and controlled
Ɛ Develops and delivers the
Group’s debt capital strategy
and other treasury matters
Ɛ Ensures the Group has
effective processes in
place to enable all reporting
obligations to be met
Ɛ Supports the Group
Chief Executive Officer in
managing the Group’s key
external stakeholders
Ɛ Maximises shareholder
value through clear,
rigorous assessment of
business opportunities.
STEVE FAWCETT
GROUP HUMAN
RESOURCES DIRECTOR
Roles and responsibilities
Ɛ Leads the implementation of
the Group’s employee strategy
in order to recruit, retain,
motivate and develop high
quality employees
Ɛ Provides guidance and support
on all HR matters to the Group
Chief Executive Officer, ExCo
and the Group Board and
Remuneration Committee
Ɛ Delivers HR services to
the Group.
WAYNE SNOW
GROUP CHIEF RISK OFFICER
SIMON TRUE
GROUP CHIEF ACTUARY
QUENTIN ZENTNER
GENERAL COUNSEL
Roles and responsibilities
Ɛ Leads the Group’s risk
management function,
embracing changes in best
practice and regulation
including Solvency II
Ɛ Oversees and manages
the Group’s relationship
with the FCA and PRA
Ɛ Oversees adherence to the
Group’s risk appetite.
Roles and responsibilities
Ɛ Ensures capital is managed
efficiently across the Group
Ɛ Manages the Group’s
solvency position
Ɛ Leads the development of the
Group’s investment strategy
Ɛ Identifies and delivers
opportunities to enhance
shareholder value across
the Group.
Roles and responsibilities
Ɛ Leads provision of legal advice
to the Group Board, other
Group company Boards, ExCo
and senior management
Ɛ Oversees and co-ordinates
maintenance of, and adherence
to, appropriate corporate
governance procedures across
the Group
Ɛ Designs and implements
a framework to manage
legal risk within the Group,
including compliance by Group
companies and staff with
relevant legal obligations.
Phoenix Group Holdings Annual Report and Accounts 2015 CORPORATE
GOVERNANCE REPORT
47
Ɛ Tom Cross Brown is the non-executive Chairman of Just Retirement
Group plc. The Group has an arrangement with Just Retirement
whereby Phoenix customers may be referred to Just Retirement
to enable them to explore enhanced annuities should they wish to
do so. The decisions regarding this arrangement are not made by
the Board of Phoenix Group Holdings and the relationship is not
considered to impact the independent status of Tom Cross Brown.
Ɛ Isabel Hudson is a non-executive director of Standard Life PLC which
has investment management arrangements with the Phoenix Life
subsidiary companies. The decisions regarding these arrangements
are not made by the Board of Phoenix Group Holdings and the
relationship is not considered to impact the independent status of
Isabel Hudson.
The remuneration of the Directors is shown in the Directors’
Remuneration Report on pages 57 and 80. The terms and conditions
of appointment of Non-Executive Directors are on the Group’s website.
In accordance with the provisions of the Articles and the Code, all
Directors (except Tom Cross Brown, who is standing down from
the Board) will submit themselves for election or re-election at the
Company’s AGM on 11 May 2016.
The Board is responsible to the shareholders for the overall
performance of the Group. The Board’s role is to provide entrepreneurial
leadership within a framework of prudent and effective controls which
enables risk to be assessed and managed. The Board has a schedule of
matters reserved for its consideration and approval supported by a set
of operating principles. These matters include:
Ɛ Group strategy and business plans
Ɛ Major acquisitions, investments and capital expenditure
Ɛ Financial reporting and controls
Ɛ Dividend policy
Ɛ Capital structure
Ɛ The constitution of Board committees
Ɛ Appointments to the Board and Board committees
Ɛ Senior executive appointments
Ɛ Key Group policies.
The schedule of matters reserved for the Board is available from the
Group Company Secretary. Matters which are not reserved for the
Board and also its committees under their terms of reference (which
are available on the Group website), or for shareholders in general
meetings, are delegated to the executive management under a
schedule of delegated authorities approved by the Board.
The head office of the Company is in Jersey and, as such, the Board
and its committees hold their meetings in Jersey.
INTRODUCTION
The Board is committed to high standards of corporate governance and
the Group’s Corporate Governance policy is aligned to compliance with
the UK Corporate Governance Code (‘the Code’) which sets standards
of good practice for UK listed companies. It is the Board’s view that the
Company has been fully compliant during 2015 with the provisions set
down in the Code apart from provision E.2.3 due to one Director being
unable to attend the AGM for personal reasons.
THE BOARD
The Board comprises the Non-Executive Chairman, the Group Chief
Executive Officer, the Group Finance Director and seven independent
Non-Executive Directors. Biographical details of all Directors are
provided on pages 44 to 45.
BOARD COMPOSITION
A
A Chairman
(10%)
B Executive Directors
(20%)
B
C Non-Executive Directors
(70%)
C
The Board skillset must be aligned to the Group strategy of enhancing
value for shareholders and policyholders and taking forward the Group’s
M&A agenda. The Board undertook a skills audit in the first half of
2015, evaluating the Directors’ skills against strategic requirements.
The output has been used to inform succession and recruitment of
Directors. A further skills audit will be undertaken in the first half of 2017,
to ensure the Board skillset continues to be appropriate to the Group’s
strategy and the external environment.
The Board considers that the following Directors are independent:
Rene-Pierre Azria, Alastair Barbour, Ian Cormack, Tom Cross Brown,
Isabel Hudson, Kory Sorenson and David Woods. The Board has
considered the criteria proposed by the Code in assessing the
independence of the Directors, in particular the following:
Ɛ The Board had previously considered Rene-Pierre Azria not to be
independent as a firm he was connected with had undertaken
services for two shareholders, each holding more than 3% of the
Company’s issued share capital. Those two shareholders have each
sold down their shareholding to less than 0.5% and are no longer
significant shareholders. Therefore, the Board has concluded that
Mr Azria can be considered independent as (a) he acts in a wholly
independent manner in character and judgement and (b) none of the
relationships or circumstances listed in provision B1.1 of the Code
apply to Mr Azria.
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 48
CORPORATE
GOVERNANCE REPORT
Continued
THE CHAIRMAN, GROUP CHIEF EXECUTIVE OFFICER
AND SENIOR INDEPENDENT DIRECTOR
An action list, with senior executive accountability, has been established
to address the recommendations from the November 2015 evaluation.
Henry Staunton is Chairman of the Board of Directors of the Company,
having succeeded Howard Davies on 1 September 2015. There is
a division of responsibility, approved by the Board, between the
Chairman, who is responsible for the leadership and effective operation
of the Board and the Group Chief Executive Officer, Clive Bannister,
who is responsible to the Board for the overall management and
operation of the Group. The Chairman’s other commitments are set out
in his biographical details on page 44. The Chairman was appointed on
the basis of committing two days per week to Phoenix.
The Senior Independent Director, appointed by the Board, is Ian
Cormack. His role is to be available to shareholders whose concerns are
not resolved through the normal channels or when such channels are
inappropriate. He is also responsible for leading the annual appraisal of
the Chairman’s performance by the Non-Executive Directors.
BOARD EFFECTIVENESS
In accordance with the Code, an evaluation of the performance
of the Board and that of its Committees and individual Directors
was undertaken in the latter part of 2015. The process was led by
the Chairman and internally facilitated by the Company Secretary.
The process involved completion by Directors of a questionnaire
covering various aspects of Board, Committee and Director
effectiveness followed by individual meetings between the Chairman
and each Director, concluding in a Board report which was discussed
by the Board in November 2015. Key outputs from the review are
shown below:
The table below shows how the main recommendations from the
November 2014 evaluation were addressed in 2015.
The output from the November 2015 Board and individual director
reviews informed the review of the Board composition undertaken
by the Board Nomination Committee in January 2016, leading to the
Board’s recommendations to shareholders regarding re-election of
Directors at the 2016 Annual General Meeting (‘AGM’).
All Directors receive a tailored induction on joining the Board in
accordance with a process approved by the Board. The new Group
Chairman, Henry Staunton, undertook a comprehensive induction
before and following his appointment in September 2015. This included
a focus on the new Solvency II reporting environment, applicable from
1 January 2016, as well as detailed strategic and operational briefings
and information.
To ensure that the Directors maintain up-to-date skills and knowledge
of the Company, all Directors receive regular presentations on different
aspects of the Company’s business and on financial, legal and
regulatory issues.
KEY OUTPUTS FROM THE 2015 BOARD EFFECTIVENESS REVIEW:
Ɛ A strong theme was the desire to spend more time on strategy.
Ɛ Much of the discussion related to proposals to improve Board processes and operations to facilitate better use of Directors’ time.
Ɛ The Board skillset is considered balanced and right, with a continued focus on required skills in capital markets and M&A.
Phoenix Group Holdings Annual Report and Accounts 2015 49
PROGRESS AGAINST ACTIONS FROM THE EXTERNALLY-FACILITATED 2014 BOARD EFFECTIVENESS REVIEW:
Action
Conduct skills audit over next 12 months.
Provide clearer direction/priorities in Board papers which should be
simplified and shortened where possible.
Provide more life assurance sector intelligence (acknowledging that this
is addressed in detail at the regulated life company subsidiary boards).
Conduct reviews of significant past decisions.
Status
Skills Audit conducted, matching Board skills to the Group’s strategic
requirements and reported to the Board in April 2015. The output has
informed the skills required to replace those Directors due to vacate
the Board over the next 18 months.
Addressed, with ongoing monitoring expected.
Briefings provided to the Board on the commercial and regulatory
environment facing the life assurance sector and the Senior Insurance
Manager Regime; process established to provide Non-Executive
Directors with ongoing media and press information on the life and
pensions sector.
Reviews of major recent decisions presented to the Board in April 2015
and October 2015.
OPERATION OF THE BOARD
KEY FOCUS AREAS AT BOARD MEETINGS
The terms of appointment for the Directors state that they are
expected to attend in person regular (at least six per year) and additional
Board meetings of the Company and to devote appropriate preparation
time ahead of each meeting. In January 2016, the Nomination
Committee reviewed the time spent by Directors and concluded
that the time required of (and given by) the Company’s Directors is
considered at least at the level expected in their appointment terms
and is believed to be high in comparison to other FTSE 250 companies.
Alastair Barbour, on account of being on the boards of a number of
public companies listed in the UK and/or Bermuda and chairing the audit
committee for all, has provided an analysis of his work commitments
to the Nomination Committee, which shows the relatively low level
of time commitment required for certain of his other roles and the
complementary nature of his roles and the time committed to Phoenix
(40 days in 2015, his second biggest role). The Nomination Committee
and Board confirmed their satisfaction with the time and overall
commitment given to Phoenix by Mr Barbour and all other directors.
The Board met seven times during 2015 and is scheduled to meet
seven times in 2016 including for a two day strategy-setting meeting.
Additional meetings will be held as required, and the Non-Executive
Directors will hold meetings with the Chairman, without the Executive
Directors being present, as they did on several occasions in 2015.
BOARD COMMITTEES
The Board has delegated specific responsibilities to four standing
committees of the Board. The terms of reference of the committees
can be found on the Company’s website.
Ɛ Reports from Chairs of Board committees and subsidiary Boards
Ɛ CEO Report
Ɛ Management Information Report
Ɛ Financial Reporting
Ɛ Strategy and Planning
Ɛ Consideration of corporate transactions
Ɛ Board and Board Committee changes and issues.
Board attendance 2015
Board meetings
Maximum
Actual
Chairman
Howard Davies¹
Henry Staunton²
Executive Directors
Clive Bannister (CEO)
James McConville (FD)
Non-Executive Directors
René-Pierre Azria
Alastair Barbour
Ian Cormack
Tom Cross Brown
Isabel Hudson
Kory Sorenson
David Woods
1 Howard Davies resigned from the Board on 31 August 2015.
2 Henry Staunton was appointed to the Board on 1 September 2015.
5
2
7
7
7
7
7
7
7
7
7
5
2
7
7
7
7
7
6
7
7
7
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 50
CORPORATE
GOVERNANCE REPORT
Continued
Audit Committee
ALASTAIR BARBOUR
AUDIT COMMITTEE CHAIRMAN
OTHER MEMBERS
Isabel Hudson
Kory Sorenson
David Woods
Ɛ Provision of advice to the Board to enable the Board to report on
whether the Annual Report and Accounts, taken as a whole, are fair,
balanced and understandable and provide the information necessary
for shareholders to assess the Group’s performance, business model
and strategy.
Ɛ Responsible for making recommendations to the Board on the
appointment of the external auditors and their terms of engagement
and for reviewing the performance, objectivity and independence of
the external auditors. The terms of reference of the Audit Committee
state that it shall meet the external auditor at least once a year
without management being present.
Ɛ Considering and approving the remit of the internal audit function and
reviewing its effectiveness.
Ɛ Oversight of activities of subsidiary audit committees through
receipt and review of minutes, discussions between the Chairmen
of the Audit Committee and subsidiary audit committees, and the
Audit Committee Chairman’s attendance at the Phoenix Life Audit
Committee on an occasional basis, as well as his receipt of all papers
going to the Phoenix Life Audit Committee.
MEETING ATTENDANCE 2015
AUDIT COMMITTEE’S PRINCIPAL ACTIVITIES DURING 2015
Audit Committee
EXTERNAL REPORTING AND CONTROLS
Maximum
Actual
Ɛ Reviewed the Company’s 2014 Annual Report and Accounts,
Chairman
Alastair Barbour
Other members
Isabel Hudson
Kory Sorenson
David Woods
7
7
7
7
7
7
7
7
The composition of the Audit Committee is in accordance with the
requirements of the Code that the Audit Committee should consist of
at least three independent Non-Executive Directors of whom at least
one has recent and relevant financial experience. Both Alastair Barbour
and Isabel Hudson have that experience. The Audit Committee met
seven times during 2015. Its meetings are attended by the Chairman of
the Risk Committee (who is also a member of the Audit Committee),
the Group Finance Director, the Deputy Group Finance Director, the
Group Head of Internal Audit, the external auditors and usually also by
the Group Chairman and the Group Chief Executive Officer. The Audit
Committee holds private meetings at least annually with each of the
Group Finance Director, the Group Head of Internal Audit and the
external auditors.
AUDIT COMMITTEE’S ROLE
Ɛ Receiving and reviewing the Annual Report and Accounts and other
related financial disclosures, although the ultimate responsibility for
these matters remain with the Board.
Ɛ Monitoring the overall integrity of the financial reporting by the
Company and its subsidiaries and the effectiveness of the Group’s
internal controls.
2015 Interim Financial Statements and 2015 Interim Management
Statements, recommending their approval to the Board, as well as
related disclosures and the financial reporting process, supported by
reports from management and the external auditors.
Ɛ Considered and addressed a number of significant matters in relation
to the IFRS and MCEV financial statements for 2014 (annual), 2015
(interim) and 2015 (annual) as summarised in the table on page 52.
These matters were considered by the Audit Committee to be areas
subject to the most significant levels of judgement or estimation, and
identified with regard to the significant risks assessed by the Group’s
external auditors as set out in their audit opinion on page 87.
Ɛ Reviewed the financial forecasts prepared by management,
supported by the sensitivity analysis on the key assumptions
underpinning the forecasts, in support of the assumption that
the Group will continue as a going concern and in support of
dividend payments.
Ɛ Reviewed the annual internal controls effectiveness report (and the
half-year interim update) prior to its consideration by the Board and
received reports regarding consequential actions.
Ɛ Reviewed reports from Internal Audit and EY (as part of their audit
assurance) on the control environment in the Group’s outsource
service providers, noting that this was addressed in more detail at the
Phoenix Life Audit Committee.
Ɛ Approved the internal controls framework which set out the process
by which controls were set across the risk management framework.
The Committee requested the development of an assurance strategy
to provide clarity of the roles of line 1 (Executive Management), line
2 (Risk Function) and line 3 (Internal Audit) for the assurance work
surrounding the framework. The assurance strategy was developed
through the course of 2015 and reviewed by the Audit Committee
prior to its finalisation.
Phoenix Group Holdings Annual Report and Accounts 2015 51
ASSESSMENT OF THE EFFECTIVENESS
OF THE EXTERNAL AUDIT PROCESS
The effectiveness of the external audit process was assessed through
the completion of an assessment questionnaire by the key divisions
and Group functions within Phoenix Group. The feedback covered
EY’s performance with regard to their audits under the IFRS, MCEV,
Solvency I and Solvency II bases of reporting. To provide a more
detailed analysis, the review was supported by the utilisation of an
online questionnaire based tool provided by a third party supplier.
The output from the review enabled management to identify key areas
of focus to facilitate the audit process and enhanced understanding
of the importance of various criteria with regard to the external
auditor relationship for a future tender exercise. The Audit Committee
contributed feedback to the exercise, considered the effectiveness
of the process and reviewed the overall findings.
AUDITOR’S APPOINTMENT
The current auditors, EY, were appointed in September 2009. However,
EY have been auditors to significant parts of the Group for a longer
period. In accordance with the requirements of The Statutory Audit
Services for Large Companies Market Investigation (Mandatory Use of
Competitive Tender Processes and Audit Committee Responsibilities)
Order 2014, the Audit Committee has decided to undertake a
competitive audit tender in 2016 to be effective for the 2017 statutory
audit, which it considers in the best interests of its shareholders in light
of the length of association with the current auditors.
AUDITOR’S INDEPENDENCE
The Company has adopted a Charter of Statutory Auditor
Independence, which requires the Company and the external auditors
to take measures to safeguard the objectivity and independence of
the external auditors. These measures include a prohibition regarding
non-audit services in respect of specific areas, such as secondments
to management positions, or those which could create a conflict or
perceived conflict. It also includes details of the procedures for the
rotation of the external engagement partner. The Charter can be found
on the Group’s website.
EXTERNAL AUDIT
Ɛ Reviewed the effectiveness, engagement and remuneration of the
external auditors, recommending their re-appointment to the Board
and thence to shareholders.
Ɛ Reviewed and monitored the independence of the external auditors
including their provision of non-audit services.
Ɛ Monitored the engagement of the external auditors for non-audit
work in accordance with approved policy.
Ɛ Considered and agreed the timing for a tendering exercise for the
external audit engagement – see ‘Auditor’s appointment’.
INTERNAL AUDIT
Ɛ Reviewed the External Quality Assessment of the internal audit
function (‘EQA’), undertaken by Independent Audit, the conclusion
being that the internal audit function was effective in its role, and
suggesting areas for development.
Ɛ Approved the Group Internal Audit Proposition for 2015–2016 which
had been updated to reflect the recommendations of the EQA.
Ɛ Approved the annual update of the Group Internal Audit Charter
(which was aligned to the CIIA Code for ‘Effective Internal Audit in
Financial Services’) and the Group Internal Audit Plan (including its
link to the Risk Management Framework), receiving regular reports
to monitor progress against the plan. In line with the developing
proposition, the Internal Audit Plan was split between static/risk
policy audits and dynamic/thematic audits.
Ɛ Reviewed the internal audit control environment opinion which
included Internal Audit’s view on the embedding of the risk
management framework across the Group.
Ɛ Reviewed the report by the Internal Audit Function on internal
audit effectiveness in the Group’s outsource service providers
(‘OSPs’); and reviewed internal audit reports on information security
in the OSPs, noting the extensive oversight in Phoenix and that
more detailed OSP oversight was undertaken by the Phoenix Life
Audit Committee.
Ɛ Noted an initial review of the potential role of internal audit in risk
culture governance.
AUDIT COMMITTEE’S PERFORMANCE
Ɛ Reviewed the Audit Committee’s performance, constitution and
terms of reference, noting that all its duties had been addressed
in accordance with its terms of reference, and that the Board
would undertake its own review of the performance of the Board
committees. The Audit Committee agreed, and recommended to
the Board, a change to its terms of reference to reflect responsibility
for reviewing the internal controls and assurance framework and
remove duplication with the Risk Committee.
GENERAL
Ɛ Reviewed arrangements for whistleblowing (and whistleblowing
activity) should an employee wish to raise concerns, in confidence,
about any possible improprieties; this being reviewed in the context
of the market data available, requested by the Audit Committee and
provided by EY.
Ɛ Reviewed and approved updates to the Group Tax Policy and the
Group Liquidity & Funding Policy.
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 52
CORPORATE
GOVERNANCE REPORT
Continued
SIGNIFICANT MATTERS CONSIDERED BY THE AUDIT COMMITTEE IN RELATION TO THE FINANCIAL STATEMENTS
Significant matters in relation to the 2015 IFRS financial
statements and MCEV supplementary information
Review of the actuarial valuation process,
to include the setting of actuarial
assumptions and methodologies,
and the robustness of actuarial data
Tax provisioning and the recoverability
of deferred tax assets
Valuation of complex and illiquid
financial assets
Operating Profit
Assessment of whether the Annual
Report and Accounts are fair, balanced
and understandable
Going concern analysis
Viability Statement
How these issues were addressed
Ɛ Management presented papers to the Phoenix Life Audit Committee detailing
recommendations for the actuarial assumptions and methodologies to be used for the interim
and year-end reporting periods with justification and benchmarking as appropriate. These
assumptions and methodologies were debated and challenged by the Phoenix Life Audit
Committee, focusing on longevity and persistency in relation to demographics and on credit
in relation to economics, prior to their approval. The assumptions reflected methodology and
model improvements from the new actuarial reporting system referred to in the 2014 Annual
Report and largely implemented during 2015.
Ɛ A summary of these papers was presented for oversight review by the Audit Committee,
and the Phoenix Life Audit Committee’s conclusions were reported to the Audit Committee
through minutes of its meeting and a discussion between the Chairmen of the two
committees. The Audit Committee discussed, and questioned management and EY on,
the content of the summary papers and the Phoenix Life Audit Committee’s conclusions.
Ɛ The Audit Committee received and considered detailed written and verbal reporting from the
external auditors setting out their observations and conclusions in respect of the assumptions,
methodologies and actuarial models. Pension assumptions for use in the IAS 19 Employee
Benefits valuations were reviewed and approved by the Audit Committee prior to the
finalisation of the valuation reports.
Ɛ Economic assumptions for use in the MCEV valuation were reviewed and approved by
the Audit Committee.
Ɛ The Audit Committee requested and received a dedicated training session to enhance
its knowledge of the different bases of assumptions setting.
Ɛ As part of the interim and year-end reporting process, the Audit Committee considered
presentations from management that provided an update on taxation risks and exposures,
provisioning levels and matters pertaining to the recoverability of deferred tax assets.
Ɛ Management presented papers setting out the basis of valuation of financial assets, including
changes in methodology and assumptions, for the interim and year-end reporting periods to
the Phoenix Life Audit Committee. The assumptions, valuations and processes, particularly
for financial assets determined by valuation techniques using significant non-observable
inputs (Level 3), were debated and challenged by the Phoenix Life Audit Committee prior to
being approved.
Ɛ The valuation information was then presented for oversight review by the Audit Committee
who considered and confirmed the appropriateness of the basis of valuation.
Ɛ The Audit Committee reviewed the allocation of key items to operating profit to ensure the
allocations were in line with the Group’s operating profit framework and consistent with
previous practice.
Ɛ The Audit Committee considered an analysis of the processes (which had been further
developed during 2015) and conclusions in support of management’s conclusions that the
Annual Report and Accounts are fair, balanced and understandable. In particular, the Audit
Committee sought assurance as to the review processes that operated over the production
of the Annual Report and Accounts.
Ɛ A comprehensive going concern assessment was undertaken by the Audit Committee
for the 2015 year end and 2015 interim reporting periods, based on an assessment by
management of the Group’s liquidity for the going concern review period together with
forecasts and a stress and sensitivity analysis. The analysis also confirmed that all regulatory
and working capital requirements would be met under the base case and adverse stress
scenarios throughout the going concern review period.
Ɛ The Audit Committee reviewed the processes to support the Viability Statement proposed
by provision C2.2 in the UK Corporate Governance Code. The Committee decided that
the period covered by the viability statement should be five years to align it to the Group’s
business planning.
Phoenix Group Holdings Annual Report and Accounts 2015 53
The composition of the Remuneration Committee accords with
the requirements of the Code that the Remuneration Committee
should consist of at least three independent Non-Executive Directors.
The Remuneration Committee met six times during 2015.
The Remuneration Committee is responsible for making
recommendations to the Board on the Company’s remuneration
and compensation plans, policies and practices and for determining,
within agreed terms of reference, specific remuneration packages for
the Executive Directors. These include pension rights and executive
incentive schemes to encourage superior performance. Details of the
remuneration structure and the Remuneration Committee’s activities in
2015 are provided in the Directors’ Remuneration Report on pages 57
to 80.
FIT Remuneration Consultants provided advice to the Remuneration
Committee in 2015 and are independent of the Group.
Remuneration Committee
IAN CORMACK
REMUNERATION
COMMITTEE CHAIRMAN
OTHER MEMBERS
Isabel Hudson
Kory Sorenson
MEETING ATTENDANCE 2015
Chairman
Ian Cormack
Other members
Isabel Hudson
Kory Sorenson
Remuneration Committee
Maximum
Actual
6
6
6
6
6
6
57
Read more about our remuneration structure
and Remuneration Committee activities
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 54
CORPORATE
GOVERNANCE REPORT
Continued
Risk Committee
DAVID WOODS
RISK COMMITTEE CHAIRMAN
OTHER MEMBERS
René Pierre Azria
Alastair Barbour
Tom Cross Brown
MEETING ATTENDANCE 2015
Chairman
David Woods
Other members
René Pierre Azria
Alastair Barbour
Tom Cross Brown
Risk Committee
Maximum
Actual
6
6
6
6
6
6
6
3
34
Read more about our
Risk Management Framework
The establishment of a Risk Committee is not a requirement of the
Code. However, the Board believes such a Committee is important
to ensure the robust oversight of the management of risk within the
Group. The composition of the Risk Committee, with a majority of
independent Non-Executive Directors, is in accordance with the final
recommendations of the report by Sir David Walker titled ‘A review of
corporate governance in UK banks and other financial industry entities’.
The Risk Committee met six times in 2015. Its meetings are attended
by the Chairman of the Audit Committee (who is also a member of the
Risk Committee), the Chief Risk Officer, the Group Head of Internal
Audit and occasionally also by the Group Chairman and the Group
Chief Executive Officer.
The Risk Committee advises the Board on risk appetite and tolerance in
setting the future strategy, taking account of the Board’s overall degree
of risk aversion, the current financial situation of the Group and the
Group’s capacity to manage and control risks within the agreed strategy.
It advises the Board on all high level risk matters. Details of the Risk
Management Framework, for which the Risk Committee has oversight,
are provided in the Risk Management section on pages 34 to 39.
RISK COMMITTEE’S PRINCIPAL ACTIVITIES DURING 2015
Ɛ Reviewed the Group’s risk appetite and recommended to the Board
the Group’s overall risk management strategy.
Ɛ Approved the Group Risk Function’s 2016 plan and monitored
progress against the 2015 Group Risk Function plan.
Ɛ Considered any breaches of the Group’s risk appetite.
Ɛ Monitored compliance with the Group’s principal risk policies,
satisfying itself that action plans to address significant breaches of
those policies were sufficient.
Ɛ Reviewed the Group’s risk profile, monitoring it against the risk
categories of Market, Insurance, Credit, Financial Soundness,
Customer and Operational with particular attention to risk appetite,
risk trends, risk concentrations, provisions, experience against budget
and key performance indicators for risk.
Ɛ Provided oversight of, and challenge to, the design and execution
of the Group’s stress and scenario testing, including any changes
of assumptions.
Ɛ Undertook horizon scanning to consider emerging risks that could
impact the Group including more prominent badging of forward-
looking work in risk papers as proposed by the November 2014
Board Evaluation Report.
Ɛ Conducted a detailed risk governance review which included the
establishment of a dedicated Risk Committee of the Phoenix Life
Board to provide additional Board Committee focus on risk matters.
Ɛ Agreed a set of operating principles for the Group and Phoenix Life
Board Risk Committees to support their work in providing effective
risk oversight of the Group.
Phoenix Group Holdings Annual Report and Accounts 2015 55
Nomination Committee
HENRY STAUNTON
NOMINATION COMMITTEE CHAIRMAN*
OTHER MEMBERS
Ian Cormack
Tom Cross Brown
MEETING ATTENDANCE 2015
Chairman
Henry Staunton*
Howard Davies
Other members
Ian Cormack
Tom Cross Brown
* Howard Davies up to 31 August 2015.
Nomination Committee
Maximum
Actual
2
5
7
8
2
5
7
5
The composition of the Nomination Committee is in accordance
with the requirements of the Code that a majority of its members
should be independent Non-Executive Directors. The Nomination
Committee is responsible for considering the size, composition and
balance of the Board; the retirement and appointment of Directors;
succession planning for the Board and senior management; and
making recommendations to the Board on these matters.
During 2015, a special-purpose Nomination Committee, consisting of
independent Non-Executive Directors, Tom Cross Brown (Chairman),
Alastair Barbour, Kory Sorenson and David Woods, was appointed for
the recruitment of the new Chairman.
The Nomination Committee (including the Chairman-selection
Committee) met eight times in 2015. The Chairman-selection
Committee undertook a detailed process for the recruitment
of the Chairman, including several briefing sessions with the
search consultants.
The standard process used by the Committee for Board appointments
involves the use of an external search consultancy to source candidates
external to the Group (and in the case of executive appointments
also considers internal candidates). Detailed assessments of short-
listed candidates are undertaken by the search consultancy, followed
by interviews with Committee members and other Directors and
the sourcing of references before the Committee recommends the
appointments to the Board. This process was used for the appointment
of Henry Staunton as Chairman in 2015. The search consultancy used in
2015 for Director appointments was The Zygos Partnership which has
no other connection with the Company.
NOMINATION COMMITTEE’S PRINCIPAL ACTIVITIES
DURING 2015
Ɛ Delivered a recommendation to the Board for the appointment
of Henry Staunton as Chairman following a comprehensive
search process led by the Nomination Committee with Zygos
search consultancy.
Ɛ Undertook a skills audit in response to a recommendation from
the 2014 Board Evaluation Report to re-assess the ideal blend
of skills and knowledge on the Board, aligned to the Group’s
strategy. The output of this audit was used in deciding the skills
and experience required for the new Chairman and will inform
the requirements for new Non-Executive Director appointments
intended for 2016 .
Ɛ In conjunction with the skills audit and taking account of the
Board Evaluation Review, reviewed the balance of skills, diversity,
experience, independence and knowledge on the Board.
Ɛ In conjunction with the skills audit and taking account of the Board
Evaluation Review, reviewed the structure, size and composition of
the Board.
Ɛ Reviewed the time spent by Directors in fulfilling their duties,
concluding that the time spent appeared to be high in comparison
with other FTSE 250 companies.
Ɛ Reviewed the succession plan for Executive and Non-Executive
Directors and recommended its approval to the Board.
Ɛ Reviewed, prior to their appointments, the proposed new Non-
Executive Director appointments to the subsidiary Phoenix Life
Board. This included succession planning for the Phoenix Life
Board Chairman.
The Board’s policy on diversity is as follows:
Ɛ The Board supports the enhancement of diversity, including gender,
as a consideration when recruiting new Directors.
Ɛ The Board’s overriding aim is to appoint the right Directors to
the Board to drive forward the Group’s strategy within a robustly
compliant framework.
Ɛ The Board will undertake regular skills audits to ensure the Board’s
skills remain appropriate for its strategy and providing diversity where
possible; the 2015 skills audit having been being assessed against
ten strategic skill categories.
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 56
CORPORATE
GOVERNANCE REPORT
Continued
COMMUNICATION WITH SHAREHOLDERS
FINANCIAL REPORTING AND GOING CONCERN
The Company places considerable importance on communication
with shareholders and regularly engages with them on a wide range
of issues.
The Directors have acknowledged their responsibilities in the Statement
of Directors’ Responsibilities in relation to the IFRS financial statements
for the year ended 31 December 2015.
The Company’s Investor Relations department is dedicated to
facilitating communication with investors and analysts and an active
investor relations programme is maintained.
The Group’s business activities, together with the factors likely to affect
its future development, performance and position are set out in the
Strategic Report on pages 4 to 40.
During 2015 the Company’s Investor Relations department and
management held the following activity:
The financial position of the Group, its cash flows and liquidity position
are described in the financial statements and notes.
Ɛ 11 days of roadshows meeting investors
Ɛ 7 institutional conferences holding one-on-one or group meetings
The Board’s going concern assessment is included within the Directors’
report on page 82.
with investors
Ɛ 120 face-to-face meetings with investors and analysts.
At these meetings a wide range of relevant issues including
strategy, performance, management and governance are discussed.
The Chairman, Senior Independent Director and Executive Directors are
available to meet investors and analysts when required. Should major
shareholders wish to meet newly appointed Directors, or any of the
Directors generally, they are welcome to do so.
In addition, continued engagement is undertaken with shareholders
and proxy advisers on evolving governance issues.
The Directors consider it important to understand the views of the
market. Board members regularly receive copies of the latest analyst
reports on the Company and the sector, as well as market feedback to
further develop their knowledge and understanding of external views
about the Company. The Chairman and the Non-Executive Directors
provide feedback to the Board on topics raised with them by major
shareholders. In addition, investor days are conducted periodically.
The Company also undertakes perception studies, when appropriate,
designed to determine the investment community’s view of the core
business from both institutional fund managers and sell-side analysts.
The Company’s AGM provides another opportunity to communicate
with its shareholders. At the 2015 meeting, the Company complied
with the Code provisions relating to voting and the separation of
resolutions. Shareholders were invited to ask questions during the
meeting. It is intended that the same processes will be followed
at the 2016 AGM. In line with the Code, details of proxy voting by
shareholders will be made available at the meeting and will be posted
on the Company’s website following the meeting.
The Company’s Annual Report and Accounts, together with the
Company’s Interim Report, Interim Management Statements and
other public announcements and presentations, are designed to
present a fair, balanced and understandable view of the Group’s
activities and prospects. These are available on the Company’s
website at www.thephoenixgroup.com, along with a wide range of
relevant information for private and institutional investors, including the
Company’s financial calendar.
VIABILITY STATEMENT
The Viability Statement, as required by section C.2.2 of the Code,
has been undertaken for a period of five years to align to the Group’s
business planning and is contained in the Risk Management section on
page 39.
REVIEW OF SYSTEM OF INTERNAL CONTROLS
The Code requires Directors to review the effectiveness of the
Company’s risk management and internal control systems which
includes financial, operational and compliance controls. The Board has
overall responsibility for the Group’s risk management and internal
control systems and for reviewing their effectiveness. The Group’s
systems of internal controls are designed to manage rather than
eliminate the risk of failure to achieve business objectives and can
provide only reasonable and not absolute assurance against material
misstatement or loss. The Board’s review of the period covered by this
report, which was undertaken with the assistance of the Audit and Risk
Committees, was completed on 22 March 2016. Where any significant
weaknesses were identified, corrective actions have been taken, or are
being taken and monitored.
The Board (and its subsidiary company boards) monitor internal controls
on a continual basis, in particular through Audit and Risk Committees.
There is an ongoing process for identifying, evaluating and managing
the significant risks faced by the Group, which has been in place
throughout the period covered by this report and up to the date of
approval of the Annual Report and Accounts for 2015, in accordance
with the ‘Guidance on Risk Management, Internal Control and
Related Financial and Business Reporting’ published by the Financial
Reporting Council.
Additional assurance is provided by the internal audit function, which
operates and reports independently of management. The internal audit
function provides objective assurance on risk mitigation and control to
the Audit Committee.
Phoenix Group Holdings Annual Report and Accounts 2015 DIRECTORS’ REMUNERATION
REPORT
57
Dear Shareholder,
On behalf of the Board, I am pleased to
present our Directors’ remuneration report
for the year ended 31 December 2015.
This report covers remuneration for
Executive and Non‑Executive Directors
of the Company.
IAN CORMACK
REMUNERATION COMMITTEE CHAIRMAN
22 MARCH 2016
There were three direct consequences of delivering on the Board’s
additional priorities on the AIP:
Ɛ MCEV was included as a measure on the basis that it was a fair
measure of the capital strength of the Company and, generally,
positive actions by management improve it. As explained more fully
on page 64 under the section headed ‘AIP Outcomes for 2015’, a
consequence of our achieving an investment grade credit rating was
that the value of bonds issued by the Company increased due to
the positive market impact. The Committee clearly did not want to
penalise management for this positive development.
Ɛ Similarly, management successfully adjusted the investment
portfolio in line with the new priorities set by the Board to enable
our Internal Model to be approved and so the Committee, again,
excluded the direct negative consequences of the recalibration
from the AIP out-turn.
Ɛ Cash distributed from the life company to the Company was
included as a measure on the basis that it is both an effective
measure of the capital strength of the life companies (distributions
will only be approved by its independent Board if they are satisfied
of its capital strength after meeting obligations to policyholders and
elsewhere) and of the Company’s ability to pay dividends to its own
shareholders. Although less cash was actually paid in the year, to
ensure that risks are effectively managed and that the position on
distributions is considered in light of the post-year end final accounts,
the Committee’s practice has been to look at both the distributions
made in the year, and also to credit potential distributions that were
deferred to the following year where the cash generated related to
the AIP year. Such potential distributions are then added to any target
for the subsequent year to avoid double-counting.
In prior years, the Committee has defaulted to making as few
adjustments as possible and has not excluded the negative impact
on some elements of the AIP of a number of management actions
which, while in the interests of shareholders overall, reduced some
element of the AIP as such actions have more typically been reflected
in the budget process. While the exercise of any judgment is inherently
subjective and should be used sparingly, the Committee believes
that the three adjustments above were both sufficiently significant
as to warrant adjustment and that, without those adjustments, the
AIP out-turn would not have reflected the true level of corporate and
management performance.
Following the application of such steps the Corporate measure factor
for 2015 (i.e. the AIP before assessment of the personal performance
element) was determined on a formulaic basis at 85% of maximum.
LINKING REMUNERATION TO COMPANY PERFORMANCE
2015 was a year of major achievements for Phoenix Group as set
out in more detail in the Group Chief Executive Officer’s report at the
beginning of this Annual Report and Accounts. Particular operational
and financial highlights for the year included:
Ɛ Operating companies’ cash generation of £225 million
Ɛ Incremental Market Consistent Embedded Value (‘MCEV’) from
management actions of £205 million, meeting the target of
£400 million of management actions between 2014 and 2016, one
year ahead of schedule
Ɛ The achievement of an investment grade credit rating from
Fitch Ratings
Ɛ The approval of the Group’s Solvency II Internal Model by the
Prudential Regulation Authority
Ɛ The accreditation, for the fourth successive year, that Phoenix has
been formally recognised as one of the ‘UK’s Top Employers’
Ɛ Managing the new pension freedom changes introduced in April
2015, providing customers with greater choice with regard to their
retirement options.
As a closed life business, success for the Company is not assessed
in the same way as at many other companies but through the
efficient delivery of management actions and maintenance of our
capital strength both to ensure that we can meet our obligations to
policyholders and to maintain dividends to shareholders.
Against each of these objectives, this was an exceptional year for the
Company. To deliver this performance, management were asked not
only to deliver on the targets originally set at the commencement of the
year but also to deliver additional goals set by the Board during the year,
primarily securing an investment grade credit rating (which, while an
aspiration, had not been factored in the annual target setting process) and
to revise the asset mix to reduce assets which carried a higher capital
charge thereby permitting approval of our Solvency II Internal Model.
While fully committed to maintaining the integrity of the Company’s
incentive arrangements at all times, the Committee considered the
impact of these additional priorities set for management by the Board
and concluded that, while not separately rewarding management for
the delivery of these achievements (other than through the normal
assessment of personal performance in respect of 30% of the
Annual Incentive Plan (‘AIP’) opportunity), the Committee should
equally ensure that such additional priorities should not inadvertently
disadvantage the very high level of achievement from management in
respect of the targets set at the start of the year.
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 58
DIRECTORS’ REMUNERATION REPORT
Continued
This produced an AIP out-turn for the Chief Executive Officer, after
reflecting personal performance, of approximately 82% of maximum.
While, in principle, the Committee felt that a similar adjustment could
have been made to the Long Term Incentive Plan (‘LTIP’), no such
adjustment was made. The LTIP vesting level of 57% was approved.
REMUNERATION POLICY FOR 2016
Looking ahead to 2016, the Committee concluded that:
Ɛ Neither Executive Director will receive a salary increase (this means
that the Group Chief Executive Officer has not had any increase in
salary since his date of joining approximately five years ago)
Ɛ No changes will be made to the target or maximum levels under our
AIP or to the award levels under our LTIP.
The Committee has therefore not made any changes to the overall
remuneration levels detailed in our Directors’ remuneration policy which
was approved by our shareholders at the 2014 Annual General Meeting
(‘AGM’).
The Phoenix business strategy involves corporate actions that can be
considered price-sensitive activity. Indeed, much of 2013, 2014 and
2015 was spent in either a ‘closed’ or ‘prohibited’ period due to such
potential activity (not all of which led to publicly announced actions
but which included the sale of Ignis and the refinancing of the Group
to secure investment grade status) which results in the Company not
being able to transact or make decisions relating to shares.
This can impact the Group’s ability to manage its incentive plans
effectively as, during such periods, we have been unable to allocate
shares under the Deferred Bonus Share Scheme (‘DBSS’), and
impacted employees were unable to exercise any vested DBSS share
award. The same restrictions apply to our LTIP arrangements with
grants under both plans (DBSS and LTIP) not being made until the
Group emerged from the restrictions in September 2015.
Accordingly, the Company has made a number of minor technical
changes to the rules of the DBSS to make it more formulaic.
Commencing with the 2015 awards, DBSS awards will automatically
vest on the dealing day following the third anniversary of the
announcement of the Company’s results. The share price at the actual
time of grant continues to be used to determine the number of shares
awarded. This means that DBSS awards will vest on a consistent cycle,
even if regulatory constraints delay the making of DBSS awards in
any year. These changes can be made to the DBSS as it is a formulaic
arrangement under which one-third of the AIP out-turn per individual is
deferred. Equivalent changes to the LTIP have not been made.
The Committee has commissioned a broader review of incentives
during 2016 to consider whether alternative approaches will be more
suitable for Phoenix Group given the constraints outlined above.
As part of that review, the Committee will also look at the developing
approach of financial services regulators towards the design of
executive remuneration. Specifically within the insurance industry,
this includes the remuneration aspects of Solvency II and, in the wider
regulated financial sector, the continuing development of regulators’
views towards the implementation of the remuneration aspects
of CRD IV (the EU’s Capital Requirements Directive for regulated
financial businesses).
The review will look at the structure of executive pay within Phoenix
Group in the light of these ongoing regulatory developments and, whilst
it is not proposed to increase the overall quantum of pay, will consider
whether current structures remain appropriate in the new regulatory
environment. Any outcomes from this review will be discussed with
key shareholders and then disclosed in full in the 2016 Directors’
remuneration report.
As detailed on pages 60 and 61, important changes are also being
made to the performance measures for 2016 AIP and for the 2016
LTIP award. In light of Solvency II, embedded value is expected to be
a less relevant measure within the insurance industry and Phoenix will
no longer be reporting MCEV; accordingly measures based on MCEV
have been removed for 2016’s incentive plans and the other measures
re-balanced.
The Board has noted that in the period since the Group’s Premium
Listing on the London Stock Exchange in July 2010, the fee levels for
Non-Executive Directors across the sector have increased significantly
in recognition of the increased time commitment of Directors in
regulated businesses. There has been no increase in the base fee levels
for Non-Executive Directors since July 2010 and the Board has decided
to increase the base fee for all Non-Executive Directors to £105,000 in
2016 to reflect these factors. This is against a background of significant
time commitment and increasingly complex and onerous financial
services requirements and related responsibilities. All other fees remain
unchanged (i.e. Board Committee Chairmanship fees of £10,000 and
no separate Board Committee membership fees).
Our Directors’ remuneration report for 2016 will include a re-statement
of the Directors’ remuneration policy which, in line with the normal
requirement for Directors’ remuneration policies to be renewed every
three years, will be put to the Company’s shareholders for approval at
the 2017 AGM.
SHAREHOLDER APPROVAL
At the AGM on 11 May 2016, shareholders will be invited to approve
the 2015 Directors’ remuneration report as set out in the following
pages. For ease of reference, and consistent with our approach last
year, the main summary policy tables from the Directors’ remuneration
policy approved at the 2014 AGM are also set out as an Appendix to
the Directors’ remuneration report, although we are not seeking further
approval from shareholders for our policy at the 2016 AGM.
I hope that we can continue to rely on the support of our shareholders
for the resolution on the 2015 Directors’ remuneration report which will
be proposed at the 2016 AGM.
Yours sincerely,
IAN CORMACK
REMUNERATION COMMITTEE CHAIRMAN
22 MARCH 2016
Phoenix Group Holdings Annual Report and Accounts 2015 59
INTRODUCTION
DIRECTORS’ REMUNERATION POLICY
We have presented this Directors’ remuneration report in accordance
with the UK’s Large and Medium-sized Companies and Groups
(Accounts and Reports) Regulations 2008 (the ‘UK regulations’).
The Company complies with the reporting obligations within the
UK regulations as a matter of good practice although it is not strictly
required to do so as a non-UK incorporated quoted company.
The Directors’ remuneration report also describes how the Board has
complied with the provisions set out in the UK Corporate Governance
Code relating to remuneration matters.
At our 2016 Annual General Meeting (‘AGM’) we will be holding an
advisory vote on the Directors’ remuneration report.
The auditors have reported on certain parts of the Directors’
remuneration report and stated whether, in their opinion, those parts
of the Directors’ remuneration report have been properly prepared
in accordance with the Companies Act 2006. Those sections of the
Directors’ remuneration report which have been subject to audit are
clearly indicated.
The Directors’ remuneration policy (‘Remuneration Policy’) was
approved by the Company’s shareholders at the Company’s AGM on
30 April 2014 and has effect for all payments made to Directors from
that date.
The Company’s full Remuneration Policy is available within the
Remuneration Committee (‘Committee’) section under Board
Committees on the Company’s website. For information and ease of
reference, the main summary policy tables from the Remuneration
Policy are included in the Appendix to this Directors’ remuneration
report. The information in the Appendix is not subject to the advisory
vote on the Directors’ remuneration report at the 2016 AGM.
ANNUAL IMPLEMENTATION REPORT – UNAUDITED INFORMATION
IMPLEMENTATION OF REMUNERATION POLICY IN 2016
Element of Remuneration Policy
Detail of Implementation of Policy for 2016
Overall positioning
The Company’s overall positioning on remuneration for Executive Directors remains unchanged from 2015:
Ɛ An appropriate balance is maintained between fixed and variable components of remuneration.
Ɛ Our Remuneration Policy benchmarks the total target remuneration for the Executive Directors between
FTSE 31-100 and FTSE 250 data sets, and remuneration for both Executive Directors are positioned
appropriately between these data sets.
Salaries in 2016 will remain unchanged from the 2014 and 2015 levels of £700,000 for the Group Chief
Executive Officer and £440,000 for the Group Finance Director.
There are no proposed changes to the benefits offered to Executive Directors in 2016.
There are no proposed changes to the pension benefits offered to Executive Directors in 2016.
Base Salary
Benefits
Pension
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 60
DIRECTORS’ REMUNERATION REPORT
Continued
Element of Remuneration Policy
Detail of Implementation of Policy for 2016
Annual Incentive Plan (‘AIP’)¹
The AIP for 2016 will operate on a basis that is consistent with how the AIP operated in 2015, although
there have been changes to the precise measures and weightings of the Corporate (financial and strategic)
performance measures for 2016’s AIP to reflect our evolving business focus.
The AIP maximum potential and on-target levels remain unchanged at 150% of base salary and at 50% of
maximum levels (75% of base salary) respectively. As in previous years, one-third of AIP outcomes for 2016
will be delivered as an award of deferred shares under the Deferred Bonus Share Scheme.
The overall weightings between Corporate and Personal performance measures for AIP in 2016 are
unchanged from 2015:
Ɛ Corporate (financial and strategic) performance measures – 70%.
Ɛ Personal (individual objectives) – 30%.
The weightings of the AIP performance measures for 2016 are summarised below:
Performance Measure
Corporate measure
Operating companies’ cash generation
IFRS operating earnings
Customer experience
Personal
Individual objectives
TOTAL
Weighting of Corporate Measure
% of incentive potential
50%
25%
25%
35%
17.5%
17.5%
30%
100%
The changes made from 2015’s Corporate performance measures for AIP can be summarised as follows:
Ɛ In 2016, the highest weighting will be given to operating companies’ cash generation which remains core
to our business and is linked directly to Phoenix Life free surplus under Solvency II. The overall weighting
for cash generation has increased from 2015.
Ɛ 2015’s Corporate performance measures included both a Group Market Consistent Embedded Value
(Group ‘MCEV’) and a Group MCEV operating earnings after tax measure. Due to Solvency II, embedded
value metrics are expected to be less relevant measures within the insurance industry and Phoenix will no
longer be reporting MCEV; accordingly MCEV will be removed as a measure under AIP 2016, and IFRS
operating earnings will replace MCEV operating earnings.
Ɛ Greater weighting has been given to customer experience, reflecting the focus of the Board as well as
of our regulators.
Ɛ Specific targets of employee engagement and expense management have been removed as Corporate
performance measures, but are included as part of the objectives for the Personal performance element.
Assessment of these items under the Personal element permits a more rounded assessment.
In addition, and as previously stated in the Remuneration Policy, there are three potential levels at which the
performance measures and targets and related outcomes from AIP in 2016 may be moderated (downwards
or upwards) by the Committee – more details are provided in the summary Remuneration Policy table set out
in the Appendix to the Directors’ remuneration report.
Deferred Bonus Share
Scheme (‘DBSS’)1
One-third of AIP outcomes for 2016 will be delivered as an award of deferred shares under the DBSS which
will vest after a three-year period of deferral. For DBSS awards made in 2015 (in respect of 2014’s AIP outcome)
and for DBSS awards to be made in subsequent years:
Ɛ The 3-year deferral period will run to the dealing day following the three-year anniversary of the
announcement of the annual results by reference to which the relevant AIP outcome was determined.
Ɛ Dividend entitlements for the DBSS shares will accrue over the three-year deferral period.
Ɛ When DBSS awards are made, the number of shares will be calculated using the average share price for
the 3 dealing days before the actual grant of awards.
Ɛ The DBSS awards will be made as soon as practicable following the announcement of the annual results
by reference to which the relevant AIP outcome was determined, and whilst the granting of awards may be
delayed due to ‘closed’ or ‘prohibited’ period constraints, the deferral period will begin as described above
(i.e. three years from March).
Phoenix Group Holdings Annual Report and Accounts 2015 61
Element of Remuneration Policy
Detail of Implementation of Policy for 2016
Long-Term Incentive (‘LTIP’)¹ Award levels for Executive Directors for 2016 are unchanged at 200% of base salary. When awards are made,
the number of shares within awards is calculated using the average share price for the three dealing days
before the grant of awards.
For all LTIP awards made from 2015 onwards, a holding period applies so that any LTIP awards for which
the performance vesting requirements are satisfied will not be released for a further two years from the third
anniversary of the original award date. Dividend accrual for LTIP awards will continue until the end of the
holding period.
The weightings of the LTIP performance measures for 2016 are summarised below:
Performance Measure
Cumulative cash generation
TSR
TOTAL
Weighting of Performance Measure
50%
50%
100%
These weightings represent a change from the weightings for 2015 LTIP awards, where MCEV growth had a
40% weighting, Cumulative cash generation 40% and TSR 20%. As explained above for AIP, under Solvency II,
embedded value metrics are expected to be less relevant measures within the insurance industry and Phoenix
will no longer be reporting MCEV; therefore MCEV growth has been removed for 2016’s LTIP awards and the
other measures re-balanced accordingly.
Additionally, all 2016 LTIP awards are subject to a further underpin measure relating to debt and risk
management within the Group, as detailed on page 68. This ’underpin’ will be extended for 2016 LTIP awards
to include consideration of customer satisfaction and, to meet Solvency II requirements, in exceptional cases,
personal performance. These measures and the relative weightings are considered to be appropriate for 2016’s
LTIP awards. The application of a three-year performance period for each measure, is unchanged from 2015’s
LTIP awards.
The relative TSR measure is calculated against the constituents of the FTSE 250 (excluding Investment Trusts),
with vesting commencing at median (25% of this part of the award) and full vesting at upper quintile levels,
subject to an underpin regarding underlying financial performance.
As in past years, the performance targets for Cumulative cash generation will be set by the Committee shortly
before the LTIP awards are made. The Company will disclose the performance targets for the Cumulative cash
generation measure for 2016’s LTIP awards in next year’s Directors’ remuneration report.
Executive Directors have the opportunity to participate in HMRC tax advantaged Sharesave and Share
Incentive Plans (‘SIP’) on the same basis as all other UK employees. To align with market practice, the 2016
Sharesave grant will be offered at a 20% discount to market value rather than the previous 15%.
All-Employee Share Plans
Shareholding
requirements
Requirement levels are 200% of base salary level for the Group Chief Executive Officer and the Group Finance
Director.
Where any vested LTIP awards are subject to a holding period requirement, the vested LTIP award shares
(discounted for anticipated tax liabilities) will count towards the shareholding requirements.
Chairman and Non-Executive
Directors’ fees
Fee levels for the Chairman will be at the same levels as for 2015. The new Chairman who was appointed
in 2015 was appointed at the same level of fees as the outgoing Chairman. This level of Chairman’s fee is
accordingly unchanged from October 2012.
Base fees for Non-Executive Directors have previously been set at £90,000 or £100,000 based on a range of
factors. The Board decided to increase the base fee to a common £105,000. While the headline fee is relatively
high, overall fee levels are appropriate as Board Committee chairmanship fees at Phoenix remain amongst the
lowest in the insurance sector and, unusually, no separate Board Committee membership fees are paid.
The fee levels for 2016 are £325,000 for the Chairman, £105,000 for the role of Non-Executive Director with
additional fees of: (i) £5,000 payable for the role of Senior Independent Director; and/or (ii) £10,000 payable
where an individual also chairs the Audit, Remuneration or Risk Committee; and/or (iii) £20,000 payable where
a Non-Executive Director also serves on the board of a subsidiary company and/or (iv) £10,000 payable for
service on the Solvency II Model Governance Committee.
1 All incentive plans are subject to malus and/or clawback provisions. These provisions may be applied where the Committee considers it appropriate to do so following:
Ɛ A review of the conduct, capability or performance of an individual
Ɛ A review of the performance of the Company or a Group member
Ɛ Any material misstatement of the Company’s or a Group member’s financial results for any period
Ɛ Any material failure of risk management by an individual, a Group member or the Company
Ɛ Any other circumstances that have a sufficiently significant impact on the reputation of the Company.
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 62
DIRECTORS’ REMUNERATION REPORT
Continued
BALANCE OF FIXED TO VARIABLE REMUNERATION FOR EXECUTIVE DIRECTORS
The balance of fixed to variable remuneration for the Executive Directors is illustrated in the Appendix to the Directors’ remuneration report where
the disclosure for ‘Potential Rewards under Various Scenarios’ from the Remuneration Policy is included for information. The scenarios shown
remain the same as for 2014 due to the underlying remuneration arrangements and participation levels remaining substantially unchanged.
DISTRIBUTION STATEMENT
The UK regulations require each quoted company to provide a comparison between profits distributed by way of dividend and overall expenditure
on pay.
RELATIVE IMPORTANCE (£ millions)
Profits distributed by way of dividend (no change)
Overall expenditure on pay (% change -31%)
2014
2015
Group
Ignis
120
2014
86
31
117
120
2015
81
81
Profit distributed by way of dividend has been taken as the dividend paid and proposed in respect of the relevant financial year. For 2015 this is the
interim dividend paid (£60 million) and the recommended final dividend of 26.7p multiplied by the total share capital issued at the date of the Annual
Report as set out in note D1 ‘Share capital’ in the notes to the consolidated financial statements. No share buy-backs were made in either year.
Overall expenditure on pay has been taken as the employee costs for continuing operations as set out in note C2 ‘Administrative expenses’ in the
notes to the consolidated financial statements. The 2014 figure also includes £31 million from discontinued operations which relate to Ignis, which
was disposed of on 1 July 2014. Expenditure on pay from continuing operations has decreased by 6% year on year.
PERFORMANCE GRAPH AND TABLE
The graph below shows the value to 31 December 2015, on a TSR basis, of £100 invested in Phoenix Group Holdings on 5 July 2010 (the date of
the Company’s Premium Listing) compared with the value of £100 invested in the FTSE 250 Index (excluding Investment Trusts).
TOTAL SHAREHOLDER RETURN
240
220
200
180
160
140
120
100
80
60
Jul
2010
Dec
2010
Dec
2011
Dec
2012
Dec
2013
Dec
2014
Dec
2015
FTSE 250 Index (excluding investment trusts)
Phoenix Group Holdings
Source: Thomson Reuters Datastream
The FTSE 250 Index (excluding Investment Trusts) is considered to be an appropriate comparator for this purpose as it is a broad equity index
of which the Company is a constituent.
The UK regulations also require that a performance graph is supported by a table summarising aspects of the Group Chief Executive Officer’s
remuneration for the period covered by the above graph (which will in due course be for a period of ten years).
Phoenix Group Holdings Annual Report and Accounts 2015 63
Group Chief Executive Officer Remuneration
2015
2014
2013
2012
2011
Clive Bannister
Clive Bannister
Clive Bannister
Clive Bannister
Clive Bannister 5
Jonathan Moss 5,6
2010
Jonathan Moss
Single figure of total
remuneration
(£000)
Annual variable element
award rates against
maximum opportunity
(AIP)
Long-term incentive
vesting rates against
maximum opportunity
(LTIP)
2,889
3,104 1,3
2,737
1,583
1,333
704
2,307
82%
68%
69%
69%
73%
n/a
88%
57%
57%2
67%2
n/a4
n/a4
n/a
100%
1 Figures restated for 2014. See footnote 3 for detail.
2 The long-term incentive vesting rate for 2013 is shown at 67% and for 2014 is shown as 57%. In both years the Group Chief Executive Officer decided to waive voluntarily any entitlement
in excess of two-thirds of the shares which would otherwise have vested.
3 The single figure of total remuneration for 2014 has been restated and now reflects the actual price of shares on the day the 2012 LTIP vested (23 September 2015: 836p per share) rather
than the three-month average share price to 31 December 2014 (769.93p per share) which was required to be used last year for the single figure of total remuneration, and also reflects the
actual dividends accrued on the award until the date of vesting.
4 Long-term incentive vesting rates against maximum opportunity values are not applicable for 2011 and 2012 due to no awards vesting in those financial years.
5 Jonathan Moss left the role of Group Chief Executive Officer on 7 February 2011 and left the Group on 29 March 2011. Clive Bannister joined Phoenix Group on 7 February 2011 and was
appointed to the Board as a Director on 28 March 2011.
6 Jonathan Moss’ 2011 single figure of total remuneration does not include compensation for loss of office.
PERCENTAGE CHANGE IN PAY OF THE GROUP CHIEF EXECUTIVE OFFICER 2014 TO 2015
In accordance with UK regulations, the table below provides a comparison of the percentage change in the prescribed pay elements of the Group
Chief Executive Officer (salary, taxable benefits and annual incentive outcomes) between financial years 2014 and 2015 and the equivalent
percentage changes in the average of all staff (representing all permanent staff during 2014 and 2015 on a matched basis). This group was selected
as being representative of the wider workforce using the same process as was used for this comparison in last year’s accounts.
Year-on-year % change
Group Chief Executive Officer
Staff
Salary
0.00
3.96
Taxable Benefits
Annual incentive
(0.61)
2.50
20.23
11.60
Total
10.11
5.63
Overall, the data shows virtually unchanged levels of salary and benefits for the Group Chief Executive Officer; the increase in annual incentive is
primarily due to him being awarded a higher rating on the Personal performance measures for AIP than in previous years, which has resulted in a
higher AIP out-turn. Staff more generally have received higher overall remuneration due mainly to higher AIP outcomes than in 2014. The median
level of salary increase for staff was 2.5% and is lower than the figure shown above which is based on averages.
VOTING OUTCOMES FROM THE 2015 AGM
The table below shows the votes cast to approve the Directors’ remuneration report for the year ended 31 December 2014 at the 2015 AGM held
on 23 April 2015.
Number % of votes cast
Number % of votes cast
For
Against
Abstain
Number
To approve the Directors’ remuneration report
for the year ended 31 December 2014
138,914,473
98.12
2,645,386
1.87
352,328
A vote to approve the Remuneration Policy was passed at the 2014 AGM held on 30 April 2014. Details of the votes cast in relation to this resolution
were disclosed in the Company’s Directors’ remuneration report for 2014 which is available as part of the Phoenix Group Holdings Annual Report
and Accounts 2014.
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 64
DIRECTORS’ REMUNERATION REPORT
Continued
IMPLEMENTATION REPORT – AUDITED INFORMATION
SINGLE FIGURE TABLE
Salary/fees¹
Benefits²
Annual Incentive³
Long-term
incentives
20145
Pension6
Total
20145
£000
Clive Bannister4
James McConville
2015
700
440
2014
700
440
2015
2014
16
16
16
35
2015
861
566
2014
716
475
20154
(restated)
1,189
1,5475
679
1,5035
2015
123
77
2014
125
77
2015
(restated)
2,889
3,104
1,778
2,530
1 The Executive Directors are entitled to adjust their salary/benefit combination under flexible benefits arrangements and the figures shown are before individual elections.
2 Benefits for Clive Bannister comprise car allowance and private medical insurance totalling £16,175. Benefits for James McConville comprise car allowance and private medical insurance
totalling £15,940.
3 Annual incentive amounts are presented inclusive of any amounts which must be deferred into shares for three years (i.e. one-third of the AIP award). In 2015 and 2014, £287,000 and
£238,700 respectively of Clive Bannister’s incentive payment is subject to 3-year deferral delivered in shares, and £188,650 and £158,290 of James McConville’s incentive payment is subject
to similar deferral. Details of the performance measures and targets applicable to the AIP for 2015 are set out below.
4 In accordance with the requirements of the UK regulations, the 2015 value for long-term incentives is an estimate of the vesting outcomes for LTIP awards granted in 2013 and which are
due to vest on 15 November 2016 for Clive Bannister and James McConville. These estimated vesting levels are at 57% reflecting outcomes against the MCEV growth, Cumulative cash
generation and TSR performance measures to 31 December 2015 and assumptions regarding dividends for the period until vesting. This vesting outcome is then applied to the average share
price between 1 October 2015 and 31 December 2015 (873.4924p) to produce the estimated long-term incentives figures shown for 2015 in the above table. These assumptions will be trued
up for actual share prices and dividends on vesting in the report for 2016. Details of the performance measures and targets applicable to the 2013 LTIP are set out on page 66.
5 For 2012’s LTIP grants which are reflected in the 2014 long-term incentives columns above, the performance conditions were met as to 84.24% of maximum. The Group Chief Executive
Officer decided to waive voluntarily any entitlement in excess of two-thirds of the shares which would otherwise have vested. The 2014 long-term incentives values in the above table reflect
the value of the Company’s shares on the date of vesting which, due to extended closed and prohibited periods, was 23 September 2015 (836p per share) multiplied by the number of shares
vesting, whereas the equivalent figure within the published 2014 single figure table was an estimate which reflected the average share price between 1 October 2014 and 31 December 2014
(769.93p per share) and certain assumptions regarding the cumulative value of dividends on the number of shares vesting.
6 Clive Bannister and James McConville are entitled to each receive a Company pension contribution of 20% of base salary, which may at their own choice, be paid to their Group Personal
Pension (‘GPP’) or received in cash. Pension contributions paid as cash supplements are reduced for the effect of employers’ National Insurance contributions. No Director participated
in a defined benefit pension arrangement in the year.
The aggregate remuneration of all Executive and Non-Executive Directors under salary, fees, benefits, cash supplements in lieu of pensions and
annual incentive was £3.937 million (2014: £3.771 million).
There were no payments made to former Directors and no payments for loss of office in the year.
AIP OUTCOMES FOR 2015
The Committee seeks to set suitable ranges for each measure in the context both of the Company’s own internal budgets and of external
projections (whether through management guidance or consensus forecasts). As an entirely closed life business, targets are significantly impacted
by management actions and year on year growth is not an inherent objective. The ranges are considered appropriate in that context.
As explained in the Committee Chairman’s letter, and as permitted under the AIP rules, in relation to the MCEV-based measures the Committee
excluded the additional direct MCEV implications of securing an investment grade credit rating together with related Solvency II steps, the full
negative impacts of which on MCEV were not reflected in the original AIP target setting process for 2015. The achievement of an investment grade
rating was a significant step for the Company and had been a long-standing aspiration and the increase in liabilities for MCEV from the Company
being required to value its listed bonds on a market value basis would have operated counter-intuitively if not excluded.
Group MCEV is a measure of the consolidated value of shareholders’ interests in an insurance group and the key components are net worth plus
the value of in-force covered business, based on a market-consistent methodology where assets and liabilities are valued in line with market prices.
Accordingly, listed debt is valued at the market value quoted on the reporting date. One consequence of achieving an investment grade rating was
that the market value of the Group’s listed bonds increased even though there was no additional liability for the Group (as the market perceived
our strength and, therefore, the likelihood of repayment to be higher). Consequently, as this increase in market value of debt reduced MCEV, the
Committee concluded that it would be appropriate to exclude such impact from the AIP out-turn by adjusting the targets, otherwise the impact
of such a significant step for the Group would have inadvertently penalised management.
Similarly, following clarity on the regulations under Solvency II and the actions necessary to ensure approvals in relation to full internal model
approval and matching adjustment be obtained, management took the decision to change the credit portfolio by selling assets which attracted
a high capital charge under the new regime, which were outside of the Group’s risk appetite or which were ineligible or inefficient for matching
adjustment (such as callable bonds). Furthermore, management also reduced the longevity and credit exposure by reinsuring c.£1.3 billion of
liabilities to an external reinsurer, both of which attract the highest level of risk capital under Solvency II for the Group. Accordingly, the Committee
concluded again that it would operate contrary to the principles of the AIP if management was penalised for such actions which were clearly in the
interests of the Group.
Phoenix Group Holdings Annual Report and Accounts 2015 65
It was felt appropriate to ensure that management was not disincentivised from bringing such opportunities to the Board. This could have been the
case had appropriate adjustments to the 2015 AIP targets not been made for the additional costs required to deliver these important developments.
The impact of the adjustments on the AIP Corporate measures is shown below.
Against the specific Corporate measures, out-turns were as follows:
Performance measure
Operating companies’ cash generation¹
Group MCEV2
Expense management
Group MCEV operating earnings after tax
Customer satisfaction3
Employee engagement
Total
Threshold
performance level for
2015 AIP
Maximum
performance level for
2015 AIP
Performance level
attained for 2015 AIP
£200m
£2,463m
£253m
£123m
3.5 rating
72%
£300m
£2,574m
£237m
£246m
5 rating
80%
£275m
£2,633m
£239m
£223m
4.7 rating
78%
% of 70%
of incentive
potential based
on Performance
Measure
25%
25%
15%
15%
10%
10%
% achieved
19%
25%
13%
12%
8%
8%
85%
1 Consistent with past practice, the performance level for operating companies’ cash generation has been credited with £50million which was generated within Phoenix Life. This ensures that,
at all times, management maintains sufficient capital in Phoenix Life given the implementation of Solvency II.
2 Represents reported Group MCEV after adding back ordinary dividends.
3 The rating is a score based on questions answered by customers in a satisfaction survey managed by Ipsos MORI. Customers surveyed were asked to give a satisfaction rating of between
1 and 5 to a number of questions (with a rating of 3 or above regarded as satisfied). The 4.7 rating (out of 5) in 2015 is the average score of all questions answered.
The table below shows the actual out-turn against the annual incentive maximum. For 2015 AIP, Corporate (financial and strategic) measures
applied to 70% of incentive opportunity and Personal (individual objectives) measures applied to 30% of incentive opportunity.
Name
Clive Bannister
James McConville
Corporate
Personal
Total
Maximum
As a % of
maximum
corporate
element
85.00
85.00
As a % of
salary
89.25
89.25
As a % of
maximum
personal
element
75.00
87.50
As a %
of salary
33.75
39.38
As a %
of salary
123.00
128.63
As a %
of salary
150.00
150.00
In line with market best practice, the Company has disclosed both the actual performance targets for the specific Corporate (financial and strategic)
performance measures used for the 2015 AIP and the relevant levels of attainment for those targets. Specific performance measures and targets
for the Personal (individual objectives) performance elements of the 2015 AIP are not disclosed as these performance measures and targets are
regarded as commercially sensitive by the Committee and are likely to remain so, although key achievements included the approval of the Group’s
Internal Model under Solvency II and managing the introduction of the new Pension Freedoms, together with meeting the MCEV management
actions target one year ahead of schedule.
In addition, whilst the performance measures for the AIP for 2016 have been disclosed (see Implementation of Remuneration Policy for 2016), the
performance targets for these measures are regarded as commercially sensitive at the current time and accordingly are not disclosed. However,
the Company intends to disclose the performance targets for the Corporate (financial and strategic) performance measures for 2016’s AIP
retrospectively in next year’s Directors’ remuneration report on a similar basis to the disclosures made above in respect of 2015’s AIP Corporate
(financial and strategic) performance measures.
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 66
DIRECTORS’ REMUNERATION REPORT
Continued
LTIP OUTCOMES FOR 2013 AWARDS
Performance measure and weighting Target range
Performance achieved
Vesting outcome
% achieved
MCEV growth (40%)
Cumulative cash generation
(40%)
TSR (20%)
Target range between MCEV growth in excess
of the risk-free rate by 4% per annum and MCEV
growth in excess of the risk-free rate by 6% per
annum.
Target range between cumulative cash generation
of £1.277 billion and cumulative cash generation of
£1.477 billion.
Target range between median performance
against the constituents of the FTSE 250
(excluding Investment Trusts) rising on a pro
rata basis until full vesting for upper quintile
performance. In addition, the Committee must
consider whether the TSR performance is
reflective of the underlying financial performance
of the Company.
6.14%
100%
40%
£1.258bn
0%
0%
74th percentile
87%
17%
Total
57%
The above targets were all measured over the period of three financial years 1 January 2013 to 31 December 2015.
In addition to the above targets, the Committee confirmed that the underpin performance condition relating to management of debt, capital
restructuring and risk management within the Group (as described more fully on page 68) had been achieved in the performance period.
NON-EXECUTIVE FEES
The emoluments of the Non-Executive Directors for 2015 based on the current disclosure requirements were as follows:
Name
Non-Executive Chairman
Howard Davies²
Henry Staunton³
Non-Executive Directors
René-Pierre Azria
Alastair Barbour
David Barnes4
Ian Cormack
Tom Cross Brown
Manjit Dale5
Isabel Hudson
Kory Sorenson6
David Woods
Total
Directors’
salaries/fees 2015
£000
Directors’
salaries/fees 2014
£000
Benefits¹
2015
£000
Benefits¹
2014
£000
Total
2015
£000
Total
2014
£000
217
108
100
130
–
125
120
–
100
90
130
325
–
100
122
89
125
120
33
100
45
130
1,120
1,189
–
–
–
7
–
–
–
–
–
–
11
18
–
–
–
8
–
–
–
–
–
–
8
217
108
100
137
–
125
120
–
100
90
141
325
–
100
130
89
125
120
33
100
45
138
16
1,138
1,205
1 The amounts within the benefits columns reflect the fact that the reimbursement of expenses to Non-Executive Directors for travel and accommodation costs incurred in attending
Phoenix Life Holdings Limited Board and associated meetings represent a taxable benefit. This position has been clarified with HMRC and the amounts shown are for reimbursed travel
and accommodation expenses (and the related tax liability which is settled by the Group).
2 Howard Davies retired from the Board 31 August 2015.
3 Henry Staunton joined the Board 1 September 2015.
4 David Barnes retired from the Board 22 October 2014.
5 Manjit Dale retired from the Board 30 April 2014.
6 Kory Sorenson joined the Board 1 July 2014.
Phoenix Group Holdings Annual Report and Accounts 2015 67
SHARE-BASED AWARDS
As at 31 December 2015, Directors’ interests under long-term share-based arrangements were as follows:
LTIP
Date of grant
Clive Bannister
No. of
shares
as at
1 Jan
2015
No. of
shares
granted in
2015
No. of
dividend
shares
acquired as
at vesting¹
Share
price
on grant
No. of
shares
exercised4
No. of
shares
not vested
No of
shares
as at
31 Dec
2015
Vesting date
LTIP2,4
LTIP3,4
LTIP
LTIP
LTIP5
12 April 2011
2 April 2012
657.5p
6,010
566.5p
253,493
15 November 2013
712.0p
196,629
26 March 2014
741.5p
188,806
–
–
–
–
28 September 2015
827.7p
–
169,150
–
(6,010)
–
–
12 April 2014
42,733
(185,094)
(111,132)
– 23 September 2015
–
–
–
–
–
–
–
–
–
196,629 15 November 2016
188,806
26 March 2017
169,150 28 September 2018
644,938
169,150
42,733
(191,104)
(111,132) 554,585
James McConville
LTIP3,4
LTIP
LTIP
LTIP5
23 August 2012
485.0p
169,194
15 November 2013
712.0p
112,359
26 March 2014
741.5p
118,678
–
–
–
28 September 2015
827.7p
–
106,322
37,295
(179,824)
(26,665)
– 23 September 2015
–
–
–
–
–
–
–
–
–
112,359 15 November 2016
118,678
26 March 2017
106,322 28 September 2018
400,231
106,322
37,295
(179,824)
(26,665) 337,359
1 In addition to the shares awarded under the LTIP presented above, participants receive an additional number of shares (based on the number of LTIP awards which actually vest) to reflect
the dividends paid during the vesting period (and which ,for awards made from 2015, will include dividends paid during any applicable holding period).
2 The shares outstanding at the start of the year related to dividend roll-up and were exercised on 7 January 2015.
3 The 2012 LTIP award vested at 84.24%, although the Group Chief Executive Officer decided to waive voluntarily any entitlement in excess of two-thirds of the shares which would otherwise
have vested.
4 Gains of Directors from share options exercised and vesting shares under the LTIP in 2015 were £3,037,992 (Clive Bannister’s gains were £47,599 exercised on 7 January 2015 at a share
price of £7.92 and £1,528,424 exercised on 25 September 2015 at a share price of £8.257558; James McConville’s gain was £1,461,969 exercised on 29 September 2015 at a share price
of £8.13) (2014: £1,295,305).
5 The face value of awards granted in 2015 represents the maximum vesting of awards (but before any credit for dividends over the period to vesting) and is calculated using a share price
of 827.667p being the average of the closing middle market prices of Phoenix shares for the 3 dealing days preceding the award date, being £1,399,999 for Clive Bannister and £879,992
for James McConville. The vesting % at threshold performance (2015 awards) for Clive Bannister and James McConville is 25%. As detailed on page 61 for LTIP awards made in 2015
a holding period applies so that any LTIP awards for which the performance vesting requirements are satisfied will not be released for a further 2 years from the third anniversary of the
original award date.
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 68
DIRECTORS’ REMUNERATION REPORT
Continued
The performance conditions for the 2013, 2014 and 2015 awards are set out below:
2013 award
(40% MCEV growth, 40% Cumulative
cash generation and 20% TSR)
2014 award
(40% MCEV growth, 40% Cumulative
cash generation and 20% TSR)
2015 award
(40% MCEV growth, 40% Cumulative
cash generation and 20% TSR)
Target range as for 2013.
For this award, an additional
£50 million was added to the
base MCEV figure to increase
the level of challenge.
Target range between MCEV
growth in excess of the risk-free
rate by 3% per annum and MCEV
growth in excess of the risk-free
rate by 5% per annum.
Target range between MCEV
growth in excess of the risk-free
rate by 4% per annum and MCEV
growth in excess of the risk-free
rate by 6% per annum.
As the 2013 rights issue was
known before the date of award,
the base MCEV for 2013’s award
increased by £211 million.
Target range of £1.277 billion
to £1.477 billion.
Target range of £1.348 billion
to £1.548 billion.
Target range of £841 million to
£991 million.
Target range as for 2013.
Target range as for 2013.
Target range between median
performance against the
constituents of the FTSE 250
(excluding Investment Trusts) rising
on a pro rata basis until full vesting
for upper quintile performance.
Performance measure
MCEV growth
25% of this part vests at threshold
performance rising on a pro rata
basis until 100% vests.
Measured over three financial
years commencing with the year
of award.
Cumulative cash generation
25% of this part vests at threshold
performance rising on a pro rata
basis until 100% vests.
Measured over three financial
years commencing with the year
of award.
TSR
25% of this part vests at threshold
performance rising on a pro rata
basis until 100% vests. In addition,
the Committee must consider
whether the TSR performance is
reflective of the underlying financial
performance of the Company.
Measured over three financial
years commencing with the
year of award.
Underpin: Notwithstanding the MCEV growth, Cumulative cash generation and TSR performance targets, if the Committee determines that
the Group’s debt levels and associated interest costs have not remained within parameters acceptable to the Committee over the performance
period, and that the Group has not made progress considered to be reasonable by it in executing any strategy agreed by the Board on debt
management, capital structuring and risk management, the level of awards vesting will either be reduced or lapse in full.
As noted in the section describing the Implementation of Remuneration Policy in 2016, LTIP awards to be made in 2016 will be subject to
Cumulative cash generation and Relative TSR performance measures similar to those described in the table above. The exact performance targets
for Cumulative cash generation will be determined by the Committee shortly before the awards are made. Such targets will be disclosed in the
2016 Directors’ remuneration report.
The Committee remains committed to applying the performance conditions on the LTIP awards detailed above without adjustment to the extent
this is practicable. In light of Solvency II, embedded value metrics are expected to be less relevant measures within the insurance industry and
Phoenix will no longer be reporting MCEV. The Committee will ensure that any necessary amendments to this part of the relevant LTIP awards
are, consistent with the shareholder approved Remuneration Policy, made on the basis of the Committee ensuring that any substitute performance
measure for MCEV growth does not make the performance condition easier to satisfy than the original was intended to be. Any alterations to
the performance measures for outstanding LTIP awards will be reported in the relevant Directors’ remuneration report and be subject to due
engagement with key shareholders.
Phoenix Group Holdings Annual Report and Accounts 2015 DBSS
Clive Bannister
DBSS
DBSS
DBSS
DBSS1,2
James McConville
69
Date of grant
Share price
on grant
No. of
shares
as at
1 Jan
2015
No. of
shares
granted in
2015
No. of
dividend
shares
acquired
at vesting
No. of
shares
exercised³
No. of
shares
lapsed/
waived
No of
shares
as at
31 Dec
2015
Vesting
date
2 April 2012
562.5p
41,452
27 March 2013
658.5p
36,748
28 March 2014
652.0p
34,029
–
–
–
28 September 2015
827.7p
–
28,840
12,439
(53,891)
–
–
–
–
–
–
112,229
28,840
12,439
(53,891)
–
–
–
–
–
–
–
–
–
– 23 September 2015
36,748
34,029
28,840
99,617
11,999
20,417
19,124
51,540
27 March 2016
28 March 2017
19 March 2018
27 March 2016
28 March 2017
19 March 2018
DBSS
DBSS
DBSS1,2
27 March 2013
658.5p
11,999
28 March 2014
652.0p
20,417
28 September 2015
827.7p
–
32,416
–
–
19,124
19,124
–
–
–
–
–
–
–
–
1 The face value of awards granted in 2015 is equivalent to 50% of the cash element of the 2014 AIP and is calculated using a share price of 827.667p, being the average closing market price
on the 3 days preceding the award date giving £238,699 for Clive Bannister and £158,283 for James McConville.
2 As explained in the Implementation of Remuneration Policy in 2016 table on page 60, the DBSS award made in 2015 will vest on 19 March 2018, being the day following the third
anniversary of the announcement of 2015’s annual results.
3 Gains of Directors from share options exercised and vesting shares under the DBSS in 2015 were £438,626, exercised on 29 September 2015 at a share price of £8.139129. This was
the first vesting of the DBSS for Clive Bannister since its inception.
The DBSS is the share scheme used for the deferral of AIP. No performance conditions apply therefore other than being subject to continued
employment. In addition to the shares awarded under the DBSS presented above, participants receive an additional number of shares to reflect the
dividends paid during the vesting period (or until transfer of shares for DBSS awards made before 2014).
SHARESAVE
Clive Bannister
James McConville
As at
1 Jan
2015
–
1,607
Shares
granted in
2015
–
–
Shares
vested
Shares
lapsed
–
–
–
–
As at
31 Dec
2015
–
1,607
Exercise
price
–
Exercisable
from
–
Date of
expiry
–
£5.60
01 Jun 2016 30 Nov 2016
Gains of Directors from share options exercised under Sharesave 2015 were £nil (2014: £3,878). Sharesave options are granted with an option price
that is a 15% discount to the three-day average share price when invitations are made. This is permitted by HMRC regulations for such options.
For options in 2016 this discount will be 20%. Sharesave options are not subject to performance conditions. The Sharesave options granted to
James McConville represent options granted for the then maximum monthly savings of £250 per calendar month for three years.
Aggregate gains of Directors from share options exercised and vesting shares under all share plans in 2015 were £3,476,618 (2014: £1,299,183).
During the year ended 31 December 2015, the highest mid-market price of the Company’s shares was 922p and the lowest mid-market price
was 783.5p. At 31 December 2015, the Company’s share price was 917p.
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 70
DIRECTORS’ REMUNERATION REPORT
Continued
DIRECTORS’ INTERESTS
The number of shares held by each Director is shown below:
Name
Clive Bannister
James McConville
René-Pierre Azria
Alastair Barbour
Ian Cormack
Tom Cross Brown
Howard Davies
Isabel Hudson
Kory Sorenson
Henry Staunton
David Woods
As at
1 January 2015
or date of
appointment
if later
176,422
–
34,491
3,000
3,650
1,988
3,623
3,880
1,380
–
3,500
As at
31 December 2015
or retirement
if earlier
Total share plan
interests as at
31 December 2015
– LTIP
Total share plan
interests as at
31 December 2015
– DBSS
Total share plan
interests as at
31 December 2015
– Sharesave
305,964
95,094
34,491
3,000
3,650
1,988
3,623
3,880
1,380
20,000
3,500
554,585
337,359
99,617
51,540
–
1,607
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
SHAREHOLDING REQUIREMENTS
As explained in the Remuneration Policy under the Shareholding Guidelines section, the Executive Directors are subject to shareholding requirements.
The extent to which Executive Directors have achieved the requirements by 31 December 2015 (using the share price on acquisition/vesting)
can be summarised as follows:
Position
Clive Bannister
James McConville
Shareholding
Guideline
(% of salary)
200%
200%
Value of shares
held at
31 December 2015
(% of salary)
339%
175%
The Executive Directors are required to sign a declaration that they have not and will not at any time during their employment with Phoenix Group,
enter into any hedging contract in respect of their participation in the AIP, LTIP, Sharesave, SIP or any other incentive plan of the Company, or pledge
awards in such plans as collateral, and additionally that they will neither enter into a hedging contract in respect of, nor pledge as collateral, any
shares which are required to be held for the purposes of the Company’s Shareholding requirements or any vested LTIP award shares subject to a
LTIP holding period.
Phoenix Group Holdings Annual Report and Accounts 2015 71
ADDITIONAL UNAUDITED INFORMATION
DIRECTORS’ SERVICE CONTRACTS
The dates of contracts and letters of appointment and the respective notice periods for Directors are as follows:
Executive Directors’ contracts
Name
Clive Bannister
James McConville
Date of appointment
Date of contract
28 March 2011
7 February 2011
28 June 2012
28 May 2012
Notice period from
either party (months)
12
12
Subject to Board approval, Executive Directors are permitted to accept outside appointments on external boards as long as these are not deemed
to interfere with the business of the Group. During 2015, Clive Bannister received £37,500 from Punter Southall Group and CHF60,000 from
UniGestion in respect of two external directorships. James McConville received £112,000 from Tesco Personal Finance plc.
Non-Executive Directors’ contracts
Name
René-Pierre Azria
Alastair Barbour
Ian Cormack
Tom Cross Brown
Isabel Hudson
Kory Sorenson
Henry Staunton
David Woods
Date of letter of
appointment
Date of Joining the Board
Appointment end date
Unexpired term
(months)
2 September 2009
2 September 2009
11 May 2016
11 September 2013
1 October 2013
1 October 2016
2 September 2009
2 September 2009
24 September 2009
24 September 2009
11 December 2009
18 February 2010
9 May 2014
1 July 2014
11 May 2016
11 May 2016
11 May 2016
1 July 2017
19 August 2015
1 September 2015
1 September 2018
21 December 2009
18 February 2010
11 May 2016
2
7
2
2
2
14
30
2
The above tables have been included to comply with UKLA Listing Rule 9.8.8. In the event of cessation of a Non-Executive Director’s appointment
(excluding the Chairman) they would be entitled to a one month notice period. The Chairman, as detailed in his letter of appointment, would be
entitled to a six months’ notice period.
REMUNERATION COMMITTEE GOVERNANCE
The Group established the Committee in 2010. The terms of reference of the Committee are available at www.thephoenixgroup.com. The main
determinations of the Committee in 2015 in respect of the application of the Remuneration Policy are summarised in the Committee Chairman’s
letter to shareholders at the start of the Directors’ remuneration report.
The table below shows the independent Non-Executive Directors who served on the Committee during 2015 and their date of appointment:
Member
Ian Cormack (Committee Chairman)
Isabel Hudson
Kory Sorenson
From
18 February 2010
18 February 2010
3 July 2014
To
To date
To date
To date
Under the Committee’s Terms of Reference, the Committee meets at least twice a year but more frequently if required. During 2015, six
Committee meetings were held and details of attendance at meetings are set out in the Corporate Governance Report on page 47.
Consistent with the requirements of Solvency II, the Committee is responsible for establishing, implementing, overseeing and reviewing the firm-
wide remuneration policy in the context of business strategy and changing risk conditions. The firm-wide remuneration policy focuses on ensuring
sound and effective risk management so as not to encourage risk-taking outside of the Company’s risk appetite. None of the Committee members
has any personal financial interest (other than as shareholders), conflicts of interests arising from cross-directorships or day-to-day involvement in
running the business.
The Committee makes recommendations to the Board. No Director plays a part in any discussion about his or her own remuneration.
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 72
DIRECTORS’ REMUNERATION REPORT
Continued
ADVICE
The Committee received independent remuneration advice during the year from its appointed adviser, FIT Remuneration Consultants LLP
(‘FIT’). FIT is a member of the Remuneration Consultants Group (the professional body for consultants) and adheres to its code of conduct.
This appointment was made by the Committee following consideration of FIT’s experience in this sector. FIT provided no other services to the
Group and accordingly the Committee was satisfied that the advice provided by FIT was objective and independent. FIT’s fees in respect of 2015
were £246,582. FIT’s fees were charged on the basis of the firm’s standard terms of business for advice provided.
The Committee also consulted with the Group Chief Executive Officer, Group HR Director and General Counsel who attended, by invitation,
various Committee meetings during the year although no executive is ever permitted to participate in discussions or decisions regarding his or
her own remuneration. Input is also sought from the Chief Risk Officer (without management present) and from representatives from finance,
as appropriate.
APPROVAL
This report in its entirety has been approved by the Remuneration Committee and the Board of Directors and signed on its behalf by
IAN CORMACK
REMUNERATION COMMITTEE CHAIRMAN
22 MARCH 2016
Phoenix Group Holdings Annual Report and Accounts 2015 73
APPENDIX TO DIRECTORS’ REMUNERATION REPORT:
FOR INFORMATION ONLY: THE SUMMARY REMUNERATION POLICY TABLE FROM THE DIRECTORS’
REMUNERATION POLICY APPROVED AT THE 2014 AGM
Remuneration Policy table
Element and purpose
Policy and operation
Maximum
Performance measures
Ɛ The Remuneration Committee
Ɛ N/A
will apply the factors set out in the
previous column in considering
any salary adjustments during the
duration of this policy and, in any
event, no increase will be made if it
would take an Executive Director’s
salary above the median level
of salaries for the Remuneration
Committee’s assessment of
that role in the FTSE 31-100 at or
shortly prior to when any increase
is considered
Ɛ It is not possible to prescribe the
Ɛ N/A
likely change in the cost of insured
benefits or the cost of some of the
other reported benefits year-to-
year, but the provision of benefits
will normally operate within an
annual limit of 10% of an Executive
Director’s base salary
Ɛ The Remuneration Committee
will monitor the costs in practice
and ensure that the overall costs
do not increase by more than
the Remuneration Committee
considers to be appropriate in all
the circumstances
Ɛ Relocation expenses are subject
to a maximum limit of £150,000
Ɛ A contribution limit of 20% of base
salary per annum per Executive
Director has been set for the
duration of this policy
Ɛ N/A
Base salary
This is the core
element of pay
and reflects the
individual’s role
and position within
the Group with
some adjustment
to reflect their
capability and
contribution
Benefits1
To provide other
benefits valued
by recipient
Pension
To provide
retirement benefits
and remain
competitive within
the market place
Ɛ Base salaries are reviewed each year
against companies of similar size
and complexity and set by reference
to the median data of comparators
which the Remuneration Committee
considers to be suitable, with
consideration given to both relevant
insurance companies and the
FTSE 31-100 as a whole
Ɛ The Remuneration Committee does
not strictly follow data but uses it
as a reference point in considering,
in its judgement, the appropriate
level of salary having regard to other
relevant factors including corporate
and individual performance and
any changes in an individual’s role
and responsibilities, and the level
of salary increase awarded to other
employees of the Group
Ɛ Base salary is paid monthly in cash
Ɛ Changes to base salaries normally
take effect from 1 January
Ɛ The Group provides market
competitive benefits in kind.
Details of the benefits provided in
2013 and 2014 are set out in the
section below1. The Remuneration
Committee reserves discretion to
introduce new benefits where it
concludes that it is in the interests
of Phoenix Group to do so, having
regard to the particular circumstances
and to market practice
Ɛ Where appropriate, the Company
will meet certain costs relating to
Executive Director relocations
Ɛ The Group provides a competitive
employer sponsored pension plan
Ɛ All Executive Directors are eligible
to participate in the Group Personal
Pension (‘GPP’). Executive Directors
receive a contribution to GPP or they
may opt to receive the contribution
in cash if they are impacted by the
relevant lifetime or annual limits
Ɛ Phoenix will honour the pensions
obligations entered into under all
previous policies in accordance with
the terms of such obligations
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 74
DIRECTORS’ REMUNERATION REPORT
Continued
APPENDIX TO DIRECTORS’ REMUNERATION REPORT continued
Remuneration Policy table continued
Element and purpose
Policy and operation
Maximum
Performance measures
Ɛ The maximum annual incentive
level for an Executive Director is
150% of base salary per annum
Annual Incentive
Plan (‘AIP’)
To motivate
employees
and incentivise
delivery of annual
performance
targets
Ɛ AIP levels and the appropriateness of
measures are reviewed annually to
ensure they continue to support the
Group’s strategy
Ɛ AIP outcomes are paid in cash
in one tranche (less the deferred
share award)
Ɛ One third of any annual AIP award
is to be deferred into shares for
a period of three years although
the Remuneration Committee
reserves discretion to alter the
current practice of deferral (whether
by altering the portion deferred,
the period of deferral or whether
amounts are deferred into cash or
shares). Such alterations may be
required to ensure compliance with
regulatory guidelines for pay within
the insurance sector, but will not
otherwise reduce the current portion
deferred or the period of deferral
Ɛ Deferral of AIP outcomes into shares
is currently made under the Phoenix
Group Holdings’ Deferred Bonus
Share Scheme (‘DBSS’) and DBSS
awards are made following the
announcement of annual results in
accordance with the DBSS rules
Ɛ Awards under DBSS will be in the
standard form of awards to receive
shares for nil-cost (with the shares
either being delivered automatically
at vesting or being delivered at
a time following vesting at the
individual’s choice)
Ɛ During the period until vesting of
DBSS awards, the number of shares
within such awards are cumulatively
increased by the value of dividends
notionally payable in respect of the
vesting shares
Ɛ Malus/clawback provisions apply
to the AIP and to amounts deferred
and may be operated in a broad
range of circumstances, including
those prescribed by the FCA’s
Remuneration Code
Ɛ The performance measures applied to
AIP will be set by the Remuneration
Committee and may be financial or
non-financial and corporate, divisional or
individual and in such proportions as it
considers appropriate
Ɛ In respect of the financial performance
measures, attaining the threshold
performance level produces a £nil annual
incentive payment and for non-financial
performance measures the threshold
level of performance produces an annual
incentive outcome that is 10% of the
weighting given to these measures
Ɛ On-target performance on all measures
produces an outcome of 50% of
maximum annual incentive opportunity.
However, the Remuneration Committee
reserves the right to adjust the threshold
and target levels for future financial years in
light of competitive practice
Ɛ The AIP operates subject to three levels of
moderation:
i. The Remuneration Committee sets
targets for relevant AIP metrics.
Recognising that the business of the
Company is to engage in corporate
activity, the Remuneration Committee
may adjust targets during the year to
ensure they operate as originally intended
if there is activity not contemplated by
the business plan (which may or may
not include reflecting the consequences
of such activity depending on the
circumstances)
ii. For 2014 onwards, there is a specific
multiplier of 80%-120% of the provisional
out-turn whereby the Remuneration
Committee may adjust the provisional
figure (but subject to any over-riding cap)
to take account of its broad assessment
of performance both against pre-set
targets and more generally, of the wider
shareholder experience. With respect
to financial performance measures, this
assessment will include consideration of
the quality of how particular outcomes
were achieved
iii. The AIP remains a discretionary
arrangement and the Remuneration
Committee reserves discretion to adjust
the out-turn (from zero to any cap) should
it consider that to be appropriate. In
particular, the Remuneration Committee
may operate this discretion in respect of
any risk concerns
Phoenix Group Holdings Annual Report and Accounts 2015 75
Element and purpose
Policy and operation
Maximum
Performance measures
Ɛ The formal limit under the LTIP
is 300% of base salary per
annum (and 400% per annum in
exceptional cases)
Ɛ The Remuneration Committee
expressly reserves discretion to
make such awards as it considers
appropriate within these limits
Long-Term
Incentives
To motivate and
incentivise delivery
of sustained
performance over
the long-term,
and to promote
alignment with
shareholders’
interests, the
Group operates
the Phoenix Group
Holdings Long-Term
Incentive Plan
Ɛ Awards under the LTIP may be in
any of the standard forms of awards
to receive shares for nil-cost (as
described for DBSS above), forfeitable
awards of shares or in the form of
cash-based ‘phantom’ awards
Ɛ Awards are made following the
announcement of annual results in
accordance with the LTIP rules
Ɛ During the period until vesting of
LTIP awards, the number of shares
within such awards is cumulatively
increased by the value of dividends
notionally payable in respect of the
vesting shares
Ɛ Malus/Clawback provisions apply on
a basis consistent with the equivalent
provisions in the AIP and DBSS
Ɛ The Company will honour the vesting
of all awards granted under previous
policies in accordance with the terms
of such awards
Ɛ The Remuneration Committee may
set such performance conditions
for LTIP awards as it considers
appropriate (whether financial or
non-financial and whether corporate,
divisional or individual)
Ɛ Once set, performance measures
and targets will generally remain
unaltered unless events occur which,
in the Remuneration Committee’s
opinion, make it appropriate to make
adjustments to the performance
conditions, provided that any
adjusted performance condition is,
in its opinion, neither materially more
nor less difficult to satisfy than the
original condition
Ɛ For each part of an LTIP award,
subject to a specific performance
condition, the threshold level of
vesting is 25% of that part of the
LTIP award. The Remuneration
Committee reserves the discretion to
make changes to these levels which it
considers non-material
Ɛ The performance period for LTIP
awards will be at least three years,
but the Remuneration Committee
reserves discretion to lengthen (but
not reduce) any performance period
and/or introduce a separate holding
period for vested shares2
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 76
DIRECTORS’ REMUNERATION REPORT
Continued
APPENDIX TO DIRECTORS’ REMUNERATION REPORT continued
Remuneration Policy table continued
Element and purpose
Policy and operation
Maximum
Performance measures
Ɛ Consistent with normal practice,
such awards are not subject to
performance conditions
All-employee
share plans
To encourage
share ownership by
employees, thereby
allowing them to
share in the long-
term success of the
Group and align their
interests with those
of the shareholders
Ɛ Executive Directors are able to
Ɛ Sharesave – the Remuneration
participate in all-employee share
plans on the same terms as other
Group employees as required by
HMRC legislation
Committee has the facility to allow
individuals to save up to a maximum
of £500 each month (or such
other level as permitted by HMRC
legislation) for a fixed period of
three or five years. At the end of the
savings period, individuals may use
their savings to buy ordinary shares
in the Company at a discount of up
to 20% (although for 2014 and past
years this has been set at 15%) of
the market price set at the launch of
each scheme
Ɛ Share Incentive Plan (‘SIP’) – the
Remuneration Committee has the
facility to allow individuals to have the
opportunity to purchase, out of their
pre-tax salary, shares in the Company
(up to such level as permitted by
the Company in line with HMRC
legislation) and receive up to two
matching shares for every purchased
share (although for 2014 and past
years matching has been offered
at one matching share for every six
shares purchased). SIP also has the
facility to allow for reinvestment
of dividends in further shares, or
the award of additional free shares
(up to the limits as permitted by
HMRC legislation)
Phoenix Group Holdings Annual Report and Accounts 2015 77
Element and purpose
Policy and operation
Maximum
Shareholding
Guidelines
To encourage share
ownership by the
Executive Directors
and ensure interests
are aligned
Ɛ Executive Directors are expected to
retain all shares (net of tax) which vest
under the DBSS and under the LTIP
(or any other discretionary long-term
incentive arrangement introduced in
the future) until such time as they hold
a specified value of shares
Ɛ 200% of base salary for the Group
Chief Executive Officer, 100% of
base salary for all other Executive
Directors3
Performance measures
Ɛ N/A
Ɛ Only beneficially owned shares and
vested share awards (discounted
for anticipated tax liabilities) may
be counted for the purposes of the
guidelines. Share awards do not
count prior to vesting (including
DBSS awards)
Ɛ Once shareholding guidelines have
been met, individuals are expected to
retain these levels as a minimum. The
Remuneration Committee will review
shareholdings annually in the context
of this policy
Chairman and
Non-Executive
Director fees
Ɛ The fees paid to the Chairman and
the fees of the other Non-Executive
Directors are set to be competitive
with other listed companies of
equivalent size and complexity (both
relevant insurance companies and the
FTSE 31-100 as a whole)
Ɛ The aggregate fees of the Chairman
and Non-Executive Directors will not
exceed the limit from time to time
prescribed within the Company’s
Articles of Association for such
fees (currently £2 million per annum
in aggregate)
Ɛ Fee levels are periodically reviewed.
Ɛ The Company reserves the right
Ɛ N/A
to vary the structure of fees within
this limit including, for example,
introducing time-based fees or
reflecting the establishment of new
board committees
The Company does not adopt
a quantitative approach to pay
positioning and exercises judgement
as to what it considers to be
reasonable in all the circumstances
as regards quantum
Ɛ Additional fees are paid to Non-
Executive Directors who chair or sit
on a board committee, or on boards of
subsidiary entities or on the Solvency
II Model Governance Committee
and to the Senior Independent
Director (‘SID’)
Ɛ Fees are paid monthly in cash
Ɛ Fee levels for Non-Executive Directors
are reviewed annually with any
changes normally taking effect from
1 January
Footnotes to the above Remuneration Policy table
1. Benefits in 2015
For details of benefits in 2015, please see note 1 to the ‘Single Figure of Remuneration Table’ on page 64.
2. Holding Period for LTIP awards from 2015
For LTIP awards from 2015 a two-year holding period has been introduced as explained in the ‘Implementation of Remuneration Policy in 2015’ table on page 61.
3. Shareholding Guidelines from 2015
These have been extended to 200% of base salary for all Executive Directors.
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 78
DIRECTORS’ REMUNERATION REPORT
Continued
RECRUITMENT REMUNERATION POLICY
Ɛ All such replacement awards, whether under the AIP, LTIP
or otherwise, will take account of the service obligations and
performance requirements for any remuneration relinquished by
the individual when leaving a previous employer. The Remuneration
Committee will seek to make replacement awards subject to what
are, in its opinion, comparable requirements in respect of, service
and performance. However, the Committee may choose to relax this
requirement in certain cases (such as where the service and/or
performance requirements are materially completed), and where
the Remuneration Committee considers it to be in the interest
of shareholders or where such factors are, in the view of the
Remuneration Committee, reflected in some other way, such as
a significant discount to the face value of the awards forfeited.
Exceptionally, where necessary, this may include a guaranteed or
non pro-rated annual incentive in the year of joining.
Ɛ For the avoidance of doubt, such replacement awards are not subject
to a formal cap. The Remuneration Committee has not placed a
maximum limit on any such awards which it may be necessary to
make as it is not considered to be in shareholders’ interests to set
any expectations for prospective candidates regarding such awards.
Any recruitment-related awards which do not replace awards with
a previous employer will be subject to the limits for incentive pay as
stated in the general policy.
A new Non-Executive Director would be recruited on the terms
explained above in respect of the main policy for such Directors.
The Company’s recruitment remuneration policy aims to give
the Remuneration Committee sufficient flexibility to secure the
appointment and promotion of high-calibre executives to strengthen
the management team and secure the skill sets to deliver our
strategic aims.
Ɛ In terms of the principles for setting a package for a new Executive
Director, the starting point for the Remuneration Committee will be
to apply the general policy for Executive Directors as set out above
and structure a package in accordance with that policy. Consistent
with the new UK regulations, the caps contained within the policy for
fixed pay do not apply to new recruits, although the Remuneration
Committee would not envisage exceeding these caps in practice.
Ɛ The AIP and LTIPs will operate (including the maximum award levels)
as detailed in the general policy in relation to any newly appointed
Executive Director.
Ɛ For an internal appointment, any variable pay element awarded in
respect of the prior role may either continue on its original terms or be
adjusted to reflect the new appointment as appropriate.
Ɛ For external and internal appointments, the Remuneration
Committee may agree that the Company will meet certain relocation
expenses as it considers appropriate.
Ɛ For external candidates, it may be necessary to make additional
awards in connection with the recruitment to replace awards
forfeited by the individual on leaving a previous employer. For such
replacement awards, Phoenix Group will not pay more than is, in the
view of the Remuneration Committee, necessary and will in all cases
seek, in the first instance, to deliver any such awards under the terms
of the existing incentive pay structure. It may, however, be necessary
in some cases to make such awards on terms that are more bespoke
than the existing annual and equity-based pay structures in Phoenix
in order to secure a candidate. Details of any recruitment-related
awards will be appropriately disclosed.
Phoenix Group Holdings Annual Report and Accounts 2015 79
TERMINATION POLICY SUMMARY
In practice, the facts surrounding any termination do not always fit neatly into defined categories for good or bad leavers. Therefore, it is appropriate
for the Remuneration Committee to consider the suitable treatment on a termination having regard to all of the relevant facts and circumstances
available at that time. This policy applies both to any negotiations linked to notice periods on a termination and any treatment which the
Remuneration Committee may choose to apply under the discretions available to it under the terms of the AIP, DBSS and LTIP plans. The potential
treatments on termination under these plans are summarised below.
Incentives
Good leaver
Bad leaver
Exceptional events
AIP
DBSS
LTIP
If a leaver is deemed to be a ‘good leaver’;
i.e. leaving through redundancy, serious
ill health or death or otherwise at the
discretion of the Remuneration Committee
Pro-rated annual incentive. Pro-rating
to reflect only the period worked.
Performance metrics determined by the
Remuneration Committee
If a leaver is deemed to be a ‘bad leaver’;
typically voluntary resignation or leaving for
disciplinary reasons
For example change in control or
winding-up of the Company
No awards made
Either the AIP will continue for the year or
there will be a pro-rated annual incentive.
Performance metrics determined by the
Remuneration Committee
Deferred awards vest
Deferred awards normally lapse
Deferred awards vest
Will receive a pro-rated award subject
to the application of the performance
conditions at the normal measurement
date
Remuneration Committee discretion to
disapply pro-rating or to accelerate vesting
to the date of leaving (subject to pro-rating
and performance conditions)
All awards will normally lapse
Will receive a pro-rated award subject
to the application of the performance
conditions at the date of the event.
Remuneration Committee discretion to
disapply pro-rating
The Company has power to enter into settlement agreements with executives and to pay compensation to settle potential legal claims. In addition,
and consistent with market practice, in the event of termination of an Executive Director, the Company may pay a contribution towards the
individual’s legal fees and fees for outplacement services as part of a negotiated settlement. Any such fees would be disclosed as part of the detail
of termination arrangements. For the avoidance of doubt, the policy does not include an explicit cap on the cost of termination payments.
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 80
DIRECTORS’ REMUNERATION REPORT
Continued
POTENTIAL REWARDS UNDER VARIOUS SCENARIOS
The potential total rewards available to the Executive Directors, ignoring any change in share price and roll-up of dividends are:
TOTAL REMUNERATION OPPORTUNITY (£000)
Group Chief Executive Officer – Clive Bannister
Group Finance Director – James McConville
Minimum
100%
856
Minimum
100%
544
On-target
50%
30% 20%
1,733
On-target
50% 30% 20%
1,096
Maximum
26%
32%
42%
3,307
Maximum
26%
32%
42%
2,085
LTIP
AIP
Total fixed pay
Name
Clive Bannister
James McConville
Base salary
£000
Benefits
£000
Pension
£000
Total fixed
£000
£700
£440
£17
£16
£140
£88
£857
£544
The above chart aims to show how the Remuneration Policy set out above for Executive Directors is applied using the following assumptions.
Minimum
Consists of base salary, benefits and pension
Base salary is the salary to be paid in 2014
Benefits measured as benefits paid in 2013 as set out in the single figure table but excluding relocation payments for
James McConville
Pension measured as the 20% of base salary receivable either as a pension contribution or as cash, and ignoring the
reduction to payments made in cash for employer’s national insurance contributions
On-target
Based on what the Director would receive if performance was on-target
Ɛ AIP: consists of the on-target annual incentive (75% of base salary)
Ɛ LTIP: consists of the threshold level of vesting (50% of base salary). The benefit of a single year’s participation in the
Sharesave scheme is recognised using an expected value for the Sharesave options of 30%. The benefit of a single
year’s participation in the SIP is recognised using one matching share for every six shares invested on the maximum
value which can be invested.
Maximum
Based on the maximum remuneration receivable:
Ɛ AIP: consists of the maximum annual incentive (150% of base salary)
Ɛ LTIP: assumes maximum vesting of awards and valued as on the date of grant (200% of base salary). Sharesave and
SIP valued on the same basis as in the on-target column.
Phoenix Group Holdings Annual Report and Accounts 2015
DIRECTORS’
REPORT
81
The Directors of the Group present their report for the year ended
31 December 2015.
Phoenix Group Holdings is incorporated in the Cayman Islands
(registered no. 202172) and has a Premium Listing on the London Stock
Exchange. The Company is therefore not required to comply with the
requirements of section 415 of the UK Companies Act 2006. However,
the Directors support these enhanced standards for disclosure and
have sought to comply voluntarily with these requirements.
SHAREHOLDERS
DIVIDENDS
Dividends for the year are as follows:
Ordinary shares
SUBSTANTIAL SHAREHOLDINGS
Information provided to the Company pursuant to the FCA’s Disclosure
and Transparency Rules is published on a Regulatory Information
Service and on the Company’s website. As at 22 March 2016, the
Company had been notified of the following significant holdings of
voting rights in its shares.
Number of
voting rights in
shares
Percentage
of shares in
issue
Artemis Investment Management LLP
22,477,390
Black Rock, Inc.
Ameriprise Financial Inc.
FIL Limited
11,984,110
11,277,894
11,280,767
9.97
5.31
5.00
5.00
Paid interim dividend
26.7p per share (2014: 26.7p per share)
Recommended final dividend 26.7p per share (2014: 26.7p per share)
ANNUAL GENERAL MEETING (‘AGM’)
The AGM of the Company will be held at 32 Commercial Street,
St Helier, Jersey JE2 3RU on Wednesday, 11 May 2016 at 12.30pm.
A separate notice convening this meeting will be distributed to
shareholders in due course and will include an explanation of the items
of business to be considered at the meeting.
BOARD
BOARD OF DIRECTORS
The membership of the Board of Directors during 2015 is given within
the Corporate Governance Report on page 47 which is incorporated
by reference into this report. Details of Directors and their connected
persons’ beneficial and non-beneficial interests in the shares of the
Company are shown in the Directors’ remuneration report.
During 2015 and up to the date of this report, the following changes
to the Board took place:
Ɛ Howard Davies resigned from the Board on 31 August 2015
Ɛ Henry Staunton was appointed to the Board as Chairman with effect
from 1 September 2015.
Details of related party transactions which took place during the
year with Directors of the Company and consolidated entities where
directors are deemed to have significant influence, are provided in the
Directors’ remuneration report and in note I5 to the IFRS consolidated
financial statements.
The rules about the appointment and replacement of Directors are
contained in the Company’s Articles. These state that a Director may
be appointed by an ordinary resolution of the shareholders or by a
resolution of the Directors. If appointed by a resolution of the Directors,
the Director concerned holds office only until the conclusion of the next
AGM following the appointment.
Total ordinary dividend
53.4p per share (2014: 53.4p per share)
SHARE CAPITAL
The issued share capital of the Company was increased by 329,162
ordinary shares during 2015 which related to the Company’s Sharesave
Scheme. At 31 December 2015, the issued ordinary share capital
totalled 225,419,446. Subsequently, 786 ordinary shares have been
issued in 2016 in connection with the Company’s Sharesave Scheme to
bring the total in issue to 225,420,232 at the date of this report.
Full details of the authorised, issued and fully paid share capital as at
31 December 2015 and movements in share capital during the period
are presented in note D1 to the IFRS consolidated financial statements.
The rights and obligations attaching to the Company’s ordinary
shares are set out in the Company’s Articles of Association (the
‘Company’s Articles’) which are available on the Company’s website at
www.thephoenixgroup.com/about-us/corporate-governance/articles-
of-association.aspx.
Where the Employee Benefit Trust (‘EBT’) holds shares for
unvested awards, the voting rights for these shares are exercisable
by the trustees of the EBT at their discretion, taking into account
the recommendations of the Group. For shares that have vested
into respective sub funds underneath the EBT, the voting rights
are exercisable by the trustees of the respective sub funds at their
discretion, taking into account the recommendations of the relevant
participant of the respective sub funds.
RESTRICTIONS ON TRANSFER OF SHARES
Under the Company’s Articles, the Directors may in certain
circumstances refuse to register transfers of shares. In particular,
the Board of Directors may refuse to register the transfer of shares
to a person who is a Non-Qualified Person (as defined in the
Company’s Articles).
Certain restrictions on the transfer of shares may be imposed from
time to time by applicable laws and regulations (for example, insider
trading laws), and pursuant to the Listing Rules of the Financial Conduct
Authority (‘FCA’) and the Group’s own share dealing rules whereby
Directors and certain employees of the Group require the approval of
the Company to deal in the Company’s ordinary shares.
44
Read more about our
Board of Directors
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance
82
DIRECTORS’ REPORT
Continued
In accordance with the UK Corporate Governance Code, Directors
must stand for re-election annually. The Board of Directors will be
unanimously recommending that all of the Directors, except Tom
Cross Brown who is standing down from the Board, should be put
forward for election/re-election at the forthcoming AGM to be held on
11 May 2016.
The Articles give details of the circumstances in which Directors will be
treated as having automatically vacated their office and also state that
the Company’s shareholders may remove a Director from office by
passing an ordinary resolution.
The powers of the Directors are determined by Cayman Islands
Company Law, Cayman Islands common law, the provisions of the
Company’s Memorandum and Articles and by any valid directions given
by shareholders by way of special resolution.
The Directors have been authorised to allot and issue securities and
grant options over or otherwise dispose of shares under Article 14.
At the Company’s AGM held on 23 April 2015, shareholders granted
the Company authority to purchase up to 10% of its issued ordinary
shares. Any ordinary shares purchased under the authority would,
subject to the Cayman Islands Companies Law (as amended), either be
cancelled by operation of law or held in treasury. These authorities were
not used during the year or up to the date of this report.
Subject to obtaining shareholder approval for the renewal of this
authority at the forthcoming AGM, the Company is authorised to make
purchases of its own shares under Article 20 and make payment for
the redemption or purchase of its own shares in any manner permitted
by the Cayman Islands Companies Law (as amended), applicable law
or regulation, including without limitation, out of capital, profits, share
premium or the proceeds of a new issue of shares. The Company held
no treasury shares during the year or up to the date of this report.
DIRECTORS’ REMUNERATION AND INTERESTS
A report on Directors’ remuneration is presented within the Directors’
remuneration report including details of their interests in shares and
share options or any rights to subscribe for shares in the Company.
DIRECTORS’ INDEMNITIES
Following shareholder approval on 15 March 2010, the Company
entered into a deed of indemnity by way of deed poll with its Directors
whereby the Company has agreed to indemnify each Director against
all losses incurred by them in the exercise, execution or discharge of
their powers or duties as a Director of the Company, provided that the
indemnity shall not apply to the extent prohibited by any applicable law.
The deed of indemnity remains in force as at the date of signature of
this Directors’ Report.
DIRECTORS’ CONFLICTS OF INTEREST
The Board has established procedures for handling conflicts of interest
in accordance with Cayman Islands law and the Company’s Articles.
On an ongoing basis, Directors are responsible for informing the
Company Secretary of any new, actual or potential conflicts that
may arise.
57
Read more about
Directors’ remuneration
All Directors and employees of the Company and its subsidiaries
are subject to the Group conflicts of interest policy which has been
established to provide a clear framework for an effective system of
internal control to manage conflicts of interest throughout the Group.
DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE
The Company maintains Directors’ and Officers’ liability insurance cover
which is renewed annually.
GOVERNANCE
GOING CONCERN
The Group’s business activities, together with the factors likely to affect
its future development, performance and position are set out in the
Strategic Report. The Strategic Report also provides details of any key
events affecting the Company (and its consolidated subsidiaries) since
the end of the financial year. The Strategic Report includes details of the
Group’s cash flow and solvency position, including sensitivities for both.
Principal risks and their mitigation are detailed on pages 37 to 38 and
the viability statement is included on pages 39. In addition, the financial
statements include, amongst other things, notes on the Group’s
borrowings (note E5), management of its financial and insurance risk
including market, credit and liquidity risk (note E6), its commitments
and contingent liabilities (notes I7 and I8) and its capital position and
management (note I4). The Strategic Report (on pages 4 to 40) sets
out the business model and how we create value for shareholders
and policyholders.
The Board has followed the new requirements of the UK Financial
Reporting Council’s ‘Guidance on Risk Management, Internal Control
and Related Financial and Business Reporting (September 2014)
when performing its going concern assessment. As part of its
comprehensive assessment of whether the Group and the Company
are a going concern, the Board has undertaken a review of the
liquidity and solvency of the Group under both normal and stressed
conditions as at the date of preparation of the statement of consolidated
financial position.
Having thoroughly considered the going concern assessment, including
a detailed review of the regulatory capital and cash flow positions
of each principal subsidiary company and the availability across the
Group of a range of management actions, the Board has concluded
that there are no material uncertainties that may cast significant
doubt about the Group and the Company’s ability to continue as a
going concern. The Directors have a reasonable expectation that the
Group and the Company have adequate resources to continue in
operational existence for the foreseeable future. Thus, they continue
to adopt the going concern basis of accounting in preparing the annual
financial statements.
CORPORATE GOVERNANCE STATEMENT
The disclosures required by section 7.2 of the FCA’s Disclosure and
Transparency Rules can be found in the Corporate Governance Report
on page 82 which is incorporated by reference into this Directors’
Report and comprises the Company’s Corporate Governance
Statement. The UK Corporate Governance Code (the ‘Code’) applies
to the Company and full details on the Company’s compliance with
the Code are included in the Corporate Governance Report. The Code
is available on the website of the Financial Reporting Council –
www.frc.org.uk.
Phoenix Group Holdings Annual Report and Accounts 2015 83
GREENHOUSE GAS EMISSIONS
CONTRACTUAL/OTHER
All disclosures concerning the Group’s greenhouse emissions are
contained in the Environmental Report forming part of the Strategic
Report on page 40.
FINANCIAL RISK MANAGEMENT
The Group operates a Risk Management Framework (‘RMF’) consisting
of several components, as detailed in the Risk management section
of the Strategic Report. The RMF provides a consistent approach to
highlighting and controlling key risks throughout the organisation. This is
achieved primarily through review and compliance, at a functional
level, with the risk universe and related policies (and the risk appetites
therein). At its highest level the RMF considers the following risks:
strategic, market, credit, insurance, financial soundness , customer
and operational. As a result, in preparing the consolidated financial
statements, assessment is given to a broad range of risk categories.
MEMORANDUM AND ARTICLES
Changes to the Company’s Memorandum and Articles require prior
shareholder approval.
The Memorandum and Articles are available on the Company’s website
at www.thephoenixgroup.com/about-us/corporate-governance/articles-
of-association.aspx.
RE-APPOINTMENT OF THE AUDITORS
Ernst & Young LLP (‘EY’) has indicated its willingness to continue in
office and a resolution that it is re-appointed will be proposed at the
AGM on 11 May 2016.
There is no cap on auditor liability in place in relation to audit work
carried out on the consolidated IFRS financial statements, MCEV
supplementary information and the Group’s UK subsidiaries’ individual
financial statements.
Details of fees paid to EY during 2015 for audit and non-audit work are
disclosed in note C3 to the IFRS consolidated financial statements.
DISCLOSURE OF INFORMATION TO AUDITORS
The Directors who held office at the date of approval of this Directors’
Report confirm that, so far as they are aware, there is no relevant
audit information of which the Company’s auditor is unaware and that
each Director has taken all the steps that they ought to have taken as
a Director to make themselves aware of any relevant audit information
and to establish that the Company’s auditor is aware of that information.
GROUP COMPANY SECRETARY
The Group Company Secretary throughout the 2015 financial period
was Gerald Watson.
SIGNIFICANT AGREEMENTS IMPACTED BY A CHANGE
OF CONTROL OF THE COMPANY
There are change of control clauses contained in certain of the Group’s
financing agreements. The PGH Capital revolving credit facility has a
provision which would enable the lending banks to require repayment of
all amounts borrowed following a change of control. In addition, certain
provisions of the Articles relating to the City Code on Takeovers and
Mergers apply in connection with a takeover bid.
All of the Company’s employee share and incentive plans contain
provisions relating to a change of control. Outstanding awards and
options would normally vest and become exercisable on a change of
control, subject to the satisfaction of any performance conditions and
pro rata reduction as may be applicable under the rules of the employee
share incentive plans.
Apart from the aforementioned, there are a number of agreements that
take effect, alter or terminate upon a change of control of the Company,
such as commercial contracts. None is considered to be significant in
terms of their potential impact on the business of the Group.
ESSENTIAL CONTRACTS OR ARRANGEMENTS
There are a number of relationships with third parties which are of
significant value to the Group. Apart from the PGH capital revolving
credit facility, £300 million unsecured bonds, the £200 million Phoenix
Life Limited Tier 2 bonds and the £428 million subordinated notes,
no single relationship is considered to be essential to the Group.
GROUP EMPLOYEES
The Group is committed to achieving equality of opportunity and
the equal treatment of all our people and those applying to join us.
To this end, all our people share an obligation to their colleagues,
customers and business partners to provide a safe, fair and equitable
working environment in which every individual can seek, obtain
and continue employment without experiencing any unfair or
unreasonable discrimination.
The Group recognises the need to treat people with disabilities fairly and
equally including where an employee becomes disabled during their
employment. Full and fair consideration is given to internal and external
applications from disabled people for employment and further career
opportunities, including training and development. Internal and external
applicants are asked if they have any special requirements when invited
to attend an interview and reasonable provisions are made to meet
the applicant’s request. Applicants are considered on the basis of the
job requirements and their ability and competencies, also taking into
consideration any appropriate reasonable workplace adjustments.
The Group provides the opportunity for employees to participate in
the Company’s all-employee share schemes, Sharesave and Share
Incentive Plan, to facilitate share ownership in the Company.
34
Read more about
Risk management
Phoenix Group Holdings Annual Report and Accounts 2015Corporate governance 84
DIRECTORS’ REPORT
Continued
EMPLOYEE PRACTICE
STRATEGIC AND DIRECTORS’ REPORT APPROVAL
Phoenix Group continues to communicate with staff across a wide
variety of channels, including regular news bulletins via the intranet,
Executive Committee presentations and other face-to-face briefings.
The staff briefings and Executive Committee presentations typically
include updates on the Company’s strategy and plans, progress against
key financial and operational targets, regulatory and risk management
updates and review of economic or other factors which could affect the
Company’s strategy and performance. Regular feedback mechanisms
are also in place, ensuring communication at Phoenix is a continuous
two-way dialogue.
The Board has prepared a Strategic Report which provides an overview
of the development and performance of the Group’s business for the
year ended 31 December 2015, covers the future developments in the
business of Phoenix Group Holdings and its consolidated subsidiaries,
and provides details of any important events affecting the Company
and its subsidiaries after the year-end. For the purposes of compliance
with DTR 4.1.5R(2) and DTR 4.1.8R, the required content of the
‘Management Report’ can be found in the Strategic Report and this
Directors’ Report, including the sections of the Annual Report and
Accounts incorporated by reference.
The views and opinions of staff are sought through Phoenix’s annual
Engagement Survey and more regular interim surveys and employee
communication and engagement forums. Phoenix undertakes
meaningful consultation with staff representatives on all major
organisational changes and other matters affecting employees.
In addition, the Directors at the date of this report consider that the
Annual Report and Accounts, taken as a whole, provides users (who
have a reasonable knowledge of business and economic activities) the
information necessary to assess the Group’s performance, business
model and strategy and is fair, balanced and understandable.
The Strategic Report and the Directors’ Report were approved by the
Board of Directors on 22 March 2016.
CLIVE BANNISTER
GROUP CHIEF EXECUTIVE OFFICER
JAMES MCCONVILLE
GROUP FINANCE DIRECTOR
ST HELIER, JERSEY
22 MARCH 2016
DISCLOSURES UNDER LISTING RULE 9.8.4R
For the purposes of Listing Rule 9.8.4C R, the information required
to be disclosed under Listing Rule 9.8.4 R can be found within the
following sections of the Report and Accounts:
Section Requirement
Location
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Statement of interest
capitalised
Note E5 to the Consolidated
Financial Statements
Publication of unaudited
financial information
Not applicable
Deleted
Not applicable
Details of long-term
incentive schemes
Waiver of emoluments
by a Director
Waiver of any future
emoluments by a Director
Non pre-emptive issue
of equity for cash
As per 7, but for major
subsidiary undertakings
Parent participation in any
placing of a subsidiary
Directors’ remuneration report
Directors’ remuneration report
Directors’ remuneration report
Not applicable
Not applicable
Not applicable
Contracts of significance
Not applicable
Controlling shareholder
provision of services
Not applicable
Shareholder dividend waiver Not applicable
Shareholder dividend
waiver – future periods
Controlling shareholder
agreements
Not applicable
Not applicable
Phoenix Group Holdings Annual Report and Accounts 2015 Phoenix Group Holdings Annual Report and Accounts 2015
85
IN THIS SECTION
Statement of Directors’ responsibilities
Independent Auditor’s report
IFRS consolidated financial statements
Notes to the IFRS consolidated financial statements
Parent company accounts
Asset disclosures
MCEV supplementary information
86
87
95
102
188
198
206
F
I
N
A
N
C
I
A
L
S
86
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
IN RESPECT OF THE ANNUAL REPORT
AND ACCOUNTS
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN
RESPECT OF THE ANNUAL REPORT AND ACCOUNTS
OF PHOENIX GROUP HOLDINGS
The Directors of Phoenix Group Holdings are responsible for the
preparation of the Annual Report and Accounts, the Strategic
Report, the Directors’ Report, the Directors’ remuneration report, the
Group consolidated financial statements and the Company financial
statements in accordance with applicable law and regulations.
The Directors have prepared the Group consolidated financial
statements and the Company financial statements in accordance with
International Financial Reporting Standards (‘IFRSs’) as issued by the
International Accounting Standards Board (‘IASB’). 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 the
Company and of the profit or loss of the Group and the Company for
that period.
In preparing these financial statements the Directors are required to:
Ɛ select suitable accounting policies and then apply them consistently;
Ɛ make judgements and accounting estimates that are reasonable
and prudent;
Ɛ state whether IFRS, as adopted by the IASB, have been followed,
subject to any material departures disclosed and explained in the
Group and the Company financial statements; and
In addition, the Directors as at the date of this report consider that the
Annual Report and Accounts, taken as a whole, provides users (who
have a reasonable knowledge of business and economic activities)
with the information necessary for shareholders to assess the Group’s
performance, business model and strategy, and is fair, balanced
and understandable.
The Directors have elected to comply with certain Companies Act and
Listing Rules (‘LR’) which would otherwise only apply to companies
incorporated in the UK – namely:
Ɛ the Directors’ statement under LR 9.8.6R(3) (statement by the
Directors that the business is a going concern);
Ɛ the Directors remuneration disclosures made under LR 9.8.4R(5)
and (6); and
Ɛ the requirements of Schedule 8 to The Large and Medium-sized
Companies and Groups (Accounts and Reports) Regulations 2008
of the United Kingdom pertaining to Directors’ remuneration that UK
quoted companies are required to comply with.
CLIVE BANNISTER
GROUP CHIEF EXECUTIVE OFFICER
JAMES MCCONVILLE
GROUP FINANCE DIRECTOR
Ɛ prepare the financial statements on the going concern basis unless
it is inappropriate to presume that the Group and the Company will
continue in business.
ST HELIER, JERSEY
22 MARCH 2016
The Directors are responsible for:
Ɛ keeping adequate accounting records that are sufficient to show and
explain the Group’s and the Company’s transactions and disclose,
with reasonable accuracy at any time, the financial position of the
Group and the Company;
Ɛ safeguarding the assets of the Group and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities;
and
Ɛ preparing a Strategic Report, Directors’ Report, Directors’
Remuneration Report and Corporate Governance Statement in
compliance with applicable laws and regulations.
The Directors as at the date of this report, whose names and functions
are listed in the Board of Directors section on pages 44 and 45, confirm
that, to the best of their knowledge:
Ɛ the Group’s consolidated financial statements and the Company
financial statements, which have been prepared in accordance with
IFRS as issued by the IASB, give a true and fair view of the assets,
liabilities, financial position and profit of the Group and the Company;
and
Ɛ the Directors’ Report and the Strategic Report include a fair review
of the development and the performance of the business and the
position of the Company and its consolidated subsidiaries taken
as a whole, together with a description of the principal risks and
uncertainties that they face.
Phoenix Group Holdings Annual Report and Accounts 2015 INDEPENDENT AUDITOR’S REPORT TO THE
MEMBERS OF PHOENIX GROUP HOLDINGS
87
OUR OPINION ON THE FINANCIAL STATEMENTS
In our opinion:
Ɛ Phoenix Group Holdings’ consolidated 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 2015 and of the Group’s and of the parent company’s
profit for the year then ended; and
Ɛ the financial statements have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as issued by the
International Accounting Standards Board (‘IASB’).
WHAT WE HAVE AUDITED
We have audited the consolidated financial statements of Phoenix Group Holdings and its subsidiaries (collectively ‘the Group’) and the parent
company for the year ended 31 December 2015, included within the Annual Report and Accounts, which comprise:
Group
Parent company
Ɛ The consolidated income statement for the year then ended
Ɛ The statement of comprehensive income for the year then ended
Ɛ The consolidated statement of comprehensive income for
Ɛ The statement of financial position as at 31 December 2015
the year then ended
Ɛ The pro forma reconciliation of Group operating profit to results
Ɛ The statement of cash flows for the year then ended
attributable to owners for the year then ended
Ɛ The statement of consolidated financial position as at
Ɛ The statement of changes in equity for the year then ended
31 December 2015
Ɛ The statement of consolidated cash flows for the year then ended
Ɛ Related notes 1 to 17 to the financial statements
Ɛ The statement of consolidated changes in equity for the year
then ended
Ɛ Related notes A1 to I9 to the consolidated financial statements
Certain required disclosures have been presented elsewhere in the Annual Report and Accounts, rather than in the notes to the financial
statements. These have been cross-referenced from the financial statements and are identified as audited.
The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as issued by the IASB.
OVERVIEW OF OUR AUDIT APPROACH
Materiality
Ɛ Overall Group materiality of £46m (2014: £41m) which represents 1.9% (2014: 1.7%) of total equity attributable to
owners of the parent (‘Group equity’).
Audit scope
Ɛ We performed an audit of the complete financial information of the Group Function and Insurance Companies
and audit procedures on specific balances for Other Companies. These are explained further on page 91.
Risks of material
misstatement
Ɛ The reporting units where we performed full or specific audit procedures accounted for more than 99% of the
equity and operating profit of the Group.
Ɛ Valuation of insurance contract liabilities, comprising of the following risk areas:
Ɛ actuarial assumptions;
Ɛ actuarial modelling; and
Ɛ data.
Ɛ Valuation of complex and illiquid financial investments.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 88
INDEPENDENT AUDITOR’S REPORT TO THE
MEMBERS OF PHOENIX GROUP HOLDINGS
Continued
OUR ASSESSMENT OF RISK OF MATERIAL MISSTATEMENT
We identified the risks of material misstatement described below as those that had the greatest effect on our overall audit strategy, the allocation of
resources in the audit and the direction of the efforts of the audit team. In addressing these risks, we have performed the procedures below which
were designed in the context of the financial statements as a whole and, consequently, we do not express any opinion on these individual areas.
Risk
Valuation of insurance contract liabilities (£40.9bn value of the risk; 2014: £43.9bn)
Refer to the Audit Committee Report (page 50 to 52); Critical accounting estimates (page 103); Accounting policies and notes F1 and F2 of the
consolidated financial statements (pages 140 to 142)
We considered the valuation of insurance contract liabilities to be a significant risk for the Group. Specifically we considered the actuarial
assumptions which are applied, as these involve complex and significant judgements about future events, both internal and external to the
business, for which small changes can result in a material impact to the valuation. We considered the actuarial modelling used in the valuation
process which should model the results appropriately based on the methodology and in accordance with the regulations. Additionally, the valuation
process is conditional upon on the accuracy and completeness of the data used.
We have therefore split the risks relating to the valuation of insurance contract liabilities into the following risk areas:
Ɛ actuarial assumptions;
Ɛ actuarial modelling; and
Ɛ data.
We assessed management’s analysis of movements in insurance contract liabilities and obtained evidence to support large or unexpected
movements. This provided important audit evidence over the valuation of insurance contract liabilities. Further additional audit procedures
performed to respond to the specific risk areas are set out below:
Risk
Our response to the risk
What we concluded to the Audit Committee
We determined that the actuarial assumptions
used by management are reasonable based
on the analysis of the experience to date,
industry practice and the financial and regulatory
requirements.
Actuarial assumptions
There has been no change in our assessment
of this risk from the prior year.
In obtaining sufficient audit evidence to
conclude on the appropriateness of actuarial
assumptions, we:
Economic assumptions are set by management
taking into account market conditions as at the
valuation date. Non-economic assumptions
such as future expenses, longevity and
mortality are set based on past experience,
market experience, market practice, regulations
and expectations about future trends.
The assumptions that we consider to have the
most significant impact are the rate of interest
used for discounting liabilities, the allowance for
expected credit default within the investment
portfolio, life expectancy of policyholders and
the lapse rates of policies.
These assumptions are used as inputs into a
valuation model which uses standard actuarial
methodologies.
Ɛ tested the design and operating
effectiveness of key controls over
management’s process for setting and
updating actuarial assumptions;
Ɛ compared the methodology and
assumptions used with those we would
expect based on our knowledge of the
Group, industry standards and regulatory and
financial reporting requirements;
Ɛ assessed the results of management’s
experience analysis, which supports the
adopted assumptions and methodology,
and checked that the assumptions used are
consistent with this experience analysis;
Ɛ evaluated the choice of the industry
standard Continuous Mortality Investigation
(‘CMI’) model and the parameters used
to ensure that it was appropriate given the
demographics of policyholders; and
Ɛ benchmarked the demographic and
economic assumptions against those of
other industry participants.
Phoenix Group Holdings Annual Report and Accounts 2015 89
Risk
Our response to the risk
What we concluded to the Audit Committee
Actuarial modelling
We consider that this risk has decreased
in the current year following the successful
implementation of the new actuarial modelling
system in the prior year.
Whilst the risk associated with actuarial models
has decreased, we still consider the integrity
and appropriateness of models to be critical
to the overall valuation of insurance contract
liabilities.
Over £39bn of the £41bn of insurance contract
liabilities are modelled using the new actuarial
modelling system with the residual balance
modelled outside this system to cater for
ancillary business. The key risk is therefore
associated with the new modelling system but
risks also exist in the calculation of amounts
outside this system.
In obtaining sufficient audit evidence to
conclude on actuarial models, including those
models outside the core system, we:
We determined that the models used are
appropriate and that changes to the models
were implemented as intended.
Ɛ confirmed in the prior period that the core
system is appropriately valuing liabilities, we
assessed the design, implementation and
operating effectiveness of key controls over
management’s process for model changes
during the year;
Ɛ confirmed, on a sample basis, that
model changes have been appropriately
implemented by comparing the impacts of
model changes to our own calculations of
what we would expect the impact to be;
Ɛ assessed the results of the analysis of
movements in insurance contract liabilities
in order to confirm the completeness of
model changes;
Ɛ tested the design, implementation and
operating effectiveness of key controls
over management’s process for modelling
liabilities outside the core system; and
Ɛ tested, on a sample basis, the
appropriateness of the valuations modelled
outside the core system by comparing the
results to our own calculations.
Data
There has been no change in our assessment
of this risk from the prior year.
The actuarial data is a key input into the
valuation process. The valuation of insurance
contract liabilities is therefore conditional
upon the accuracy and completeness of
the data used.
In obtaining sufficient audit evidence to assess
the integrity of actuarial data we:
Ɛ tested the adequacy of outsourced service
provider (‘OSP’) controls regarding the
maintenance of policyholder data, and where
applicable reviewed the Service Organisation
Controls (‘SOC1’) Reports produced by
the OSPs;
We determined based on our audit work
that the data used for the actuarial model
inputs are materially complete and accurate.
Ɛ confirmed that the actuarial model data
extracts provided by the OSPs were those
used as an input to the actuarial model;
Ɛ tested the design and operating
effectiveness of key controls including
information technology general controls over
management’s data collection, extraction and
validation process;
Ɛ assessed the appropriateness of
management’s grouping of data for input into
the actuarial model; and
Ɛ tested reconciliations of premiums and claims
information from the actuarial data extract to
the general ledger, where applicable.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 90
INDEPENDENT AUDITOR’S REPORT TO THE
MEMBERS OF PHOENIX GROUP HOLDINGS
Continued
Risk
Our response to the risk
What we concluded to the Audit Committee
Based on our procedures performed on
the marked to model assets and manually
priced investments we are satisfied that the
valuation of these complex and illiquid assets
is reasonable.
Valuation of complex and illiquid
financial investments (‘Level 3 assets’)
(£1.4bn; 2014: £1.8bn)
There have been a number of disposals of
Level 3 assets in the year and there have also been
investments in new areas such as equity release
mortgages. Overall we have assessed that the
risk has reduced compared with the prior year.
Refer to the Audit Committee Report
(page 50 to 52); Critical accounting estimates
(page 103); Accounting policies and notes E1
and E2 of the consolidated financial statements
(pages 118 to 127).
The extent of judgment applied by
management in valuing the Group’s financial
investments varies with the nature of securities
held, the markets in which they are traded and
the valuation methodology applied.
We focused our audit procedures on the
financial investments which require judgment
to be applied and for which quoted market
prices are not readily available and consequently
where management use models and other
inputs to estimate their value.
These investments are referred to as Level 3
assets in the financial statements.
In obtaining sufficient audit evidence to
conclude on valuation of complex and illiquid
financial investments, we:
Ɛ tested the design and operating effectiveness
of key controls over management’s process
in respect of the valuation of investments;
Ɛ evaluated the methodology, inputs and
assumptions used for a sample of mark to
model investments, by comparing yields,
spreads, earnings, house prices and market
rents to published market benchmarks
to confirm that key valuation inputs were
consistent with industry norms and our
understanding of the asset type;
Ɛ recalculated a sample of modelled valuations
to assess their reasonableness. This year
this included assessing the appropriateness
of the models and assumptions used for the
portfolio of equity release mortgages;
Ɛ obtained net asset valuation (‘NAV’)
statements provided by third party
administrators in respect of direct equity
and fund of fund structures and compared
them with management’s valuations.
We performed back testing of recent
realisations in order to confirm that NAV
continues to be an appropriate proxy for
fair value;
Ɛ used our real estate valuation specialists to
assess the reasonableness of investment
property valuations; and
Ɛ assessed the fair value of the fixed and
variable rate income securities valuations.
This included benchmarking the fair value
against comparable bonds and where
applicable obtaining broker quotes to assess
the reasonableness of management’s price.
In the prior year, our auditor’s report included a significant risk in relation to the provision of taxation and the recoverability of deferred tax assets.
In the current year, the Group settled the majority of their uncertain tax positions with HM Revenue and Customs (‘HMRC’). Refer to note C5
on pages 114 and 115 of the consolidated financial statements. The residual exposure to the Group for outstanding tax issues has decreased
significantly and thus we no longer deem this to be a significant risk. The risk attaching to recoverability of the deferred tax assets has also reduced
following the settlement with the HMRC and thus we no longer deem the recoverability of deferred tax as a significant risk.
Phoenix Group Holdings Annual Report and Accounts 2015 91
THE SCOPE OF OUR AUDIT
There were no material scope changes from the prior year.
TAILORING THE SCOPE
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each
reporting unit (‘component’) within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take
into account size, risk profile, the organisation of the Group and effectiveness of Group-wide controls, changes in the business environment and
other factors when assessing the level of work to be performed at each entity.
In assessing the risk of material misstatement to the consolidated financial statements, and to ensure we had adequate quantitative coverage
of significant accounts in the financial statements, we selected all three reporting components of the Group. The Group reporting components
consists of Insurance Companies, Group Function and Other Companies. In the Insurance Companies component the most significant insurance
companies are Phoenix Life Assurance Limited and Phoenix Life Limited. The Group Function consists of Group entities that primarily hold external
debt and the pension schemes of the Group. The Other Companies are the service companies and Opal Reassurance Limited.
Of the three components selected, we performed an audit of the complete financial information of the Insurance Companies and the Group
Function components (‘full scope components’) which were selected based on their size or risk characteristics. For the remaining Other
Companies component (‘specific scope component’), we performed audit procedures on specific accounts within that component that we
considered had the potential for the greatest impact on the significant accounts in the financial statements either because of the size of these
accounts or their risk profile.
For the Other Companies component, we performed audit procedures on provisions and administrative expenses for the service companies and
on cash and investments for Opal Reassurance Limited. The extent of audit work in respect of the Other Companies component was based on our
assessment of the risks of material misstatement at a financial statement line level.
The reporting components where we performed audit procedures accounted for more than 99% of the Group equity and the Group’s operating
profit. For the current year, the full scope components contributed 97% (2014: 98%) of the equity and 88% (2014: 93%) of the Group’s operating
profit. The specific scope component contributed 2% (2014: 2%) of the Group’s equity and 11% (2014: 7%) of the Group’s operating profit.
The charts below illustrate the coverage obtained from the work performed by our audit teams.
EQUITY
OPERATING PROFIT
B C
D
A Insurance companies
– full scope (93%)
B Group function
– full scope (4%)
C Other companies
– specific scope (2%)
D Out of scope
(less than 1%)
C
B
D
A Insurance companies
– full scope (80%)
B Group function
– full scope (8%)
C Other companies
– specific scope (11%)
D Out of scope
(less than 1%)
A
A
INVOLVEMENT WITH COMPONENT TEAMS
In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the components
by us, as the primary audit engagement team, or by the component auditors operating under our instruction.
The Group audit team provided detailed audit instructions to the component teams which included guidance on areas of focus, including the
relevant risks of material misstatement detailed above, and set out the information required to be reported to the Group team.
The Group audit team is responsible for the audit of the Group Function. The Group team visited the full scope component of the Insurance
Companies, and reviewed key work papers and participated in the planning and execution of the component team’s audit of the identified
risks. The Group team attended the closing meetings with the management of the Insurance Companies and attended key audit committee
meetings. For the specific scope component, the Group team have reviewed the audit procedures performed by the component team on the
specific accounts.
The work performed on the components, together with the additional procedures performed at Group level, gave us appropriate evidence
for our opinion on the consolidated financial statements as a whole.
Phoenix Group Holdings Annual Report and Accounts 2015Financials
92
INDEPENDENT AUDITOR’S REPORT TO THE
MEMBERS OF PHOENIX GROUP HOLDINGS
Continued
OUR APPLICATION OF MATERIALITY
REPORTING THRESHOLD
An amount below which identified misstatements are considered
as being clearly trivial.
We agreed with the Audit Committee that we would report all
uncorrected audit differences in excess of £2.3 million (2014: £2 million),
which is set at 5% of planning materiality, as well as differences
below that threshold that, in our view, warranted reporting on
qualitative grounds.
We evaluate any uncorrected misstatements against both the
quantitative measures of materiality discussed above and in light
of other relevant qualitative considerations in forming our opinion.
SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS
An audit involves obtaining evidence about the amounts and disclosures
in the financial statements sufficient to give reasonable assurance that
the financial statements are free from material misstatement, whether
caused by fraud or error. This includes an assessment of whether
the accounting policies are appropriate to the Group’s and the parent
company’s circumstances and have been consistently applied and
adequately disclosed; the reasonableness of significant accounting
estimates made by the Directors; and the overall presentation of the
financial statements. In addition, we read all the financial and non-
financial information in the Annual Report and Accounts to identify
material inconsistencies with the audited financial statements and to
identify any information that is apparently materially incorrect based on,
or materially inconsistent with, the knowledge acquired by us in the
course of performing the audit. If we become aware of any apparent
material misstatements or inconsistencies we consider the implications
for our report.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITOR
As explained more fully in the Statement of Directors’ Responsibilities
set out on page 86, the Directors are responsible for the preparation of
the financial statements and for being satisfied that they give a true and
fair view. Our responsibility is to audit and express an opinion on the
financial statements in accordance with applicable law and International
Standards on Auditing (UK and Ireland). Those standards require
us to comply with the Auditing Practices Board’s Ethical Standards
for Auditors.
We apply the concept of materiality in planning and performing the
audit, in evaluating the effect of identified misstatements on the audit
and in forming our audit opinion.
MATERIALITY
The magnitude of an omission or misstatement that, individually or in
the aggregate, could reasonably be expected to influence the economic
decisions of the users of the financial statements. Materiality provides
a basis for determining the nature and extent of our audit procedures.
We determined materiality for the Group to be £46 million
(2014: £41 million), which is 1.9% (2014: 1.7%) of Group equity. Our aim
is that materiality should not exceed 2% of year-end Group equity.
At the planning stage we set a slightly lower level of materiality to
allow for forecasting error. Whilst profit before tax or operating profit
are common bases used across the life insurance industry, we believe
that the use of equity as the basis for assessing materiality is more
appropriate given that the Group is a closed life assurance consolidator
and as such equity provides a more stable, long-term measure of
value. We note also that equity more closely correlates with key Group
performance metrics such as Insurance Group Directive (‘IGD’) surplus
and Market Consistent Embedded Value (‘MCEV’). However, as
these measures are non-GAAP measures, we consider equity to be
most appropriate.
During the course of our audit, we reassessed initial materiality and
concluded that materiality assessed at planning stages of our audit
remained appropriate.
PERFORMANCE MATERIALITY
The application of materiality at the individual account or balance
level. It is set at an amount to reduce to an appropriately low level
the probability that the aggregate of uncorrected and undetected
misstatements exceeds materiality.
On the basis of our risk assessments, together with our assessment
of the Group’s overall control environment, our judgement was
that performance materiality was 50% (2014: 50%) of our planning
materiality, namely £23.0 million (2014: £20.5 million).
Audit work at component locations for the purpose of obtaining
audit coverage over significant financial statement accounts is
undertaken based on a percentage of total performance materiality.
The performance materiality set for each component is based on
the relative scale and risk of the component to the Group as a whole
and our assessment of the risk of misstatement at that component.
In the current year, the range of performance materiality allocated to
components was £4.6 million to £18.4 million (2014: £4.2 million to
£13.7 million). In the prior year performance materiality was allocated
separately to the two life companies but in the current year it was
allocated to the Insurance Companies component taken as a whole.
Phoenix Group Holdings Annual Report and Accounts 2015 93
Phoenix Group Holdings is a non-UK company and as such is not
required to comply with the UK Companies Act 2006. As the Group is
listed on the UK Stock Exchange, the Directors have voluntarily chosen
to comply with the Companies Act 2006 and listing rules that apply to
UK Companies and have engaged us to provide an opinion as if they
were. Accordingly we have been engaged to:
Ɛ report as to whether the Strategic Report and Directors’ Report for
the financial year for which the financial statements are prepared is
consistent with the financial statements;
Ɛ report as to whether the information given in the Corporate
Governance Statement with respect to internal control and risk
management systems in relation to financial reporting processes is
consistent with the financial statements;
Ɛ report as to whether the section in the Directors’ remuneration
report that is described as audited has been properly prepared in
accordance with the basis of preparation described therein; and
Ɛ report if we are not satisfied that:
Ɛ adequate accounting records have been kept (including returns
from those branches which have not been visited); or
Ɛ the financial statements are in agreement with the records
and returns; or
Ɛ we have obtained all the information and explanations which
we consider necessary for the purposes of the audit.
This report is made solely to the Company’s members, as a body, in
accordance with our engagement letter dated the 1 August 2014 and
subsequent engagement letter dated the 10 March 2016. Our audit
work has been undertaken so that we might state to the Company’s
members those matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the
Company and the Company’s members as a body, for our audit work,
for this report, or for the opinions we have formed.
REPORT ON MATTERS PRESCRIBED BY OUR ENGAGEMENT LETTER
In our opinion:
Ɛ the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared
is consistent with the financial statements;
Ɛ the information given in the Corporate governance report set out on pages 47 to 56 with respect to internal control and risk management
systems in relation to financial reporting processes is consistent with the financial statements; and
Ɛ the part of the Directors’ remuneration report that has been described as audited has been properly prepared in accordance with the basis
of preparation as described therein.
MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION
ISAs (UK and Ireland)
reporting
We are required to report to you if, in our opinion, financial and non-financial information
in the Annual Report and Accounts is:
We have no exceptions
to report.
Ɛ materially inconsistent with the information in the audited financial statements; or
Ɛ apparently materially incorrect based on, or materially inconsistent with, our knowledge
of the Group acquired in the course of performing our audit; or
Ɛ otherwise misleading.
In particular, we are required to report whether we have identified any inconsistencies
between our knowledge acquired in the course of performing the audit and the Directors’
statement that they consider the Annual Report and Accounts taken as a whole is fair,
balanced and understandable and provides the information necessary for shareholders to
assess the entity’s performance, business model and strategy; and whether the Annual
Report and Accounts appropriately addresses those matters that we communicated to
the audit committee that we consider should have been disclosed.
We are required to review:
Ɛ the Directors’ statement in relation to going concern set out on page 82 and the longer-
term viability set out on page 39; and
Ɛ the part of the Corporate governance report relating to the company’s compliance with
the provisions of the UK Corporate Governance Code specified for our review.
We are required to report to you if, in our opinion:
Ɛ adequate accounting records have not been kept (including returns from those branches
which have not been visited); or
Ɛ the financial statements are not in agreement with the accounting records and returns; or
Ɛ we have not received all the information and explanation which we require for the audit.
We have no exceptions
to report.
We have no exceptions
to report.
Listing rules review
requirements
Engagement letter
reporting
Phoenix Group Holdings Annual Report and Accounts 2015Financials 94
INDEPENDENT AUDITOR’S REPORT TO THE
MEMBERS OF PHOENIX GROUP HOLDINGS
Continued
We have nothing
material to add or to
draw attention to.
STATEMENT ON THE DIRECTORS’ ASSESSMENT OF THE PRINCIPAL RISKS THAT WOULD THREATEN
THE SOLVENCY OR LIQUIDITY OF THE ENTITY
ISAs (UK and Ireland)
reporting
We are required to give a statement as to whether we have anything material to add or
to draw attention to in relation to:
Ɛ the Directors’ confirmation in the Annual Report and Accounts that they have carried
out a robust assessment of the principal risks facing the entity, including those that
would threaten its business model, future performance, solvency or liquidity;
Ɛ the disclosures in the Annual Report and Accounts that describe those risks and explain
how they are being managed or mitigated;
Ɛ the Directors’ statement in the Annual Report and Accounts about whether they
considered it appropriate to adopt the going concern basis of accounting in preparing
them, and their identification of any material uncertainties to the entity’s ability to continue
to do so over a period of at least twelve months from the date of approval of the financial
statements; and
Ɛ the Directors’ explanation in the Annual Report and Accounts as to how they have
assessed the prospects of the entity, 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 entity will be able to 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.
ERNST & YOUNG LLP
LONDON
22 MARCH 2016
Notes:
1. The maintenance and integrity of the Phoenix Group Holdings website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration of these
matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Phoenix Group Holdings Annual Report and Accounts 2015 CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2015
95
Gross premiums written
Less: premiums ceded to reinsurers
Net premiums written
Fees
Net investment income
Total revenue, net of reinsurance payable
Gain on transfer of business
Other operating income
Net income
Policyholder claims
Less: reinsurance recoveries
Change in insurance contract liabilities
Change in reinsurers’ share of insurance contract liabilities
Transfer from/(to) unallocated surplus
Net policyholder claims and benefits incurred
Change in investment contract liabilities
Acquisition costs
Change in present value of future profits
Amortisation and impairment of acquired in-force business
Amortisation of customer relationships
Administrative expenses
Net income attributable to unitholders
Total operating expenses
Profit before finance costs and tax
Finance costs
Profit for the year before tax
Tax credit/(charge) attributable to policyholders’ returns
Profit before the tax attributable to owners
Tax credit/(charge)
Add: tax attributable to policyholders’ returns
Tax credit/(charge) attributable to owners
Profit from continuing operations for the year attributable to owners
Discontinued operations
Profit from discontinued operations, net of tax
Profit for the year attributable to owners
Attributable to:
Owners of the parent
Non-controlling interests
Earnings per ordinary share
Basic (pence per share)
Diluted (pence per share)
Earnings per share from continuing operations
Basic (pence per share)
Diluted (pence per share)
Notes
F3
C1
I1.5
F2
G7
G7
G7
C2
C4
C5
C5
C5
C5
I1.1
D3
2015
£m
902
(1,376)
(474)
95
1,064
685
–
7
692
(3,931)
326
2,959
1,003
84
441
(232)
(7)
(6)
(148)
(15)
(430)
(7)
(404)
2014
£m
981
(1,792)
(811)
94
6,034
5,317
4
9
5,330
(3,724)
341
(1,990)
1,651
(11)
(3,733)
(408)
(9)
(9)
(98)
(15)
(429)
(8)
(4,709)
288
621
(136)
152
33
185
97
(33)
64
249
–
249
201
48
249
(156)
465
(129)
336
(151)
129
(22)
314
92
406
310
96
406
B3.1
B3.2
B3.1
B3.2
89.8p
89.6p
89.8p
89.6p
137.7p
137.5p
96.7p
96.5p
Phoenix Group Holdings Annual Report and Accounts 2015Financials 96
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2015
Profit for the year from continuing operations
Profit from discontinued operations
Other comprehensive income/(expense):
Items that are or may be reclassified to profit or loss:
Foreign exchange rate movements
Reclassification adjustments relating to foreign collective investment schemes disposed of in the period
Items that will not be reclassified to profit or loss:
Owner-occupied property revaluation gains
Remeasurements of net defined benefit asset/liability
Tax (charge)/credit relating to other comprehensive income items
Total other comprehensive income for the year
Total comprehensive income for the year
Attributable to:
Owners of the parent
Non-controlling interests
Notes
G8
G6
C5
D3
2015
£m
249
–
249
–
(10)
4
11
(5)
–
249
201
48
249
PRO FORMA RECONCILIATION OF GROUP
OPERATING PROFIT TO RESULT ATTRIBUTABLE
TO OWNERS
For the year ended 31 December 2015
Operating profit
Phoenix Life
Ignis – discontinued operations
Group costs
Total operating profit before adjusting items
Investment return variances and economic assumption changes on long-term business
Variance on owners’ funds
Amortisation of acquired in-force business
Amortisation of customer relationships
Non-recurring items
Profit before finance costs attributable to owners
Finance costs attributable to owners
Profit before the tax attributable to owners
From continuing operations
From discontinued operations
Tax credit/(charge) attributable to owners from continuing operations
Tax credit attributable to owners from discontinued operations
Profit for the year attributable to owners
Notes
B2.2
B2.3
B1.2
B1.2
2015
£m
336
–
336
(12)
324
13
(12)
(75)
(15)
49
284
(99)
(88)
185
–
185
64
–
249
336
80
416
(22)
12
406
2014
£m
314
92
406
10
–
–
240
11
261
667
571
96
667
2014
£m
487
17
504
(21)
483
12
(14)
(88)
(15)
126
504
Phoenix Group Holdings Annual Report and Accounts 2015 STATEMENT OF CONSOLIDATED
FINANCIAL POSITION
As at 31 December 2015
97
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Share premium
Shares held by employee benefit trust and Group entities
Foreign currency translation reserve
Owner-occupied property revaluation reserve
Retained earnings
Total equity attributable to owners of the parent
Non-controlling interests
Total equity
Liabilities
Insurance contract liabilities
Liabilities under insurance contracts
Unallocated surplus
Financial liabilities
Investment contracts
Borrowings
Deposits received from reinsurers
Derivatives
Net asset value attributable to unitholders
Obligations for repayment of collateral received
Provisions
Deferred tax
Reinsurance payables
Payables related to direct insurance contracts
Current tax
Accruals and deferred income
Other payables
Liabilities classified as held for sale
Total liabilities
Total equity and liabilities
Notes
2015
£m
2014
£m
D1
D2
–
861
(5)
96
4
–
979
(8)
103
–
1,478
2,434
1,291
2,365
D3
570
913
3,004
3,278
F1
F2
E5
E3
39,983
42,930
877
981
40,860
43,911
7,905
1,998
378
1,360
5,120
725
8,451
1,762
408
2,192
4,659
954
E1
17,486
18,426
G1
G2
G3
G2
G4
G5
I1.2
28
354
19
364
7
128
677
26
364
9
358
165
130
360
1,587
1,776
61,510
65,525
64,514
68,803
Phoenix Group Holdings Annual Report and Accounts 2015Financials
98
STATEMENT OF CONSOLIDATED
FINANCIAL POSITION
As at 31 December 2015
Continued
ASSETS
Pension scheme asset
Intangible assets
Goodwill
Acquired in-force business
Customer relationships
Present value of future profits
Property, plant and equipment
Investment property
Financial assets
Loans and receivables
Derivatives
Equities
Investment in joint venture
Fixed and variable rate income securities
Collective investment schemes
Insurance assets
Reinsurers’ share of insurance contract liabilities
Reinsurance receivables
Insurance contract receivables
Current tax
Prepayments and accrued income
Other receivables
Cash and cash equivalents
Assets classified as held for sale
Total assets
Notes
2015
£m
2014
£m
G6
506
426
39
1,265
202
17
39
1,413
217
23
G7
1,523
1,692
G8
19
15
G9
1,942
1,858
E3
577
1,498
12,351
–
196
2,558
13,168
133
31,814
34,384
3,826
3,583
E1
50,066
54,022
F1
3,954
2,772
29
9
67
8
3,992
2,847
47
335
474
3,940
1,670
8
405
750
5,067
1,713
64,514
68,803
G2
G10
G11
I1.2
Phoenix Group Holdings Annual Report and Accounts 2015
STATEMENT OF CONSOLIDATED
CASH FLOWS
For the year ended 31 December 2015
99
Cash flows from operating activities
Cash utilised by operations
Taxation paid
Net cash flows from operating activities
Cash flows from investing activities
Proceeds from disposal of businesses, net of cash disposed of
Net cash flows from investing activities
Cash flows from financing activities
Proceeds from issuing ordinary shares, net of associated commission and expenses
Proceeds from issuing shares in subsidiaries to non-controlling interests
Ordinary share dividends paid
Coupon paid on Perpetual Reset Capital Securities
Cash settlement of Perpetual Reset Capital Securities
Fees associated with the issuance of subordinated notes
Dividends paid to non-controlling interests
Repayment of policyholder borrowings
Repayment of shareholder borrowings
Proceeds from new policyholder borrowings, net of associated expenses
Proceeds from new shareholder borrowings, net of associated expenses
Interest paid on policyholder borrowings
Interest paid on shareholder borrowings
Net cash flows from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Separate disclosure of the cash flows relating to discontinued operations is provided in note I1.1.2.
Notes
I3
I1
D3
B4
D3
2015
£m
(576)
(110)
(686)
2014
£m
(3,716)
(54)
(3,770)
–
–
332
332
2
35
(120)
(20)
(3)
(3)
(23)
(118)
(190)
99
–
(15)
(85)
(441)
1
82
(120)
(26)
–
–
(22)
(35)
(1,769)
–
1,184
(17)
(67)
(789)
(1,127)
(4,227)
5,067
3,940
9,294
5,067
G11
Phoenix Group Holdings Annual Report and Accounts 2015Financials 100
STATEMENT OF CONSOLIDATED
CHANGES IN EQUITY
For the year ended 31 December 2015
At 1 January 2015
Profit for the year
Other comprehensive (expense)/
income for the year
Total comprehensive
(expense)/income for the year
Issue of ordinary share capital,
net of associated commissions
and expenses
Dividends paid on ordinary shares
Dividends paid to non-controlling
interests
Coupon paid to non-controlling
interests, net of tax relief
Credit to equity for equity-settled
share-based payments
Shares in subsidiaries subscribed
for by non-controlling interests
Exchange of non-controlling
interests for subordinated notes
Loss on exchange of
non-controlling interests
Shares distributed by employee
benefit trust
Shares acquired by employee
benefit trust
At 31 December 2015
Share
capital
(note D1)
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Share
premium
£m
979
–
–
–
2
(120)
–
–
–
–
–
–
–
–
861
Shares held
by the
employee
benefit
trust and
Group
entities
(note D2)
£m
Foreign
currency
translation
reserve
£m
Owner-
occupied
property
revaluation
reserve
£m
(8)
103
–
–
–
–
–
–
–
–
–
–
–
9
(6)
(5)
3
(10)
(7)
–
–
–
–
–
–
–
–
–
–
96
–
–
4
4
–
–
–
–
–
–
–
–
–
–
4
Retained
earnings
£m
1,291
Non-
controlling
interests
(note D3)
£m
913
Total
£m
2,365
Total
£m
3,278
249
–
249
2
(120)
(23)
(15)
4
35
48
–
48
–
–
(23)
(15)
–
35
(388)
(388)
–
–
–
(12)
–
(6)
198
201
6
–
204
201
–
–
–
–
4
–
–
2
(120)
–
–
4
–
–
(12)
(12)
(9)
–
–
(6)
1,478
2,434
570
3,004
Phoenix Group Holdings Annual Report and Accounts 2015 STATEMENT OF CONSOLIDATED
CHANGES IN EQUITY
For the year ended 31 December 2014
101
Shares held
by the
employee
benefit
trust and
Group
entities
(note D2)
£m
(13)
Share
premium
£m
1,097
–
–
–
1
(120)
1
–
–
–
–
–
–
–
979
–
–
–
–
–
–
–
–
–
–
10
(8)
3
(8)
Share
capital
(note D1)
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Foreign
currency
translation
reserve
£m
Retained
earnings
£m
Total
£m
Non-
controlling
interests
(note D3)
£m
Total
£m
93
–
10
10
–
–
–
–
–
–
–
–
–
–
732
1,909
778
2,687
310
251
561
–
–
–
–
–
7
–
(10)
–
1
310
261
571
1
(120)
1
–
–
7
–
–
(8)
4
96
–
96
–
–
–
(22)
(21)
–
82
–
–
–
406
261
667
1
(120)
1
(22)
(21)
7
82
–
(8)
4
103
1,291
2,365
913
3,278
At 1 January 2014
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
Issue of ordinary share capital, net of
associated commissions and expenses
Dividends paid on ordinary shares
Dividends paid on ordinary shares held by the
employee trust and Group entities
Dividends paid to non-controlling interests
Coupon paid to non-controlling interests, net
of tax relief
Credit to equity for equity-settled share-based
payments
Shares in subsidiaries subscribed for by
non-controlling interests
Shares distributed by employee benefit trust
Shares acquired by employee benefit trust
Shares sold by Group entities
At 31 December 2014
Phoenix Group Holdings is subject to Cayman Islands Companies Law. Under Cayman Islands Companies Law distributions can be made out
of profits or share premium subject, in each case, to a solvency test. The solvency test is broadly consistent with the Group’s going concern
assessment criteria.
Retained earnings comprise the owners’ interest in the post acquisition retained earnings of the subsidiary companies and the retained earnings of
the Company. Distribution of retained earnings held within the long-term business funds and surplus assets held within the owners’ funds of the life
companies is subject to retaining sufficient funds to protect policyholders’ interests.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 102
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES
A2. ACCOUNTING POLICIES
The principal accounting policies have been consistently applied in
these consolidated financial statements. Where an accounting policy
can be directly attributed to a specific note to the consolidated financial
statements, the policy is presented within that note, with a view to
enabling greater understanding of the results and financial position of
the Group. All other significant accounting policies are disclosed below.
A2.1 Foreign currency transactions
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 Group’s presentation currency.
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:
Ɛ assets and liabilities are translated at the closing rate at the
period end;
Ɛ income, expenses and cash flows denominated in foreign currencies
are translated at average exchange rates; and
Ɛ all resulting exchange differences are recognised through the
statement of consolidated comprehensive income.
Foreign currency transactions are translated into the functional currency
of the transacting Group entity using exchange rates prevailing at
the date of translation. Foreign exchange gains and losses resulting
from the settlement of such transactions and from the translation of
monetary assets and liabilities denominated in foreign currencies are
recognised in the consolidated income statement.
Translation differences on debt securities and other monetary financial
assets measured at fair value through profit or loss are included
in foreign exchange gains and losses. Translation differences on
non-monetary items at fair value through profit or loss are reported
as part of the fair value gain or loss.
A1. BASIS OF PREPARATION
The consolidated financial statements for the year ended 31 December
2015 comprise the financial statements of Phoenix Group Holdings
(‘the Company’) and its subsidiaries (together referred to as ‘the Group’).
The consolidated financial statements have been prepared on a
going concern basis and on a historical cost basis except for investment
property, owner-occupied property and those financial assets, financial
liabilities and insurance and investment contracts with discretionary
participation features (‘DPF’) that have been measured at fair value.
Statement of compliance
The consolidated financial statements have been prepared, in
accordance with International Financial Reporting Standards (‘IFRSs’)
as issued by the International Accounting Standards Board (‘IASB’).
The financial statements are presented in sterling (£) rounded to the
nearest million except where otherwise stated.
Assets and liabilities are offset and the net amount reported in the
statement of consolidated financial position only when there is a legally
enforceable right to offset the recognised amounts and there is an
intention to settle on a net basis, or to realise the assets and settle
the liability simultaneously. Income and expenses are not offset in the
consolidated income statement unless required or permitted by an
IFRS or interpretation, as specifically disclosed in the accounting policies
of the Group.
Basis of consolidation
The consolidated financial statements include the financial statements
of the Company and its subsidiary undertakings, including collective
investment schemes, where the Group exercises overall control.
In accordance with the principles set out in IFRS 10 Consolidated
Financial Statements, the Group controls an investee if and only if the
Group has all the following:
Ɛ power over the investee;
Ɛ exposure, or rights, to variable returns from its involvement with the
investee; and
Ɛ the ability to use its power over the investee to affect its returns.
The Group considers all relevant facts and circumstances in assessing
whether it has power over an investee, including relevant activities,
substantive and protective rights, voting rights and purpose and design
of an investee. The Group re-assesses whether or not it controls an
investee if facts and circumstances indicate that there are changes to
one or more of the three elements of control. Further details about the
consolidation of subsidiaries, including collective investment schemes,
is included in note H1.
Phoenix Group Holdings Annual Report and Accounts 2015 103
A3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
A3.3 Impairment of intangible assets
The preparation of financial statements requires management to make
judgements, estimates and assumptions that affect the application
of policies and reported amounts of assets and liabilities, income and
expenses. The estimates and associated assumptions are based on
historical experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the
basis of the judgements about carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may
differ from these estimates.
Critical accounting estimates are those which involve the most complex
or subjective judgements or assessments. The areas of the Group’s
business that typically require such estimates are the measurement
of insurance and investment contract liabilities, determination of
the fair value of financial assets and liabilities, impairment tests for
intangible assets, income tax assets and liabilities and pension scheme
assets and liabilities. The determination of operating profit requires
management to make judgements, detail of which is included below
at A3.6.
A3.1 Insurance and investment contract liabilities
Insurance and investment contract liability accounting is discussed in
more detail in the accounting policies in note F1 with further detail of
the key assumptions made in determining insurance and investment
contract liabilities included in note F4.
Intangible assets are subject to regular impairment reviews as detailed
in the accounting policy in note G7. Impairments are measured as
the difference between the carrying value of a particular asset and its
recoverable amount. Impairments are recognised in the consolidated
income statement in the period in which they occur. Further details
of judgements made in testing intangible assets for impairment are
included in note G7.
A3.4 Income tax assets and liabilities
Deferred tax assets are recognised to the extent that they are regarded
as recoverable, that is to the extent that, on the basis of all the available
evidence, it can be regarded as more likely than not that there will
be suitable taxable profits against which the losses can be relieved.
Forecasts of future profitability are made which by their nature involve
management’s judgement.
The UK taxation regime applies separate rules to trading and capital
profits and losses. The distinction between temporary differences
that arise from items of either a capital or trading nature may affect
the recognition of deferred tax assets.
The determination of tax provisions included in current tax liabilities
involves the use of estimates and judgements.
The accounting policy for income taxes (both current and deferred) is
discussed in more detail in the accounting policy in notes C5 and G2.
A3.2 Fair value of financial assets and liabilities
A3.5 Pension scheme assets and liabilities
Financial assets and liabilities are measured at fair value and accounted
for as set out in the accounting policies in note E1. Where possible,
financial assets and liabilities are valued on the basis of listed market
prices by reference to quoted market bid prices for assets and
offer prices for liabilities. These are categorised as Level 1 financial
instruments and do not involve estimates. If prices are not readily
determinable, fair value is determined using valuation techniques
including pricing models, discounted cash flow techniques or broker
quotes. Financial instruments valued where valuation techniques based
on observable market data at the period end are categorised as Level
2 financial instruments. Financial instruments valued using valuation
techniques based on non-observable inputs are categorised as Level
3 financial instruments. Level 2 and Level 3 financial instruments
therefore involve the use of estimates. Further details of the estimates
made are included in note E2.
The valuation of pension scheme assets and liabilities is determined
using actuarial valuations that include a number of assumptions.
As defined benefit pension schemes are long-term in nature, such
assumptions are subject to significant uncertainty. Details of the key
assumptions used are shown in note G6.
A3.6 Operating profit
Operating profit is the Group’s non-GAAP measure of performance.
The Group is required to make judgements as to the appropriate
longer-term rates of investment return for the determination of
operating profit, as detailed in note B2, and as to what constitutes an
operating or non-operating item in accordance with the accounting
policy detailed in note B1.2.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 104
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
A. SIGNIFICANT ACCOUNTING POLICIES continued
A4. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
IN 2015
The consolidated financial statements for the year ended 31 December
2015, set out on pages 95 to 101, were authorised by the Board of
Directors for issue on 22 March 2016.
In preparing the consolidated financial statements, the Group has
adopted the following amendments effective from 1 January 2015:
Ɛ Annual Improvements 2010 – 2012 cycle; and
Ɛ Annual Improvements 2011 – 2013 cycle.
A5. NEW ACCOUNTING PRONOUNCEMENTS NOT
YET EFFECTIVE
The IASB has issued the following new or amended standards and
interpretations which apply from the dates shown. The Group has
decided not to early adopt any of these standards, interpretations or
amendments where this is permitted. The impact on the Group of
adoption is subject to evaluation:
Ɛ IFRS 9 Financial Instruments (2018). This standard will replace
IAS 39 Financial Instruments: Recognition and Measurement.
IFRS 9 was originally issued in November 2009 and introduced new
requirements for the classification and measurement of financial
assets. The standard was subsequently amended in October 2010
to include requirements for the classification and measurement
of financial liabilities and for derecognition and in November
2013 to include new requirements for general hedge accounting.
Another revised version was issued in July 2014 to include a) an
expected credit loss impairment model (to replace the incurred loss
model of IAS 39) and b) limited amendments to the classification
and measurement requirements by introducing a ‘fair value through
other comprehensive income’ option for certain simple debt
instruments. Under IFRS 9, all financial assets will be measured
either at amortised cost or fair value and the basis of classification
will depend on the business model and the contractual cash flow
characteristics of the financial assets. The Group expects to continue
to value the majority of its financial assets at fair value through profit
or loss on initial recognition, so as to eliminate or reduce any potential
accounting mismatch. The expected impact remains subject to
completion of a detailed review.
Ɛ IFRS 15 Revenue from Contracts with Customers (2018). IFRS 15
establishes a single comprehensive framework for determining
whether, how and when revenue is recognised. The standard does
not apply to insurance contracts and the financial instruments within
the scope of IAS 39. The Group anticipates that the application
of IFRS 15 in the future is likely to have limited impact on the
measurement and presentation of amounts reported in respect
of the Group’s financial statements.
Ɛ Annual Improvements to IFRS 2012–2014 cycle (2016).
Ɛ Clarification of Acceptable Methods of Depreciation and Amortisation
(Amendments to IAS 16 and IAS 38) (2016).
Ɛ Disclosure initiative (Amendments to IAS 1) (2016).
Ɛ Disclosure initiative (Amendments to IAS 7) (2017).
Ɛ Recognition of Deferred tax assets for unrealised losses
(Amendments to IAS 12) (2017).
Ɛ IFRS 16 Leases (2019). IFRS 16 will replace IAS 17 Leases. The new
standard removes the classification of leases as either operating or
finance leases for the lessee, thereby treating all leases as finance
leases. This will result in the recognition of a right-to use asset and
a lease liability for all of the Group’s previously classified operating
leases. Short-term leases (less than 12 months) and leases of
low-value assets are exempt from the requirements. The Group
anticipates that the application of IFRS 16 in the future is likely to
have limited impact on amounts reported in respect of the Group’s
financial statements.
B. EARNINGS PERFORMANCE
B1. SEGMENTAL ANALYSIS
The Group defines and presents operating segments based on the
information which is provided to the Board, and therefore segmental
information in this note is presented on a different basis from profit or
loss in the consolidated financial statements.
An operating segment is a component of the Group that engages
in business activities from which it may earn revenues and incur
expenses, including revenues and expenses relating to transactions
with other components of the Group.
For management purposes, the Group is organised into business
units based on their products and services and only has the
Phoenix Life operating segment during the reporting period. In the
comparative period, the Group had two operating segments as
follows:
Ɛ Phoenix Life – this segment provides a range of whole life, term
assurance and pension products; and
Ɛ Ignis – this segment provided investment management services to
the life companies within the Group and to third parties, covering
both retail and institutional investors. The segment has been
disposed of effective from 1 July 2014 (see note I1.1).
Segmental performance is evaluated based on profit or loss which,
in certain respects, is presented differently from profit or loss in the
consolidated financial statements. Revenues or expenses that are
not directly attributable to a particular segment are allocated between
segments where there is a reasonable basis for doing so.
Group financing (including finance costs) and owners’ taxes are
managed on a Group basis and are not allocated to individual
operating segments.
Inter-segment transactions are set on an arm’s length basis in a
manner similar to transactions with third parties. Segmental results
include those transfers between business segments which are then
eliminated on consolidation.
Predominantly all revenues from external customers are sourced in
the UK. No revenue transaction with a single customer external to the
Group amounts to greater than 10% of the Group’s revenue.
Predominantly all non-current assets are located in the UK. There are
no differences between the measurement of the assets and liabilities
reflected in the primary statements and that reported for the segments.
Phoenix Group Holdings Annual Report and Accounts 2015 105
Phoenix
Life
£m
Unallocated
Group
£m
(474)
95
1,048
7
676
441
(148)
(15)
(163)
–
–
16
–
16
–
–
–
–
Total
£m
(474)
95
1,064
7
692
441
(148)
(15)
(163)
(651)
(31)
(682)
(373)
(31)
(404)
B1.1 Segmental result
2015
Net premiums written
Fees
Net investment income
Other operating income
Net income
Net policyholder claims and benefits incurred
Amortisation and impairment:
Amortisation and impairment of acquired in-force business
Amortisation of customer relationships
Other expenses
Total expenses
Profit/(loss) before finance costs and tax
303
(15)
288
Finance costs
Profit/(loss) before tax
Tax attributable to policyholders’ returns
Segmental result before the tax attributable to owners
(60)
(76)
(136)
243
33
276
(91)
–
(91)
152
33
185
Phoenix Group Holdings Annual Report and Accounts 2015Financials 106
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
B. EARNINGS PERFORMANCE continued
B1. SEGMENTAL ANALYSIS continued
2014
Net premiums written
Fees from:
External customers
Other segment
Net investment income
Other operating income
Gain on transfer of business
Net income
Net policyholder claims and benefits incurred
Amortisation:
Amortisation of acquired in-force business
Amortisation of customer relationships and other intangibles
Other expenses
Total expenses
Profit/(loss) before finance costs and tax
Finance costs
Profit/(loss) before tax
Tax attributable to policyholders’ returns
Segmental result before the tax attributable to owners
Phoenix Life
£m
(811)
Ignis
£m
–
94
–
94
6,027
9
(18)
5,301
(3,733)
(98)
(15)
(113)
26
38
64
(6)
–
–
58
–
–
–
–
(926)
(47)
(4,772)
(47)
529
(91)
438
(129)
309
11
–
11
–
11
Unallocated
Group
£m
Eliminations
£m
Discontinued
operations
eliminations
£m
–
–
–
–
7
–
129
–
–
(38)
(38)
–
–
–
–
(26)
–
(26)
6
–
(107)
Total
£m
(811)
94
–
94
6,034
9
4
136
(38)
(127)
5,330
–
–
–
–
25
25
161
(65)
96
–
96
–
–
–
–
38
38
–
–
–
–
–
–
–
–
–
(3,733)
(98)
(15)
(113)
47
(863)
47
(4,709)
(80)
621
–
(156)
(80)
–
(80)
465
(129)
336
Phoenix Group Holdings Annual Report and Accounts 2015 107
B1.2 Reconciliation of operating profit before adjusting items to the segmental result
The Group has chosen to report a non-GAAP measure of performance being operating profit. Operating profit is considered to provide a
comparable measure of the underlying performance of the Group’s business as it excludes the impact of short-term economic volatility and other
one-off items. This measure incorporates an expected return, including a longer term return on financial investments backing shareholder and
policyholder funds over the period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes
the effect of variances in experience for non-economic items, such as mortality and expenses, and the effect of changes in non-economic
assumptions. It also incorporates the impacts of significant management actions where such actions are consistent with the Group’s core
operating activities (for example, actuarial modelling enhancements and data reviews).
Impacts arising from the difference between the actual and expected experience for economic items (on both assets and liabilities) and the
impacts of changes in economic assumptions on the valuation of liabilities are excluded from operating profit and are presented in profit before
the tax attributable to owners (see section B2). Phoenix Life operating profit is net of policyholder finance charges and policyholder tax.
Operating profit also excludes the impact of the following items:
Ɛ amortisation and impairments of intangible assets;
Ɛ finance costs attributable to owners;
Ɛ gains or losses on the disposal of subsidiaries, associates or joint ventures (net of related costs of disposal);
Ɛ the financial impacts of mandatory regulatory change;
Ɛ integration, restructuring or other significant one-off projects; and
Ɛ any other items which, in the Directors’ view, should be disclosed separately by virtue of their nature or incidence to enable a full understanding
of the Group’s financial performance.
2015
Operating profit/(loss) before adjusting items
Investment return variances and economic assumption changes on long-term business
Variance on owners’ funds
Amortisation of acquired in-force business
Amortisation of customer relationships
Non-recurring items
Financing costs attributable to owners
Segmental result before the tax attributable to owners
Non-recurring items include:
Phoenix
Life
£m
Unallocated
Group
£m
336
13
(7)
(75)
(15)
47
(23)
276
(12)
–
(5)
–
–
2
(76)
(91)
Total
£m
324
13
(12)
(75)
(15)
49
(99)
185
Ɛ gain of £49 million (net of a £64 million impairment of associated acquired in-force business) arising as a result of the reassurance arrangement
entered into with RGA International (see note F3.1);
Ɛ release of provisions associated with external regulatory changes, including the cap on workplace pension charges and the pension guidance
levy, of £17 million;
Ɛ corporate project costs of £13 million; and
Ɛ net other one-off items (including Solvency II implementation and systems transformation costs) totalling a cost of £4 million.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 108
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
B. EARNINGS PERFORMANCE continued
B1. SEGMENTAL ANALYSIS continued
2014
Operating profit/(loss) before adjusting items
Investment return variances and economic assumption changes on long-term business
Variance on owners’ funds
Amortisation of acquired in-force business
Amortisation of customer relationships
Non-recurring items
Financing costs attributable to owners
Segmental result before the tax attributable to owners
Adjust for:
Profit before the tax attributable to owners from discontinued operations (see note I1.1.1)
Profit before tax attributable to owners from continuing operations
Non-recurring items include:
Phoenix
Life
£m
487
12
(8)
(88)
(15)
(56)
(23)
309
Ignis
£m
17
–
–
–
–
(6)
–
11
Unallocated
Group
£m
(21)
–
(6)
–
–
188
(65)
96
Total
£m
483
12
(14)
(88)
(15)
126
(88)
416
(80)
336
Ɛ income received in relation to the close-out of the PGL Pension Scheme longevity agreement with the with-profit funds of £68 million
(see note G6.2);
Ɛ the profit arising as a result of the divestment of Ignis of £107 million (see note I1.1);
Ɛ costs associated with external regulatory changes, including the cap on workplace pension charges of £17 million;
Ɛ corporate project costs of £15 million; and
Ɛ net other one-off items (including Solvency II implementation and systems transformation costs) totalling a cost of £17 million.
B2. INVESTMENT RETURN VARIANCES AND ECONOMIC ASSUMPTION CHANGES
The long-term nature of much of the Group’s operations means that, for internal performance management, the effects of short-term economic
volatility are treated as non-operating items. The Group focuses instead on an operating profit measure that incorporates an expected return
on investments supporting its long-term business. The accounting policy adopted in the calculation of operating profit is detailed in note B1.2.
The methodology for the determination of the expected investment return is explained below together with an analysis of investment return
variances and economic assumption changes recognised outside of operating profit.
B2.1 Calculation of the long-term investment return
The expected return on investments for both owner and policyholder funds is based on opening economic assumptions applied to the funds
under management at the beginning of the reporting period. Expected investment return assumptions are derived actively, based on market
yields on risk-free fixed interest assets at the start of each financial year. The long-term risk-free rate is defined as the annualised return on the
FTSE UK Gilt Index plus 10bps. A risk premium of 300bps is added to the risk-free yield for equities, 200bps for properties and 100bps for other
fixed interest assets, to obtain investment return assumptions.
The principal assumptions underlying the calculation of the long-term investment return are:
Equities
Properties
Gilts (15 year gilt)
Other fixed interest
2015
%
5.3
4.3
2.3
3.3
2014
%
6.6
5.6
3.6
4.6
Phoenix Group Holdings Annual Report and Accounts 2015 109
B2.2 Life assurance business
Operating profit for life assurance business is based on expected investment returns on financial investments backing owners’ and policyholder
funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes
the effect of variance in experience for non-economic items, for example mortality, persistency and expenses, and the effect of changes in
non-economic assumptions. Changes due to economic items, for example market value movements and interest rate changes, which give rise
to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed
separately outside operating profit.
The movement in liabilities included in operating profit reflects both the change in liabilities due to the expected return on investments and the
impact of experience variances and assumption changes for non-economic items.
The effect of differences between actual and expected economic experience on liabilities, and changes to economic assumptions used to value
liabilities, are taken outside operating profit. For many types of long-term business, including unit-linked and with-profit funds, movements in asset
values are offset by corresponding changes in liabilities, limiting the net impact on profit. For other long-term business the profit impact of economic
volatility depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees.
The investment return variances and economic assumption changes excluded from the long-term business operating profit are as follows:
Investment return variances and economic assumption changes on long-term business
2015
£m
13
2014
£m
12
Positive investment return variances and economic assumption changes on long-term business of £13 million (2014: £12 million) include the
minority share of the result of the consolidated UKCPT property investment structure of £46 million (2014: £75 million) and a £19 million gain on
the purchase of a portfolio of equity release mortgages arising from the yield uplift on assets available to back annuity liabilities. Increases in yields
during the period have also had a positive impact reflecting short asset positions held relative to the longer term IFRS basis liabilities. These positive
items have been partly offset by the adverse impacts of changes in asset portfolios undertaken in preparation for the implementation of the new
Solvency II regime, together with the impact of widening credit spreads during the period.
B2.3 Owners’ funds
For non-long-term business including owners’ funds, the total investment income, including fair value gains, is analysed between a calculated
longer-term return and short-term fluctuations.
The variances excluded from operating profit in relation to owners’ funds are as follows:
Variances on owners’ funds of:
Subsidiary undertakings
The Company
2015
£m
2014
£m
(12)
–
(12)
(19)
5
(14)
The negative variance on owners’ funds of subsidiary undertakings of £12 million (2014: £19 million) is principally driven by fair value losses on
investments and hedging positions held by the shareholder funds and holding companies.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 110
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
B. EARNINGS PERFORMANCE continued
B3. EARNINGS PER SHARE
The Group calculates its basic earnings per share based on the present shares in issue using the earnings attributable to ordinary equity holders
of the parent, divided by the weighted average number of ordinary shares in issue during the year.
Diluted earnings per share are calculated based on the potential future shares in issue assuming the conversion of all potentially dilutive
ordinary shares. The weighted average number of ordinary shares in issue is adjusted to assume conversion of dilutive share awards granted
to employees and warrants.
B3.1 Basic earnings per share
The result attributable to owners of the parent for the purposes of computing earnings per share has been calculated as set out below. This is after
adjusting for the result attributable to non-controlling interests.
Profit for the period
Share of result attributable to non-controlling interests
Profit attributable to owners of the parent
Analysed as:
Profit attributable to owners of the parent from continuing operations
Profit attributable to owners of the parent from discontinued operations
The weighted average number of ordinary shares outstanding during the period is calculated as follows:
Issued ordinary shares at beginning of the period
Effect of ordinary shares issued
Own shares held by employee benefit trust and Group entities
Weighted average number of ordinary shares
Basic earnings per share is as follows:
Basic earnings per share from continuing operations
Basic earnings per share from discontinued operations
Total basic earnings per share
2015
£m
249
(48)
201
201
–
2014
£m
406
(96)
310
218
92
2015
Number
million
225
–
(1)
2014
Number
million
225
1
(1)
224
225
2015
pence
89.8
–
89.8
2014
pence
96.7
41.0
137.7
Phoenix Group Holdings Annual Report and Accounts 2015 111
B3.2 Diluted earnings per share
The result attributable to owners for the parent used in the calculation of diluted earnings per share is the same as that used in the basic earnings
per share calculation in B3.1 above. The diluted weighted average number of ordinary shares outstanding during the period is 225 million
(2014: 225 million). The Group’s deferred bonus share scheme and sharesave share-based schemes increased the weighted average number
of shares on a diluted basis by 490,276 shares for the year ended 31 December 2015 (2014: 465,256).
Diluted earnings per share is as follows:
Diluted earnings per share from continuing operations
Diluted earnings per share from discontinued operations
Total diluted earnings per share
2015
pence
89.6
–
89.6
2014
pence
96.5
41.0
137.5
The following instruments could potentially dilute basic earnings per share in the future but have not been included in the diluted earnings per share
figure because they did not have a dilutive effect for the periods presented due to the exercise price being significantly higher than the share price
of the Company:
Ɛ 5 million warrants issued to certain entities providing finance to the Group on 2 September 2009.
Details of the warrants are given in note E3.2.
B4. DIVIDENDS
Final dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Group’s owners.
Interim dividends are deducted from equity when they are paid.
As permitted by Cayman Islands Companies Law, dividends have been charged within equity against the share premium account. Where
shareholders exercise a scrip dividend option, the amount of the related dividend is credited to share premium in the statement of consolidated
changes in equity and an amount equal to the nominal value of the shares issued is transferred from share premium to share capital.
Dividends for the year that are approved after the reporting period are dealt with as an event after the reporting period.
Declared dividends are those that are appropriately authorised and are no longer at the discretion of the entity.
Dividends declared and paid in 2015
2015
£m
120
2014
£m
120
On 17 March 2015, the Board recommended a final dividend of 26.7p per share in respect of the year ended 31 December 2014. The dividend
was approved at the Company’s Annual General Meeting, which was held on 23 April 2015. The dividend amounted to £60 million and was paid
on 27 April 2015.
On 19 August 2015, the Board declared an interim dividend of 26.7p per share for the half year ended 30 June 2015. The dividend amounted
to £60 million and was paid on 1 October 2015.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 112
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
C. OTHER CONSOLIDATED INCOME STATEMENT NOTES
C1. NET INVESTMENT INCOME
Net investment income comprises interest, dividends, rents receivable, net interest income/(expense) on the net defined benefit asset/(liability),
fair value gains and losses on financial assets and investment property at fair value and impairment losses on loans and receivables.
Interest income is recognised in the consolidated income statement as it accrues using the effective interest method.
Dividend income is recognised in the consolidated income statement on the date the right to receive payment is established, which in the case
of listed securities is the ex-dividend date.
Rental income from investment property is recognised in the consolidated income statement on a straight-line basis over the term of the lease.
Lease incentives granted are recognised as an integral part of the total rental income.
Fair value gains and losses on financial assets designated at fair value through profit or loss are recognised in the consolidated income statement.
Fair value gains and losses includes both realised and unrealised gains and losses.
Investment income
Interest income on loans and receivables at amortised cost
Interest income on financial assets designated at fair value through profit or loss on initial recognition
Dividend income
Rental income
Net interest income on Group defined benefit pension scheme asset/liability
Fair value (losses)/gains
Loans and receivables at amortised cost
Financial assets at fair value through profit or loss
Designated upon initial recognition
Held for trading – derivatives
Investment property
Net investment income
C2. ADMINISTRATIVE EXPENSES
Administrative expenses are recognised in the consolidated income statement as incurred.
Employee costs
Outsourcer expenses
Professional fees
Office costs
Investment management expenses and transaction costs
Direct costs of life companies
Direct costs of collective investment schemes
Pension administrative expenses
Other
2015
£m
2014
£m
3
1,076
911
90
17
4
1,156
1,098
95
4
2,097
2,357
–
1
(1,178)
5
140
(1,033)
1,064
2,333
1,143
200
3,677
6,034
2015
£m
2014
£m
81
97
33
23
150
15
17
5
9
86
106
29
23
122
9
26
7
21
430
429
Phoenix Group Holdings Annual Report and Accounts 2015
Employee costs comprise:
Wages and salaries
Social security contributions
Average number of persons employed
C3. AUDITOR’S REMUNERATION
During the year the Group obtained the following services from its auditor at costs as detailed in the table below.
Audit of the consolidated financial statements
Audit of the Company’s subsidiaries
Audit of MCEV supplementary information
Audit-related assurance services
Reporting accountant assurance services
Total fee for assurance services
Tax advisory services
Corporate finance services
Other non-audit services
Total fees for other services
Total auditor’s remuneration
113
2015
£m
2014
£m
73
8
81
77
9
86
2015
Number
2014
Number
750
757
2015
£m
2014
£m
0.5
2.3
0.4
3.2
0.9
0.1
4.2
0.1
0.1
0.3
0.5
4.7
0.5
2.3
0.4
3.2
0.8
0.2
4.2
–
0.6
0.3
0.9
5.1
No services were provided by the Company’s auditors to the Group’s pension schemes in either 2015 or 2014.
Audit-related assurance services includes fees payable for services where the reporting is required by law or regulation to be provided by the
auditor, such as reporting on regulatory returns. It also includes fees payable in respect of reviews of interim financial information and services
where the work is integrated with the audit itself.
Reporting accountant assurance services relate to assurance reporting on historical information included within investment circulars.
Corporate finance services fees were £0.1 million (2014: £0.6 million). Fees for 2014 primarily related to services performed in association with the
divestment of Ignis, where management concluded that significant efficiencies would arise as a result of engaging the Group’s auditors to perform
the work.
Other non-audit services of £0.3 million (2014: £0.3 million) primarily includes fees payable in respect of assurance services related to applications
made to the regulator with regard to the Group’s implementation of Solvency II. In 2014, the fees principally related to a Solvency II preparedness
review required in response to an industry-wide request from the Prudential Regulation Authority (‘PRA’).
Phoenix Group Holdings Annual Report and Accounts 2015Financials 114
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
C. OTHER CONSOLIDATED INCOME STATEMENT NOTES continued
C4. FINANCE COSTS
Interest payable is recognised in the consolidated income statement as it accrues and is calculated using the effective interest method.
This note analyses the interest costs on the Group’s borrowings which are described in note E5.
Interest expense
On financial liabilities at amortised cost
On financial liabilities at fair value through profit or loss
Attributable to:
– policyholders
– owners
C5. TAX (CREDIT)/CHARGE
2015
£m
2014
£m
122
14
136
37
99
136
141
15
156
68
88
156
Income tax comprises current and deferred tax. Income tax is recognised in the consolidated income statement except to the extent that it
relates to items recognised in the statement of consolidated comprehensive income or the statement of consolidated changes in equity, in which
case it is recognised in these statements.
Current tax is the expected tax payable on the taxable income for the year, using tax rates and laws enacted or substantively enacted at the date
of the statement of consolidated financial position together with adjustments to tax payable in respect of previous years.
The tax charge is analysed between tax that is payable in respect of policyholders’ returns and tax that is payable on owners’ returns.
This allocation is calculated based on an assessment of the effective rate of tax that is applicable to owners for the year.
C5.1 Current year tax (credit)/charge
Current tax:
UK corporation tax
Overseas tax
Adjustment in respect of prior years
Total current tax (credit)/charge
Deferred tax:
Origination and reversal of temporary differences
Change in the rate of UK corporation tax
Movement in unrecognised deferred tax
Total deferred tax (credit)/charge
Total tax (credit)/charge
Attributable to:
– policyholders
– owners
Total tax (credit)/charge
2015
£m
2014
£m
11
8
19
(99)
(80)
7
(24)
–
(17)
(97)
(33)
(64)
(97)
120
18
138
(11)
127
28
(2)
(2)
24
151
129
22
151
The Group, as a proxy for policyholders in the UK, is required to pay taxes on investment income and gains each year. Accordingly, the tax credit or
expense attributable to UK life assurance policyholder earnings is included in income tax expense. The tax (credit)/charge attributable to policyholder
earnings was £(33) million (2014: £129 million).
Phoenix Group Holdings Annual Report and Accounts 2015 C5.2 Tax charged/(credited) to other comprehensive income
Current tax credit on share schemes
Deferred tax charge/(credit) on defined benefit schemes
Deferred tax on share schemes
C5.3 Reconciliation of tax (credit)/charge
Profit before tax
Policyholder tax credit/(charge)
Profit before the tax attributable to owners
Tax at standard UK1 rate of 20.25% (2014: 21.5%)
Non-taxable income and gains
Disallowable expenses
Prior year tax credit for shareholders2
Movement on acquired in-force amortisation at less than 20.25% (2014: 21.5%)
Profits taxed at rates other than 20.25% (2014: 21.5%)
Recognition of previously unrecognised deferred tax assets
Deferred tax rate change
Temporary differences not valued
Other
Owners’ tax (credit)/charge
Policyholder tax (credit)/charge
Total tax (credit)/charge for the period
115
2015
£m
(1)
5
1
5
2015
£m
152
33
185
37
(13)
6
(41)
15
(36)
(6)
(24)
(1)
(1)
(64)
(33)
(97)
2014
£m
(2)
(9)
–
(11)
2014
£m
465
(129)
336
72
(6)
7
(16)
2
(21)
(19)
(7)
4
6
22
129
151
1 The Phoenix Life operating segment operates predominantly in the UK. The reconciliation of the tax (credit)/charge has, therefore, been completed by reference to the standard rate of UK tax
rather than by reference to the Jersey income tax rate of 0% which is applicable to Phoenix Group Holdings.
2 The prior year tax credit represents the impact of reaching agreement with HMRC in respect of the Group’s uncertain tax positions for the years 2007 to 2014. This includes the increased
utilisation of tax losses previously unrecognised, the effect of the reduction in corporate tax rates across the years and a release of tax provisions.
D. EQUITY
D1. SHARE CAPITAL
The Group has issued ordinary shares which are classified as equity. Incremental external costs that are directly attributable to the issue of these
shares are recognised in equity, net of tax.
Authorised:
410 million (2014: 410 million) ordinary shares of €0.0001 each
Issued and fully paid:
2015
£
2014
£
31,750
31,750
225.4 million (2014: 225.1 million) ordinary shares of €0.0001 each
18,444
18,439
The holders of ordinary shares are entitled to one vote per share on matters to be voted on by owners and to receive such dividends, if any, as may
be declared by the Board of Directors in its discretion out of legally available profits. Movements in issued share capital during the year:
Phoenix Group Holdings Annual Report and Accounts 2015Financials 116
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
D. EQUITY continued
D1. SHARE CAPITAL continued
2015
Shares in issue at 1 January
Other ordinary shares issued in the period
Shares in issue at 31 December
Number
£
225,090,284
18,439
329,162
5
225,419,446
18,444
During the year, the Company issued 329,162 shares at a premium of £2 million in order to satisfy its obligations to employees under the Group’s
sharesave schemes (see note I2).
2014
Shares in issue at 1 January
Other ordinary shares issued in the period
Shares in issue at 31 December
Number
£
224,818,301
18,418
271,983
21
225,090,284
18,439
During 2014, the Company issued 271,983 shares at a premium of £1 million in order to satisfy its obligations to employees under the Group’s
sharesave schemes.
D2. SHARES HELD BY THE EMPLOYEE BENEFIT TRUST AND GROUP ENTITIES
Where the Phoenix Group Holdings Employee Benefit Trust (‘PGH EBT’) or other Group entity acquires shares in the Company or obtains rights
to purchase its shares, the consideration paid (including any attributable transaction costs, net of tax) is shown as a deduction from owners’
equity. Gains and losses on sales of shares held by the PGH EBT and Group entities are charged or credited to the own shares account in equity.
The PGH EBT holds shares to satisfy awards granted to employees under the Group’s share-based payment schemes.
At 1 January
Shares acquired by the PGH EBT in year
Shares awarded to employees by the PGH EBT in year
Shares sold by other Group entities in year
At 31 December
2015
£m
2014
£m
8
6
(9)
–
5
13
8
(10)
(3)
8
During the year 1,398,290 (2014: 1,478,921) shares were awarded to employees by the PGH EBT and 735,068 (2014: 1,200,000) shares were
purchased. The number of shares held by the PGH EBT at 31 December 2015 was 587,334 (2014: 1,250,556).
The Company provides the PGH EBT with an interest-free facility arrangement to enable it to purchase the shares. Details of this loan are included
in note 9 to the parent company accounts.
In the prior period 540,612 shares held by other Group entities were sold. The number of shares held by other Group entities as at 31 December
2015 was nil (2014: nil).
Phoenix Group Holdings Annual Report and Accounts 2015 117
D3. NON-CONTROLLING INTERESTS
Non-controlling interests are stated at the share of net assets attributed to the non-controlling interest holder at the time of acquisition,
adjusted or the relevant share of subsequent changes in equity.
2015
At 1 January
Profit for the year
Dividends paid
Coupon paid, net of tax relief
Exchange of Notes for subordinated notes
Shares in subsidiaries subscribed for by non-controlling interests
At 31 December
2014
At 1 January
Profit for the year
Dividends paid
Coupon paid, net of tax relief
Shares in subsidiaries subscribed for by non-controlling interests
At 31 December
D3.1 Perpetual Reset Capital Securities
Perpetual
Reset
Capital
Securities
£m
UK
Commercial
Property
Trust
Limited
£m
408
2
–
(15)
(388)
–
7
505
46
(23)
–
–
35
563
Perpetual
Reset
Capital
Securities
£m
UK
Commercial
Property
Trust Limited
£m
408
21
–
(21)
–
408
370
75
(22)
–
82
505
Total
£m
913
48
(23)
(15)
(388)
35
570
Total
£m
778
96
(22)
(21)
82
913
On 1 January 2010, Pearl Group Holdings (No. 1) Limited (‘PGH1’) had in issue £500 million of Perpetual Reset Capital Securities (‘the Notes’)
which are admitted to the Official List of the UK Listing Authority and to trading on the LSE. Following amendments made to the Notes in 2010,
the principal amount outstanding was £425 million.
On 23 January 2015, the Group exchanged 99% of the Notes for £428 million of new subordinated notes, issued by PGH Capital Limited, and
£3 million of cash (see note E5 for further details). £32 million of the new notes are held by Group companies and are therefore eliminated in
the preparation of the consolidated financial statements. The exchange resulted in a loss of £12 million which has been recognised in equity.
The remaining Notes outstanding at 31 December 2015 had a principal amount outstanding of £6 million.
The Notes are unsecured obligations of PGH1 and are subordinate to the claims of senior creditors. Payments in respect of the Notes are
conditional upon PGH1 being solvent at the time of payment and immediately following such payment.
The outstanding Notes have no fixed maturity date and coupon payments may be deferred at the option of PGH1; accordingly the Notes meet
the definition of equity for financial reporting purposes and are disclosed as a non-controlling interest in the consolidated financial statements.
The remaining Notes may be redeemed at par at the option of PGH1 on the first reset date of 25 April 2016 or on any coupon payment date
thereafter. Redemption is subject to the agreement of the PRA. In certain circumstances PGH1 has the right to substitute the Notes or to redeem
the Notes before the first reset date.
Coupons are payable annually in arrears on 25 April, at the rate of 6.5864% per annum, until the first reset date. Thereafter coupons are payable
semi-annually at 2.73% per annum over the then prevailing offered rate for six month sterling deposits.
If PGH1 opts to defer a coupon payment, then PGH1 has the option to either leave the coupon outstanding or satisfy the deferred coupon payment
through the alternative coupon satisfaction mechanism (the ‘ACSM’), which involves the issue by PGH1 of ordinary shares in order to fund payment
of the deferred coupon.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 118
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
D. EQUITY continued
E. FINANCIAL ASSETS & LIABILITIES
D3. NON-CONTROLLING INTERESTS continued
For so long as a deferred coupon payment has not been satisfied,
PGH1 may not declare, pay or distribute a dividend on any of its
securities in issue ranking junior to the Notes, including the ordinary
shares of PGH1 or any parity securities or, except in particular
circumstances, redeem, purchase or otherwise acquire any of its
securities in issue ranking junior to the Notes, including its ordinary
shares or any parity securities. These restrictions would also apply
to the Company until the deferred coupon payment is satisfied.
On 23 January 2015, the coupon that was due on the Notes
was settled with the noteholders that exchanged their Notes.
On 25 April 2015, the 2015 coupon was settled in full with the
remaining noteholders.
On 21 March 2016, PGH1 gave notice to the noteholders to redeem
the remaining Notes on 25 April 2016.
E1. FAIR VALUES
Financial assets
Purchases and sales of financial assets are recognised on the trade
date, which is the date that the Group commits to purchase or sell
the asset.
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. For the majority of the Group’s loans and receivables these
investments are initially recognised at cost, being the fair value
of the consideration paid for the acquisition of the investment.
All transaction costs directly attributable to the acquisition are
also included in the cost of the investment. Subsequent to initial
recognition, these investments are carried at amortised cost, using
the effective interest method. The Group holds a portfolio of loans
that are designated at fair value through profit or loss.
D3.2 UK Commercial Property Trust Limited
UK Commercial Property Trust Limited (‘UKCPT’) is a property
investment subsidiary which is domiciled in Guernsey and is admitted
to the Official List of the UK Listing Authority and to trading on the LSE.
Derivative financial instruments are classified as held for trading.
They are recognised initially at fair value and subsequently are
remeasured to fair value. The gain or loss on remeasurement to
fair value is recognised in the consolidated income statement.
As at 31 December 2015 the Group held 50% (2014: 53%) of the
issued share capital of UKCPT. The Group’s interest in UKCPT is held
in the with-profit funds of the Group’s life companies. Therefore, the
shareholder exposure to the results of UKCPT is limited to the impact
of those results on the shareholder share of distributed profits of the
relevant fund.
Summary financial information for the UKCPT is shown below:
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Revenue
Profit before tax
Income tax
Profit for the year after tax
2015
£m
683
17
(124)
(13)
563
58
46
–
46
2014
£m
612
14
(111)
(10)
505
86
75
–
75
Equities, fixed and variable rate income securities, collective
investment schemes and certain loans and receivables are
designated at fair value through profit or loss and accordingly are
stated in the statement of consolidated financial position at fair value.
They are designated at fair value through profit or loss because
this is reflective of the manner in which the financial assets are
managed and reduces a measurement inconsistency that would
otherwise arise with regard to the insurance liabilities that the assets
are backing.
Impairment of financial assets
The Group assesses at each period end whether a financial asset
or group of financial assets held at amortised cost is impaired.
The Group first assesses whether objective evidence of impairment
exists. If it is determined that no objective evidence of impairment
exists for an individually assessed financial asset, the asset is included
in a group of financial assets with similar credit risk characteristics and
that group of financial assets is collectively assessed for impairment.
Assets that are individually assessed for impairment and for which
an impairment loss is, or continues to be recognised, are not included
in the collective assessment of impairment.
Phoenix Group Holdings Annual Report and Accounts 2015 119
Fair value estimation
The fair value of financial instruments traded in active markets such
as publicly traded securities and derivatives are based on quoted
market prices at the period end. The quoted market price used for
financial assets is the applicable bid price on the period end date.
The fair value of investments that are not traded in an active market is
determined using valuation techniques such as broker quotes, pricing
models or discounted cash flow techniques. Where pricing models
are used, inputs are based on market related data at the period end.
Where discounted cash flow techniques are used, estimated future
cash flows are based on contractual cash flows using current market
conditions and market calibrated discount rates and interest rate
assumptions for similar instruments.
For units in unit trusts and shares in open-ended investment
companies, fair value is determined by reference to published
bid-values. The fair value of receivables and floating rate and
overnight deposits with credit institutions is their carrying value.
The fair value of fixed interest-bearing deposits is estimated using
discounted cash flow techniques.
Joint ventures
Investments in joint ventures that are held for investment purposes
are accounted for under IAS 39 Financial Instruments: Recognition
and Measurement as permitted by IAS 28 Investments in Associates
and Joint Ventures. These are measured at fair value through profit
or loss. There are no investments in joint ventures which are of a
strategic nature.
Financial liabilities
On initial recognition, financial liabilities are recognised when due
and measured at the fair value of the consideration received less
directly attributable transaction costs (with the exception of liabilities
at fair value through profit or loss for which all transaction costs
are expensed).
Subsequent to initial recognition, financial liabilities (except for liabilities
under investment contracts and other liabilities designated at fair
value through profit or loss) are measured at amortised cost using
the effective interest method.
Financial liabilities are designated upon initial recognition at fair value
through profit or loss and where doing so results in more meaningful
information because either:
Ɛ it eliminates or significantly reduces accounting mismatches
that would otherwise arise from measuring assets or liabilities or
recognising the gains and losses on them on different bases; or
Ɛ a group of financial assets, financial liabilities or both is managed
and its performance is evaluated and managed on a fair value basis,
in accordance with a documented risk management or investment
strategy, and information about the investments is provided
internally on that basis to the Group’s key management personnel.
Investment contracts without DPF
Contracts under which the transfer of insurance risk to the Group from
the policyholder is not significant are classified as investment contracts
and accounted for as financial liabilities.
Receipts and payments on investment contracts without DPF
are accounted for using deposit accounting, under which the
amounts collected and paid out are recognised in the statement
of consolidated financial position as an adjustment to the liability
to the policyholder.
The valuation of liabilities on unit-linked contracts is held at the fair
value of the related assets and liabilities. The liability is the sum of
the unit-linked liabilities plus an additional amount to cover the present
value of the excess of future policy costs over future charges.
Movements in the fair value of investment contracts without DPF
are included in the ‘change in investment contract liabilities’ in the
consolidated income statement.
Investment contract policyholders are charged for policy administration
services, investment management services, surrenders and other
contract fees. These fees are recognised as revenue over the
period in which the related services are performed. If the fees are
for services provided in future periods, then they are deferred and
recognised over those periods. ‘Front end’ fees are charged on some
non-participating investment contracts. Where the non-participating
investment contract is measured at fair value, such fees which relate
to the provision of investment management services are deferred
and recognised as the services are provided.
Deposits from reinsurers
It is the Group’s practice to obtain collateral to cover certain reinsurance
transactions, usually in the form of cash or marketable securities.
Where cash collateral is available to the Group for investment purposes,
it is recognised as a ‘financial asset’ and the collateral repayable is
recognised as ‘deposits received from reinsurers’ in the statement of
consolidated financial position.
Net asset value attributable to unitholders
The net asset value attributable to unitholders represents the non-
controlling interest in collective investment schemes which are
consolidated by the Group. This interest is classified at fair value
through profit or loss and measured at fair value, which is equal to the
bid value of the number of units of the collective investment scheme
not owned by the Group.
Obligations for repayment of collateral received
It is the Group’s practice to obtain collateral in stock lending and
derivative transactions, usually in the form of cash or marketable
securities. Where cash collateral is available to the Group for
investment purposes, it is recognised as a ‘financial asset’ and the
collateral repayable is recognised as ‘obligations for repayment of
collateral received’ in the statement of consolidated financial position.
The ‘obligations for repayment of collateral received’ are measured at
amortised cost, which in the case of cash is equivalent to the fair value
of the consideration received.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 120
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
E. FINANCIAL ASSETS & LIABILITIES continued
E1. FAIR VALUES continued
The table below sets out a comparison of the carrying amounts and fair values of financial instruments as at 31 December 2015:
2015
Financial assets measured at carrying and fair values
Financial assets at fair value through profit or loss:
Held for trading – derivatives
Designated upon initial recognition:
Loans and receivables
Equities1
Investment in joint venture
Fixed and variable rate income securities
Collective investment schemes 1
Loans and receivables at amortised cost
Less amounts classified as held for sale (see note I1.2)
Carrying value
Amounts
due for
settlement
after
12 months
£m
Total
£m
Fair value
£m
1,498
1,335
1,498
268
12,351
149
31,814
3,826
309
50,215
(149)
245
–
–
24,176
–
24
–
268
12,351
149
31,814
3,826
309
50,215
(149)
Total financial assets
50,066
50,066
Financial liabilities measured at carrying and fair values
Financial liabilities at fair value through profit or loss:
Held for trading – derivatives
Designated upon initial recognition:
Borrowings
Net asset value attributable to unitholders 1
Investment contract liabilities 1
Financial liabilities measured at amortised cost:
Borrowings
Deposits received from reinsurers
Obligations for repayment of collateral received 2
Total financial liabilities
Carrying value
Amounts
due for
settlement
after
12 months
£m
Total
£m
Fair value
£m
1,360
1,255
1,360
194
5,120
7,905
194
–
–
194
5,120
7,905
1,804
1,772
1,907
378
725
17,486
347
–
378
–
16,864
1 These assets and liabilities have no expected settlement date.
2 These liabilities have no expected settlement date. As the obligations relate to the repayment of collateral received in the form of cash, the liability is stated at the value of the consideration
received and therefore no fair value has been disclosed.
Phoenix Group Holdings Annual Report and Accounts 2015
121
Carrying value
Amounts
due for
settlement
after
12 months
£m
Total
£m
Fair value
£m
2,558
2,112
2,558
13,168
133
–
–
13,168
133
34,384
27,244
34,384
3,583
196
54,022
–
36
3,583
196
54,022
Carrying value
Amounts
due for
settlement
after
12 months
£m
Total
£m
Fair value
£m
2,192
2,122
2,192
184
4,659
8,451
184
–
–
184
4,659
8,451
1,578
1,425
1,698
408
954
18,426
375
–
408
–
17,592
2014
Financial assets measured at carrying and fair values
Financial assets at fair value through profit or loss:
Held for trading – derivatives
Designated upon initial recognition:
Equities 1
Investment in joint venture 1
Fixed and variable rate income securities
Collective investment schemes 1
Loans and receivables at amortised cost
Total financial assets
Financial liabilities measured at carrying and fair values
Financial liabilities at fair value through profit or loss:
Held for trading – derivatives
Designated upon initial recognition:
Borrowings
Net asset value attributable to unitholders 1
Investment contract liabilities 1
Financial liabilities measured at amortised cost:
Borrowings
Deposits received from reinsurers
Obligations for repayment of collateral received 2
Total financial liabilities
1 These assets and liabilities have no expected settlement date.
2 These liabilities have no expected settlement date. As the obligations relate to the repayment of collateral received in the form of cash, the liability is stated at the value
of the consideration received and therefore no fair value has been disclosed.
Phoenix Group Holdings Annual Report and Accounts 2015Financials
122
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
E. FINANCIAL ASSETS & LIABILITIES continued
E2. FAIR VALUE HIERARCHY
E2.1 Determination of fair value and fair value hierarchy of financial instruments
Level 1 financial instruments
The fair value of financial instruments traded in active markets (such as exchange traded securities and derivatives) is based on quoted market
prices at the period end provided by recognised pricing services. Market depth and bid-ask spreads are used to corroborate whether an active
market exists for an instrument. Greater depth and narrower bid-ask spread indicates higher liquidity in the instrument and are classed as Level 1
inputs. For collective investment schemes, fair value is by reference to published bid prices.
Level 2 financial instruments
Financial instruments traded in active markets with less depth or wider bid-ask spreads which do not meet the classification as Level 1 inputs,
are classified as Level 2. The fair values of financial instruments not traded in active markets are determined using broker quotes or valuation
techniques with observable market inputs. Financial instruments valued using broker quotes are classified at Level 2, only where there is a
sufficient range of available quotes. The fair value of unquoted equities, over the counter derivatives, loans and deposits and collective investment
schemes, where published bid prices are not available, are estimated using pricing models or discounted cash flow techniques. Where pricing
models are used, inputs are based on market related data at the period end. Where discounted cash flows are used, estimated future cash flows
are based on management’s best estimates and the discount rate used is a market related rate for a similar instrument.
Level 3 financial instruments
The Group’s financial instruments determined by valuation techniques using non-observable market inputs are based on a combination of
independent third party evidence and internally developed models. In relation to investments in hedge funds and private equity investments,
non-observable third party evidence in the form of net asset valuation statements are used as the basis for the valuation. Adjustments may
be made to the net asset valuation where other evidence, for example recent sales of the underlying investments in the fund, indicates this is
required. Securities that are valued using broker quotes which could not be corroborated across a sufficient range of quotes are considered as
Level 3. For a small number of investment vehicles and debt securities, standard valuation models are used, as due to their nature and complexity
they have no external market. Inputs into such models are based on observable market data where applicable. The fair value of loans and
some borrowings with no external market is determined by internally developed discounted cash flow models using appropriate assumptions
corroborated with external market data where possible.
For financial instruments that are recognised at fair value on a recurring basis, the Company determines whether transfers have occurred
between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement
as a whole) at the start of each reporting period.
Phoenix Group Holdings Annual Report and Accounts 2015 123
E2.2 Fair value hierarchy of financial instruments
The tables below separately identify financial instruments carried at fair value from those measured on another basis but for which
fair value is disclosed.
2015
Financial assets measured at fair value
Derivatives
Financial assets designated at fair value through profit or loss upon initial recognition:
Level 1
£m
Level 2
£m
Level 3
£m
Total
fair value
£m
14
1,484
–
1,498
Loans and receivables
Equities
Investment in joint venture
Fixed and variable rate income securities
Collective investment schemes
Less amounts classified as held for sale (see note I1.2)
Total financial assets measured at fair value
Financial assets for which fair values are disclosed
Loans and receivables at amortised cost
Total financial assets
Financial liabilities measured at fair value
Derivatives
Financial liabilities designated at fair value through profit or loss upon initial recognition:
Borrowings
Net asset value attributable to unitholders
Investment contract liabilities
Total financial liabilities measured at fair value
Financial liabilities for which fair values are disclosed
Borrowings at amortised cost
Deposits received from reinsurers
Total financial liabilities for which fair values are disclosed
Total financial liabilities
–
11,734
–
–
11
–
20,346
11,138
646
3,098
35,178
–
268
606
149
330
82
268
12,351
149
31,814
3,826
11,795
1,435
48,408
–
(149)
(149)
35,192
13,279
1,286
49,757
–
309
–
309
35,192
13,588
1,286
50,066
Level 1
£m
Level 2
£m
Level 3
£m
Total
fair value
£m
33
1,327
–
1,360
–
5,120
–
5,120
–
–
7,905
7,905
194
–
–
194
5,120
7,905
194
13,219
5,153
9,232
194
14,579
–
–
–
970
378
1,348
5,153
10,580
937
–
937
1,131
1,907
378
2,285
16,864
Phoenix Group Holdings Annual Report and Accounts 2015Financials
124
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
E. FINANCIAL ASSETS & LIABILITIES continued
E2. FAIR VALUE HIERARCHY continued
2014
Financial assets measured at fair value
Derivatives
Financial assets designated at fair value through profit or loss upon initial recognition:
Equities
Investment in joint venture
Fixed and variable rate income securities
Collective investment schemes
Total financial assets measured at fair value
Financial assets for which fair values are disclosed
Loans and receivables at amortised cost
Total financial assets
Financial liabilities measured at fair value
Derivatives
Financial liabilities designated at fair value through profit or loss upon initial recognition:
Borrowings
Net asset value attributable to unitholders
Investment contract liabilities
Total financial liabilities measured at fair value
Financial liabilities for which fair values are disclosed
Borrowings at amortised cost
Deposits received from reinsurers
Total financial liabilities for which fair values are disclosed
Total financial liabilities
E2.3 Level 3 financial instrument sensitivities
Level 1
£m
Level 2
£m
Level 3
£m
Total
fair value
£m
18
2,540
–
2,558
12,315
–
24,639
2,579
149
–
9,010
923
704
133
735
81
13,168
133
34,384
3,583
39,533
10,082
1,653
51,268
39,551
12,622
1,653
53,826
–
36
186
222
39,551
12,658
1,839
54,048
Level 1
£m
Level 2
£m
Level 3
£m
Total
fair value
£m
40
2,151
1
2,192
–
4,659
–
4,659
–
–
8,451
8,451
184
–
–
184
4,659
8,451
184
13,294
4,699
10,602
185
15,486
–
–
–
553
408
961
4,699
11,563
1,145
–
1,145
1,330
1,698
408
2,106
17,592
Level 3 investments in indirect property, equities (including private equity) and collective investment schemes (including hedge funds) are valued
using net asset statements provided by independent third parties, and therefore no sensitivity analysis has been prepared.
Fixed and variable rate securities categorised as Level 3 investments, with the exception of a property investment structure and certain local
authority loans, are valued using broker quotes. Although such valuations are sensitive to estimates, it is believed that changing one or more of the
assumptions to reasonably possible alternative assumptions would not change the fair value significantly.
Level 3 investments in fixed and variable income securities include a property investment structure with a value of £36 million (2014: £59 million).
This investment was restructured during the year and inputs to the valuation have changed.
Phoenix Group Holdings Annual Report and Accounts 2015
125
The investment is valued by taking the fair value of the equity holdings in the structure, using market data less a discount spread to reflect reduced
liquidity due to redemption restrictions. The fair value of the debt in the structure is valued using a simple calculation model taking a comparable
overseas bond issue and applying a credit spread to reflect reduced liquidity.
The valuation of the debt investment is sensitive to a change in the credit spread whereby an increase of 100bps in the credit spread would
decrease the value by £1 million and a spread reduction of 100bps would increase the value by £1 million. The valuation of the equity investment
is sensitive to changes in the equity discount rate, whereby an increase of 5% in the discount spread would decrease the value by £2 million and
a 5% reduction would increase the value by £1 million.
Also included within fixed and variable rate securities are investments in local authority loans. These investments are valued using a simple
calculation model taking a comparable UK Treasury stock and applying a credit spread to reflect reduced liquidity. The credit spread is derived from
a sample broker quote. The valuations are sensitive to movements in this spread, an increase of 25bps would decrease the value by £1 million
(2014: £1 million) and a decrease of 25bps would increase the value by £1 million (2014: £1 million).
Included within loans and receivables are investments in equity release mortgages with a value of £268 million, acquired in January 2015. The loans
are valued using a discounted cash flow model, the key inputs to which include demographic assumptions, economic assumptions (including
house price index) and the use of a Black-Scholes model for valuation of the no-negative equity guarantee. The no-negative equity guarantee caps
the loan repayment in the event of death or entry into long-term care to be no greater than the sales proceeds from the property. The significant
sensitivities arise from movements in gilt curve, inflation rate and house prices.
An increase of 100bps in the gilt curve would decrease the value by £22 million and a decrease of 100bps would increase the value by £25 million.
An increase of 1% in the inflation rate would increase the value by £2 million and a decrease of 1% would decrease the value by £3 million.
An increase of 10% in house prices would increase the value by £1 million and a decrease of 10% would decrease the value by £1 million.
Borrowings measured at fair value and categorised as Level 3 financial liabilities comprise the property reversion loans, measured using an internally
developed model. The valuation is sensitive to key assumptions of the discount rate and the house price inflation rate. An increase in the discount
rate of 1% would decrease the value by £5 million and a decrease of 1% would increase the value by £5 million. An increase of 1% in the house
price inflation rate would increase the value by £6 million and a decrease of 1% would decrease the value by £6 million. Details of the valuation of
the underlying residential property reversions are included in note G9.
E2.4 Transfers of financial instruments between Level 1 and Level 2
2015
Financial assets measured at fair value
Financial assets designated at fair value through profit or loss upon initial recognition:
Fixed and variable rate income securities
2014
Financial assets measured at fair value
Financial assets designated at fair value through profit or loss upon initial recognition:
Fixed and variable rate income securities
Collective investment schemes
From
Level 1 to
Level 2
£m
From
Level 2 to
Level 1
£m
173
210
From
Level 1 to
Level 2
£m
From
Level 2 to
Level 1
£m
167
2
372
–
Consistent with the prior year, all the Group’s Level 1 and Level 2 assets have been valued using standard market pricing sources.
The application of the Group’s fair value hierarchy classification methodology at an individual security level, in particular observations with regard
to measures of market depth and bid-ask spreads, have resulted in an overall net movement of financial assets from Level 2 to Level 1 in the
current and comparative periods.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 126
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
E. FINANCIAL ASSETS & LIABILITIES continued
E2. FAIR VALUE HIERARCHY continued
E2.5 Movement in Level 3 financial instruments measured at fair value
2015
Total
(losses)/
gains in
income
statement
£m
At
1 January
2015
£m
Purchases
£m
Sales
£m
Transfers
from
Level 1
and Level 2
£m
Transfers
to
Level 1
and Level 2
£m
At
31 December
2015
£m
Unrealised
(losses)/
gains on
assets held
at end of
period
£m
–
704
133
735
81
1,653
(133)
1,520
(15)
(26)
16
(34)
10
(49)
(16)
(65)
298
79
–
378
28
783
–
783
At
1 January
2015
£m
Total
losses in
income
statement
£m
Purchases
£m
1
–
184
185
37
37
–
–
–
(15)
(152)
–
(724)
(37)
(928)
–
(928)
Sales
£m
–
(27)
(27)
–
4
–
–
–
4
–
4
–
(3)
–
(25)
–
(28)
–
(28)
268
606
149
330
82
1,435
(149)
1,286
(12)
(9)
16
(26)
5
(26)
–
(26)
Transfers
from
Level 1
and Level 2
£m
Transfers
to
Level 1
and Level 2
£m
At
31 December
2015
£m
Unrealised
losses on
liabilities
held at end
of period
£m
–
–
–
(1)
–
–
–
(1)
194
194
37
37
Financial assets
Financial assets designated at
fair value through profit or loss
upon initial recognition:
Loans and receivables
Equities
Investment in joint venture
Fixed and variable rate income
securities
Collective investment
schemes
Less amounts classified as held
for sale (see note I1.2)
Total financial assets
Financial liabilities
Derivatives
Financial liabilities designated at
fair value through profit or loss
upon initial recognition:
Borrowings
Total financial liabilities
Phoenix Group Holdings Annual Report and Accounts 2015
127
2014
Financial assets
Financial assets designated at
fair value through profit or loss
upon initial recognition:
Equities
Investment in joint venture
Fixed and variable rate income
securities
Collective investment
schemes
Total financial assets
Financial liabilities
Derivatives
Financial liabilities designated at
fair value through profit or loss
upon initial recognition:
Borrowings
Total financial liabilities
At
1 January
2014
£m
Total
gains in
income
statement
£m
Purchases
£m
Sales
£m
Transfers
from
Level 1
and Level 2
£m
Transfers
to
Level 1
and Level 2
£m
At
31 December
2014
£m
Unrealised
gains on
assets held at
end of period
£m
628
125
935
116
1,804
40
8
57
5
110
95
–
427
5
527
At
1 January
2014
£m
Total (gains)/
losses in
income
statement
£m
Purchases
£m
3
(2)
186
189
22
20
–
–
–
(59)
–
(502)
(45)
(606)
Sales
£m
–
(24)
(24)
–
–
8
–
8
–
–
(190)
–
(190)
704
133
735
81
1,653
60
8
19
5
92
Transfers
from
Level 1
and Level 2
£m
Transfers
to
Level 1
and Level 2
£m
At
31 December
2014
£m
Unrealised
losses on
liabilities held
at end of
period
£m
–
–
–
–
–
–
1
1
184
185
22
23
Updates to the Group’s observations with regard to measures of market depth, bid-ask spreads and the extent to which inputs to the valuation
of fixed and variable rate income securities are market observable resulted in a net transfer of financial assets from Level 3 to Level 1 and 2 in
both periods.
Gains and losses on Level 3 financial instruments are included in net investment income in the consolidated income statement. There were no
gains or losses recognised in other comprehensive income in either the current or comparative periods.
Phoenix Group Holdings Annual Report and Accounts 2015Financials
128
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
E. FINANCIAL ASSETS & LIABILITIES continued
E3. DERIVATIVES
The Group purchases derivative financial instruments in connection with the management of its insurance contract and investment contract
liabilities based on the principles of reduction of risk and efficient portfolio management. The Group does not typically hold derivatives for the
purpose of selling or repurchasing in the near term or with the objective of generating a profit from short-term fluctuations in price or margin.
Derivative financial instruments are classified as held for trading. They are recognised initially at fair value and subsequently are remeasured to
fair value. The gain or loss on remeasurement to fair value is recognised in the consolidated income statement.
E3.1 Summary
The fair values of derivative financial instruments are as follows:
Forward currency
Credit default options
Contract for differences
Interest rate swaps
Swaptions
Inflation swaps
Equity options
Stock index futures
Fixed income futures
Currency futures
E3.2 Warrants over shares
Assets
2015
£m
Liabilities
2015
£m
Assets
2014
£m
Liabilities
2014
£m
35
3
8
94
8
6
27
1
8
23
9
6
1,046
1,197
1,965
2,062
265
13
115
12
1
–
–
22
–
27
2
4
355
55
129
14
2
2
–
52
–
32
8
–
1,498
1,360
2,558
2,192
Lenders’ warrants
On 2 September 2009, the Company issued 5 million warrants over its shares to the Lenders. These warrants entitled the holder to purchase one
‘B’ ordinary share at a price of £15 per share, subject to adjustment. Following the achievement of the Company’s Premium Listing on 5 July 2010,
the Lenders’ warrants relate to ordinary shares rather than ‘B’ ordinary shares. At 31 December 2015 the terms of Lenders’ warrants entitled the
holders to purchase 1.027873 (2014: 1.027873) ordinary shares per Lenders’ warrant for an exercise price of £14.59 (2014: £14.59).
The exercise period terminates on the first to occur of:
Ɛ 15th anniversary of the date issued;
Ɛ date fixed for the redemption of the warrants; and
Ɛ liquidation of the Company.
All outstanding Lenders’ warrants may be redeemed at the option of the Company at any time after they become exercisable and prior to their
expiration at a price of €0.01 per warrant provided that the last closing bid price of the ordinary shares is equal to or exceeds £18.97 (2014: £18.97)
on each of 20 consecutive trading days. The Company must give not less than 30 days’ notice of the redemption date. Each warrant may then be
exercised by the warrant holder (in whole or any part) at its option.
The holders are entitled to exercise their warrants for cash, assignment of an amount of outstanding principal/accrued interest of any Global Debt
(i.e. any debt owed to the registered holder by any Group company) or on a cashless basis where the Company redeems the warrants. Any warrant
either not exercised or tendered back to the Company by the redemption date shall be cancelled on the books of the Company and have no further
value except for the €0.01 redemption price.
These Lenders’ warrants are not traded in an active market and have therefore been valued using an extended Black-Scholes valuation model
to capture the embedded barrier feature. The key assumptions used to ascertain a value as at 31 December 2015 are:
Ɛ the share price as at 31 December 2015 of £9.17;
Ɛ volatility of 30%;
Ɛ the warrants are not adjusted for dividends; and
Ɛ the valuation incorporates the impact of amending some of the terms of the warrants on 8 May 2012.
The value of the warrants at the year end was £100,000 (2014: £200,000).
Phoenix Group Holdings Annual Report and Accounts 2015 129
Royal London and IPO warrants
The exercise period for the Royal London and IPO warrants expired on 3 September 2014.
E4. COLLATERAL ARRANGEMENTS
The Group receives and pledges collateral in the form of cash or non-cash assets in respect of stock lending transactions, derivative contracts
and reinsurance arrangements in order to reduce the credit risk of these transactions. The amount and type of collateral required where the
Group receives collateral depends on an assessment of the credit risk of the counterparty.
Collateral received in the form of cash, where the Group has contractual rights to receive the cash flows generated, is recognised as an asset in
the statement of consolidated financial position with a corresponding liability for its repayment. Non-cash collateral received is not recognised
in the statement of consolidated financial position, unless the counterparty defaults on its obligations under the relevant agreement.
Non-cash collateral pledged where the Group retains the contractual rights to receive the cash flows generated is not derecognised from the
statement of consolidated financial position, unless the Group defaults on its obligations under the relevant agreement. Cash collateral pledged,
where the counterparty has contractual rights to receive the cash flows generated, is derecognised from the statement of consolidated financial
position and a corresponding receivable is recognised for its return.
E4.1 Financial instrument collateral arrangements
The Group has no financial assets and financial liabilities that have been offset in the statement of consolidated financial position as at 31 December
2015 (2014: none).
The table below contains disclosures related to financial assets and financial liabilities recognised in the statement of consolidated financial position
that are subject to enforceable master netting arrangements or similar agreements. Such agreements do not meet the criteria for offsetting in
the statement of consolidated financial position as the Group has no current legally enforceable right to offset recognised financial instruments.
Furthermore, certain related assets received as collateral under the netting arrangements will not be recognised in the statement of consolidated
financial position as the Group does not have permission to sell or re-pledge, except in the case of default. Details of the Group’s collateral
arrangements in respect of these recognised assets and liabilities are provided below.
2015
Financial assets
OTC derivatives
Exchange traded derivatives
Stock lending
Total
Financial liabilities
OTC derivatives
Exchange traded derivatives
Total
Related amounts not offset
Gross and net amounts
of recognised financial
assets
£m
Financial
instruments
received
£m
Cash
collateral
received
£m
Derivative
liabilities
£m
Net
amount
£m
1,483
15
254
1,752
259
–
272
531
725
447
–
–
4
–
725
451
52
11
(18)
45
Related amounts not offset
Gross and net amounts
of recognised financial
liabilities
£m
Financial
instruments
pledged
£m
Cash
collateral
pledged
£m
Derivative
assets
£m
Net
amount
£m
1,325
35
1,360
455
–
455
283
19
302
447
4
451
140
12
152
Phoenix Group Holdings Annual Report and Accounts 2015Financials 130
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
E. FINANCIAL ASSETS & LIABILITIES continued
E4. COLLATERAL ARRANGEMENTS continued
2014
Financial assets
OTC derivatives
Exchange traded derivatives
Stock lending
Repurchase arrangements
Total
Financial liabilities
OTC derivatives
Exchange traded derivatives
Total
E4.2 Derivative collateral arrangements
Related amounts not offset
Gross and net amounts
of recognised
financial assets
£m
Financial
instruments
received
£m
Cash
collateral
received
£m
Derivative
liabilities
£m
Net
amount
£m
2,540
18
143
84
2,785
405
–
152
–
557
870
1,082
–
3
84
957
9
–
–
1,091
183
9
(12)
–
180
Related amounts not offset
Gross and net amounts
of recognised
financial liabilities
£m
Financial
instruments
pledged
£m
Cash
collateral
pledged
£m
Derivative
assets
£m
Net
amount
£m
2,152
40
2,192
424
–
424
537
29
566
1,082
9
1,091
109
2
111
Assets accepted
It is the Group’s practice to obtain collateral to mitigate the counterparty risk related to over-the-counter (‘OTC’) derivatives usually in the form of
cash or marketable financial instruments.
The fair value of financial assets accepted as collateral for OTC derivatives but not recognised in the statement of consolidated financial position
amounts to £259 million (2014: £405 million).
The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2015 are set out below.
Financial assets
Financial liability
The maximum exposure to credit risk in respect of OTC derivative
assets is £1,483 million (2014: £2,540 million) of which credit risk of
£1,408 million (2014: £2,353 million) is mitigated by use of collateral
arrangements (which are settled net after taking account of any OTC
derivative liabilities owed to the counterparty).
Credit risk on exchange traded derivative assets of £15 million
(2014: £18 million) is mitigated through regular margining and the
protection offered by the exchange.
Assets pledged
The Group pledges collateral in respect of its OTC derivative liabilities.
The value of assets pledged at 31 December 2015 in respect of OTC
derivative liabilities of £1,325 million (2014: £2,152 million) amounted to
£738 million (2014: £961 million).
OTC derivatives
2015
£m
725
(725)
2014
£m
870
(870)
E4.3 Stock lending collateral arrangements
Certain of the Group’s consolidated collective investment schemes lend
financial assets held in their investment portfolios to other institutions.
The consolidated collective investment schemes conduct stock lending
only with well-established, reputable institutions in accordance with
established market conventions. The financial assets do not qualify
for derecognition as the Group retains all the risks and rewards of the
transferred assets except for the voting rights.
It is the Group’s practice to obtain collateral in stock lending transactions,
usually in the form of cash or marketable financial instruments.
The fair value of financial assets accepted as such collateral but
not recognised in the statement of financial position amounts to
£272 million (2014: £152 million).
No collateral has been accepted in the form of cash as at 31 December
2015 (2014: £3 million).
Phoenix Group Holdings Annual Report and Accounts 2015 131
The maximum exposure to credit risk in respect of stock lending
transactions is £254 million (2014: £143 million) of which credit risk
of £254 million (2014: £143 million) is mitigated through the use of
collateral arrangements.
E4.4 Repurchase agreements
In November 2014, the Group entered into agreements to sell securities
in the form of UK Treasury Stocks to another party with an agreement
to repurchase these stocks at an agreed date and price in the future.
This arrangement was wound down during 2015 and no related
balances are recognised in the statement of consolidated financial
position at 31 December 2015.
The repurchase arrangement was in substance a short-term
collateralised cash loan with the securities being used as
collateral. These arrangements were completed only with
well-established, reputable institutions in accordance with
established market conventions.
E5. BORROWINGS
Collateral provided did not qualify for derecognition as the Group
retained the risk and rewards, although the counterparty had the right
to sell or repledge the assets. The carrying value of the listed financial
assets transferred that were not derecognised as at 31 December 2014
was £84 million of fixed and variable interest rate securities.
The maximum exposure to credit risk in respect of these repurchase
transactions as at 31 December 2014 was £84 million and this was fully
mitigated through the use of collateral arrangements.
E4.5 Other collateral arrangements
Collateral has also been pledged and charges granted in respect of
certain of the Group’s borrowings. The details of these arrangements
are set out in note E5.
The Group classifies the majority of its interest bearing borrowings as financial liabilities carried at amortised cost and these are recognised
initially at fair value less any attributable transaction costs. The difference between initial cost and the redemption value is amortised through
the consolidated income statement over the period of the borrowing using the effective interest method.
Certain borrowings are designated upon initial recognition at fair value through profit or loss and measured at fair value where doing so provides
more meaningful information due to the reasons stated in the financial liabilities accounting policy (see note E1). Transaction costs relating to
borrowings designated upon initial recognition at fair value through profit or loss are expensed as incurred.
Borrowings are classified as either policyholder or shareholder borrowings. Policyholder borrowings are those attributable to with-profit operations
and are held by the with-profit funds. Shareholder exposure to these borrowings is limited to their participation in these with-profit funds.
Limited recourse bonds 2022 7.59% (note a)
Property Reversions loan (note b)
£80 million facility agreement (note c)
£150 million term facility (note d)
£100 million facility agreement (note e)
Total policyholder borrowings
£200 million 7.25% unsecured subordinated loan (note f)
£300 million senior unsecured bond (note g)
£450 million revolving credit facility (note h)
£450 million amortising term loan (note h)
£428 million subordinated loans (note i)
Total shareholder borrowings
Carrying value
Fair value
2015
£m
66
194
–
148
99
507
158
298
443
199
393
2014
£m
73
184
80
150
–
487
149
298
441
387
–
2015
£m
74
194
–
148
99
515
212
324
450
200
400
2014
£m
92
184
80
150
–
506
212
324
450
390
–
1,491
1,275
1,586
1,376
Total borrowings
1,998
1,762
2,101
1,882
Amount due for settlement after 12 months
1,966
1,609
Phoenix Group Holdings Annual Report and Accounts 2015Financials 132
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
E. FINANCIAL ASSETS & LIABILITIES continued
E5. BORROWINGS continued
a. In 1998, Mutual Securitisation plc raised £260 million of capital
through the securitisation of embedded value on a block of existing
unit-linked and unitised with-profit life and pension policies.
The bonds were split between two classes, which rank pari passu,
and were listed on the Irish Stock Exchange The £140 million
7.39% class A1 limited recourse bonds matured in 2012 with no
remaining outstanding principal. The £120 million 7.59% class A2
limited recourse bonds with an outstanding principal of £83 million
(2014: £94 million) have an average remaining life of 3 years
maturing in 2022. PLAL has provided collateral of £34 million
(2014: £39 million) to provide security to the holders of the recourse
bonds in issue. During 2015, repayments totalling £11 million were
made (2014: £11 million).
b. The Property Reversions loan from Santander UK plc (‘Santander’)
was brought into the consolidated financial statements at fair value.
It relates to the sale of Extra-Income Plan policies that Santander
finances to the value of the associated property reversions. As part
of the arrangement Santander receive an amount calculated by
reference to the movement in the Halifax House Price Index and the
Group is required to indemnify Santander against profits or losses
arising from mortality or surrender experience which differs from
the basis used to calculate the reversion amount. Repayment will
be on a policy-by-policy basis and is expected to occur over the next
10 to 20 years. During 2015, repayments totalling £27 million were
made (2014: £24 million). Note G9 contains details of the assets that
support this loan.
c. In 2008, UKCPT entered into an £80 million revolving loan facility
agreement. This loan accrues interest at LIBOR plus a variable margin
of 0.50% to 0.60% per annum. The lender holds a floating charge
over certain assets of UKCPT and its subsidiaries. This facility was
due for repayment on 19 June 2015 and was refinanced on 2 April
2015 (see note e).
d. On 19 May 2011, UKCPT entered into a £150 million investment term
loan facility agreement. The £150 million investment term loan facility
agreement accrued interest at LIBOR plus a variable margin of 1.60%
to 2.00% per annum. The lender holds security over the assets of UK
Commercial Property Estates Holdings Limited and UK Commercial
Property Estates Limited, both of which are subsidiaries of UKCPT.
On 8 April 2015, UKCPT amended the agreement, extending the
repayment date to April 2020. The facility now accrues interest at
LIBOR plus a margin of 1.50% per annum. The amendment includes
the provision of a five year additional revolving credit facility of up
to £50 million. As at 31 December 2015, the main facility was fully
drawn down (2014: Fully drawn down) and the additional facility had
not been drawn down.
e. On 2 April 2015, UK Commercial Property Finance Holdings
Limited, a wholly-owned subsidiary of UKCPT, entered into a new
£100 million 12-year fixed rate term loan facility agreement with
Cornerstone Real Estate Advisers Europe LLP. This facility accrues
interest at a rate of 3.03% per annum. The lender holds security over
the assets of the UK Commercial Property Finance Holdings Limited
and a further subsidiary of UKCPT. As at 31 December 2015, the
facility was fully drawn down.
f. Scottish Mutual Assurance Limited issued £200 million 7.25% undated,
unsecured subordinated loan notes on 23 July 2001 (‘PLL subordinated
debt’). The earliest repayment date of the notes is 25 March 2021
and thereafter on each fifth anniversary so long as the notes are
outstanding. With effect from 1 January 2009, as a part of a Part VII
transfer, these loan notes were transferred into the shareholder fund
of PLL. In the event of the winding-up of PLL, the right of payment
under the notes is subordinated to the rights of the higher-ranking
creditors (principally policyholders). As a result of the acquisition of
the Phoenix Life businesses in 2009, these subordinated loan notes
were acquired at their fair value and as such, the outstanding principal
of these subordinated loan notes differs from the carrying value
in the statement of consolidated financial position. The fair value
adjustments, which were recognised on acquisition, will unwind
over the remaining life of these subordinated loan notes.
With effect from 23 December 2014, minor modifications were
made to the terms of the notes to enable them to qualify as Tier
2 capital for regulatory reporting purposes. Expenses incurred in
effecting these modifications amounted to £10 million. Given the
modifications were not substantial, the carrying amount of the liability
was adjusted accordingly and the expenses are being amortised over
the life of the notes.
g. On 7 July 2014, the Group’s financing subsidiary, PGH Capital
Limited, issued a £300 million 7 year senior unsecured bond at an
annual coupon rate of 5.75% (‘PGH Capital senior bond’). The senior
bond is subject to guarantee by the Company.
h. On 23 July 2014, PGH Capital Limited entered into a £900 million
5 year unsecured bank facility (‘PGH Capital facility’). The facility
comprises a £450 million revolving credit facility (‘RCF’) loan and a
£450 million amortising term loan of which £200 million remained
outstanding at 31 December 2015. Both loans are guaranteed by the
Company and are repayable by July 2019 with an option to request
an extension to the term of the RCF loan by two years to July 2021.
Further terms of the facilities agreement include:
(i) term facility repayment instalments of £30 million are due semi-
annually on 30 June and 31 December each year. Additional target
repayments of £30 million may be paid semi-annually on 30 June
and 31 December each year, non-payment of which would trigger
restrictions on the Group regarding the declaration of dividends;
(ii) the term loan and RCF loan bear interest at LIBOR plus a
margin which changes in accordance with a margin ratchet
which operates by reference to the Group’s gearing ratio. As at
31 December 2015 the margin on the term loan was 2.625% and
the margin on the RCF loan was 2.375%; and
(iii) amongst other fees, a utilisation fee of 0.25% p.a. is payable in
respect of the RCF loan for so long as the amount outstanding under
the RCF exceeds 50% of the total commitments of the RCF loan.
During 2015, a £190 million repayment was made in respect of
targeted and mandatory repayments on the £450 million amortising
term loan including prepayments of £70 million in respect of
payments due in 2016 and £30 million in respect of payments due
in 2017.
In March 2016, the Group agreed an amendment of the PGH Capital
facility into a revolving credit facility (the ‘PGH Capital revolving credit
facility’), details of which are included in note I9.
Phoenix Group Holdings Annual Report and Accounts 2015
133
i. On 23 January 2015, PGH Capital Limited issued £428 million of
subordinated notes (‘PGH Capital subordinated notes’) due 2025
at a coupon of 6.625%. Upon exchange £32 million of these notes
were held and continued to be held as at 31 December 2015 by
Group companies. Fees associated with these notes of £3 million
have been deferred and amortised over the life of the notes in the
condensed statement of consolidated financial position. The notes
are subject to a subordinated guarantee by the Company.
E6. RISK MANAGEMENT – FINANCIAL RISK
This note forms one part of the risk management disclosures in the
consolidated financial statements. The Group’s management of
insurance risk is detailed in note F4.
E6.1 Financial risk and the asset liability management (‘ALM’)
framework
The use of financial instruments naturally exposes the Group to the
risks associated with them, mainly, market risk, credit risk and financial
soundness risk.
Responsibility for agreeing the financial risk profile rests with the
board of each life company, as advised by investment managers,
internal committees and the actuarial function. In setting the risk
profile, the board of each life company will receive advice from the
appointed investment managers, the relevant with-profit actuary and
the relevant actuarial function holder as to the potential implications of
that risk profile with regard to the probability of both realistic insolvency
and of failing to meet the regulatory minimum capital requirement.
The actuarial function holder will also advise the extent to which the
investment risk taken is consistent with the Group’s commitment to
treat customers fairly.
Derivatives are used in many of the Group’s funds, within policy
guidelines agreed by the Board of each life company and overseen by
investment committees of the Boards of each life company supported
by management oversight committees. Derivatives are primarily
used for risk hedging purposes or for efficient portfolio management,
including the activities of the Group’s Treasury function.
More detail on the Group’s exposure to financial risk is provided in note
E6.2 below.
The Group is also exposed to insurance risk arising from its Phoenix Life
segment. Life insurance risk in the Group arises through its exposure
to longevity, persistency, mortality and to other variances between
assumed and actual experience. These variances can be in factors such
as persistency levels and management and administrative expenses.
More detail on the Group’s exposure to insurance risk is provided in
note F4.
The Group’s overall exposure to market and credit risk is monitored
by appropriate committees, which agree policies for managing each
type of risk on an ongoing basis, in line with the investment strategy
developed to achieve investment returns in excess of amounts due in
respect of insurance contracts. The effectiveness of the Group’s ALM
relies on the matching of assets and liabilities arising from insurance and
investment contracts, taking into account the types of benefits payable
to policyholders under each type of contract. Separate portfolios of
assets are maintained for with-profit business funds, (which includes all
of the Group’s participating business), non-linked non-profit funds and
unit-linked funds.
E6.2 Financial risk analysis
Transactions in financial instruments result in the Group assuming
financial risks. These include credit risk, market risk and financial
soundness risk. Each of these are described below, together with
a summary of how the Group manages them.
E6.2.1 Credit risk
Credit risk is the risk that one party to a financial instrument will cause
a financial loss for the other party by failing to discharge an obligation.
These obligations can relate to both on and off balance sheet assets
and liabilities.
There are two principal sources of credit risk for the Group:
Ɛ credit risk which results from direct investment activities, including
investments in fixed and variable rate income securities, derivatives,
collective investment schemes and the placing of cash deposits; and
Ɛ credit risk which results indirectly from activities undertaken in
the normal course of business. Such activities include premium
payments, outsourcing contracts, reinsurance, exposure from
material suppliers and the lending of securities.
The amount disclosed in the statement of consolidated financial
position in respect of all financial assets, together with rights secured
under off balance sheet collateral arrangements, and excluding those
that back unit-linked liabilities, represents the Group’s maximum
exposure to credit risk.
The impact of non-government fixed and variable rate income securities
and, inter alia, the change in market credit spreads during the year
is fully reflected in the values shown in these financial statements.
Credit spreads are the excess of corporate bond yields over gilt yields to
reflect the higher level of risk. Similarly, the value of derivatives that the
Group holds takes into account fully the changes in swap rates.
There is an exposure to spread changes affecting the prices of
corporate bonds and derivatives. This exposure applies to with-profit
funds, non-profit funds (where risks and rewards fall wholly to
shareholders) and shareholders’ funds.
The Group holds £3,942 million (2014: £3,589 million) of corporate
bonds which are used to back annuity liabilities in non-profit funds.
These annuity liabilities include an aggregate credit default provision
of £214 million (2014: £266 million) to fund against the risk of default.
A 100bps widening of credit spreads, with all other variables held
constant and no change in assumed expected defaults, would result in
a decrease in the profit after tax in respect of a full financial year, and in
equity, of £55 million (2014: £97 million).
A 100bps narrowing of credit spreads, with all other variables held
constant and no change in assumed expected defaults, would result
in an increase in the profit after tax in respect of a full financial year,
and in equity, of £62 million (2014: £102 million).
Credit risk is managed by the monitoring of aggregate Group exposures
to individual counterparties and by appropriate credit risk diversification.
The Group manages the level of credit risk it accepts through credit risk
tolerances. In certain cases, protection against exposure to particular
credit risk types may be achieved through the use of derivatives.
The credit risk borne by the shareholder on with-profit policies is
dependent on the extent to which the underlying insurance fund
is relying on shareholder support.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 134
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
E. FINANCIAL ASSETS & LIABILITIES continued
E6. RISK MANAGEMENT – FINANCIAL RISK continued
Quality of credit assets
An indication of the Group’s exposure to credit risk is the quality of the investments and counterparties with which it transacts. The following table
provides information regarding the aggregate credit exposure split by credit rating:
2015
Loans and receivables
Derivatives
Fixed and variable rate income
securities
Reinsurers’ share of insurance
contract liabilities
Cash and cash equivalents
2014
Loans and receivables
Derivatives
Fixed and variable rate income
securities
Reinsurers’ share of insurance
contract liabilities
Cash and cash equivalents
Non-rated
£m
Unit-linked
£m
AAA
£m
–
6
AA
£m
90
–
A
£m
133
1,046
BBB
£m
40
319
BB
£m
–
–
B and
below
£m
–
–
3,976
14,774
8,469
3,548
425
229
–
–
1,969
483
1,983
3,415
2
7
–
–
–
–
309
127
388
–
–
3,982
17,316
15,046
3,916
425
229
824
Total
£m
577
1,498
31,814
3,954
3,940
41,783
5
–
5
–
35
45
AAA
£m
–
–
AA
£m
65
–
A
£m
92
2,146
BBB
£m
–
347
BB
£m
–
–
B and
below
£m
3
–
Non-rated
£m
Unit-linked
£m
33
64
3
1
Total
£m
196
2,558
4,777
17,184
6,824
4,065
529
505
441
59
34,384
–
54
631
822
2,138
4,057
2
27
–
2
–
–
1
–
4,831
18,702
15,257
4,441
531
508
539
–
105
168
2,772
5,067
44,977
Non-equity based derivatives are included in the credit risk table above.
Credit ratings have not been disclosed in the above tables for holdings in unconsolidated collective investment schemes. The credit quality of the
underlying debt securities within these vehicles is managed by the safeguards built into the investment mandates for these vehicles.
The Group maintains accurate and consistent risk ratings across its asset portfolio. This enables management to focus on the applicable risks and
to compare credit exposures across all lines of business, geographical regions and products. The rating system is supported by a variety of financial
analytics combined with market information to provide the main inputs for the measurement of counterparty risk. All risk ratings are tailored to the
various categories of assets and are assessed and updated regularly.
Phoenix Group Holdings Annual Report and Accounts 2015 135
A further indicator of the quality of the Group’s financial assets is the extent to which they are neither past due nor impaired. The following table
gives information regarding the ageing of financial assets that are past due but not impaired and the carrying value of financial assets that have
been impaired.
2015
Loans and receivables
Derivatives
Fixed and variable rate income securities
Reinsurers’ share of insurance contract liabilities
Reinsurance receivables
Prepayments and accrued income
Other receivables
Cash and cash equivalents
2014
Neither
past
due nor
impaired
£m
572
1,498
31,795
3,954
29
335
474
3,905
Less than
30 days
£m
30–90 days
£m
Greater
than
90 days
£m
Impaired
£m
Unit-linked
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
–
–
–
–
–
–
–
12
–
–
–
–
–
Neither past
due nor
impaired
£m
Less than
30 days
£m
30–90 days
£m
Greater
than
90 days
£m
Impaired
£m
Unit-linked
£m
Loans and receivables
Derivatives
Fixed and variable rate income securities
Reinsurers’ share of insurance contract liabilities
Reinsurance receivables
Prepayments and accrued income
Other receivables
Cash and cash equivalents
190
2,557
34,325
2,772
67
405
750
4,962
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3
–
–
–
–
–
–
–
Carrying
value
£m
577
1,498
31,814
3,954
29
335
474
Carrying
value
£m
196
2,558
5
–
5
–
–
–
–
3
1
35
3,940
59
34,384
–
–
–
–
2,772
67
405
750
105
5,067
Please refer to pages 199 to 205 for additional life company asset disclosures which include the life companies’ exposure to peripheral Eurozone
debt securities. Peripheral Eurozone is defined as Portugal, Spain, Italy, Ireland and Greece. The Group’s exposure to peripheral Eurozone debt
continues to be relatively small compared to total assets.
Assets backing unit-linked business have not been analysed in these tables as the credit risk on such financial assets is borne by the policyholders.
However, these assets have been included as a separate column in these tables to reconcile the information to the statement of consolidated
financial position. Shareholder credit exposure on unit-linked assets is limited to the level of fee income to the extent it is dependent on the
underlying assets.
Concentration of credit risk
Concentration of credit risk might exist where the Group has significant exposure to an individual counterparty or a group of counterparties with
similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic and
other conditions. The Group has most of its counterparty risk within its life business and this is monitored by the counterparty limits contained
within the investment guidelines and investment management agreements, overlaid by regulatory requirements and the monitoring of aggregate
counterparty exposures across the Group against additional Group counterparty limits. Counterparty risk in respect of OTC derivative counterparties
is monitored using a Value-at-Risk (VaR) exposure metric.
The Group is also exposed to concentration risk with outsource partners. This is due to the nature of the outsourced services market. The Group
operates a policy to manage outsourcer service counterparty exposures and the impact from default is reviewed regularly by executive committees
and measured though the ICA stress and scenario testing.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 136
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
E. FINANCIAL ASSETS & LIABILITIES continued
E6. RISK MANAGEMENT – FINANCIAL RISK continued
Collateral
The credit risk of the Group is mitigated, in certain circumstances,
by entering into collateral agreements. The amount and type of
collateral required depends on an assessment of the credit risk of the
counterparty. Guidelines are implemented regarding the acceptability
of types of collateral and the valuation parameters. Collateral is mainly
in respect of stock lending, certain reinsurance arrangements and to
provide security against the maturity proceeds of derivative financial
instruments. Management monitors the market value of the collateral
received, requests additional collateral when needed, and performs an
impairment valuation when impairment indicators exist and the asset
is not fully secured (and is not carried at fair value). See note E4.1 for
further information on collateral arrangements.
E6.2.2 Market risk
Market risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market
influences. Market risk comprises interest rate risk, currency risk
and other price risk (comprising equity risk, property risk, inflation
risk and alternative asset class risk).
The Group is mainly exposed to market risk as a result of:
Ɛ the mismatch between liability profiles and the related asset
investment portfolios;
Ɛ the investment of surplus assets including shareholder reserves yet
to be distributed, surplus assets within the with-profit funds and
assets held to meet regulatory capital and solvency requirements;
and
Ɛ the income flow of management charges from the invested assets
of the business.
The Group manages the levels of market risk that it accepts through
an approach to investment management that determines:
Ɛ the constituents of market risk for the Group;
Ɛ the basis used to fair value financial assets and liabilities;
Ɛ the asset allocation and portfolio limit structure;
Ɛ diversification from and within benchmarks by type of instrument
and geographical area;
Ɛ the net exposure limits by each counterparty or group of
counterparties, geographical and industry segments;
Ɛ control over hedging activities;
Ɛ reporting of market risk exposures and activities; and
Ɛ monitoring of compliance with market risk policy and review of
market risk policy for pertinence to the changing environment.
All operations comply with regulatory requirements relating to the taking
of market risk.
Interest rate risk
Interest rate risk is the risk that the fair value of future cash flows of
a financial instrument will fluctuate relative to the respective liability
due to the impact of changes in market interest rates on the value of
interest-bearing assets and on the value of future guarantees provided
under certain contracts of insurance.
Interest rate risk is managed by matching assets and liabilities where
practicable and by entering into derivative arrangements for hedging
purposes where appropriate. This is particularly the case for the
non-participating funds. For participating business, some element
of investment mismatching is permitted where it is consistent with
the principles of treating customers fairly. The with-profit funds of
the Group provide capital to allow such mismatching to be effected.
In practice, the life companies of the Group maintain an appropriate
mix of fixed and variable rate instruments according to the underlying
insurance or investment contracts and will review this at regular
intervals to ensure that overall exposure is kept within the risk profile
agreed for each particular fund. This also requires the maturity profile
of these assets to be managed in line with the liabilities to policyholders.
The sensitivity analysis for interest rate risk indicates how changes
in the fair value or future cash flows of a financial instrument arising
from changes in market interest rates at the reporting date result in a
change in profit after tax and in equity. It takes into account the effect
of such changes in market interest rates on all assets and liabilities that
contribute to the Group’s reported profit after tax and in equity (but
excludes the impact on the Group’s pension schemes).
With-profit business and non-participating business within the with-
profit funds are exposed to interest rate risk as guaranteed liabilities are
valued relative to market interest rates and investments include fixed
interest securities and derivatives. For with-profit business the profit
or loss arising from mismatches between such assets and liabilities
is largely offset by increased or reduced discretionary policyholder
benefits dependent on the existence of policyholder guarantees.
The contribution of these funds to the Group result is determined
primarily by either the shareholders’ share of the declared annual bonus
or by the shareholders’ interest in any change in value in the capital
advanced to the Group’s with-profit funds.
In the non-participating funds, policy liabilities’ sensitivity to interest
rates are matched primarily with fixed and variable rate income
securities, with the result that sensitivity to changes in interest rates
is very low.
As part of preparation for the new Solvency II regime, management
has reviewed the matching position of assets and liabilities resulting in
changes to the hedging position for certain asset portfolios. As a result
an increase of 1% in interest rates, with all other variables held constant,
would now result in a decrease in the profit after tax in respect of a
full financial year, and in equity, of £89 million (2014: an increase of
£24 million).
A decrease of 1% in interest rates, with all other variables held constant,
would result in an increase in profit after tax in respect of a full financial
year, and in equity, of £89 million (2014: a decrease of £52 million).
Phoenix Group Holdings Annual Report and Accounts 2015 137
Equity, property and inflation risk
The Group has exposure to financial assets and liabilities whose values
will fluctuate as a result of changes in market prices other than from
interest rate and currency fluctuations. This is due to factors specific to
individual instruments, their issuers or factors affecting all instruments
traded in the market. Accordingly, the Group limits its exposure to
any one counterparty in its investment portfolios and to any one
foreign market.
The portfolio of marketable equity securities and property investments
which is carried in the statement of consolidated financial position at
fair value, has exposure to price risk. The Group’s objective in holding
these assets is to earn higher long-term returns by investing in a diverse
portfolio of equities and properties. Portfolio characteristics are analysed
regularly and price risks are actively managed in line with investment
mandates. The Group’s holdings are diversified across industries and
concentrations in any one company or industry are limited.
Equity and property price risk is primarily borne in respect of assets held
in with-profit or unit-linked funds. For unit-linked funds this risk is borne
by policyholders and asset movements directly impact unit prices and
hence policy values. For with-profit funds policyholders’ future bonuses
will be impacted by the investment returns achieved and hence the
price risk, whilst the Group also has exposure to the value of guarantees
provided to with-profit policyholders. In addition some equity
investments are held in respect of shareholders’ funds. The Group as
a whole is exposed to price risk fluctuations impacting the income flow
of management charges from the invested assets of all funds.
Equity and property price risk is managed through the agreement and
monitoring of financial risk profiles that are appropriate for each of the
Group’s life funds in respect of maintaining adequate regulatory capital
and treating customers fairly. This is largely achieved through asset
class diversification and within the Group’s ALM framework through
the holding of derivatives or physical positions in relevant assets
where appropriate.
The sensitivity analysis for equity and property price risk illustrates how
a change in the fair value of equities and properties affects the Group
result. It takes into account the effect of such changes in equity and
property prices on all assets and liabilities that contribute to the Group’s
reported profit after tax and in equity (but excludes the impact on the
Group’s pension schemes).
A 10% decrease in equity prices, with all other variables held constant,
would result in an increase in the profit after tax in respect of a full
financial year, and in equity, of £48 million (2014: an increase of
£36 million).
A 10% increase in equity prices, with all other variables held constant,
would result in a decrease in the profit after tax in respect of a full
financial year, and in equity, of £46 million (2014: a decrease of
£36 million).
A 10% decrease in property prices, with all other variables held
constant, would result in a decrease in the profit after tax in respect
of a full financial year, and in equity, of £21 million (2014: a decrease
of £27 million).
A 10% increase in property prices, with all other variables held
constant, would result in an increase in the profit after tax in respect
of a full financial year, and in equity, of £21 million (2014: an increase
of £28 million).
The Group is exposed to inflation risk through certain contracts, such
as annuities, which may provide for future benefits to be paid taking
account of changes in the level of experienced and implied inflation,
and also through the Group’s cost base. The Group seeks to manage
inflation risk within the ALM framework through the holding of
derivatives, such as inflation swaps, or physical positions in relevant
assets, such as index linked gilts, where appropriate.
Currency risk
The Group’s principal transactions are carried out in sterling and
therefore its exchange risk is limited principally to historic business that
was written in the Republic of Ireland, where the assets are generally
held in the same currency denomination as their liabilities, therefore,
any foreign currency mismatch is largely mitigated. Consequently, the
foreign currency risk relating to this business mainly arises when the
assets and liabilities are translated into sterling.
The Group’s financial assets are primarily denominated in the same
currencies as its insurance and investment liabilities. Thus, the main
foreign exchange risk arises from recognised assets and liabilities
denominated in currencies other than those in which insurance and
investment liabilities are expected to be settled and, indirectly, from the
earnings of UK companies arising abroad.
Certain Phoenix Life with-profit funds have an exposure to overseas
assets which is not driven by liability considerations. The purpose
of this exposure is to reduce overall risk whilst maximising returns
by diversification. This exposure is limited and managed through
investment mandates which are subject to the oversight of the
investment committees of the Boards of each life company.
Fluctuations in exchange rates from certain holdings in overseas assets
are hedged against currency risks.
Sensitivity of profit after tax and equity to fluctuations in currency
exchange rates is not considered significant at 31 December 2015,
since unhedged exposure to foreign currency was relatively low
(2014: not considered significant).
Phoenix Group Holdings Annual Report and Accounts 2015Financials 138
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
E. FINANCIAL ASSETS & LIABILITIES continued
E6. RISK MANAGEMENT – FINANCIAL RISK continued
E6.2.3 Financial soundness risk
Financial soundness risk is a broad risk category encompassing capital
management risk, tax risk and liquidity and funding risk.
Capital management risk is defined as the failure of the Group, or
one of its separately regulated subsidiaries, to maintain sufficient
capital to provide appropriate security for policyholders and meet all
regulatory capital requirements whilst not retaining unnecessary capital.
The PLHL Group has exposure to capital management risk through the
requirements of the new Solvency II capital regime, as implemented
by the PRA, to calculate regulatory capital adequacy at a Group level.
The Group’s UK life subsidiaries have exposure to capital management
risk through the Solvency II regulatory capital requirements mandated
by the PRA at the solo level. The Group’s approach to managing capital
management risk is described in detail in note I4.
Tax risk is defined as the risk of financial or reputational loss arising from
a lack of liquidity, funding or capital due to an unforeseen tax cost, or by
the inappropriate reporting and disclosure of information in relation to
taxation. Tax risk is managed by maintaining an appropriately-staffed tax
team who have the qualifications and experience to make judgements
on tax issues, augmented by advice from external specialists where
required. The Group has a formal tax risk policy, which sets out its risk
appetite in relation to specific aspects of tax risk, and which details the
controls the Group has in place to manage those risks. These controls
are subject to a regular review process. The Group’s subsidiaries
have exposure to tax risk through the annual statutory and regulatory
reporting and through the processing of policyholder tax requirements.
Liquidity and funding risk is defined as the failure of the Group to
maintain adequate levels of financial resources to enable it to meet its
obligations as they fall due. The Group has exposure to liquidity risk as
a result of servicing its external debt and equity investors, and from the
operating requirements of its subsidiaries. The Group’s subsidiaries
have exposure to liquidity risk as a result of normal business activities,
specifically the risk arising from an inability to meet short-term cash
flow requirements.
The Board of Phoenix Group Holdings has defined a number of
governance objectives and principles and the liquidity risk frameworks
of each subsidiary are designed to ensure that:
Ɛ liquidity risk is managed in a manner consistent with the subsidiary
company Boards’ strategic objectives, risk appetite and Principles and
Practices of Financial Management (‘PPFM’);
Ɛ cash flows are appropriately managed and the reputation of the
Group is safeguarded; and
Ɛ appropriate information on liquidity risk is available to those
making decisions.
The Group’s policy is to maintain sufficient liquid assets of suitable
credit quality at all times including, where appropriate, by having
access to borrowings so as to be able to meet all foreseeable current
liabilities as they fall due in a cost-effective manner. Forecasts are
prepared regularly to predict required liquidity levels over both the short
and medium term allowing management to respond appropriately to
changes in circumstances.
The vast majority of the Group’s derivative contracts are traded OTC
and have a two day collateral settlement period. The Group’s derivative
contracts are monitored daily, via an end-of-day valuation process, to
assess the need for additional funds to cover margin or collateral calls.
Some of the Group’s commercial property investments are held
through collective investment schemes. The collective investment
schemes have the power to restrict and/or suspend withdrawals,
which would, in turn, affect liquidity. To date, the collective investment
schemes have continued to process both investments and realisations
in a normal manner and have not imposed any restrictions or delays.
Some of the Group’s cash and cash equivalents are held through
collective investment schemes. The collective investment schemes
have the power, in an extreme stress, to restrict and/or suspend
withdrawals, which would, in turn, affect liquidity. To date, the collective
investment schemes have continued to process both investments and
realisations in a normal manner and have not imposed any restrictions
or delays.
Phoenix Group Holdings Annual Report and Accounts 2015 139
The following table provides a maturity analysis showing the remaining contractual maturities of the Group’s undiscounted financial liabilities
and associated interest. Liabilities under insurance contract contractual maturities are included based on the estimated timing of the amounts
recognised in the statement of consolidated financial position in accordance with the requirements of IFRS 4 Insurance contracts:
2015
Liabilities under insurance contracts
Investment contracts
Borrowings1
Deposits received from reinsurers1
Derivatives1
Net asset value attributable to unitholders
Obligations for repayment of collateral received
Reinsurance payables
Payables related to direct insurance contracts
Accruals and deferred income
Other payables
2014
Liabilities under insurance contracts
Investment contracts
Borrowings1
Deposits received from reinsurers1
Derivatives1
Net asset value attributable to unitholders
Obligations for repayment of collateral received
Reinsurance payables
Payables related to direct insurance contracts
Accruals and deferred income
Other payables
1 year or
less or on
demand
£m
1–5 years
£m
Greater
than
5 years
£m
No fixed
term
£m
Total
£m
2,646
7,905
32
30
104
5,120
725
19
364
127
677
1 year or
less or on
demand
£m
3,293
8,451
153
33
70
4,659
954
9
358
130
360
9,611
26,961
765
39,983
–
1,056
108
137
–
1,155
351
1,760
–
–
–
–
1
–
–
–
–
–
–
–
–
194
–
–
–
–
–
–
–
–
7,905
2,437
489
2,001
5,120
725
19
364
128
677
1–5 years
£m
Greater
than
5 years
£m
No fixed
term
£m
Total
£m
11,037
27,801
799
42,930
–
992
112
68
–
–
–
–
–
–
–
563
375
3,509
–
–
–
–
–
–
–
184
–
–
–
–
–
–
–
–
8,451
1,892
520
3,647
4,659
954
9
358
130
360
1 These financial liabilities are disclosed at their undiscounted value and therefore differ to the statement of consolidated financial position which discloses the discounted value.
Investment contract policyholders have the option to terminate or transfer their contracts at any time and to receive the surrender or transfer value
of their policies. Although these liabilities are payable on demand, and are therefore included in the contractual maturity analysis as due within one
year, the Group does not expect all these amounts to be paid out within one year of the reporting date.
A significant proportion of the Group’s financial assets are held in gilts, cash, supranationals and investment grade securities which the Group
considers sufficient to meet the liabilities as they fall due. The vast majority of these investments are readily realisable immediately since most
of them are quoted in an active market.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 140
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
E. FINANCIAL ASSETS & LIABILITIES continued
E6. RISK MANAGEMENT – FINANCIAL RISK continued
E6.3 Unit-linked contracts
For unit-linked insurance contract liabilities the provision is based on
the fund value, together with an allowance for any excess of future
expenses over charges, where appropriate.
For unit-linked contracts the Group matches all the liabilities with assets
in the portfolio on which the unit prices are based. There is therefore no
interest, price, currency or credit risk for the Group on these contracts.
For participating business, the liabilities under insurance contracts and
investment contracts with DPF are calculated in accordance with the
following methodology:
In extreme circumstances, the Group could be exposed to liquidity
risk in its unit-linked funds. This could occur where a high volume of
surrenders coincides with a tightening of liquidity in a unit-linked fund
to the point where assets of that fund have to be sold to meet those
withdrawals. Where the fund affected consists of property, it can take
several months to complete a sale and this would impede the proper
operation of the fund. In these situations, the Group considers its risk
to be low since there are steps that can be taken first within the funds
themselves both to ensure the fair treatment of all investors in those
funds and to protect the Group’s own risk exposure.
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH
DPF AND REINSURANCE
F1. LIABILITIES UNDER INSURANCE CONTRACTS
Classification of contracts
Contracts under which the Group accepts significant insurance risk
are classified as insurance contracts.
Contracts under which the transfer of insurance risk to the Group
from the policyholder is not significant are classified as investment
contracts, and accounted for as financial liabilities (see note E1).
Some insurance and investment contracts contain a DPF. This feature
entitles the policyholder to additional discretionary benefits as a
supplement to guaranteed benefits. Investment contracts with a DPF
are recognised, measured and presented as insurance contracts.
Insurance contracts and investment contracts with DPF
Under current IFRS requirements the Group’s insurance contracts
and investment contracts with DPF are measured using accounting
policies consistent with those previously adopted under UK GAAP.
Amounts recoverable from reinsurers are estimated in a manner
consistent with the outstanding claims provision or settled claims
associated with the reinsured policy.
Insurance liabilities
Insurance contract liabilities for non-participating business, other
than unit-linked insurance contracts, are calculated on the basis of
current data and assumptions, using either a net premium or gross
premium method. Where a gross premium method is used, the
liability includes allowance for prudent lapses. Negative policy values
are allowed for on individual policies:
Ɛ where there are no guaranteed surrender values; or
Ɛ in the periods where guaranteed surrender values do not apply
even though guaranteed surrender values are applicable after a
specified period of time.
Ɛ liabilities to policyholders arising from the with-profit business are
stated at the amount of the realistic value of the liabilities, adjusted
to exclude the owners’ share of projected future bonuses;
Ɛ acquisition costs are not deferred; and
Ɛ reinsurance recoveries are measured on a basis that is consistent
with the valuation of the liability to policyholders to which the
reinsurance applies.
The with-profit bonus reserve for an individual contract is determined
by either a retrospective calculation of ‘accumulated asset share’
approach or by way of a prospective ‘bonus reserve valuation’
method. The cost of future policy related liabilities is determined using
a market consistent approach, mainly based on a stochastic model
calibrated to market conditions at the end of the reporting period.
Non-market related assumptions (for example, persistency, mortality
and expenses) are based on experience adjusted to take into account
of future trends.
The realistic liability for any contract is equal to the sum of the with-
profit bonus reserve and the cost of future policy-related liabilities.
Where policyholders have valuable guarantees, options or promises
in respect of the with-profit business, these costs are generally
valued using a stochastic model.
In calculating the realistic liabilities, account is taken of the future
management actions consistent with those set out in the Principles
and Practices of Financial Management (‘PPFM’).
Present value of future profits on non-participating business in the
with-profit funds
For UK with-profit life funds, an amount may be recognised for the
present value of future profits (‘PVFP’) on non-participating business
written in a with-profit fund where the determination of the realistic
value of liabilities in that with-profit fund takes account, directly or
indirectly, of this value.
Where the value of future profits can be shown to be due to
policyholders, this amount is recognised as a reduction in the liability
rather than as an intangible asset. This is then apportioned between
the amounts that have been taken into account in the measurement
of liabilities and other amounts which are shown as an adjustment to
the unallocated surplus.
Where it is not possible to apportion the future profits on this non-
participating business to policyholders, the PVFP on this business
is recognised as an intangible asset and changes in its value are
recorded as a separate item in the consolidated income statement
(see note G7).
Phoenix Group Holdings Annual Report and Accounts 2015 141
The value of the PVFP is determined in a manner consistent with
realistic measurement of liabilities. In particular, the methodology and
assumptions involve adjustments to reflect risk and uncertainty, are
based on current estimates of future experience and current market
yields and allow for market consistent valuation of any guarantees
or options within the contracts. The value is also adjusted to remove
the value of capital backing the non-profit business if this is included
in the realistic calculation of PVFP. The principal assumptions used
to calculate the PVFP are the same as those used in calculating the
insurance contract liabilities given in note F4.
Embedded derivatives
Embedded derivatives, including options to surrender insurance
contracts, that meet the definition of insurance contracts or are
closely related to the host insurance contract, are not separately
measured. All other embedded derivatives are separated from the
host contract and measured at fair value through profit or loss.
Liability adequacy
At each reporting date, liability adequacy tests are performed to
assess whether the insurance contract and investment contract
with DPF liabilities are adequate. Current best estimates of future
cash flows are compared to the carrying value of the liabilities. Any
deficiency is charged to the consolidated income statement.
The Group’s accounting policies for insurance contracts meet the
minimum specified requirements for liability adequacy testing under
IFRS 4 Insurance Contracts, as they allow for current estimates of
all contractual cash flows and of related cash flows such as claims
handling costs. Cash flows resulting from embedded options and
guarantees are also allowed for, with any deficiency being recognised
in the consolidated income statement.
Consolidated income statement recognition
Gross premiums
In respect of insurance contracts and investment contracts with
DPF, premiums are accounted for on a receivable basis and exclude
any taxes or duties based on premiums. Funds at retirement under
individual pension contracts converted to annuities with the Group
are, for accounting purposes, included in both claims incurred and
premiums within gross premiums written.
Gross benefits and claims
Claims on insurance contracts and investment contracts with DPF
reflect the cost of all claims arising during the period, including
policyholder bonuses allocated in anticipation of a bonus declaration.
Claims payable on maturity are recognised when the claim becomes
due for payment and claims payable on death are recognised
on notification. Surrenders are accounted for at the earlier of the
payment date or when the policy ceases to be included within
insurance contract liabilities. Where claims are payable and the
contract remains in-force, the claim instalment is accounted for when
due for payment. Claims payable include the costs of settlement.
Reinsurance
The Group cedes insurance risk in the normal course of business.
Reinsurance assets represent balances due from reinsurance
providers. Reinsurers’ share of insurance contract liabilities is
dependent on expected claims and benefits arising under the related
reinsured policies.
Reinsurance assets are reviewed for impairment at each reporting
date, or more frequently, when an indication of impairment arises
during the reporting period. Impairment occurs when there is
objective evidence, as a result of an event that occurred after initial
recognition of the reinsurance asset, that the Group may not receive
all outstanding amounts due under the terms of the contract and
the event has a reliably measurable impact on the amounts that
the Group will receive from the reinsurer. The impairment loss is
recognised in the consolidated income statement. The reinsurers’
share of investment contract liabilities is measured on a basis that is
consistent with the valuation of the liability to policyholders to which
the reinsurance applies.
Reinsurance premiums payable in respect of certain reinsured
individual and group pensions annuity contracts are payable by
quarterly instalments and are accounted for on a payable basis. Due
to the period of time over which reinsurance premiums are payable
under these arrangements, the reinsurance premiums and related
payables are discounted to present values using a pre-tax risk-free
rate of return. The unwinding of the discount is included as a charge
within the consolidated income statement.
Reinsurance claims are recognised when the related gross insurance
claim is recognised according to the terms of the relevant contract.
Gains or losses on purchasing reinsurance are recognised in the
consolidated income statement at the date of purchase and are not
amortised. They are the difference between the premiums ceded to
reinsurers and the related change in the reinsurers’ share of insurance
contract liabilities.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 142
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE continued
F1. LIABILITIES UNDER INSURANCE CONTRACTS continued
The table below shows a summary of the liabilities under insurance contracts and the related reinsurers’ share included within assets in the
statement of consolidated financial position.
Gross
liabilities
2015
£m
Reinsurers’
share
2015
£m
Gross
liabilities
2014
£m
Reinsurers’
share
2014
£m
Life assurance business:
Insurance contracts
Investment contracts with DPF
Less amounts classified as held for sale (note I1.2)
31,150
10,420
41,570
5,474
33,582
4,484
1
11,124
5,475
44,706
(1,587)
(1,521)
(1,776)
39,983
3,954
42,930
1
4,485
(1,713)
2,772
Amounts due for settlement after 12 months
37,337
3,909
39,636
2,705
At 1 January
Amounts classified as held for sale at 1 January
Premiums
Claims
Other changes in liabilities
Foreign exchange adjustments
Disposal of SMI (note I1.3)
Less amounts classified as held for sale (note I1.2) at 31 December
At 31 December
F2. UNALLOCATED SURPLUS
Gross
liabilities
2015
£m
Reinsurers’
share
2015
£m
42,930
1,776
44,706
902
2,772
1,713
4,485
1,376
Gross
liabilities
2014
£m
42,729
–
42,729
981
(3,931)
(326)
(3,724)
70
(19)
(158)
(47)
(13)
–
4,751
(31)
–
41,570
5,475
44,706
(1,587)
(1,521)
(1,776)
39,983
3,954
42,930
Reinsurers’
share
2014
£m
2,851
–
2,851
1,792
(341)
200
(17)
–
4,485
(1,713)
2,772
The unallocated surplus comprises the excess of the assets over the policyholder liabilities of the with-profit business of the Group’s life operations.
For the Group’s with-profit funds this represents amounts which have yet to be allocated to owners since the unallocated surplus attributable to
policyholders has been included within liabilities under insurance contracts.
If the realistic value of liabilities to policyholders exceeds the value of the assets in the with-profit fund, the unallocated surplus is valued at £nil.
At 1 January
Transfer (to)/from income statement
Disposal of SMI (see note I1.3)
At 31 December
2015
£m
981
(84)
(20)
877
2014
£m
970
11
–
981
Phoenix Group Holdings Annual Report and Accounts 2015 143
F3. REINSURANCE
This section includes disclosures in relation to reinsurance. Further disclosures and accounting policies relating to reinsurance are included in
note F1.
F3.1 Premiums ceded to reinsurers
Premiums ceded to reinsurers during the period were £1,376 million (2014: £1,792 million).
On 9 November 2015 the Group entered into an agreement with RGA International, effective from 1 November 2015, to reinsure substantively all
of the Phoenix Life Assurance Limited (‘PLAL’) annuity liabilities previously ceded to Opal Reassurance Limited (‘Opal Re’), a subsidiary undertaking
of the Company. The Group paid a reinsurance premium of £1,346 million to RGA International. Under the terms of the arrangement, RGA
International holds assets in a collateral account over which the Group has a floating charge as disclosed in note F3.2.
On 31 July 2014, the Group entered into a business transfer agreement with Guardian Assurance Limited (‘Guardian’) (see note I1.2). The transfer
has been initially effected under a reinsurance agreement effective from 1 January 2014.
In accordance with the business transfer agreement, it is intended that the reinsurance agreement will be replaced by a transfer of the business
using a scheme under Part VII of the Financial Services and Markets Act 2000 by the end of 2016 subject to the necessary regulatory and
Court approvals.
The Group paid a reinsurance premium of £1,736 million to Guardian. Under the terms of the agreement, in order to mitigate the risk of counterparty
default, Guardian holds assets in a collateral account over which the Group has a fixed charge as disclosed in note F3.2.
F3.2 Collateral arrangements
It is the Group’s practice to obtain collateral to mitigate the counterparty risk related to reinsurance transactions usually in the form of cash or
marketable financial instruments.
Where the Group receives collateral in the form of marketable financial instruments which it is not permitted to sell or re-pledge except in the
case of default, it is not recognised in the statement of consolidated financial position. The fair value of financial assets accepted as collateral for
reinsurance transactions but not recognised in the statement of consolidated financial position amounts to £4,909 million (2014: £3,829 million).
The increase is largely driven by the reinsurance agreement entered into with RGA International during the period over certain portfolios of the
Group’s annuity liabilities (see note F3.1).
Where the Group receives collateral on reinsurance transactions in the form of cash it is recognised in the statement of consolidated financial
position along with a corresponding liability to repay the amount of collateral received, disclosed as ‘Deposits received from reinsurers’.
The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2015 are set out below.
Financial assets
Financial liabilities
Reinsurance
transactions
2015
£m
376
376
2014
£m
405
405
F4. RISK MANAGEMENT – INSURANCE RISK
This note forms one part of the risk management disclosures in the consolidated financial statements. Financial risk is included in note E6.
Insurance risk refers to the risk that the frequency or severity of insured events may be worse than expected and includes expense risk.
The Phoenix Life segment contracts include the following sources of insurance risk:
Mortality
Longevity
Morbidity
Expenses
Lapses
higher than expected number of death claims on assurance products and occurrence of one or more large claims;
faster than expected improvements in life expectancy on immediate and deferred annuity products;
higher than expected number of serious illness claims or more sickness claims which last longer on income protection
policies;
policies cost more to administer than expected;
the numbers of policies terminating early is different to that expected in a way which increases expected claims costs
or expenses or reduces future profits; and
Options
unanticipated changes in policyholder option exercise rates giving rise to increased claims costs.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 144
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS
WITH DPF AND REINSURANCE continued
F4. RISK MANAGEMENT – INSURANCE RISK continued
Objectives and policies for mitigating insurance risk
The Group uses several methods to assess and monitor insurance risk
exposures both for individual types of risks insured and overall risks.
These methods include internal risk measurement models, experience
analyses, external data comparisons, sensitivity analyses, scenario
analyses and stress testing.
The profitability of the run-off of the closed long-term insurance
businesses within the Group depends, to a significant extent, on the
values of claims paid in the future relative to the assets accumulated
to the date of claim. Typically, over the lifetime of a contract, premiums
and investment returns exceed claim costs in the early years and it
is necessary to set aside these amounts to meet future obligations.
The amount of such future obligations is assessed on actuarial
principles by reference to assumptions about the development
of financial and insurance risks.
It is therefore necessary for the Directors of each life company to make
decisions, based on actuarial advice, which ensure an appropriate
accumulation of assets relative to liabilities. These decisions include
investment policy, bonus policy and, where discretion exists, the level
of payments on early termination.
Sensitivities
Insurance liabilities are sensitive to changes in risk variables, such
as prevailing market interest rates, currency rates and equity prices,
since these variations alter the value of the financial assets held to
meet obligations arising from insurance contracts and changes in
investment conditions also have an impact on the value of insurance
liabilities themselves. Additionally, insurance liabilities are sensitive to
the assumptions which have been applied in their calculation, such as
mortality and lapse rates. Sometimes allowance must also be made
for the effect on future assumptions of management or policyholder
actions in certain economic scenarios. This could lead to changes in
assumed asset mix or future bonus rates. The most significant non-
economic sensitivities arise from mortality, longevity and lapse risk.
A decrease of 5% in assurance mortality, with all other variables held
constant, would result in an increase in the profit after tax in respect
of a full year, and an increase in equity of £12 million (2014: £14 million).
An increase of 5% in assurance mortality, with all other variables held
constant, would result in a decrease in the profit after tax in respect
of a full year, and a decrease in equity of £12 million (2014: £14 million).
A decrease of 5% in annuitant longevity, with all other variables held
constant, would result in an increase in the profit after tax in respect
of a full year, and an increase in equity of £99 million (2014: £135 million).
An increase of 5% in annuitant longevity, with all other variables held
constant, would result in a decrease in the profit after tax in respect
of a full year, and a decrease in equity of £99 million (2014: £135 million).
A decrease of 25% in lapse rates, with all other variables held constant,
would result in a decrease in the profit after tax in respect of a full year,
and a decrease in equity of £76 million (2014: £53 million).
An increase of 25% in lapse rates, with all other variables held constant,
would result in an increase in the profit after tax in respect of a full year,
and an increase in equity of £76 million (2014: £46 million).
F4.1 Assumptions
Valuation of participating insurance and investment contracts
For participating business, which is with-profit business (insurance and
investment contracts), the insurance contract liability is calculated on
a realistic basis, adjusted to exclude the shareholders’ share of future
bonuses and the associated tax liability. This is a market consistent
valuation, which involves placing a value on liabilities similar to the
market value of assets with similar cash flow patterns.
Valuation of non-participating insurance contracts
The non-participating insurance contract liabilities are determined using
either a net premium or gross premium valuation method.
Process used to determine assumptions
For participating business in realistic basis companies the assumptions
about future demographic trends are intended to be ‘best estimates’.
They are determined after considering the companies’ recent
experience and/or relevant industry data. Economic assumptions
are market consistent.
For other business, demographic assumptions are derived by adding
a prudent margin to best estimate assumptions. Economic assumptions
are prudent estimates of the returns expected to be achieved on the
assets backing the liabilities.
Phoenix Group Holdings Annual Report and Accounts 2015 145
During the year a number of changes were made to assumptions to reflect changes in expected experience or to harmonise the approach across
the enlarged Group. The impact of material changes during the year was as follows:
Change in longevity assumptions
Change in persistency assumptions
Change in mortality assumptions
Change in expenses assumptions
(Decrease)/
increase in
insurance
liabilities 2015
£m
(3)
Decrease in
insurance
liabilities 2014
£m
(14)
1
3
5
(13)
–
–
Valuation interest rate
For realistic basis companies the liabilities are determined stochastically using an appropriate number of risk neutral scenarios produced by an
economic scenario generator calibrated to market conditions and gilt yields as at the valuation date.
For funds not subject to realistic reporting, the method used to determine valuation interest rates generally follows the regulations set out in the
Prudential Sourcebook for Insurers.
Assets are firstly hypothecated to classes of business being valued. The valuation interest rates for each block of business are based on the
expected returns of the hypothecated assets. The yield is then adjusted to make allowance for credit risk, liquidity risk, reinvestment risk and
investment management expenses.
Valuation interest rates (after tax for life policies) are typically in the following ranges:
Life policies
Pension policies
2015
%
1.70 – 2.18
2014
%
2.06 – 2.72
1.26 – 3.01
2.45 – 3.31
Expense inflation
Expenses are assumed to increase at the rate of increase in the Retail Price Index (‘RPI’) plus fixed margins in accordance with the various
management service agreements (‘MSAs’) the Group has in place with outsource partners. For with-profit business the rate of RPI inflation is
determined within each stochastic scenario. For other business it is based on the Bank of England inflation spot curve. For MSAs with contractual
increases set by reference to national average earnings inflation, this is approximated as RPI inflation plus 1%. In instances in which inflation risk is
not mitigated, a further margin for adverse deviations may then be added to the rate of expense inflation.
Mortality and longevity rates
Mortality rates are based on published tables, adjusted appropriately to take account of changes in the underlying population mortality since
the table was published, company experience and forecast changes in future mortality. Where appropriate, a margin is added to assurance
mortality rates to allow for adverse future deviations. Annuitant mortality rates are adjusted to make allowance for future improvements in
pensioner longevity.
Lapse and surrender rates (persistency)
The assumed rates for surrender and voluntary premium discontinuance depend on the length of time a policy has been in force and the relevant
company. Surrender or voluntary premium discontinuances are only assumed for realistic basis companies. Withdrawal rates used in the valuation
of with-profit policies are based on observed experience and adjusted when it is considered that future policyholder behaviour will be influenced by
different considerations than in the past. In particular, it is assumed that withdrawal rates for unitised with-profit contracts will be higher on policy
anniversaries on which Market Value Adjustments do not apply.
Discretionary participating bonus rate
For realistic basis companies, the regular bonus rates assumed in each scenario are determined in accordance with each company’s PPFM.
Final bonuses are assumed at a level such that maturity payments will equal asset shares subject to smoothing rules set out in the PPFM.
Policyholder options and guarantees
Some of the Group’s products give potentially valuable guarantees, or give options to change policy benefits which can be exercised at the
policyholders’ discretion. These products are described below.
Most with-profit contracts give a guaranteed minimum payment on a specified date or range of dates or on death if before that date or dates.
For pensions contracts, the specified date is the policyholder’s chosen retirement date or a range of dates around that date. For endowment
contracts, it is the maturity date of the contract. For with-profit bonds it is often a specified anniversary of commencement, in some cases with
further dates thereafter. Annual bonuses when added to with-profit contracts usually increase the guaranteed amount.
There are guaranteed surrender values on a small number of older contracts.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 146
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE continued
F4. RISK MANAGEMENT – INSURANCE RISK continued
Some pensions contracts include guaranteed annuity options (see deferred annuities in note F4.2 for details). The total amount provided in the
with-profit and non-profit funds in respect of the future costs of guaranteed annuity options are £1,710 million (2014: £1,809 million) and £5 million
(2014: £6 million) respectively.
In common with other life companies in the UK which have written pension transfer and opt-out business, the Group has set up provisions for the
review and possible redress relating to personal pension policies. These provisions, which have been calculated from data derived from detailed file
reviews of specific cases and using a certainty equivalent approach, which give a result very similar to a market consistent valuation, are included
in liabilities arising under insurance contracts. The total amount provided in the with-profit funds and non-profit funds in respect of the review and
possible redress relating to pension policies, including associated costs, are £254 million (2014: £284 million) and £14 million (2014: £15 million)
respectively.
With-profit deferred annuities participate in profits only up to the date of retirement. At retirement, a guaranteed cash option allows the policyholder
to commute the annuity benefit into cash on guaranteed terms.
F4.2 Managing product risk
The following sections give an assessment of the risks associated with the Group’s main life assurance products, as shown below, and the ways in
which the Group manages those risks.
2015
With-profit funds:
Pensions:
Deferred annuities – with guarantees
Deferred annuities – without guarantees
Immediate annuities
Unitised with-profit
Total pensions
Life:
Immediate annuities
Unitised with-profit
Life with-profit
Total life
Other
Non-profit funds:
Deferred annuities – with guarantees
Deferred annuities – without guarantees
Immediate annuities
Protection
Unit-linked
Other
Gross
Reinsurance
Insurance
contracts
£m
Investment
contracts
with DPF
£m
Insurance
contracts
£m
Investment
contracts
with DPF
£m
8,534
1,586
865
1,017
12,002
59
555
4,377
4,991
1,967
14
489
7,933
508
1,353
306
142
–
–
8,574
8,716
–
640
–
640
–
–
–
–
–
1,059
5
726
–
404
38
1,168
4
20
9
33
182
–
2
2,383
99
46
40
29,563
10,420
3,953
–
–
–
–
–
–
–
1
1
–
–
–
–
–
–
–
1
Phoenix Group Holdings Annual Report and Accounts 2015
147
Gross
Reinsurance
Insurance
contracts
£m
Investment
contracts
with DPF
£m
Insurance
contracts
£m
Investment
contracts
with DPF
£m
9,298
1,717
1,158
1,089
13,262
63
594
4,704
5,361
2,022
15
647
8,107
497
1,650
246
157
–
–
9,106
9,263
–
688
–
688
–
–
–
–
–
1,167
5
595
–
589
39
1,223
5
22
10
37
181
–
–
1,117
114
54
45
31,807
11,123
2,771
–
–
–
–
–
–
–
1
1
–
–
–
–
–
–
–
1
2014
With-profit funds:
Pensions:
Deferred annuities – with guarantees
Deferred annuities – without guarantees
Immediate annuities
Unitised with-profit
Total pensions
Life:
Immediate annuities
Unitised with-profit
Life with-profit
Total life
Other
Non-profit funds:
Deferred annuities – with guarantees
Deferred annuities – without guarantees
Immediate annuities
Protection
Unit-linked
Other
The tables above exclude insurance contract liabilities and related reinsurer’s share of insurance contract liabilities classified as held for sale at
31 December 2015 and 31 December 2014.
With-profit fund (unitised and traditional)
The Group operates a number of with-profit funds in the UK in which the with-profit policyholders benefit from a discretionary annual bonus
(guaranteed once added in most cases) and a discretionary final bonus. Non-participating business is also written in some of the with-profit funds
and some of the funds may include immediate annuities and deferred annuities with Guaranteed Annuity Rates (‘GAR’).
The investment strategy of each fund differs, but is broadly to invest in a mixture of fixed interest investments and equities and/or property and
other asset classes in such proportions as is appropriate to the investment risk exposure of the fund and its capital resources.
The Group has significant discretion regarding investment policy, bonus policy and early termination values. The process for exercising discretion
in the management of the with-profit funds is set out in the PPFM for each with-profit fund and is overseen by With-Profit committees. Advice is
also taken from the with-profit actuary of each with-profit fund. Compliance with the PPFM is reviewed annually and reported to the PRA, FCA
and policyholders.
The bonuses are designed to distribute to policyholders a fair share of the return on the assets in the with-profit funds together with other elements
of the experience of the fund. The shareholders of the Group are entitled to receive one-ninth of the cost of bonuses declared for some funds and
£nil for others.
Unitised and traditional with-profit policies are exposed to equivalent risks, the main difference being that unitised with-profit policies purchase
notional units in a with-profit fund whereas traditional with-profit policies do not. Benefit payments for unitised policies are then dependent on unit
prices at the time of a claim, although charges may be applied. A unitised with-profit fund price is typically guaranteed not to fall and increases in line
with any discretionary bonus payments over the course of one year.
Phoenix Group Holdings Annual Report and Accounts 2015Financials
148
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS
WITH DPF AND REINSURANCE continued
F4. RISK MANAGEMENT – INSURANCE RISK continued
Deferred annuities
Deferred annuity policies are written to provide either a cash benefit
at retirement, which the policyholder can use to buy an annuity on
the terms then applicable, or an annuity payable from retirement.
The policies contain an element of guarantee expressed in the form
that the contract is written in, i.e. to provide cash or an annuity.
Deferred annuity policies written to provide a cash benefit may also
contain an option to convert the cash benefit to an annuity benefit on
guaranteed terms; these are known as GAR policies. Deferred annuity
policies written to provide an annuity benefit may also contain an option
to convert the annuity benefit into cash benefits on guaranteed terms;
these are known as Guaranteed Cash Option (‘GCO’) policies.
During the last decade, interest rates and inflation have fallen and life
expectancy has increased more rapidly than originally anticipated.
The guaranteed terms on GAR policies are more favourable than the
annuity rates currently available in the market available for cash benefits.
The guaranteed terms on GCO policies are currently not valuable.
Deferred annuity policies which are written to provide annuity benefits
are managed in a similar manner to immediate annuities and are
exposed to the same risks.
The option provisions on GAR policies are particularly sensitive
to downward movements in interest rates, increasing life
expectancy and the proportion of customers exercising their option.
Adverse movements in these factors could lead to a requirement to
increase reserves which could adversely impact profit and potentially
require additional capital. In order to address the interest rate risk
(but not the risk of increasing life expectancy or changing customer
behaviour with regard to exercise of the option), insurance subsidiaries
within the Group have purchased derivatives that provide protection
against an increase in liabilities and have thus reduced the sensitivity of
profit to movements in interest rates.
The Group seeks to manage this risk in accordance with both the terms
of the issued policies and the interests of customers, and has obtained
external advice supporting the manner in which it operates the long-
term funds in this respect.
Immediate annuities
This type of annuity is purchased with a single premium at the outset,
and is paid to the policyholder for the remainder of their lifetime.
Payments may also continue for the benefit of a surviving spouse or
partner after the annuitant’s death. Annuities may be level, or escalate
at a fixed rate, or may escalate in line with a price index and may be
payable for a minimum period irrespective of whether the policyholder
remains alive.
The main risks associated with this product are longevity and
investment risks. Longevity risk arises where the annuities are paid for
the lifetime of the policyholder, and is managed through the initial pricing
of the annuity and through reinsurance (appropriately collateralised)
or transfer of existing liabilities. Annuities may also be a partial ‘natural
hedge’ against losses incurred in protection business in the event of
increased mortality (and vice versa) although the extent to which this
occurs will depend on the similarity of the demographic profile of each
book of business.
The pricing assumption for mortality risk is based on both historic
internal information and externally-generated information on mortality
experience, including allowances for future mortality improvements.
Pricing will also include a contingency margin for adverse deviations
in assumptions.
Market and credit risk is influenced by the extent to which the cash
flows under the contracts have been matched by suitable assets which
is managed under the ALM framework. Asset/liability modelling is used
to monitor this position on a regular basis.
Protection
These contracts are typically secured by the payment of a regular
premium payable for a period of years providing benefits payable on
certain events occurring within the period. The benefits may be a
single lump sum or a series of payments and may be payable on death,
serious illness or sickness.
The main risk associated with this product is the claims experience
and this risk is managed through the initial pricing of the policy (based
on actuarial principles), the use of reinsurance and a clear process for
administering claims.
Market and credit risk is influenced by the extent to which the cash
flows under the contracts have been matched by suitable assets which
is managed under the ALM framework. Asset/liability modelling is used
to monitor this position on a regular basis.
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL
POSITION NOTES
G1. PROVISIONS
A provision is recognised when the Group has a present legal or
constructive obligation, as a result of a past event, which is likely to
result in an outflow of resources and where a reliable estimate of
the amount of the obligation can be made. If the effect is material,
the provision is determined by discounting the expected future cash
flows at a pre-tax rate that reflects current market assessments of
the time value of money and, where appropriate, the risks specific to
the liability.
A provision is recognised for onerous contracts when the expected
benefits to be derived from the contracts are less than the related
unavoidable costs. The unavoidable costs reflect the net cost of
exiting the contract, which is the lower of the cost of fulfilling it and
any compensation or penalties arising from failure to fulfil it.
Phoenix Group Holdings Annual Report and Accounts 2015 149
At 1 January
Additions in the year
Utilised during the year
Released during the year
At 31 December
Leasehold
properties
£m
Staff
related
£m
Known
incidents
£m
Other
£m
Total
£m
7
–
(1)
(1)
5
12
1
–
–
13
2
–
–
–
2
5
7
(4)
–
8
26
8
(5)
(1)
28
The leasehold properties provision has been made for amounts in respect of the excess of lease rentals and other payments on properties that are
currently vacant or are expected to become vacant, over the amounts to be recovered from subletting these properties. The discount rate used
was 1.7% (2014: 1.7%) and it is expected that the provision will be utilised over the next 3 years (2014: 4 years).
Staff related provisions include provisions for unfunded pensions of £6 million (2014: £6 million) and private medical insurance costs for former
employees of £3 million (2014: £3 million).
The known incidents provision was created for historical data quality, administration systems problems and process deficiencies on the policy
administration, financial reconciliations and operational finance aspects of business outsourced.
Included in other provisions are litigation and onerous contract provisions.
G2. TAX ASSETS AND LIABILITIES
Deferred tax is provided for on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for taxation purposes. Deferred tax is not provided in respect of temporary differences arising from the initial recognition of
goodwill and the initial recognition of assets or liabilities in a transaction that is not a business combination and that, at the time of the transaction,
affects neither accounting nor taxable profit. The amount of deferred tax provided is based on the expected manner of realisation or settlement
of the carrying amount of assets and liabilities, using tax rates and laws enacted or substantively enacted at the period end.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be
utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
Current tax:
Current tax receivable
Current tax payable
Deferred tax:
Deferred tax liabilities
2015
£m
47
(7)
2014
£m
8
(165)
(354)
(364)
Phoenix Group Holdings Annual Report and Accounts 2015Financials 150
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued
G2. TAX ASSETS AND LIABILITIES continued
Movement in deferred tax assets/(liabilities)
2015
Recognised in
consolidated
income
statement
£m
Recognised
in other
comprehensive
income
£m
1 January
£m
Trading losses
Expenses and deferred acquisition costs carried forward
Provisions and other temporary differences
Non-refundable pension scheme surplus
Committed future pension contributions
Accelerated capital allowances
Unpaid interest
Acquired in-force business
Customer relationships
IFRS transitional adjustments
Adjustment for insurance policies held with related parties in
respect of the PGL pension scheme
2014
37
2
11
(8)
57
8
42
(401)
(43)
(64)
(5)
(364)
(22)
14
(2)
1
(10)
(2)
(21)
42
6
10
1
17
Disposals in
year
£m
(1)
–
–
–
–
–
–
–
–
–
–
–
–
(1)
–
(5)
–
–
–
–
–
–
(6)
(1)
31 December
£m
14
16
8
(7)
42
6
21
(359)
(37)
(54)
(4)
(354)
Trading losses
Expenses and deferred acquisition costs carried forward
Provisions and other temporary differences
Non-refundable pension scheme surplus
Committed future pension contributions
Accelerated capital allowances
Unpaid interest
Acquired in-force business
Customer relationships
IFRS transitional adjustments
Adjustment for insurance policies held with related parties in
respect of the PGL pension scheme
Recognised in
consolidated
income
statement
£m
Recognised
in other
comprehensive
income
£m
Discontinued
operations
disposed of
during the year
£m
1 January
£m
31 December
£m
40
37
(3)
–
70
14
61
(428)
(73)
(72)
(19)
(373)
(3)
(35)
15
(8)
(22)
(4)
(19)
27
3
8
14
(24)
–
–
–
–
9
–
–
–
–
–
–
9
–
–
(1)
–
–
(2)
–
–
27
–
–
24
37
2
11
(8)
57
8
42
(401)
(43)
(64)
(5)
(364)
The Finance Act 2014 set the rate of corporation tax at 20% from 1 April 2015. Finance (No. 2) Act 2015 reduces the rate of corporation tax to 19%
in April 2017 and 18% from April 2020. Consequently a blended rate of tax has been used for the purposes of providing for deferred tax in these
financial statements.
A further 1% reduction, to 17%, effective from April 2020 has been announced in the 2016 Budget and will be introduced by future legislation.
The benefit to the Group’s net assets arising from the further 1% reduction in the tax rate is estimated at £8 million in total and will be recognised
when the legislation is substantively enacted.
Phoenix Group Holdings Annual Report and Accounts 2015 151
Deferred income tax assets are recognised for tax losses carried forward only to the extent that realisation of the related tax benefit is probable.
Deferred tax assets have not been recognised in respect of:
Tax losses carried forward
Provisions and other temporary differences
Deferred tax assets not recognised on capital losses1
1 These can only be recognised against future capital gains and have no expiry date.
G3. PAYABLES RELATED TO DIRECT INSURANCE CONTRACTS
2015
£m
16
4
89
2014
£m
39
6
116
Payables related to direct insurance contracts are recognised when due and are measured on initial recognition at the fair value of the
consideration payable. Subsequent to initial recognition, these payables are measured at amortised cost using the effective interest rate method.
Payables related to direct insurance contracts
Amount due for settlement after 12 months
G4. ACCRUALS AND DEFERRED INCOME
This note analyses the Group’s accruals and deferred income at the end of the year.
Accruals and deferred income
Amount due for settlement after 12 months
G5. OTHER PAYABLES
2015
£m
364
2014
£m
358
–
–
2015
£m
128
2014
£m
130
1
–
Other payables are recognised when due and are measured on initial recognition at the fair value of the consideration payable. Subsequent to
initial recognition, these payables are measured at amortised cost using the effective interest rate method.
Investment broker balances
Other payables
Amount due for settlement after 12 months
2015
£m
581
96
677
2014
£m
242
118
360
–
–
Phoenix Group Holdings Annual Report and Accounts 2015Financials 152
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued
G6. PENSION SCHEMES
Defined contribution pension schemes
Obligations for contributions to defined contribution pension schemes are recognised as an expense in the consolidated income statement
as incurred.
Defined benefit pension schemes
The net surplus or deficit (the economic surplus or deficit) in respect of the defined benefit pension schemes is calculated by estimating
the amount of future benefit that employees have earned in return for their service in the current and prior years; that benefit is discounted
to determine its present value and the fair value of any scheme assets is deducted.
The economic surplus or deficit is subsequently adjusted to eliminate on consolidation the carrying value of insurance policies issued by Group
entities to the defined benefit pension schemes (the reported surplus or deficit). A corresponding adjustment is made to the carrying values
of insurance contract liabilities and investment contract liabilities.
As required by IFRIC 14, IAS 19 –‘The limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’, to the extent that
the economic surplus will be available as a refund, the economic surplus is stated after a provision for tax that would be borne by the scheme
administrators when the refund is made. The Group recognises a pension surplus on the basis that it is entitled to the surplus of each scheme
in the event of a gradual settlement of the liabilities, due to its ability to order a winding up of the Trust.
Additionally under IFRIC 14 pension funding contributions are considered to be a minimum funding requirement and, to the extent that the
contributions payable will not be available to the Group after they are paid into the scheme, a liability is recognised when the obligation arises.
The net defined benefit asset/liability represents the economic surplus net of all adjustments noted above.
The Group determines the net interest expense or income on the net defined benefit asset/liability for the period by applying the discount
rate used to measure the defined benefit obligation at the beginning of the annual period to the opening net defined benefit asset/liability.
The discount rate is the yield at the period end on AA credit rated bonds that have maturity dates approximating to the terms of the Group’s
obligations. The calculation is performed by a qualified actuary using the projected unit credit method.
The movement in the net defined benefit asset/liability is analysed between the service cost, past service cost, curtailments and settlements
(all recognised within administrative expenses in the consolidated income statement), the net interest cost on the net defined benefit asset/
liability, including any reimbursement assets (recognised within net investment income in the consolidated income statement), remeasurements
of the net defined asset/liability (recognised in other comprehensive income) and employer contributions.
This note describes the Group’s two main staff pension schemes for its employees, the Pearl Group Staff Pension Scheme and the PGL Pension
Scheme and explains how the pension asset/liability is calculated.
An analysis of the defined benefit asset for each pension scheme is set out below:
Pearl Group Staff Pension Scheme
Economic surplus
Minimum funding requirement obligation
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme
Net defined benefit asset
PGL Pension Scheme
Economic surplus (including £570 million (2014: £526 million) available as a refund on a winding-up of the Scheme)
Adjustment for insurance policies eliminated on consolidation
Net economic surplus
Minimum funding requirement obligation
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme
Net defined benefit asset
2015
£m
2014
£m
276
(74)
(97)
105
631
(22)
609
(9)
(199)
401
218
(86)
(76)
56
590
(23)
567
(13)
(184)
370
Phoenix Group Holdings Annual Report and Accounts 2015 153
The Group’s defined benefit schemes typically expose the Group to a
number of risks, the most significant of which are:
and the related interest costs have been measured using the projected
unit credit method.
Asset volatility – the value of the schemes’ assets will vary as market
conditions change and as such is subject to considerable volatility.
The volatility in the schemes’ assets can be caused by both volatility
within the markets or variations in the return achieved by the schemes’
investment managers relative to market performance. In particular there
is the risk that the variation in asset values will not be in line with the
variation in pension liability values, and as such differences in the nature
and duration of the assets and liabilities can cause difference in the way
that the assets and liabilities vary.
Inflation risk – a significant proportion of the schemes’ benefit
obligations are linked to inflation, and higher inflation will lead to higher
liabilities (although in most cases, caps on the level of inflationary
increases are in place to protect against extreme inflation). Assets in
both schemes are invested so as to hedge a significant proportion of
the inflation risks, further details of which are included in this note.
Life expectancy – the majority of the schemes’ obligations are
to provide benefits for the life of the member, so increases in life
expectancy will result in an increase in the liabilities.
Information on each of these schemes is set out below.
G6.1 Pearl Group Staff Pension Scheme
Scheme details
The Pearl Group Staff Pension Scheme (‘the Pearl Scheme’) comprises
a final salary section, a money purchase section and a hybrid section
(a mix of final salary and money purchase). The final salary and hybrid
sections of the Pearl Scheme are closed to new members, and since
1 July 2011 are also closed to future accrual by active members.
Defined contribution scheme
Contributions in the year amounted to £1 million (2014: £1 million).
Defined benefit scheme
The defined benefit scheme is funded by payment of contributions to
a separately administered trust fund. The Pearl Scheme is established
under, and governed by, the trust deeds and rules. A Group company,
Pearl Group Holdings No.2 Limited (‘PGH2’), is the principal employer
of the Pearl Scheme. The principal employer meets the administration
expenses of the Pearl Scheme. The Pearl Scheme is administered by a
trustee company, P.A.T. (Pensions) Limited, which is separate from the
company. The trustee company is comprised of two representatives
from the Group, three member nominated representatives and one
independent trustee in accordance with the trustee company’s articles
of association. The trustee is required by law to act in the interest of all
relevant beneficiaries and is responsible for the investment policy with
regard to the assets.
To the extent that an economic surplus will be available as a refund,
the economic surplus is stated after a provision for tax that would
be borne by the scheme administrators when the refund is made.
Additionally pension funding contributions are considered to be a
minimum funding requirement and, to the extent that the contributions
payable will not be available to the Group after they are paid into the
scheme, a liability is recognised when the obligation arises.
The valuation has been based on an assessment of the liabilities of the
Pearl Scheme as at 31 December 2015, undertaken by independent
qualified actuaries. The present values of the defined benefit obligation
Funding
A triennial funding valuation of the Pearl Scheme as at 30 June 2012
was completed in May 2013. This showed a deficit as at 30 June 2012
of £480 million, on the agreed technical provisions basis.
On 27 November 2012 the principal employer and the Trustee of the
Pearl Scheme entered into a revised pensions funding agreement (the
‘Pensions Agreement’), which forms the basis of the 30 June 2012
triennial valuation. The principal terms of the Pensions Agreement are:
Ɛ annual cash payments into the scheme of £70 million in 2013 and
2014 payable on 30 September, followed by payments of £40 million
each year from 2015 to 2021. The Pensions Agreement includes
a sharing mechanism, related to the level of dividends paid out of
PGH2, that in certain circumstances allows for an acceleration of the
contributions to be paid to the Pearl Scheme;
Ɛ increased and further contributions may become payable if the
scheme is not anticipated to meet the two agreed funding targets:
(i) to reach full funding on the technical provisions basis by 30 June
2022; and
(ii) to reach full funding on a gilts flat basis by 30 June 2031;
Ɛ the Trustee continues to benefit from a first charge over shares in
Phoenix Life Assurance Limited, National Provident Life Limited,
Pearl Group Services Limited and PGS2 Limited. Following the
repayment of the £425 million loan facility and £75 million of secured
C loan notes on 23 July 2014 (see note E5) the value of the security
claim granted under the share charges is capped at the lower of
£600 million and 100% of the Pearl Scheme deficit (calculated on a
basis linked to UK government securities) revalued every three years
thereafter, increasing from 60% of the Pearl Scheme deficit; and
Ɛ covenant tests relating to the embedded value of certain companies
with the Group.
The triennial funding valuation of the scheme as at 30 June 2015
commenced during the year and is expected to be completed by
September 2016.
It should be noted that the terms of the £900 million facility agreement
(see note E5) restrict the Group’s ability, with certain exceptions, to
transfer assets into the secured companies over which the Trustee
holds a charge over shares.
An additional liability of £74 million (2014: £86 million) has been
recognised, reflecting a charge on any refund of the resultant
IAS 19 surplus that arises after adjustment for discounted future
contributions of £213 million (2014: £245 million) in accordance with
the minimum funding requirement. A deferred tax asset of £38 million
(2014: £49 million) has also been recognised to reflect tax relief at
a rate of 18% (2014: 20%) that is expected to be available on the
contributions, once paid into the scheme.
Contributions totalling £40 million were paid into the scheme in 2015
(2014: £68 million) and contributions totalling £40 million are currently
expected to be paid into the scheme in 2016.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 154
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued
G6. PENSION SCHEMES continued
Summary of amounts recognised in the consolidated financial statements
The amounts recognised in the consolidated financial statements are as follows:
2015
At 1 January
2,279
(2,061)
(76)
(86)
Fair value
of scheme
assets
£m
Defined
benefit
obligation
£m
Provision for
tax on the
economic
surplus
available as
a refund
£m
Minimum
funding
requirement
obligation
£m
Interest income/(expense)
Included in profit or loss
Remeasurements:
82
82
(73)
(73)
Return on plan assets excluding amounts included in interest income
(85)
Gain from changes in financial assumptions
Experience gains
Change in provision for tax on economic surplus available as a refund
Change in minimum funding requirement obligation
Included in other comprehensive income
Employer’s contributions
Benefit payments
At 31 December
–
–
–
–
(85)
40
(103)
–
55
39
–
–
94
–
103
2,213
(1,937)
(97)
(74)
105
Total
£m
56
3
3
(85)
55
39
(18)
15
6
40
–
(3)
(3)
–
–
–
(18)
–
(18)
–
–
(3)
(3)
–
–
–
–
15
15
–
–
Phoenix Group Holdings Annual Report and Accounts 2015 155
Total
£m
(137)
(5)
(5)
360
19
(195)
20
(76)
2
130
68
–
56
Fair value
of scheme
assets
£m
1,855
Defined
benefit
obligation
£m
(1,908)
83
83
–
–
–
–
–
(84)
(84)
–
19
(195)
20
–
–
360
(156)
68
(87)
–
87
Provision for
tax on the
economic
surplus
available
as a refund
£m
Minimum
funding
requirement
obligation
£m
–
–
–
–
–
–
–
(76)
–
(76)
–
–
(84)
(4)
(4)
–
–
–
–
–
2
2
–
–
2,279
(2,061)
(76)
(86)
2015
2014
Of which
not quoted
in an active
market
£m
(24)
Total
£m
1,891
122
130
941
191
34
32
99
(1,227)
2,213
–
–
–
191
34
32
–
–
233
Of which
not quoted
in an active
market
£m
(16)
–
–
–
170
37
38
–
–
229
Total
£m
1,916
120
140
935
170
37
38
90
(1,167)
2,279
2014
At 1 January
Interest income/(expense)
Included in profit or loss
Remeasurements:
Return on plan assets excluding amounts included in interest income
360
Gain from changes in demographic assumptions
Loss from changes in financial assumptions
Experience gains
Change in provision for tax on economic surplus available as a refund
Change in minimum funding requirement obligation
Included in other comprehensive income
Employer’s contributions
Benefit payments
At 31 December
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
Hedging portfolio
Equities
Fixed interest gilts
Other debt securities
Properties
Private equities
Hedge funds
Cash and other
Obligations for repayment of stock lending collateral received
The actual return on plan assets was a loss of £3 million (2014: £443 million gain).
The Group ensures that the investment positions are managed within an asset liability matching (‘ALM’) framework that has been developed to
achieve long-term investments that are in line with the obligations under the Pearl Scheme. Within this framework an allocation of 25% of the
scheme assets is invested in collateral for interest rate and inflation rate hedging where the intention is to hedge greater than 90% of the interest
rate and inflation rate risk measured on the Technical Provisions basis.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 156
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued
G6. PENSION SCHEMES continued
The Pearl Scheme uses swaps, UK Government bonds and UK Government stock lending to hedge the interest rate and inflation exposure arising
from the liabilities which are disclosed in the table above as ‘Hedging Portfolio’ assets. Under the Scheme’s stock lending programme, the Scheme
lends a Government bond to an approved counterparty and receives a similar value in the form of cash in return which is typically reinvested into
other Government bonds. The Scheme retains economic exposure to the Government bond, hence the bonds continue to be recognised as
scheme assets with a corresponding liability to repay the cash received as disclosed in the table above.
Defined benefit obligation
The calculation of the defined benefit obligation can be allocated to the scheme’s members as follows:
Ɛ deferred scheme members: 40% (2014: 40%)
Ɛ retirees: 60% (2014: 60%)
The weighted average duration of the defined benefit obligation at 31 December 2015 is 17 years (2014: 17 years).
Principal assumptions
The principal financial assumptions of the Pearl Scheme are set out in the table below:
Rate of increase for pensions in payment (5% per annum or RPI if lower)
Rate of increase for deferred pensions (‘CPI’)
Discount rate
Inflation – RPI
Inflation – CPI
2015
%
2.95
2.05
3.85
3.05
2.05
2014
%
2.90
2.00
3.65
3.00
2.00
The discount rate and inflation rate assumptions have been determined by considering the shape of the appropriate yield curves and the duration
of the Pearl Scheme’s liabilities. This method determines an equivalent single rate for each of the discount and inflation rates, which is derived from
the profile of projected benefit payments.
It has been assumed that post-retirement mortality is in line with a scheme-specific table which was derived from the actual mortality experience
in recent years, performed as part of the actuarial funding valuation as at 30 June 2012, based on the SAPS standard tables for males and for
females based on year of use. Future longevity improvements are in line with current Group best estimate longevity improvements, which are
based on CMI 2014 Core Projections and a long-term rate of improvement of 2% p.a. up to and including age 75 then decreasing linearly to 0% p.a.
at age 110. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 60 is 30.8 years
and 33.0 years for male and female members respectively.
A quantitative sensitivity analysis for significant actuarial assumptions as at 31 December 2015 is shown below:
2015
Assumptions
Sensitivity level
Base
Discount rate
RPI
Life expectancy
25bps
increase
25bps
decrease
25bps
increase
25bps
decrease
1 year
increase
1 year
decrease
Impact on the defined benefit obligation (£m)
1,937
(71)
75
54
(52)
54
(54)
2014
Assumptions
Sensitivity level
Base
Discount rate
RPI
Life expectancy
25bps
increase
25bps
decrease
25bps
increase
25bps
decrease
1 year
increase
1 year
decrease
Impact on the defined benefit obligation (£m)
2,061
(79)
84
53
(50)
55
(53)
Phoenix Group Holdings Annual Report and Accounts 2015 157
Funding
A triennial funding valuation of the PGL Pension Scheme as at 30 June
2012 was completed in September 2013. This showed a deficit as at
30 June 2012 of £39 million. Following discussions with the Trustee
of the PGL Pension Scheme it was agreed that the existing schedule
of cash contributions to the scheme amounting to £59 million would
continue to be paid over the period from October 2013 to August 2017.
Contributions totalling £15 million were paid into the scheme in 2015
(2014: £20 million) and contributions totalling £15 million are expected
to be paid into the scheme in 2016. Total scheduled future contributions
amount to £25 million at 31 December 2015.
The triennial valuation of the scheme as at 30 June 2015 commenced
during the year and is expected to be completed by September 2016.
In accordance with an agreement dated November 2005, certain of
the Group’s with-profit funds indemnified the shareholders in respect
of contribution calls equal to their share of the costs of changes in
longevity assumptions. In January 2014, PGH1 received £8 million
under this agreement. In June 2014, PGH1 and Phoenix Life Limited
(‘PLL’) entered into an agreement whereby in exchange for a payment
by the PLL with-profit funds to PGH1 of £68 million, PGH1 released the
with-profit funds from any future obligations to indemnify the company.
On the same date, the PLL non-profit fund entered into a longevity
swap with the PGL Pension Scheme with effect from 1 January
2014, under which the scheme has transferred the risk of longevity
improvements to PLL. The financial effect of this contract is eliminated
on consolidation.
An additional liability has been recognised of £9 million
(2014: £13 million) reflecting a charge on any refund of the resultant
IAS 19 surplus that arises after adjustment for discounted future
contributions of £24 million (2014: £38 million) in accordance with
the minimum funding requirement. A deferred tax asset of £4 million
(2014: £8 million) has also been recognised to reflect tax relief at
a rate of 18% (2014: 20%) that is expected to be available on the
contributions, once paid into the scheme.
The above sensitivity analyses are based on a change in an assumption
while holding all other assumptions constant. In practice, this is unlikely
to occur, and changes in some of the assumptions may be correlated.
When calculating the sensitivity of the defined benefit obligation to
significant actuarial assumptions the same method has been applied
as when calculating the pension asset recognised within the statement
of financial position.
The UK Government currently intends to equalise benefits between
males and females arising from the accrual of Guaranteed Minimum
Pensions (‘GMP’) requirements. Legislation will be implemented
following completion of the ongoing consultation on this matter.
Once this consultation process has reached a conclusion, the Group
will be able to quantify the impact of this change.
G6.2 PGL Pension Scheme
The PGL Pension Scheme comprises a final salary section and a
defined contribution section.
Scheme details
Defined contribution scheme
Contributions in the year amounted to £6 million (2014: £6 million).
Defined benefit scheme
The defined benefit section of the PGL Pension Scheme is a final salary
arrangement which is closed to new entrants and has been closed to
future accrual by active members since 1 July 2011.
The PGL Scheme is administered by a separate trustee company,
PGL Pension Trustee Ltd. The trustee company is comprised of
two representatives from the Group, three member nominated
representatives and one independent trustee in accordance with the
trustee company’s articles of association. The trustee is required by
law to act in the interest of all relevant beneficiaries and is responsible
for the investment policy with regard to the assets plus the day to day
administration of the benefits.
The valuation has been based on an assessment of the liabilities of
the PGL Pension Scheme as at 31 December 2015, undertaken by
independent qualified actuaries.
To the extent that an economic surplus will be available as a refund,
the economic surplus is stated after a provision for tax that would
be borne by the scheme administrators when the refund is made.
Additionally pension funding contributions are considered to be a
minimum funding requirement and, to the extent that the contributions
payable will not be available to the Group after they are paid into the
scheme, a liability is recognised when the obligation arises.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 158
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued
G6. PENSION SCHEMES continued
Summary of amounts recognised in the consolidated financial statements
The amounts recognised in the consolidated financial statements are as follows:
2015
At 1 January
2,024
(1,457)
(184)
(13)
Fair value
of scheme
assets
£m
Defined
benefit
obligation
£m
Provision for
tax on the
economic
surplus
available as
a refund
£m
Minimum
funding
requirement
obligation
£m
Interest income/(expense)
Administrative expenses
Included in profit or loss
Remeasurements:
73
(3)
70
Return on plan assets excluding amounts included in interest income
(40)
Experience gains
Gain from changes in financial assumptions
Change in provision for tax on economic surplus available as a refund
Change in minimum funding requirement obligation
Included in other comprehensive income
Employer’s contributions
Benefit payments
At 31 December
(52)
–
(52)
–
13
36
–
–
49
–
63
(6)
–
(6)
–
–
–
(9)
–
(9)
–
–
(1)
–
(1)
–
–
–
–
5
5
–
–
–
–
–
–
(40)
15
(63)
2,006
(1,397)
(199)
(9)
401
Total
£m
370
14
(3)
11
(40)
13
36
(9)
5
5
15
–
Phoenix Group Holdings Annual Report and Accounts 2015 159
Total
£m
160
9
(3)
6
277
54
(143)
(84)
6
110
74
20
–
Fair value
of scheme
assets
£m
1,639
Defined
benefit
obligation
£m
(1,366)
Provision for
tax on the
economic
surplus
available
as a refund
£m
Minimum
funding
requirement
obligation
£m
(96)
(17)
75
(3)
72
–
–
–
–
(60)
–
(60)
–
54
(143)
–
–
277
(89)
74
20
(58)
–
–
58
(4)
–
(4)
–
–
–
(84)
–
(84)
–
–
–
(2)
–
(2)
–
–
–
–
6
6
–
–
–
2,024
(1,457)
(184)
(13)
370
2014
At 1 January
Interest income/(expense)
Administrative expenses
Included in profit or loss
Remeasurements:
Return on plan assets excluding amounts included in interest income
277
Gain from change in demographic assumptions
Loss from change in financial assumptions
Change in provision for tax on economic surplus available as a refund
Change in minimum funding requirement obligation
Included in other comprehensive income
Plan assets previously eliminated on consolidation
Employer’s contributions
Benefit payments
At 31 December
Phoenix Group Holdings Annual Report and Accounts 2015Financials 160
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued
G6. PENSION SCHEMES continued
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
Fixed interest gilts
Index-linked bonds
Swaps
Properties
Hedge funds
Cash and other
Obligations for repayment of stock lending collateral received
2015
2014
Of which
not quoted
in an active
market
£m
–
–
3
98
83
–
–
Of which
not quoted
in an active
market
£m
–
–
(24)
88
80
–
–
Total
£m
1,570
373
(24)
88
80
354
(417)
184
2,024
144
Total
£m
930
984
3
98
83
21
(113)
2,006
The actual return on plan assets was £33 million (2014: £353 million).
The economic value of the PGL Pension Scheme assets as at 31 December 2015, amounted to £2,028 million (2014: £2,047 million). For financial
reporting purposes, the carrying value of the insurance policies effected by the PGL Pension Scheme with the Group have been eliminated on
consolidation, resulting in reported assets of the PGL Pension Scheme as at 31 December 2015 of £2,006 million (2014: £2,024 million).
The Group ensures that the investment positions are managed within an asset liability matching (ALM) framework that has been developed to
achieve long-term investments that are in line with the obligations under the pension scheme. Within this framework an allocation of 85% of the
scheme assets is invested in a combination of supranational debt and a liability hedging portfolio. The Liability Driven Investment (‘LDI’) portfolio
is passively managed against a liability benchmark in order to hedge the duration and inflation risks.
The PGL Scheme uses swaps, UK Government bonds and UK Government stock lending to hedge the interest rate and inflation exposure arising
from the liabilities. Under the Scheme’s stock lending programme, the Scheme lends a Government bond to an approved counterparty and
receives a similar value of cash in return which it typically reinvested into other Government bonds. The Scheme retains economic exposure to
the Government bonds, hence the value of the gilts continues to be recognised as a scheme asset with a corresponding liability to repay the cash
received as disclosed in the table above.
Defined benefit obligation
The calculation of the defined benefit obligation can be allocated to the scheme’s members as follows:
Ɛ deferred scheme members: 39% (2014: 39%); and
Ɛ retirees: 61% (2014: 61%).
The weighted average duration of the defined benefit obligation at 31 December 2015 is 17 years (2014: 17 years).
Phoenix Group Holdings Annual Report and Accounts 2015 161
Principal assumptions
The principal financial assumptions of the PGL Pension Scheme are set out in the table below:
Rate of increase for pensions in payment (7.5% per annum or RPI if lower)
Rate of increase for deferred pensions (‘CPI’)
Discount rate
Inflation – RPI
Inflation – CPI
2015
%
3.10
2.05
3.85
3.05
2.05
2014
%
3.00
2.00
3.65
3.00
2.00
The discount rate and inflation assumptions have been determined by considering the shape of the appropriate yield curves and the duration
of the PGL Scheme liabilities. This method determines an equivalent single rate for each of the discount and inflation rates, which is derived
from the profile of projected benefit payments.
It has been assumed that post-retirement mortality is in line with 86%/94% of S1PA base tables with future longevity improvements in line
with CMI 2014 Core Projections and a long-term rate of improvement of 2% p.a. up to and including age 75 then decreasing linearly to 0% at
age 110. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 62 is 28.4 years
and 30.4 years for male and female members respectively.
A quantitative sensitivity analysis for significant actuarial assumptions as at 31 December 2015 is shown below:
2015
Assumptions
Sensitivity level
Base
Discount rate
RPI
Life expectancy
25bps
increase
25bps
decrease
25bps
increase
25bps
decrease
1 year
increase
1 year
decrease
Impact on the defined benefit obligation (£m)
1,397
(54)
57
37
(39)
46
(46)
2014
Assumptions
Sensitivity level
Base
Discount rate
RPI
Life expectancy
25bps
increase
25bps
decrease
25bps
increase
25bps
decrease
1 year
increase
1 year
decrease
Impact on the defined benefit obligation (£m)
1,457
(60)
63
40
(38)
46
(44)
The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely
to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to
significant actuarial assumptions the same method has been applied as when calculating the pension liability recognised within the statement
of financial position.
The UK Government currently intends to equalise benefits between males and females arising from the accrual of Guaranteed Minimum Pension
(‘GMP’) requirements. Legislation will be implemented following completion of the ongoing consultation on this matter. Once this consultation
process has reached a conclusion, the Group will be able to quantify the impact of this change.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 162
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued
G7. INTANGIBLE ASSETS
Goodwill
Business combinations are accounted for by applying the purchase method. Goodwill represents the difference between the cost of the
acquisition and the fair value of the net identifiable assets acquired.
Goodwill is measured on initial recognition at cost. Following initial recognition, goodwill is stated at cost less any accumulated impairment
losses. It is tested for impairment annually or when there is evidence of possible impairment. Goodwill is not amortised. For impairment testing,
goodwill is allocated to the Phoenix Life cash-generating unit. Goodwill is impaired when the recoverable amount is less than the carrying value.
Acquired in-force business
Insurance and investment contracts with and without DPF acquired in business combinations and portfolio transfers are measured at fair value
at the time of acquisition. The difference between the fair value of the contractual rights acquired and obligations assumed and the liability
measured in accordance with the Group’s accounting policies for such contracts is recognised as acquired in-force business.
Acquired in-force business is amortised over the estimated life of the contracts on a basis which recognises the emergence of the
economic benefits.
An impairment review is performed whenever there is an indication of impairment. When the recoverable amount is less than the carrying
value, an impairment loss is recognised in the consolidated income statement. Acquired in-force business is also considered in the liability
adequacy test for each reporting period.
The acquired in-force business is allocated to the Phoenix Life segment.
Customer relationships
Intangible assets include vesting pension premiums and investment management contracts. These are measured on initial recognition at cost.
The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition,
intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible
assets are not capitalised and expenditure is reflected in the consolidated income statement in the year in which the expenditure is incurred.
Intangible assets with finite lives are amortised on a straight-line basis over their useful economic lives and assessed for impairment whenever
there is an indication that the recoverable amount of the intangible asset is less than its carrying value.
Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash-generating unit level.
Such intangibles are not amortised.
Present value of future profits on non-participating business in the with-profit fund
The value of the present value of future profits is determined on a realistic basis and is allocated in full to the Phoenix Life segment.
Phoenix Group Holdings Annual Report and Accounts 2015 163
Acquired
in-force
business
£m
Customer
relationships
£m
Present value
of future
profits
£m
Goodwill
£m
39
–
39
–
–
–
–
39
39
2,048
–
2,048
(635)
(84)
(64)
(783)
1,265
1,191
297
–
297
(80)
(15)
–
(95)
202
187
23
(6)
17
–
–
–
–
17
17
Acquired
in-force
business
£m
Customer
relationships
and other
£m
Present value
of future
profits
£m
Goodwill
£m
96
(57)
–
39
–
–
–
–
39
39
2,048
–
–
2,048
(537)
–
(98)
(635)
1,413
1,315
448
(151)
–
297
(80)
15
(15)
(80)
217
202
32
–
(9)
23
–
–
–
–
23
23
Total
£m
2,407
(6)
2,401
(715)
(99)
(64)
(878)
1,523
1,434
Total
£m
2,624
(208)
(9)
2,407
(617)
15
(113)
(715)
1,692
1,579
2015
Cost or valuation
At 1 January
Revaluation
At 31 December
Amortisation and impairment
At 1 January
Amortisation charge for the year
Impairment charge for the year
At 31 December
Carrying amount at 31 December
Amount recoverable after 12 months
2014
Cost or valuation
At 1 January
Discontinued operations disposed of during the year
Revaluation
At 31 December
Amortisation
At 1 January
Discontinued operations disposed of during the year
Charge for the year – from continuing operations
At 31 December
Carrying amount at 31 December
Amount recoverable after 12 months
Phoenix Group Holdings Annual Report and Accounts 2015Financials
164
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL
POSITION NOTES continued
G7. INTANGIBLE ASSETS continued
G7.1 Goodwill
The carrying value of goodwill has been tested for impairment at the
period end. No impairment has resulted as the value in use of this
intangible continues to exceed its carrying value. Value in use has
been determined as the present value of certain future cash flows
associated with the management services business of the Phoenix
Life segment. The cash flows used in this calculation are consistent
with those adopted by management in the Group’s operating plan and,
for the period 2020 and beyond, reflect the anticipated run-off of the
Phoenix Life insurance business. The underlying assumptions of these
projections include management’s best estimates with regards to
longevity, persistency, mortality and morbidity.
Future cash flows have been valued using a discount rate of 9.0%
(2014: 8.1%) for the management services business of the Phoenix
Life segment.
Impairment tests have been performed using assumptions which
management consider reasonable. Given the magnitude of the excess
of the value in use over carrying value, management does not believe
that a reasonably foreseeable change in key assumptions would cause
the carrying value to exceed value in use.
Goodwill disposed of during the prior year relates to the disposal of the
discontinued operations of Ignis on 1 July 2014 (see note I1.1).
The carrying amount of goodwill allocated to the Phoenix Life segment
is £39 million (2014: £39 million).
G7.2 Acquired in-force business
Acquired in-force business represents the difference between the fair
value of the contractual rights acquired and obligations assumed under
insurance contracts with and without DPF and the liability measured
in accordance with the Group’s accounting policies for such contracts.
This intangible is being amortised in accordance with the run-off of the
book of business within the Phoenix Life segment.
The acquired in-force business is allocated to the Phoenix Life segment.
During the year, an impairment charge of £64 million has been
recognised in respect of acquired in-force business originally allocated
to contracts issued by PLAL and reinsured to the Group’s Bermudan
reinsurance captive, Opal Re. As detailed in note F3.1, the Opal Re
reassurance was recaptured during the year and replaced with a new
agreement with an external reinsurer, RGA International. Accordingly,
the value of the acquired in-force business associated with these
contracts has been fully impaired.
G7.3 Customer relationships and other
The customer relationships intangible at 31 December 2015 relates to
vesting pension premiums which captures the new business arising
from policies in-force at the acquisition date, specifically top-ups made
to existing policies and annuities vested from matured pension policies.
The total value of this customer relationship intangible at acquisition
was £297 million and has been allocated to the Phoenix Life segment.
This intangible is being amortised over a 20 year period.
The new UK legislation on pension freedoms that came into force in
April 2015 is expected to impact the level of future annuity business
written by the Group. This is considered to be an indicator of
impairment for the Group’s vesting pension premiums intangible and as
a result an impairment test was carried out during the year.
No impairment has resulted as the value in use of the intangible
is considered to exceed its carrying value. The value in use was
determined as the present value of certain future cash flows associated
with annuities vesting from matured pension policies. The cash
flows used in this calculation are consistent with those adopted by
management in the Group’s operating plan for the next five years, and
for the period 2020 and beyond, and reflect the anticipated run-off of
the Phoenix Life insurance business. The cash flows are based on
long-term future profit margins and risk-free projections of with-profits
maturity payments that are largely consistent with the Group’s MCEV
basis. The cash flows also include an allowance for future profits earned
by the service companies on the administration of vesting policies.
The cash flows reflect management’s best estimate of future take-up
rates on guaranteed annuity rate business and non-guaranteed annuity
rate business. Future cash flows have been valued using a discount rate
of 11.2%.
The impairment test was carried out using assumptions which
management consider reasonable. However, given the limited
experience available to date since the implementation of the pension
freedoms, there remains considerable uncertainty as to the long-term
impact on policyholder behaviour of the changes to the annuities rules.
Were actual experience with regard to the take-up rates and profit
margins for annuity business to differ significantly from management’s
current best estimate assumptions, there is a potential for the carrying
value of the intangible to exceed the value in use.
The customer relationships intangible disposed of during 2014 related
to the investment management contracts (‘IMCs’) held within Ignis,
the disposal of which was completed on 1 July 2014 (see note I1.1).
Other intangibles of £3 million relating to capitalised software costs held
within Ignis were also disposed of during 2014.
The amortisation charge for customer relationships and other is
presented separately in the consolidated income statement.
G7.4 Present value of future profits on non-participating business
in the with-profit fund
The principal assumptions used to calculate the present value of future
profits are the same as those used in calculating the insurance contract
liabilities given in note F4.1. Revaluation of the present value of future
profits is charged or credited to the consolidated income statement
as appropriate.
Phoenix Group Holdings Annual Report and Accounts 2015 165
G8. PROPERTY, PLANT AND EQUIPMENT
Owner-occupied property is stated at its revalued amount, being
its fair value at the date of the revaluation less any subsequent
accumulated depreciation and impairment. Owner-occupied
property is depreciated over its estimated useful life, which is taken
as 50 years. Land is not depreciated. Gains and losses on owner-
occupied property are recognised in the statement of consolidated
comprehensive income.
At 1 January
Additions
Improvements
Disposals
Gains on adjustments to fair value
(recognised in profit and loss)
At 31 December
2015
£m
1,858
152
19
(227)
140
1,942
2014
£m
1,603
107
7
(59)
200
1,858
Owner-occupied property
2015
£m
19
2014
£m
15
Unrealised gains on properties held at end
of period
120
194
The property portfolio consists of a mix of commercial sectors, held
by the life companies, £420 million (2014: £407 million), and by the
UK Commercial Property Trust, £1,312 million (2014: £1,265 million).
The portfolio is spread geographically throughout the UK.
Investment properties also include £210 million (2014: £186 million)
of property reversions arising from sales of the NPI Extra Income Plan
(see note E5 for further details).
Commercial investment property is measured at fair value by
independent property valuers having appropriate recognised
professional qualifications and recent experiences in the location and
category of the property being valued. The valuations are carried out
in accordance with the Royal Institute of Chartered Surveyors (‘RICS’)
guidelines with expected income and capitalisation rate as the key
non observable inputs.
The residential property reversions, an interest in customer’s properties
which the Group will realise upon their death, are valued using a DCF
model based on the Group’s proportion of the current open market
value, and discounted for the expected lifetime of the policyholder.
The open market value is measured by independent local property
surveyors having appropriate recognised professional qualifications with
reference to the condition of the property and local market conditions.
The individual properties are valued triennially and indexed using
regional house price indices to the 31 December 2015. The discount
rate is a risk-free rate appropriate for the duration of the asset, adjusted
for liquidity and mortality risk. Assumptions are also made in the
valuation for future movements in property prices. The residential
property reversions have been substantially refinanced under the
arrangements with Santander as described in note E5.
Jones Lang Lasalle, an accredited independent valuer, completed a
valuation of owner-occupied property at 31 December 2015 on an
open market basis in accordance with the Royal Institution of Chartered
Surveyors’ requirements, which is deemed to equate to fair value.
The fair value measurement for the property of £19 million has been
categorised as a Level 3 fair value based on the non-observable inputs
to the valuation technique used.
The following table shows a reconciliation from the opening to the
closing fair value for the Level 3 owner-occupied property at valuation:
At 1 January
Depreciation recognised in profit or loss
Remeasurement recognised in other comprehensive
income
At 31 December
Unrealised gains for the year
2015
£m
15
–
4
19
4
The fair value of the owner-occupied property at valuation was derived
using the investment method supported by comparable evidence.
The significant non-observable inputs used in the valuation are the
expected rental value per square foot and the capitalisation rate.
The fair value of the owner-occupied property valuation would increase
(decrease) if the expected rental value per square foot were to be higher
(lower) and the capitalisation rate were to be lower (higher).
G9. INVESTMENT PROPERTY
Investment property is stated at fair value. Fair value is the price
that would be received to sell a property in an orderly transaction
between market participants at the measurement date. Gains and
losses arising from the change in fair value are recognised in the
consolidated income statement.
Leases, where a significant portion of the risks and rewards of
ownership are retained by the lessor, are classified as operating
leases. Where investment property is leased out by the Group, rental
income from these operating leases is recognised as income in
the consolidated income statement on a straight-line basis over the
period of the lease.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 166
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued
G9. INVESTMENT PROPERTY continued
The fair value measurement of the investment properties has been categorised as a Level 3 fair value based on the inputs to the valuation
techniques used. The following table shows the valuation techniques used in measuring the fair value of the investment properties, the
significant non-observable inputs used, the inter-relationship between the key non-observable inputs and the fair value measurement of the
investment properties:
Description
Valuation techniques
Significant non-observable inputs
Range (weighted average)
Commercial Investment Property
(held by life companies)
Commercial Investment Property
(held by the UK Commercial
Property Trust)
RICS valuation
Expected income per sq. ft.
£4.65 – £149.21 (£31.87)
Capitalisation rate
3.35% – 13.09% (5.36%)
Yield methodology
Expected income per sq. ft.
Retail: £3 – £324 (£67)
Office: £15 – £78 (£38)
Industrial: £5 – £19 (£8)
Leisure: £12 – £35 (£24)
Retail: 3.6% – 11.7% (5.4%)
Office: 3.9% – 7.5% (5.0%)
Industrial: 4.8% – 7.3% (5.6%)
Leisure: 5.1% – 5.9% (5.3%)
130% IFL92C15 – Female
130% IML92C15 – Male
Capitalisation rate
Residential Property Reversions
(held by life companies)
DCF Model and RICS valuation
Mortality
Future growth in house prices
5 year RPI estimate + 1% margin
Discount rates
5 year Gilt Spot Rate + 1.7% margin
The estimated fair value of the commercial properties (held by life companies and UK Commercial Property Trust) would increase (decrease) if:
Ɛ the expected income were to be higher (lower); or
Ɛ the capitalisation rate were to be lower (higher).
The fair value of the residential property reversions (held by life companies) would increase (decrease) if the market value of the property were to
be higher (lower) or the life expectancy of the policyholders were to increase (decrease). The fair value is also sensitive to discount rate and house
prices as follows:
Ɛ an increase (decrease) of 1% in house price inflation would increase (decrease) the fair value by £11 million;
Ɛ an increase of 1% in the discount rate would decrease the fair value by £10 million; and
Ɛ a decrease of 1% in the discount rate would increase the fair value by £11 million.
Direct operating expenses (offset against rental income in the income statement) in respect of investment properties that generated rental income
during the year amounted to £5 million (2014: £5 million). The direct operating expenses arising from investment property that did not generate
rental income during the year amounted to £3 million (2014: £2 million).
Phoenix Group Holdings Annual Report and Accounts 2015 167
2015
£m
91
295
436
2014
£m
92
284
414
Future minimum lease rental receivables in respect of non-cancellable operating leases on investment properties were as follows:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
G10. OTHER RECEIVABLES
Other receivables are recognised when due and measured on initial recognition at the fair value of the amount receivable. Subsequent to initial
recognition, these receivables are measured at amortised cost using the effective interest rate method.
Investment broker balances
Cash collateral pledged
Other debtors
Amount recoverable after 12 months
G11. CASH AND CASH EQUIVALENTS
2015
£m
73
327
74
474
2014
£m
98
597
55
750
–
–
Cash and cash equivalents comprise cash balances and short-term deposits with an original maturity term of three months or less at the date of
placement. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are deducted from cash
and cash equivalents for the purpose of the statement of consolidated cash flows.
Bank and cash balances
Short-term deposits (including demand and time deposits)
2015
£m
773
3,167
3,940
2014
£m
1,007
4,060
5,067
All deposits are subject to fixed interest rates. The carrying amounts approximate to fair value at the period end. Cash and cash equivalents
in long-term business operations and collective investment schemes of £3,836 million (2014: £4,821 million) are primarily held for the benefit
of policyholders and so are not generally available for use by the owners.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 168
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
H. INTERESTS IN SUBSIDIARIES AND JOINT VENTURES
H1.1 Significant restrictions
The ability of subsidiary undertakings to transfer funds to the Group in
the form of cash dividends or to repay loans and advances is subject to
local laws, regulations and solvency requirements.
Each UK Life company and the Group must retain sufficient capital
at all times to meet the regulatory capital requirements mandated by
or otherwise agreed with the PRA. Further information on the capital
requirements applicable to Group entities are set out in the Capital
Management note (I4). Under UK company law, dividends can only
be paid if a UK company has distributable reserves sufficient to cover
the dividend.
In addition, contractual requirements may place restrictions on the
transfer of funds as follows:
Ɛ the Pearl Pension Scheme funding agreement includes certain
covenants which restrict the transfer of funds within the Group.
Details are provided in note G6;
Ɛ as disclosed in note D3.1, deferral of the coupon payable on the
Notes may restrict the payment of dividends by certain Group
companies; and
Ɛ in the first half of 2014 there was a restriction on the ability of
certain subsidiary undertakings to distribute funds to Phoenix Group
Holdings as a result of restrictions imposed by the Group’s two
credit agreements, namely the Pearl Facility and the Impala Facility.
These facilities were replaced with a single debt facility in July 2014
thereby removing these restrictions. Details of restrictions on the
payment of dividends imposed by this facility are provided in note E5.
H2. STRUCTURED ENTITIES
A structured entity is an entity that has been designed so that voting
or similar rights are not the dominant factor in deciding who controls
the entity, such as when any voting rights relate to administrative tasks
only, and the relevant activities are directed by means of contractual
arrangements. A structured entity often has some or all of the following
features or attributes: (a) restricted activities; (b) a narrow and well-
defined objective, such as to provide investment opportunities for
investors by passing on risks and rewards associated with the assets
of the structured entity to investors; (c) insufficient equity to permit the
structured entity to finance its activities without subordinated financial
support; and (d) financing in the form of multiple contractually linked
instruments to investors that create concentrations of credit or other
risks (tranches).
H1. SUBSIDIARIES
Subsidiary undertakings are consolidated from the date that effective
control is obtained by the Group (see basis of consolidation in note
A1) and are excluded from consolidation from the date they cease
to be subsidiary undertakings. For subsidiary undertakings disposed
of during the year, any difference between the net proceeds, plus
the fair value of any retained interest, and the carrying amount
of the subsidiary undertaking including non-controlling interests,
is recognised in the consolidated income statement.
The Group uses the purchase method to account for the acquisition
of subsidiary undertakings. The cost of an acquisition is measured
at the fair value of the consideration. Any excess of the cost of
acquisition over the fair value of the net assets acquired is recognised
as goodwill. Any excess of the fair value of the net assets acquired
over the cost of acquisition is recognised in the consolidated income
statement. Directly attributable acquisition costs are included within
administrative expenses, except for acquisitions undertaken prior to
2010 when they are included within the cost of the acquisition. Costs
directly related to the issuing of debt or equity securities are included
within the initial carrying amount of debt or equity securities where
these are not carried at fair value. Intra-group balances and income
and expenses arising from intra-group transactions are eliminated in
preparing the consolidated financial statements.
The Group has invested in a number of collective investment
schemes such as Open-ended Investments Companies (‘OEICs’),
unit trusts, Société d’Investissement à Capital Variable (‘SICAVs’) and
private equity funds. These invest mainly in equities, bonds, property
and cash and cash equivalents. The Group’s percentage ownership in
these collective investment schemes can fluctuate according to the
level of Group and third party participation in structures.
For such collective investment schemes, the following circumstances
may indicate, in substance that the Group has power over the
investee:
Ɛ where the investee is managed by fund managers outside the
Group, the Group has existing substantive rights (such as power
of veto and liquidation rights) that give it the ability to direct the
current activities of the investee. In assessing the Group’s ability
to direct an investee the Group considers its ability relative to other
investors; and
Ɛ where the investee is managed by the Group’s fund manager,
and the Group holds a significant investment in the investee. It is
generally presumed that the Group has rights to variable returns
and has the ability to use its power to affect its returns where
the Group’s holding is greater than 50%. For holdings between
25% and 50% the Group performs an assessment of power
and associated control on a case by case basis. This assessment
includes establishing the nature of the decision making rights that
the fund manager has over the investee and whether these rights
give it the power to control the investee.
Where Group companies are deemed to control such collective
investment schemes they are consolidated in the Group financial
statements, with the interests of external third parties recognised as
a liability, see the accounting policy for ‘Net asset value attributable to
unitholders’ in note E1.
Certain of the collective investment schemes have non-coterminous
period ends and are consolidated on the basis of additional financial
statements prepared to the period end.
Phoenix Group Holdings Annual Report and Accounts 2015 169
The Group has determined that all of its investments in collective
investment schemes are structured entities. In addition, a number of
debt security structures, private equity funds and the Group’s joint
venture have been identified as structured entities. The Group has
assessed that it has interests in both consolidated and unconsolidated
structured entities as shown below:
Ɛ unit trusts;
Ɛ OEICs;
Ɛ SICAVs;
Ɛ private equity funds (‘PEF’s);
Ɛ asset-backed securities;
Ɛ collateralised debt obligations (‘CDO’s); and
Ɛ other debt structures
The Group’s holdings in the above investments are subject to the terms
and conditions of the respective fund’s prospectus and are susceptible
to market price risk arising from uncertainties about future values.
The Group holds redeemable shares or units in each of the funds.
The funds are managed by internal and external fund managers who
apply various investment strategies to accomplish their respective
investment objectives. All of the funds are managed by fund managers
who are compensated by the respective funds for their services.
Such compensation generally consists of an asset-based fee and a
performance-based incentive fee and is reflected in the valuation of
each fund.
Equities
Collective investment schemes:
Directly held collective investment schemes1:
Equities
Bonds
Property
Diversified
Short-term liquidity
Indirectly held collective investment
schemes2
Fixed and variable rate income securities:
CDOs
Asset-backed securities
2015
Carrying
value of
financial
assets
£m
217
2014
Carrying
value of
financial
assets
£m
367
728
286
117
3
1,932
808
303
280
–
873
760
1,319
221
669
224
517
4,933
4,691
1 Directly held collective investment schemes refer to those structured entities directly
invested in by Group companies. Such investments have been analysed by reference
to the predominant asset class the structure is investing in.
2 Indirectly held collective investment schemes are those interests in structured entities
that are held by collective investment schemes over which it has been assessed that the
Group exercises overall control and have been consolidated into the financial statements.
H2.1 Interests in consolidated structured entities
The Group has determined that where it has control over funds, these
investments are consolidated structured entities.
At 31 December 2015 the Group has granted loans to the PGH EBT of
£6 million (2014: £6 million). Further loans are expected to be granted in
2016. Details are provided in note D2.
The Group’s maximum exposure to loss with regard to the interests
presented above is the carrying amount of the Group’s investments.
Once the Group has disposed of its shares or units in a fund, it ceases
to be exposed to any risk from that fund. The Group’s holdings in the
above unconsolidated structured entities are largely less than 50% and
as such the size of these structured entities are likely to be significantly
higher than their carrying value.
As at the reporting date the Group has no intention to provide financial
or other support in relation to any consolidated structured entity.
Details of commitments to subscribe to private equity funds and other
unitised assets are included in note I7.
H2.2 Interests in unconsolidated structured entities
The Group has interests in unconsolidated structured entities.
These investments are held as financial assets in the Group’s
consolidated statement of financial position held at fair value through
profit or loss. Any change in fair value is included in the consolidated
income statement in ‘net investment income’. Dividend and interest
income is received from these investments.
A summary of the Group’s interest in unconsolidated structured entities
is included below. These are shown according to the financial asset
categorisation in the consolidated statement of financial position and
further analysed by type of fund in which the entity is invested.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 170
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
H. INTERESTS IN SUBSIDIARIES AND JOINT VENTURES continued
H3. GROUP ENTITIES
The table below sets out the Group’s subsidiary undertakings (including collective investment schemes that have been consolidated within the
Group’s financial statements), joint ventures, associates and significant holdings in undertakings (including undertakings where holding amounts
to 20% or more of the nominal value of the shares or units and they are not classified as a subsidiary undertaking, joint venture or associate).
If
unincorporated,
address of
principal
place of
business
Country of
incorporation
(if not UK)
Type of
investment (including
class of
shares held)
% of shares/
units held
Subsidiary undertakings:
National Provident Life Limited (Life assurance company)
Phoenix Life Assurance Limited (Life assurance company)
Phoenix Life Limited (Life assurance company)
Impala Holdings Limited (Holding company)
Mutual Securitisation plc (Finance company)
NP Life Holdings Limited (Holding company)
Opal Reassurance Limited (Reassurance company)2
PGH Capital Limited (Finance company)2
PGH (LCA) Limited (Finance company)2
PGH (LCB) Limited (Finance company)2
PGH (LC1) Limited (Finance company)
PGH (LC2) Limited (Finance company)
PGH (MC1) Limited (Finance company)
PGH (MC2) Limited (Finance company)
PGH (TC1) Limited (Holding company)2
PGH (TC2) Limited (Holding company)2
Pearl Group Holdings (No. 1) Limited (Finance company)
Pearl Group Holdings (No. 2) Limited (Holding company)
Pearl Life Holdings Limited (Holding company)
Pearl Group Services Limited (Management services company)
Pearl Group Management Services Limited (Management
services company)
Phoenix Life Holdings Limited (Holding company)
PGMS (Ireland) Limited (Management services company)
PA (GI) Limited (Non-trading company)
Phoenix Customer Care Limited (Financial services company)
Britannic Finance Limited (Finance and insurance
services company)
Britannic Money Investment Services Limited
(Investment advice company)
Phoenix Unit Trust Managers Limited (Unit trust manager)
Pearl Customer Care Limited (Financial services company)
Pearl Life Services Limited (Property landlord)
Republic of
Ireland
Bermuda
Republic of
Ireland
Republic of
Ireland
Pearl (WP) Investments LLC (Investment company)
US
Phoenix SCP Limited (Investment company)
Scottish Mutual Assurance Limited (Investment company)
Ordinary shares
100.00%
Ordinary shares
100.00%
Ordinary shares
100.00%
Ordinary shares
100.00%
N/A
N/A1
Ordinary shares
100.00%
Ordinary shares
100.00%
Ordinary shares
100.00%
Ordinary shares
100.00%
Ordinary shares
100.00%
Ordinary shares
100.00%
Ordinary shares
100.00%
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Ordinary shares
Ordinary shares
100.00%
100.00%
Ordinary shares
Ordinary shares
Ordinary shares
100.00%
100.00%
100.00%
Ordinary shares
100.00%
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Phoenix Group Holdings Annual Report and Accounts 2015 171
If
unincorporated,
address of
principal
place of
business
Type of
investment (including
class of
shares held)
% of shares/
units held
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Country of
incorporation
(if not UK)
Jersey
Jersey
Jersey
Jersey
Republic of
Ireland
Impala Loan Company 1 Limited (Investment company)
SMA (Jersey) Limited (Investment company)
ILC1 (Jersey) Limited (Investment company)
PGH1 (Jersey) Limited (Investment company)
IH (Jersey) Limited (Investment company)
Pearl Assurance Group Holdings Limited (Investment company)
PGMS (Ireland) Holdings (Holding company)
PGMS (Glasgow) Limited (Investment company)
Phoenix SCP Pensions Trustees Limited (Trustee company)
Phoenix SCP Trustees Limited (Trustee company)
PGS2 Limited (Investment company)
Century Group Limited (Investment company)
Pearl RLH Limited (Investment holding company)
SPL (Holdings) Limited (Investment holding company)
Alcobendas Entrust Limited (Investment company)
Scottish Mutual Pension Funds Investment Limited
(Trustee company)
Britannic Group Services Limited (Dormant company)
Phoenix Pensions Trustee Services Limited (Dormant company)
Pearl (Covent Garden) Limited (Dormant company)
NPI (Westgate) Limited (Dormant company)
NPI (Printworks) Limited (Dormant company)
Pearl (Barwell 2) Limited (Dormant company)
Pearl (Chiswick House) Limited (Dormant company)
Pearl (Printworks) Limited (Dormant company)
Pearl (Stockley Park) Limited (Dormant company)
London Life Trustees Limited (Dormant company)
Pearl Trustees Limited (Dormant company)
Pearl Group Secretariat Services Limited (Dormant company)
Phoenix Life Pension Trust Limited (Dormant company)
Century Trustee Services Limited (Dormant company)
Pearl AL Limited (Dormant company)
Phoenix Pensions Limited (Dormant company)
Bradford Insurance Company Limited (Dormant company)
Clearfol Investment Limited (Dormant company)
Pearl PLP Limited (Dormant company)
SL Liverpool PLC (Dormant company)
SPL (Holdings 1) Limited (Non-trading company)
Zilmer Limited (Dormant company)
Alba Life Trustees Limited (Non-trading company)
Scottish Mutual Customer Care Limited (Dormant company)
BA (FURBS) Limited (Dormant company)
PG Dormant No. 1 Limited (Dormant company)
Phoenix Annuities Limited (Dormant company)
Phoenix Group Holdings Annual Report and Accounts 2015Financials 172
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
H. INTERESTS IN SUBSIDIARIES AND JOINT VENTURES continued
H3. GROUP ENTITIES continued
If
unincorporated,
address of
principal
place of
business
Country of
incorporation
(if not UK)
Phoenix Pension Scheme (Trustees) Limited
Evergreen Trustee Limited (Dormant company)
Corunna Limited (Dormant company)
Pearl ULA Limited (Dormant company)
Scottish Mutual Nominees Limited (Dormant company)
National Provident Institution (Dormant company)
Phoenix & London Assurance Limited (Dormant company)
Cityfournic (Dormant company)
Phoenix Life Insurance Services Limited
Scottish Mutual International Holdings (Holding company)
London Life Limited (Non-trading company)
Pearl RLG Limited (Dormant company)
The London Life Association Limited (Dormant company)
Pearl BULA Limited (Dormant company)
The Scottish Mutual Assurance Society (Dormant company)
The Phoenix Life SCP Institution (Dormant company)
Alba LAS Pensions Management Limited (Dormant company)
Axial Fundamental Strategies (US Investments) LLC
(Non-trading company)
Bellevale Properties Limited (Holding company)
Pearl Breakfast Unit Trust (Jersey Property Unit Trust)
Pearl (Martineau Phase 2) Limited (Dormant company)
Pearl MG Birmingham Limited (Dormant company)
The Pearl Martineau Galleries Limited Partnership (Dormant)
Pearl (Martineau Phase 1) Limited (Dormant company)
Pearl MP Birmingham Limited (Dormant company)
The Pearl Martineau Limited Partnership (Dormant company)
Pearl (Moor House 1) Limited (Dormant company)
Pearl (Moor House 2) Limited (Dormant company)
Pearl (Moor House) Limited (Dormant company)
UK Commercial Property Trust Limited
(Property investment company)
UK Commercial Property Estates Holdings Limited
(Property investment company)
UK Commercial Property Holdings Limited
(Property investment company)
UK Commercial Property Estates Limited
(Property investment company)
UK Commercial Property Nominee Limited
(Property investment company)
UK Commercial Property GP Limited
UKCPT Limited Partnership
Republic of
Ireland
US
Gibraltar
Jersey
Guernsey
Guernsey
Guernsey
Guernsey
Guernsey
Guernsey
Guernsey
Type of
investment
(including
class of
shares held)
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Unlimited without
shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Limited by guarantee
% of shares/
units held
100.00%
100.00%
100.00%
100.00%
100.00%
N/A
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
N/A
Ordinary shares
100.00%
Limited by guarantee
Limited by guarantee
N/A
N/A
Ordinary shares
Ordinary shares
100.00%
100.00%
Ordinary shares
Units
Ordinary shares
Ordinary shares
Limited Partnership
Ordinary shares
Ordinary shares
Limited Partnership
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
50.02%
Ordinary shares
50.02%
Ordinary shares
50.02%
Ordinary shares
50.02%
Ordinary shares
50.02%
Ordinary shares
Limited Partnership
50.02%
50.02%
Phoenix Group Holdings Annual Report and Accounts 2015 173
If
unincorporated,
address of
principal
place of
business
Type of
investment
(including
class of
shares held)
% of shares/
units held
Ordinary shares
100.00%
Floating rate notes
74.71%
Country of
incorporation
(if not UK)
Republic of
Ireland
London 3
London 3
OEIC, sub fund
OEIC, sub fund
London 3 Authorised unit trust
London 3
OEIC, sub fund
London 3 Authorised unit trust
London 3 Authorised unit trust
London 3
OEIC, sub fund
89.55%
82.15%
99.93%
83.97%
75.54%
99.87%
78.98%
London 3
OEIC, sub fund
68.18%
London 3
OEIC, sub fund
85.75%
London 3
OEIC, sub fund
74.42%
London 3 Authorised unit trust
London 3 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
99.95%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
99.97%
99.46%
CH Management Limited
Castle Hill Enhanced Floating Rate Opportunities Limited
Henderson Global Funds – Institutional Emerging Markets Fund
Henderson Multi-Manager Investment Fund – Henderson Diversified
Growth UK Fund
Henderson Institutional Credit Fund
Henderson Global Funds – Henderson Institutional Overseas Bond Fund
Henderson Institutional UK Enhanced Equity Trust
Henderson Institutional Mainstream UK Equity Trust
Henderson Strategic Investment Funds – Henderson Institutional
European Enhanced Equity Fund
Henderson Strategic Investment Funds – Henderson Institutional
Japan Enhanced Equity Fund
Henderson Strategic Investment Funds – Henderson Institutional
North American Enhanced Equity Fund
Henderson Strategic Investment Funds – Henderson Institutional Asia
Pacific Ex Japan Enhanced Equity Fund
Henderson Institutional UK Equity Tracker Trust
Henderson Short Duration Bond Fund
PUTM Bothwell Floating Rate ABS Fund
PUTM Bothwell Global Credit Fund
PUTM Bothwell Fixed ABS Sterling Hedged Fund
PUTM Bothwell Asia Pacific (Excluding Japan) Fund
PUTM Bothwell Emerging Market Debt Unconstrained Fund
PUTM Bothwell Emerging Markets Equity Fund
PUTM Bothwell European Credit Fund
PUTM Bothwell Europe Fund
PUTM Bothwell Credit Financial Sterling Hedged Fund
PUTM Bothwell Global Bond Fund
PUTM Bothwell Global Equity Fund
PUTM Bothwell Index-Linked Sterling Hedged Fund
PUTM Bothwell Japan Tracker Fund
PUTM Bothwell Long Gilt Sterling Hedged Fund
PUTM Bothwell North America Fund
PUTM Bothwell Credit Non Financial Sterling Hedged Fund
PUTM Bothwell UK Equity Smaller Companies Fund
PUTM Bothwell Sterling Government Bond Fund
PUTM Bothwell Euro Sovereign Fund
PUTM Bothwell Sterling Credit Fund
PUTM Bothwell Tactical Asset Allocation Fund
PUTM Bothwell UK Equity 350 Fund
PUTM Bothwell UK Equity Income Fund
PUTM UK All-Share Index Unit Trust
PUTM Cautious Unit Trust
Phoenix Group Holdings Annual Report and Accounts 2015Financials 174
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
H. INTERESTS IN SUBSIDIARIES AND JOINT VENTURES continued
H3. GROUP ENTITIES continued
Country of
incorporation
(if not UK)
PUTM European Unit Trust
PUTM Far Eastern Unit Trust
PUTM International Growth Unit Trust
PUTM North American Unit Trust
PUTM Opportunity Unit Trust
PUTM UK Stock Market Fund (Series 3)
PUTM UK Stock Market Fund
PUTM UK Equity Unit Trust
PUTM Growth Unit Trust
Ignis Liquidity Fund Plc – Euro Liquidity Fund
Ignis Liquidity Fund Plc – Sterling Liquidity Fund
Ignis Liquidity Fund Plc – Sterling Short Duration Cash Fund
Ignis Strategic Solutions Funds Plc – Fundamental Strategies Fund
Ignis Strategic Solutions Funds Plc – Systematic Strategies Fund
Ignis Private Equity Fund LP
Ignis Strategic Credit Fund LP
Joint ventures:
If
unincorporated,
Type of
address of
investment
principal
(including
place of
class of
business
shares held)
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Wythall 4 Authorised unit trust
Dublin 5
OEIC, sub fund
Dublin 5
Dublin 5
Dublin 5
Dublin 5
Cayman Islands 6
Cayman Islands 6
Limited Partnership
Limited Partnership
OEIC, sub fund
OEIC, sub fund
OEIC, sub fund
OEIC, sub fund
% of shares/
units held
99.51%
99.75%
99.87%
99.25%
100.00%
99.76%
100.00%
99.79%
100.00%
100.00%
59.20%
81.37%
100.00%
100.00%
100.00%
100.00%
The Tesco Property Limited Partnership (property joint venture)
Tesco Property Partner (GP) Limited (property joint venture)
Limited Partnership
Ordinary shares
50.00%
50.00%
Associates:
Castle Hill Asset Management LLC
US
Ordinary shares
40.00%
Significant holdings:
Henderson Global Funds – World Select Fund
Henderson Global Care Funds – Henderson Global Care Growth Fund
Henderson Global Care Funds – Henderson Institutional Global Care
Managed Fund
Henderson Institutional High Alpha UK Equity Fund
Henderson UK & Europe Funds – Henderson Institutional UK Gilt Fund
London 3
London 3
London 3
OEIC, sub fund
OEIC, sub fund
OEIC, sub fund
London 3 Authorised unit trust
London 3
OEIC, sub fund
28.00%
22.78%
68.00%
37.99%
70.56%
1 The shares of this subsidiary undertaking are held by a trust. The Group has assessed that it exercises overall control in respect of this subsidiary undertaking.
2 These subsidiary undertakings are directly owned by Phoenix Group Holdings.
3 201 Bishopsgate, London, EC2M 3AE.
4 1 Wythall Green Way, Wythall, Birmingham, B47 6WG.
5 25/28 North Wall Quay, Dublin 1, Ireland.
6 Ugland House, Grand Cayman, Cayman Islands, KY1-1104.
Phoenix Group Holdings Annual Report and Accounts 2015 175
The following subsidiary undertakings were fully disposed of during the
period and were deconsolidated from the date of disposal:
Ɛ Scottish Mutual International Limited (life assurance company)
(for further details see note I1.3);
Ɛ Castle Hill Credit Opportunities Holdings Limited (for further details
see note I1.4);
Ɛ Castle Hill Fixed Income Opportunities Sarl;
Ɛ PUTM Bothwell Emerging Market Debt Absolute Return Fund;
Ɛ Ignis Funds SICAV – Ignis Absolute Return Emerging Market
Debt Fund;
Ɛ Ignis Funds SICAV – Global Emerging Markets Equity Fund; and
Ɛ Ignis Global Growth Fund.
The following subsidiary undertakings were reclassified as significant
holdings due to the loss of effective control by the Group during
the period:
Ɛ Henderson Global Care Funds – Henderson Institutional Global Care
Managed Fund.
I. OTHER NOTES
I1. DISCONTINUED OPERATIONS, ASSETS AND LIABILITIES
HELD FOR SALE AND DISPOSALS
A discontinued operation is a component of the Group’s business,
the operations and cash flows of which can be clearly distinguished
from the rest of the Group and which:
Ɛ represents a separate major line of business; and
Ɛ is part of a coordinated plan to dispose of a separate line of
business.
Classification as a discontinued operation occurs at the earlier of
disposal or when the operation meets the criteria to be classified
as held for sale. When an operation is classified as a discontinued
operation, the comparative consolidated income statement
and statement of comprehensive income is re-presented as
if the operation had been discontinued from the start of the
comparative year.
Non-current assets or disposal groups are classified separately as
held for sale in the statement of financial position when their carrying
amount will be recovered through a sale transaction rather than
through continuing use. This condition is met only when the sale is
highly probable, the asset or disposal group is available for immediate
sale in its present condition, and management is committed to
the sale, which should be expected to qualify for recognition as
a completed sale within one year from the date of classification.
Liabilities directly associated with the assets classified as held for
sale and expected to be included as part of the sale transaction
are correspondingly also classified separately. The net assets and
liabilities of a disposal group classified as held for sale are measured
at the lower of their carrying amount and fair value less costs to sell.
I1.1 Discontinued operations
On 25 March 2014, the Group and Standard Life Investments (Holdings)
Limited (‘Standard Life Investments’) signed a disposal agreement
under which Standard Life Investments agreed to acquire the entire
issued share capital of Ignis in return for gross cash consideration
of £390 million. The divestment was completed on 1 July 2014 and
the results for the business have been included in the Ignis operating
segment up to this date. A post completion payment of £6 million,
calculated in accordance with the sale and purchase agreement,
was paid to Standard Life Investments on 24 September 2014.
As part of the divestment, the Group agreed to a purchase price
adjustment for a period of 10 years from the date of the divestment in
the event that assets held by the life companies are withdrawn from
management by Ignis Asset Management, other than for specific
reasons such as poor investment performance or for material breaches
of investment management contracts. In 2015 a liability of £2 million
was recognised as due to Standard Life Investments in respect of
assets no longer managed by Ignis Asset Management following the
recapture of annuity liabilities from Opal Re, a subsidiary undertaking of
the Company, and the subsequent reinsurance to RGA International.
The expense has been recognised in the consolidated income
statement in administrative expenses.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 176
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
I. OTHER NOTES continued
I1. DISCONTINUED OPERATIONS, ASSETS AND LIABILITIES HELD FOR SALE AND DISPOSALS continued
I1.1.1 Results of discontinued operations
The results of Ignis are as follows:
Fees
Net investment income
Total revenue
Administrative expenses
Total operating expenses
Loss before tax
Attributable tax credit
Gain on disposal of discontinued operations
Attributable tax credit
Profit for the year from discontinued operations
2014
£m
26
(6)
20
(47)
(47)
(27)
9
(18)
107
3
110
92
The loss before tax for the year ended 31 December 2014 excludes intra-group fee income of £38 million. This intra-group fee income represents
the difference between the result before tax for the period from discontinued operations (excluding the gain on disposal and attributable tax credit)
and the Ignis segmental result before tax attributable to owners results shown in note B1.1 and reflects the income earned by Ignis on managed
assets of the Group’s life companies.
The profit for the year ended 31 December 2014 from discontinued operations was entirely attributable to the owners of the parent.
The gain on disposal of discontinued operations of £110 million recognised in the results for the year ended 31 December 2014, comprised net
consideration received of £384 million less net assets and liabilities disposed of £254 million, transaction costs and tax.
I1.1.2 Cash flows generated by discontinued operations
The net cash flows generated by Ignis (including cash flows relating to the divestment) are as follows:
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Net cash inflow
Cash flows from investing activities of £311 million comprises net consideration received of £384 million less attributable transaction costs
of £5 million, less cash and cash equivalents disposed of £68 million.
2014
£m
31
311
(29)
313
Phoenix Group Holdings Annual Report and Accounts 2015 177
2014
£m
57
136
37
10
68
3
53
(27)
(23)
(60)
254
I1.1.3 Effect of disposal on the financial position of the Group
Goodwill
Customer relationships and other intangibles
Financial assets
Property, plant and equipment
Cash and cash equivalents
Deferred tax assets
Other assets
Deferred tax liabilities
Provisions
Other liabilities
Net assets and liabilities disposed of
I1.2 Assets and liabilities of operations classified as held for sale
The balances transferred to assets and liabilities classified as held for sale in the statement of consolidated financial position as at 31 December
2015 relate to the anticipated Part VII transfer of a portfolio of annuity liabilities to Guardian and to the sale of the Pearl Breakfast Unit Trust.
The balances as at 31 December 2014 relate to the anticipated Part VII transfer to Guardian.
Assets classified as held for sale:
Reinsurer’s share of insurance contract liabilities
Investment in joint venture
Liabilities classified as held for sale:
Liabilities under insurance contracts
2015
£m
2014
£m
1,521
149
1,670
1,713
–
1,713
1,587
1,587
1,776
1,776
Phoenix Group Holdings Annual Report and Accounts 2015Financials
178
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
I. OTHER NOTES continued
I1. DISCONTINUED OPERATIONS, ASSETS AND LIABILITIES HELD FOR SALE AND DISPOSALS continued
I1.2.1 Annuity liabilities transfer
On 31 July 2014, the Group entered into a reinsurance agreement, effective from 1 January 2014, to reinsure certain portfolios of the Group’s
annuity liabilities to Guardian in exchange for the transfer of financial assets of £1.7 billion. The annuity in-payment liabilities are currently held in the
Group’s with-profit funds. It is highly probable that the reinsurance agreement will be replaced by a formal scheme under Part VII of the Financial
Services and Market Act 2000 to transfer the annuity liabilities to Guardian or a member of its group. Management’s expectations are that the
necessary approvals will be in place by the end of 2016. The parties remain committed to fulfilling their contractual obligations in relation to the
Part VII. Accordingly the assets and liabilities to be transferred have been classified as held for sale.
Liabilities classified as held for sale include the annuity liabilities reinsured to Guardian and directly attributable expense reserves where they will
be extinguished at the time of transfer. Assets classified as held for sale include the associated reinsurers’ share of insurance contract liabilities.
Under the terms of this reinsurance agreement Guardian holds assets in a collateral account over which the Group has a fixed charge as disclosed
in note F3.2.
I1.2.2 Sale of Pearl Breakfast Unit Trust
At 31 December 2015 the Group invested in an investment property joint venture which was held by the Pearl Breakfast Unit Trust. In 2015 the
Group committed to selling the Pearl Breakfast Unit Trust (and consequently its investment in the joint venture) and on 25 February 2016 the units
in the Pearl Breakfast Unit Trust were sold to Tesco Property Holdings (No.2) Limited and Tesco Property Holdings Limited. As part of the sale
agreement Tesco plc also purchased the Group’s investment in Tesco Property Partner (GP) Limited.
The Group’s investment in the joint venture has therefore been classified as held for sale as at 31 December 2015.
I1.3 Scottish Mutual International (‘SMI’)
On 2 December 2015, the Group completed the sale of its entire interest in SMI for gross cash consideration of £14 million following a pre-
completion return of capital by SMI. The carrying value of the net assets transferred was £1 million which excludes £11 million of recoverables
under an intercompany reinsurance agreement that is eliminated on consolidation.
Cash consideration received (net of transaction costs)
Less: carrying value of net assets sold
Financial assets
Cash and cash equivalents
Other receivables
Liabilities under insurance contracts
Unallocated surplus
Other liabilities
Intercompany liabilities under insurance contracts assumed on disposal
Loss on sale (net of tax)
I1.4 Castle Hill Credit Opportunities Holding Limited (‘CHCOHL’)
2015
£m
12
(181)
(12)
(1)
169
20
4
(1)
(11)
–
During the second half of 2015, the Group completed the disposal of its entire investment in the Sterling (Class A) loan notes of CHCOHL. No gain
or loss arose on the disposal of the investment as the net assets of the structure were carried at fair value in the consolidated financial statements.
I1.5 BAGI
The Group completed the sale of its entire interest in BAGI to National Indemnity Company on 18 March 2014 for cash consideration of £21 million.
The carrying value of the net assets transferred was £17 million, resulting in a pre-tax gain of £4 million.
Phoenix Group Holdings Annual Report and Accounts 2015 179
I2. SHARE-BASED PAYMENT
Equity-settled share-based payments to employees and others providing services are measured at the fair value of the equity instruments at the
grant date. The fair value excludes the effect of non-market-based vesting conditions. Further details regarding the determination of the fair value
of equity-settled share-based transactions are set below.
The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting
period, based on the Group’s estimate of equity instruments that will eventually vest. At each period end, the Group revises its estimate of the
number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of the revision of
the original estimates, if any, is recognised in the consolidated income statement such that the cumulative expense reflects the revised estimate
with a corresponding adjustment to equity.
I2.1 Share-based payment expense
The expense recognised for employee services receivable during the year is as follows:
Expense arising from equity-settled share-based payment transactions
I2.2 Share-based payment schemes in issue
2015
£m
4
2014
£m
7
Long-term incentive plan (‘LTIP’)
In 2009, the Group implemented a long-term incentive plan to retain and motivate its senior management group. The awards under this plan are in
the form of nil-cost options to acquire an allocated number of ordinary shares. Assuming no good leavers or other events which would trigger early
vesting rights, these awards will be subject to performance conditions tied to the Company’s financial performance in respect of growth in MCEV,
cumulative cash generation over a three year period and total shareholder return (‘TSR’). For all LTIP awards made from 2015 onwards, a holding
period applies so that any LTIP awards for which the performance vesting requirements are satisfied will not be released for a further two years
from the third anniversary of the original award date. Dividends will accrue for LTIP awards until the end of the holding period. There are no cash
settlement alternatives.
The 2015 LTIP awards were granted on 28 September 2015. The 2012 LTIP awards vested during the year. The 2013 award will vest on
15 November 2016, the 2014 award will vest on 26 March 2017 and the 2015 award will vest on 28 September 2018.
The fair value of these awards is estimated at the share price at the grant date, taking into account the terms and conditions upon which the
instruments were granted.
Sharesave scheme
The sharesave scheme allows participating employees to save up to £250 each month over a period of either three or five years. This amount was
increased to £500 each month with respect to the 2014 and 2015 sharesave schemes.
Under the sharesave arrangement, participants remaining in the Group’s employment at the end of the three or five year saving period are entitled
to use their savings to purchase shares at an exercise price at a discount to the share price on the date of grant. Employees leaving the Group for
certain reasons are able to use their savings to purchase shares if they leave less than six months before the end of their three or five year periods.
The fair value of the awards has been determined using a Black-Scholes valuation model. Key assumptions within this valuation model include
expected share price volatility and expected dividend yield.
The 2010, 2011 and 2012 sharesave awards were increased during 2013 as a result of the equity raising on 21 February 2013. The exercise price
of these awards were also amended as a result of the equity raising. The 2015 sharesave awards were granted on 21 April 2015.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 180
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
I. OTHER NOTES continued
I2. SHARE-BASED PAYMENT continued
The following information was relevant in the determination of the fair value of the 2011 to 2015 sharesave awards in the year:
Share price (p)
Exercise price (£)
Expected life (years)
2015
sharesave
843.0
7.40
2014
sharesave
674.0
6.04
2013
sharesave
630.0
5.60
2012
sharesave
524.5
4.66
2011
sharesave
669.5
5.58
3.25 and 5.25
3.25 and 5.25
3.25 and 5.25
3.25 and 5.25
3.25 and 5.25
Risk-free rate (%) – based on UK government
gilts commensurate with the expected term
of the award
0.8 (for 3.25 year
scheme) and
1.2 (for 5.25 year
scheme)
1.3 (for 3.25 year
scheme) and
1.9 (for 5.25 year
scheme)
0.4 (for 3.25 year
scheme) and
0.8 (for 5.25 year
scheme)
0.6 (for 3.25 year
scheme) and
1.1 (for 5.25 year
scheme)
1.8 (for 3.25 year
scheme) and
2.6 (for 5.25 year
scheme)
Expected volatility (%) based on the
Company’s share price volatility to date
Dividend yield (%)
30.0
6.33
30.0
7.9
30.0
8.5
30.0
8.0
30.0
6.3
Deferred bonus share scheme (‘DBSS’)
With effect from 31 December 2010, part of the annual incentive for certain executives, for any year, is deferred into Phoenix Group Holdings’
shares. This grant of shares is conditional on the employee remaining in employment with the Group for a period of three years. For DBSS awards
made in 2015 and for those to be made in subsequent years, the three year deferral period will run to the dealing day following the three year
anniversary of the announcement of the annual results. Dividends will accrue for DBSS awards over the three year deferral period. The 2015 DBSS
was granted on 28 September 2015 and is expected to vest on 19 March 2018. The 2012 DBSS awards vested during the year. The 2013 awards
are expected to vest on 27 March 2016 and the 2014 awards are expected to vest on 28 March 2017.
The fair value of these awards is estimated at the share price at the grant date, taking into account the terms and conditions upon which the options
were granted.
Phoenix Group Holdings Annual Report and Accounts 2015 181
No. of share options 2015
LTIP
SAYE
DBSS
3,153,621
987,518
482,249
867,817
253,757
171,441
(248,865)
(43,738)
(28,732)
–
(21,585)
–
(993,902)
(343,272)
(95,874)
(84,498)
–
–
2,694,173
832,680
529,084
No. of share options 2014
LTIP
SAYE
DBSS
3,749,531
1,017,771
362,867
1,154,260
503,544
212,898
(610,236)
(241,221)
(31,570)
–
(34,703)
–
(1,139,934)
(257,873)
(61,946)
3,153,621
987,518
482,249
I2.3 Movements in the year
The following tables illustrate the number of, and movements in, share options during the year:
Outstanding at the beginning of the year
Granted during the year
Forfeited during the year
Cancelled during the year
Exercised during the year
Waived during the year
Outstanding at the end of the year
Outstanding at the beginning of the year
Granted during the year
Forfeited during the year
Cancelled during the year
Exercised during the year
Outstanding at the end of the year
The weighted average fair value of options granted during the year was £6.93 (2014: £5.65).
The weighted average share price at the date of exercise for the rewards exercised is £8.36 (2014: £6.90).
The weighted average remaining contractual life for the rewards outstanding as at 31 December 2015 is 1.6 years (2014: 1.4 years).
Phoenix Group Holdings Annual Report and Accounts 2015Financials 182
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
I. OTHER NOTES continued
I3. CASH FLOWS FROM OPERATING ACTIVITIES
The following analysis gives further detail behind the ‘cash utilised operations’ figure in the statement of consolidated cash flows.
Profit for the period before tax from continuing operations
Loss for the period before tax from discontinued operations (see note I1.1.1)
Profit for the period before tax
Non-cash movements in profit for the year before tax
Fair value (gains)/losses on:
Investment property
Financial assets
Change in fair value of borrowings
Amortisation and impairment of intangible assets
Change in present value of future profits
Change in unallocated surplus
Share-based payment charge
Interest expense on borrowings
Net interest income on Group defined benefit pension scheme asset/liability
Other expenses and losses on pension schemes
Gain on sale of BAGI (see note I1.5)
Gain on divestment of Ignis (see note I1.1.1)
Decrease in investment assets
(Increase)/decrease in reinsurance assets
(Decrease)/increase in insurance contract and investment contract liabilities
(Decrease)/increase in deposits received from reinsurers
Decrease in obligation for repayment of collateral received
Net decrease in working capital
Cash utilised by operations
Separate disclosure of the cash flows from operating activities generated by discontinued operations is provided in note I1.1.1.
2015
£m
152
–
152
2014
£m
465
(27)
438
(140)
1,125
(200)
(3,494)
48
163
6
(84)
4
136
(17)
3
–
–
2,468
(1,134)
(3,487)
(30)
(229)
440
(576)
19
113
9
11
7
156
(4)
3
(4)
(107)
5,556
43
37
23
(6,330)
8
(3,716)
Phoenix Group Holdings Annual Report and Accounts 2015
183
I4. CAPITAL MANAGEMENT
Capital management framework
This note sets out the Group’s approach to managing capital, provides
an analysis of available capital resources and explains the different
regulatory capital requirements of the Group and its life companies.
The Group’s Capital Management Framework is designed to achieve
the following objectives:
Ɛ provide appropriate security for policyholders and meet all regulatory
capital requirements whilst not retaining unnecessary excess capital;
Risk and capital management objectives
Ɛ ensure sufficient liquidity to meet obligations to policyholders and
other creditors;
Ɛ optimise the level of debt in the Group statement of consolidated
financial position to maintain an investment grade credit rating; and
Ɛ to meet the dividend expectations of shareholders as set by the
Group’s dividend policy.
The framework comprises a suite of capital management policies that
govern the allocation of capital throughout the Group to achieve the
framework objectives under a range of stress conditions. The policy
suite is defined with reference to policyholder security, creditor
obligations, owner dividend policy and regulatory capital requirements.
The capital policy of each life company is set and monitored by each life
company Board. These policies ensure there is sufficient capital within
each life company to meet regulatory capital requirements under a
range of stress conditions. The capital policy of each life company varies
according to the risk profile and financial strength of the company.
Regulatory capital adequacy at a Group level is calculated at the ultimate
EEA insurance parent undertaking which is PLHL. This continues to be
the case after 1 January 2016 under the Solvency II regime.
The risk management objectives and policies of the Group are based
on the requirement to protect the Group’s regulatory capital position,
thereby safeguarding policyholders’ guaranteed benefits whilst also
ensuring the Group can meet its various cash flow requirements.
Subject to this, the Group seeks to use available capital to achieve
increased returns, balancing risk and reward, to generate additional
value for policyholders and shareholders.
In pursuing these objectives, the Group deploys financial and other
assets and incurs insurance contract liabilities and financial and other
liabilities. Financial and other assets principally comprise investments
in equity securities, fixed and variable rate income securities, collective
investment schemes, property, derivatives, reinsurance, trade and
other receivables, and banking deposits. Financial liabilities principally
comprise investment contracts, borrowings for financing purposes,
derivative liabilities and net asset value attributable to unit holders.
The risk management disclosures in the consolidated financial
statements set out the major risks that the Group businesses are
exposed to and describe the Group’s approach to managing these.
The section on financial risk is included in note E6, the section on
insurance risk is included in note F4 and the sections on risk and
capital management objectives and other risks are included below.
The Group’s risk management framework is described in the risk
management commentary on pages 34 to 39 of the Annual Report
and Accounts.
Other risks
Customer risk
Customer risk is the risk of reductions in earnings and/or value, through
inappropriate or poor customer treatment (including poor advice).
Operational risk
Operational risk is the risk of reductions in earnings and/or value,
through financial or reputational loss, from inadequate or failed internal
processes and systems, or from people related or external events.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 184
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
I. OTHER NOTES continued
I4. CAPITAL MANAGEMENT continued
Group capital
Capital resources
The primary sources of capital used by the Group prior to 1 January 2016 comprised equity shareholder funds as measured on an MCEV basis,
the Perpetual Reset Capital Securities and shareholder borrowings. This is analysed as follows:
Total IFRS equity attributable to owners of the parent1
Adjustments between IFRS equity attributable to owners of the parent and MCEV net worth2
MCEV value of in-force business2
Group MCEV
Gross shareholder debt:
Perpetual Reset Capital Securities
Shareholder borrowings
Difference between IFRS and MCEV carrying values of shareholder borrowings
Gross MCEV
1 As shown in the consolidated statement of financial position.
2 As detailed in the reconciliation of Group IFRS equity to MCEV net worth in the MCEV financial statements.
Notes
D3.1
E5
2015
£m
2014
£m
2,434
2,365
(1,863)
(1,899)
1,942
2,513
6
1,491
95
2,181
2,647
408
1,275
78
4,105
4,408
From 1 January 2016, the primary sources of capital used by the Group comprise the Group Basic Own Funds calculated on a Solvency II basis
(see Solvency II regulatory capital measures below).
Leverage
In managing capital the Group seeks to optimise the level of debt on its balance sheet. The Group’s closed book business model allows it to
operate with higher leverage than life companies that are still writing new business, as it does not need to fund upfront capital requirements and
new business acquisition expenses.
Further detail on the Group’s financial leverage calculation (unaudited) is provided in the business review on page 33.
Regulatory capital measures (applicable until 31 December 2015)
Under the regulatory rules applicable until 31 December 2015, each UK life company and PLHL was required to retain sufficient capital at all
times to meet the regulatory capital requirements mandated by the PRA. In addition to EU-directive-based ‘Pillar 1’ individual and group capital
requirements, the PRA also stipulated a ‘Pillar 2’ of risk-based capital requirements that were implemented in the UK. The actual capital requirement
for each UK life company and PLHL is based on whichever of the Pillar 1 or Pillar 2 requirement turns out to be more onerous for the company and
for PLHL. Each UK life company generally holds an amount of capital that is greater than the minimum required amount to allow for adverse events
in the future that may use capital and might otherwise cause the company to fail the minimum level of regulatory capital test.
UK Life companies
Capital resources of the UK life companies comprise capital arising within their long-term fund, i.e. within the with-profit funds and non-participating
funds; and capital arising outside their long-term fund. There are certain restrictions that operate over the capital in these funds which are
summarised as follows:
With-profit funds – any available surplus held in each fund can only be used to meet the requirements of the fund itself or be distributed to
policyholders and owners. In 90:10 with-profit funds, policyholders are entitled to at least 90% of the distributed profits while owners receive the
balance. In 100:0 with-profit funds, policyholders are entitled to 100% of the distributed profits.
Non-participating funds – any available surplus held in these funds is attributable to owners. Capital within the non-participating funds may be made
available to meet capital requirements elsewhere in the Group subject to meeting regulatory and legal requirements, and after consideration of the
internal capital requirements of the relevant fund and company.
Pillar 1 capital requirements
The regulatory capital requirement under Pillar 1 for the Group’s UK life companies applicable until 31 December 2015 was the total amount held in
respect of investment, expense and insurance risks (the ‘long-term insurance capital requirement’ (‘LTICR’)) and an additional amount in respect of
with-profit funds which may result in an additional capital requirement referred to as the ‘with-profit insurance capital component’ (‘WPICC’).
Phoenix Group Holdings Annual Report and Accounts 2015 185
Pillar 2 capital requirements
The Pillar 2 capital requirements applicable until 31 December 2015
were based on a self-assessment methodology, called the ‘Individual
Capital Assessment’ (‘ICA’). This methodology determined the capital
requirement to ensure that the life company’s realistic liabilities could
be met in one year’s time with a 99.5% confidence level, or in other
words to be able to withstand a one in 200 year event. The PRA
reviewed each life company’s ICA and could impose additional capital
requirements if necessary in the form of ‘Individual Capital Guidance’
(‘ICG’).
PLHL Group
Prior to 1 January 2016, PLHL maintained two separate measures
of its regulatory capital resources and related capital requirements.
These were the Insurance Groups’ Directive (‘IGD’) and PLHL ICA,
which correspond to the Pillar 1 and Pillar 2 requirement respectively.
IGD
PRA regulated insurance groups (including their holding companies)
are required to assess capital adequacy on a group wide basis to
enable the PRA to assess both the level of insurance and financial
risk within the group and the capital resources available to cover that
risk. The assessment is known as the IGD, and was in force until
31 December 2015.
The Group’s IGD assessment was made at the ultimate insurance
parent undertaking within the EEA, which is PLHL. The assessment
aggregated the capital resources of the UK life companies and
insurance holding companies headquartered within the EEA and made
adjustments to remove internal holdings and apply regulatory rules
pertaining to the calculation. The result is compared with the aggregate
regulatory Pillar 1 capital requirements (see below) to determine the
overall surplus for the IGD measure of regulatory capital.
As at 31 December 2015, the unaudited estimated PLHL Group Capital
Resources were £5.9 billion (2014: £5.6 billion) and the unaudited
estimated PLHL Group IGD Surplus was £1.5 billion (2014: £1.2 billion).
Further detail of the PLHL IGD position (unaudited) is provided in the
business review on page 31.
PLHL ICA
Prior to 1 January 2016, the Group undertook a further group
solvency calculation, the ‘PLHL ICA’, at the same level at which the
IGD calculation was performed. This involves an assessment, on an
economic basis, of the capital resources and requirements arising from
the obligations and risks which exist outside of the life companies.
For this measure the capital resources included the surplus over
capital policy in the life companies and the net assets of the holding
companies, less the pension scheme obligations on an economic
basis. The capital requirements relate to the risks arising outside of the
life companies including those in relation to the Group’s staff pension
schemes, offset by Group diversification benefits. Applicable until
31 December 2015 and as agreed with the PRA, the Group aimed to
ensure that PLHL maintains an ICA surplus of at least £150 million.
As at 31 December 2015, the unaudited estimated PLHL Group ICA
position was £0.6 billion (2014: £0.7 billion).
Further detail of the PLHL ICA position is provided in the business
review (unaudited) on page 31.
Solvency II regulatory capital measures (applicable from
1 January 2016)
The Solvency II Directive became effective from 1 January 2016.
Under this regime, each UK life company and the PLHL Group are
required to retain sufficient capital (termed ‘own funds’) at all times
to meet the Solvency Capital Requirements (‘SCR’) as determined
by Phoenix’s PRA approved Internal Model.
Basic Own Funds represents the excess of assets over liabilities
from the Solvency II balance sheet adjusted to add back any
relevant subordinated liabilities that meet the criteria to be treated as
capital items.
The Basic Own Funds can be classified into three tiers based on
permanency and loss absorbency (tier 1 being the highest quality and
tier 3 the lowest). Limits are imposed on the amount of each tier that
can be held to cover the SCR. Eligible Own Funds at a Life company
level are obtained after having applied these prescribed tiering limits
to the Basic Own Funds.
Phoenix has obtained PRA approval to calculate the SCR of its UK life
companies using an Internal Model. This model has been calibrated
to ensure that the life company’s liabilities could be met in one year’s
time with a 99.5% confidence level, or in other words to be able to
withstand a one in 200 year event.
Surplus funds in with-profit funds of the life companies (‘ring fenced
funds’) are restricted and can only be included in Eligible Own Funds up
to the value of the SCR they are used to support.
The Group’s Solvency II assessment is made at the ultimate parent
undertaking within the EEA, which is PLHL. Solvency at the PGH
Group level is regulated by the PRA through a series of ‘other methods’
as agreed in a PRA approved waiver exempting the PGH Group from
application of the full group requirements of the Solvency II Directive.
Group Own Funds are assessed for their eligibility to cover the Group
SCR with reference to both the quality of capital and its availability and
transferability and restrictions are applied accordingly.
Each UK Life company and the PLHL Group generally hold an amount
of Eligible Own Funds that is greater than the SCR to allow for adverse
events in the future that may use capital and might otherwise cause the
company to fail the minimum level of regulatory capital test (termed the
Minimum Capital Requirement).
The unaudited estimated PLHL Solvency II surplus position at 1 January
2016 is set out below:
Own funds1
Solvency capital requirement2
Estimated Solvency II surplus (unaudited)
Year ended
31 December
2 015
£bn
5.8
(4.5)
1.3
1 Own funds includes the net assets of the life and holding companies calculated
under Solvency II rules, pension scheme surpluses calculated on an IAS19 basis
not exceeding the holding companies’ contribution to the Group SCR and qualifying
subordinated liabilities.
2 Solvency capital requirements relate to the risks and obligations, to which the Group is
exposed, calculated using an internal model, offset by Group diversification benefits.
Further details of the PLHL Solvency II excess (unaudited) is provided
in the Financial performance section on page 32.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 186
NOTES TO THE IFRS CONSOLIDATED
FINANCIAL STATEMENTS
Continued
I. OTHER NOTES continued
I5. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Group and its subsidiaries carry out transactions with related parties as defined by IAS 24 Related
party disclosures.
I5.1 Transactions with pension schemes
During the year, the Group entered into the following transactions with its pension schemes:
Pearl Group Staff Pension Scheme
Payment of administrative expenses
PGL Pension Scheme
Investment management fees
Transactions
2015
£m
Balances
outstanding
2015
£m
Transactions
2014
£m
Balances
outstanding
2014
£m
(2)
–
–
–
(4)
1
–
–
The Pearl Scheme has invested in collective investment schemes that are controlled by the Group. At 31 December 2015, the Pearl Scheme held
44,354,178 units in the Castle Hill Enhanced Floating Rate Opportunities Limited Fund. The value of these investments at 31 December 2015
was £74 million. At 31 December 2014, Castle Hill Enhanced Floating Rate Opportunities Limited Fund was not a related party, and therefore no
comparatives have been reported.
Information on other transactions with the pension schemes is included in note G6.
I5.2 Transactions with key management personnel
The total compensation of key management personnel, being those having authority and responsibility for planning, directing and controlling the
activities of the Group, including the Executive and Non-Executive Directors, are as follows:
Salary and other short-term benefits
Equity compensation plans
2015
£m
4
2
2014
£m
4
2
Details of the shareholdings and emoluments of individual Directors are provided in the Remuneration report on pages 57 to 80.
I6. OPERATING LEASES
Leases, where a significant portion of the risks and rewards of ownership are retained by the lessor, are classified as operating leases. Where
the Group is the lessee, payments made under operating leases, net of any incentives received from the lessor are charged to the consolidated
income statement on a straight-line basis over the period of the lease.
Operating lease rentals charged within administrative expenses amounted to £8 million (2014: £10 million).
The Group has commitments under non-cancellable operating leases as set out below:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
2015
£m
7
22
–
2014
£m
10
33
7
The principal operating lease commitments for 2015 concern office space located at St Vincent Street, Glasgow and Juxon House, London
(2014: St Vincent Street, Glasgow and Juxon House, London).
Disclosures of future minimum lease rental receivables in respect of non-cancellable operating leases on investment properties are included
in note G9.
Phoenix Group Holdings Annual Report and Accounts 2015 187
2015
£m
443
6
5
2014
£m
334
28
2
I7. COMMITMENTS
This note analyses the Group’s other commitments.
To subscribe to private equity funds and other unlisted assets
To purchase, construct or develop investment property
For repairs, maintenance or enhancements of investment property
I8. CONTINGENT LIABILITIES
Where the Group has a present legal or constructive obligation, but it is not probable that there will be an outflow of resources to settle the
obligation or the amount cannot be reliably estimated, this is disclosed as a contingent liability.
In the normal course of business the Group is exposed to certain legal issues, which involve litigation and arbitration. At the period end, the Group
has a number of contingent liabilities in this regard, none of which are considered by the Directors to be material.
I9. EVENTS AFTER THE REPORTING PERIOD
The financial statements are adjusted to reflect significant events that have a material effect on the financial results and that have occurred
between the period end and the date when the financial statements are authorised for issue, provided they give evidence of conditions that
existed at the period end. Events that are indicative of conditions that arise after the period end that do not result in an adjustment to the financial
statements are disclosed.
In March 2016, the Group agreed an amendment of its £900 million 5 year unsecured bank facility into a £650 million unsecured revolving
credit facility, maturing in June 2020. There are no mandatory or target amortisation payments associated with the facility but prepayments
are permissible.
On 22 March 2016, the Board recommended a final dividend of 26.7p per share (2014: 26.7p per share) for the year ended 31 December 2015.
Payment of the final dividend is subject to shareholder approval at the AGM. The cost of this dividend has not been recognised as a liability in the
financial statements for 2015 and will be charged to the statement of changes in equity in 2016.
H Staunton
C Bannister
J McConville
A Barbour
I Cormack
T Cross Brown
I Hudson
D Woods
K Sorenson
ST HELIER, JERSEY
22 MARCH 2016
Phoenix Group Holdings Annual Report and Accounts 2015Financials 188
Phoenix Group Holdings Annual Report and Accounts 2015
PARENT COMPANY
ACCOUNTS
PARENT COMPANY ACCOUNTS
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2015
189
Net investment income
Net income
Administrative expenses
Impairment of investment in subsidiaries
Total operating expenses
Total comprehensive income for the year attributable to owners
Notes
4
2015
£m
620
2014
£m
147
620
147
5
7
(19)
(437)
(22)
–
(456)
(22)
164
125
The Company is exempt from tax in the Cayman Islands on any profits, income, gains or appreciations for a period of 30 years from 11 May 2010.
There are no other comprehensive income items for 2015 and 2014.
STATEMENT OF FINANCIAL POSITION
As at 31 December 2015
EQUITY AND LIABILITIES
Equity attributable to owners
Share capital
Share premium
Foreign currency translation reserve
Retained earnings
Total equity
Liabilities
Financial liabilities
Borrowings
Other amounts due to Group entities
Total equity and liabilities
ASSETS
Investments in Group entities
Financial assets
Collective investment schemes
Loans and receivables
Other amounts due from Group entities
Cash and cash equivalents
Total assets
Notes
2015
£m
2014
£m
D1
6
15
7
8
9
15
10
–
858
89
557
–
976
89
389
1,504
1,454
3
123
3
146
1,630
1,603
800
1,317
11
819
–
–
5
270
8
3
1,630
1,603
The notes identified numerically on pages 192 to 197 are an integral part of these Company financial statements. Where items also appear
in the consolidated financial statements, reference is made to the notes (identified alphanumerically) on pages 102 to 187.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 190
STATEMENT OF CASH FLOWS
For the year ended 31 December 2015
Cash flows from operating activities
Cash (utilised)/generated by operations
Net cash flows from operating activities
Cash flows from investing activities
Dividends received from Group entities
Loan advance to Group entities
Repayment of loan from a Group entity
Interest received from Group entities
Return of share capital from Opal Re
Net cash flows from investing activities
Cash flows from financing activities
Proceeds from issuing ordinary shares
Ordinary share dividends paid
Net cash flows from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Notes
2015
£m
2014
£m
11
(28)
(28)
40
(6)
–
19
90
143
15
15
85
(6)
1
18
–
98
2
(120)
1
(120)
(118)
(119)
(3)
3
–
(6)
9
3
10
Phoenix Group Holdings Annual Report and Accounts 2015PARENT COMPANY ACCOUNTS PARENT COMPANY ACCOUNTS
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2015
191
At 1 January 2015
Total comprehensive income for the year attributable to owners
Issue of ordinary share capital (note D1)
Dividends paid on ordinary shares (note B4)
Credit to equity for equity-settled share-based payments (note I2)
At 31 December 2015
Share
capital
(note D1)
£m
Share
premium
£m
Foreign
currency
translation
reserve
£m
Retained
earnings
£m
Total
£m
–
–
–
–
–
–
976
89
389
1,454
–
2
(120)
–
858
–
–
–
–
164
–
–
4
164
2
(120)
4
89
557
1,504
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2014
At 1 January 2014
Total comprehensive income for the year attributable to owners
Issue of ordinary share capital (note D1)
Dividends paid on ordinary shares (note B4)
Credit to equity for equity-settled share-based payments (note I2)
At 31 December 2014
Share
capital
(note D1)
£m
–
–
–
–
–
–
Share
premium
£m
1,095
–
1
(120)
–
976
Foreign
currency
translation
reserve
£m
Retained
earnings
£m
Total
£m
89
257
1,441
–
–
–
–
125
–
–
7
125
1
(120)
7
89
389
1,454
Phoenix Group Holdings is subject to Cayman Islands Companies Law. Under Cayman Islands Companies Law distributions can be made out
of profits or share premium subject, in each case, to a solvency test. The solvency test is broadly consistent with the Group’s going concern
assessment criteria. The notes identified numerically on pages 192 to 197 are an integral part of these Company financial statements. Where items
also appear in the consolidated financial statements, reference is made to the notes (identified alphanumerically) on pages 102 to 187.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 192
NOTES TO THE PARENT COMPANY
FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
(A) BASIS OF PREPARATION
The financial statements have been prepared on an historical cost basis
except for those financial assets and financial liabilities that have been
measured at fair value.
Statement of Compliance
The financial statements have been prepared in accordance with
International Financial Reporting Standards (‘IFRSs’) as issued by the
International Accounting Standards Board (‘IASB’).
The Company assesses at each reporting date whether an investment
is impaired. The Company first assesses whether objective evidence
of impairment exists. Evidence of impairment needs to be significant
or prolonged to determine that objective evidence of impairment exists.
If objective evidence of impairment exists, the Company calculates
the amount of impairment as the difference between the recoverable
amount of the Group entity and its carrying value and recognises the
amount as an expense in the income statement.
The recoverable amount is determined based on the cash flow
projections of the underlying entities.
The financial statements are presented in sterling (£) rounded to the
nearest million unless otherwise stated.
The assessment of whether an investment in a Group entity is impaired
is considered to be a critical accounting judgement for the Company.
Assets and liabilities are offset and the net amount reported in
the statement of financial position only when there is a legally
enforceable right to offset the recognised amounts and there is an
intention to settle on a net basis, or to realise the assets and settle
the liabilities simultaneously.
Income and expenses are not offset in the statement of comprehensive
income unless required or permitted by an IFRS or interpretation,
as specifically disclosed in the accounting policies of the Company.
2. FINANCIAL INFORMATION
In preparing the financial statements the Company has adopted the
standards, interpretations and amendments effective 1 January 2015
which have been issued by the IASB as detailed in note A4 of the
consolidated financial statements, none of which have had a significant
impact on the Company’s financial statements. Details of standards,
interpretations and amendments to be adopted in future periods are
also detailed in note A5.
(B) ACCOUNTING POLICIES
3. SEGMENTAL ANALYSIS
The accounting policies in the separate financial statements are the
same as those presented in the notes to the consolidated financial
statements on pages 102 to 187, except for the policy noted below.
Where an accounting policy can be directly attributed to a specific
note to the consolidated financial statements, the policy is presented
within that note. Each note within the Company financial statements
makes reference to the note to the consolidated financial statements
containing the applicable accounting policy. The accounting policy in
relation to foreign currency transactions is included within note A2.1.
Investments in Group entities
Investments in Group entities are carried in the statement of financial
position at cost less impairment.
The Company has one reportable segment, comprising its investment
in and loans to/from its subsidiaries. Its revenue principally comprises
the dividend and interest income derived from these investments and
loans. Information relating to this segment is included in the Company’s
primary financial statements on pages 189 to 191. The accounting
policy for segmental analysis is included in note B1.
Predominantly, all revenues from external customers is sourced
in the UK.
Predominantly, all assets are located in the UK.
Phoenix Group Holdings Annual Report and Accounts 2015PARENT COMPANY ACCOUNTS 4. NET INVESTMENT INCOME
The accounting policy for net investment income is included in note C1.
Investment income
Dividend income from other Group entities
Interest income from other Group entities
Reversal of impairment losses on loans and receivables
Fair value gains on financial instruments
Net investment income
5. ADMINISTRATIVE EXPENSES
The accounting policy for administrative expenses is included in note C2.
Employee costs1
Professional fees
Office costs
Write down of loans due from other Group entities
Other
Administrative expenses
193
2015
£m
487
58
545
75
–
620
2014
£m
94
48
142
–
5
147
2015
£m
2014
£m
1
1
–
8
9
19
1
7
1
10
3
22
1 In addition to the Non-Executive Directors, one employee was employed by Phoenix Group Holdings during the period (2014: one). Other Group employees are employed by other
Group entities.
6. BORROWINGS
The accounting policy for borrowings is included in note E5.
Loans due to Impala Holdings Limited
Amount due for settlement after 12 months
Carrying value
Fair value
2015
£m
2014
£m
3
–
3
3
2015
£m
3
2014
£m
3
All borrowings are due to Group entities and are measured at amortised cost using the effective interest method.
On 16 July 2010, the Company was granted a loan from Impala Holdings Limited of £3 million. The loan accrues interest at six month LIBOR
plus a margin of 3.25% (2014: 3.25%) which is capitalised semi-annually on 7 April and 7 October. The loan has a maturity date of 31 December
2016. Interest of £0.1 million (2014: £0.1 million) was accrued during the year. The balance outstanding at 31 December 2015 was £3 million
(2014: £3 million).
All borrowings are categorised as Level 3 financial instruments. The fair value of borrowings with no external market is determined by internally
developed discounted cash flow models using a risk adjusted discount rate corroborated with external market data where possible.
Phoenix Group Holdings Annual Report and Accounts 2015Financials
194
NOTES TO THE PARENT COMPANY
FINANCIAL STATEMENTS
Continued
7. INVESTMENTS IN GROUP ENTITIES
Cost
At 1 January
Additions
Return of share capital
At 31 December
Impairment
At 1 January
Charge for the year
At 31 December
Carrying amount at 31 December
2015
£m
2014
£m
1,317
1,308
10
(90)
9
–
1,237
1,317
–
(437)
(437)
–
–
–
800
1,317
On 27 April 2015, the Company received a £10 million dividend (2014: £9 million) from Opal Reassurance Limited (‘Opal Re’) in the form of
preference shares. During the year, the Company received £90 million as a result of a return of share capital from Opal Re.
Following a restructure of the Company’s holdings in PGH (LCA) Limited, PGH (LCB) Limited, PGH (TC1) Limited and PGH (TC2) Limited, the
Company received dividends of £205 million and £232 million from PGH (TC1) Limited and PGH (TC2) Limited respectively, settled by the novation
of intragroup loan receivables to the Company. The Company impaired its investments in PGH (TC1) Limited and PGH (TC2) Limited to the extent
of dividends received.
For a list of principal Group entities, refer to note H3 of the consolidated financial statements. The entities directly held by Phoenix Group Holdings
are separately identified.
8. COLLECTIVE INVESTMENT SCHEMES
The accounting policy for collective investment schemes is included in note E1.
Investment in collective investment schemes
Amount due for settlement after 12 months
Carrying value
Fair value
2015
£m
11
–
2014
£m
5
–
2015
£m
11
2014
£m
5
All investments are categorised as Level 1 financial instruments. Details of the factors considered in determination of the fair value are included
in note E2 to the consolidated financial statements.
Phoenix Group Holdings Annual Report and Accounts 2015PARENT COMPANY ACCOUNTS 195
9. LOANS AND RECEIVABLES
Loans due from PGH (LCA) Limited and PGH (LCB) Limited
Loans due from PGH (MC1) Limited and PGH (MC2) Limited
Loans due from Employee Benefit Trust
Notes due from Phoenix Life Holdings Limited
Carrying value
Fair value
2015
£m
626
113
5
75
819
2014
£m
164
99
7
–
2015
£m
791
262
5
74
2014
£m
257
194
7
–
270
1,132
458
Amounts due after 12 months
814
270
The accounting policy for loans and receivables is included in note E1.
All loans and receivables balances are due from Group entities and are measured at amortised cost using the effective interest method.
The fair value of these loans and receivables are also disclosed.
On 22 March 2010, the Company subscribed for £325 million of Eurobonds which were issued equally by PGH (LCA) Limited and PGH (LCB)
Limited. On 23 March 2010, the Eurobonds were listed on the Channel Islands Stock Exchange. Interest accrues on these Eurobonds at a rate of
LIBOR plus a margin of 2.5% and the final maturity date to 30 June 2025. The Eurobonds were initially recognised at fair value and are accreted to
par over the period to 2025. At 31 December 2015, £175 million was due (2014: £160 million).
On 12 December 2011, the Company, PGH (LCA) Limited and PGH (LCB) Limited, became party to a joint £77 million loan agreement to formalise
an inter-company balance which had arisen in 2009 relating to fees payable to a syndicate of external banks. The loan accrues interest at a rate of
LIBOR plus a margin of 1.25% and matures on 30 June 2016. Interest of £0.1 million was capitalised during the year (2014: £0.1 million) and £nil
was repaid (2014: £nil). At 31 December 2015, £5 million was due (2014: £4 million).
In June 2015, the Company was assigned loans of £436 million issued equally by PGH (LCA) Limited and PGH (LCB) Limited. These loans
accrue interest at a rate of LIBOR plus a margin of 2.9% and mature on 5 June 2020. Interest of £10 million was capitalised during the year.
At 31 December 2015, £446 million was due.
On 22 March 2010, the Company subscribed for £250 million of Eurobonds which were issued equally by PGH (MC1) Limited and PGH (MC2)
Limited. On 23 March 2010, the Eurobonds were listed on the Channel Islands Stock Exchange. Interest accrues on these Eurobonds at a rate of
LIBOR plus a margin of 2.5% and the final maturity date to 30 June 2025. The Eurobonds were initially recognised at fair value and are accreted to
par over the period to 2025. At 31 December 2015, £113 million was due (2014: £99 million).
On 16 July 2010, the Company entered into an interest free facility arrangement with Phoenix Group Holdings’ Employee Benefit Trust (‘EBT’).
In 2015, an additional £6 million was drawn down against this facility (2014: £6 million). The loan is recoverable until the point the awards held by the
EBT vest to the participants, at which point the loan is reviewed for impairment. Any impairments are determined by comparing the carrying value
to the estimated recoverable amount of the loan. Following the vesting of awards in 2015, £8 million of the loan (2014: £10 million) has been written
off. At 31 December 2015, £5 million was due (2014: £7 million).
On 22 April 2010, Pearl Group Holdings (No.1) Limited issued a balancing instrument under which notes with a principal of £75 million were issued
to Phoenix Group Holdings. During January 2015 the notes were transferred from PGH1 to Phoenix Life Holdings Limited (‘PLHL’). The notes have
no fixed maturity date and are included in the Company’s financial statements at a value of £75 million (2014: £nil). Phoenix Group Holdings paid
no consideration for the notes and has waived its right to receive a coupon on the notes. In November 2015, PLHL agreed, subject to obtaining
approvals, to repay the notes in full in 2016.
No other loans are considered to be past due or impaired.
For the purposes of the additional fair value disclosures for assets recognised at amortised cost, all loans and receivables are categorised as Level 3
financial instruments. The fair value of loans and receivables with no external market is determined by internally developed discounted cash flow
models using a risk adjusted discount rate corroborated with external market data where possible.
Details of the factors considered in determination of fair value are included in note E2 to the consolidated financial statements.
Phoenix Group Holdings Annual Report and Accounts 2015Financials
196
NOTES TO THE PARENT COMPANY
FINANCIAL STATEMENTS
Continued
10. CASH AND CASH EQUIVALENTS
The accounting policy for cash and cash equivalents is included in note G11.
Short-term deposits (including demand and time deposits)
11. CASH FLOWS FROM OPERATING ACTIVITIES
Profit for the year before tax
Adjustments to reconcile profit for the year to cash flows from operating activities:
Interest income from other Group entities
Reversal of impairment losses on loans and receivables
Fair value gains on financial instruments
Dividends received
Write down of loans to Group entities
Impairment of investment in subsidiaries
Share-based payment charge
Net (increase)/decrease in investment assets
Net decrease/(increase) in working capital
Cash (utilised)/generated by operations
12. CAPITAL AND RISK MANAGEMENT
2015
£m
–
2015
£m
164
(58)
(75)
–
(487)
8
437
4
(29)
8
(28)
2014
£m
3
2014
£m
125
(48)
–
(5)
(94)
10
–
7
26
(6)
15
The Company’s capital comprises share capital and all reserves. At 31 December 2015, total capital was £1,504 million (2014: £1,454 million).
The movement in capital in the year comprises the total comprehensive income for the year attributable to owners of £164 million
(2014: £125 million), proceeds from the issue of ordinary share capital of £2 million (2014: £1 million) and a credit to equity for equity-settled
share-based payments of £4 million (2014: £7 million), partly offset by payment of dividends of £120 million (2014: £120 million).
There are no externally imposed capital requirements on the Company. The Company’s capital is monitored by the Directors and managed on
an on-going basis via a monthly close process to ensure that it remains positive at all times.
Details of the Group risk management policies are outlined in notes E6 and F4 to the consolidated financial statements.
The primary operation of the Company is to manage its investment in subsidiaries. The Company’s other assets and liabilities mainly consist
of receivables due from and borrowings owed to other Group entities.
The principal risks and uncertainties facing the Company are:
Ɛ interest rate risk, since the movement in interest rates will impact the value of interest receivable and payable by the Company;
Ɛ liquidity risk, exposure to liquidity risk as a result of normal business activities, specifically the risk arising from an inability to meet short-term
cash flow requirements; and
Ɛ credit risk, arising from the default of the counterparty to a particular financial asset and is significantly reduced as assets are primarily
inter-company receivables from other Group entities.
The Company’s exposure to all these risks is monitored by the Directors, who agree policies for managing each of these risks on an ongoing basis.
13. SHARE-BASED PAYMENTS
For detailed information on the long-term incentive plans, sharesave schemes and deferred bonus share schemes refer to note I2 in the
consolidated financial statements.
14. DIRECTORS’ REMUNERATION
Details of the remuneration of the Directors’ of Phoenix Group Holdings is included in the Directors’ remuneration report on pages 57 to 80 of the
Annual Report and Accounts.
Phoenix Group Holdings Annual Report and Accounts 2015PARENT COMPANY ACCOUNTS
197
15. RELATED PARTY TRANSACTIONS
The Company has related party transactions with Group entities and its key management personnel. Details of the total compensation of key
management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including
the Executive and Non-Executive Directors, are included in note I5 of the consolidated financial statements.
During the year ended 31 December 2015, the Company entered into the following transactions with Group entities:
Dividends received
Interest received on loans and receivables due from Group entities
Amounts due from related parties at the end of the year:
Loans due from Group entities
Other amounts due from Group entities
Amount due for settlement after 12 months
Amounts due to related parties at the end of the year:
Loans due to Group entities
Other amounts due to Group entities
Amount due for settlement after 12 months
2015
£m
487
58
545
2015
£m
819
–
819
2014
£m
94
48
142
2014
£m
270
8
278
814
270
2015
£m
3
123
126
2014
£m
3
146
149
–
3
The Company guarantees certain borrowings of PGH Capital Limited as detailed in note E5 to the consolidated financial statements.
16. AUDITOR’S REMUNERATION
Details of auditor’s remuneration, for Phoenix Group Holdings subsidiary undertakings, is included in note C3 to the consolidated
financial statements.
17. EVENTS AFTER THE REPORTING PERIOD
Details of events after the reporting date are included in note I9 to the consolidated financial statements.
H Staunton
C Bannister
J McConville
A Barbour
R P Azria
I Cormack
T Cross Brown
I Hudson
D Woods
K Sorenson
ST HELIER, JERSEY
22 MARCH 2016
Phoenix Group Holdings Annual Report and Accounts 2015Financials 198
Phoenix Group Holdings Annual Report and Accounts 2015
ASSET
DISCLOSURES
ASSET DISCLOSURES
ADDITIONAL LIFE COMPANY
ASSET DISCLOSURES
199
The analysis of the asset portfolio provided below comprises the assets held by the Group’s life companies. It excludes other Group assets such as
cash held in the holding and service companies; the assets held by the non-controlling interests in consolidated collective investment schemes and
UK Commercial Property Trust; and is stated net of derivative liabilities.
The following table provides an overview of the exposure by asset category of the Group’s life companies’ shareholder and policyholder funds:
Shareholder and
non-profit funds1
£m
1,236
1,262
5,203
186
140
266
Participating
supported1
£m
2,498
818
1,380
62
74
(31)
Participating
non-supported2
£m
Unit-linked2
£m
3,921
7,275
6,263
5,231
821
767
1,065
602
724
7,294
336
(1)
8,293
4,801
24,278
10,020
31 December 2015
Carrying value
Cash and cash equivalents
Debt securities – gilts
Debt securities – bonds
Equity securities
Property investments
Other investments4
At 31 December 2015
Cash and cash equivalents in Group holding companies
Cash and financial assets in other Group companies
Financial assets held by the non-controlling interest in the
consolidated UKCPT
Financial assets held by the non-controlling interest in
consolidated collective investment schemes
Total Group consolidated assets
Comprised of:
Investment property
Financial assets
Cash and cash equivalents
Assets held for sale
Derivative liabilities
Total3
£m
8,720
9,957
13,570
12,773
1,371
1,001
47,392
706
328
838
5,473
54,737
1,942
50,066
3,940
149
(1,360)
54,737
1 Includes assets where shareholders of the life companies bear the investment risk.
2 Includes assets where policyholders bear most of the investment risk.
3 This information is presented on a look through basis to underlying funds where available.
4 Includes equity release mortgages of £268 million, policy loans of £11 million, other loans of £15 million, net derivative assets of £139 million and other investments of £568 million.
Phoenix Group Holdings Annual Report and Accounts 2015Financials
200
ASSET DISCLOSURES
ADDITIONAL LIFE COMPANY
ASSET DISCLOSURES
Continued
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
Unit-linked
£m
1,429
1,485
6,379
367
191
402
728
2,348
1,936
67
67
(22)
2,861
8,756
7,082
5,613
997
806
1,176
661
815
7,787
346
–
10,253
5,124
26,115
10,785
31 December 2014
Carrying value
Cash and cash equivalents
Debt securities – gilts
Debt securities – bonds
Equity securities
Property investments
Other investments1
At 31 December 2014
Cash and cash equivalents in Group holding companies
Cash and financial assets in other Group companies
Financial assets held by the non-controlling interest in the
consolidated UKCPT
Financial assets held by the non-controlling interest in
consolidated collective investment schemes
Adjustments on consolidation
Total Group consolidated assets
Comprised of:
Investment property
Financial assets
Cash and cash equivalents
Derivative liabilities
1 Includes policy loans of £12 million, other loans of £24 million, net derivative assets of £362 million and other investments of £788 million.
The following table analyses by type the debt securities of the life companies:
2 Includes debt issued by governments; public and statutory bodies; government backed institutions and supranationals.
31 December 2015
Analysis by type of debt securities
Gilts
Other government and supranational2
Corporate – financial institutions
Corporate – other
Asset backed securities (‘ABS’)
At 31 December 2015
31 December 2014
Analysis by type of debt securities
Gilts
Other government and supranational
Corporate – financial institutions
Corporate – other
Asset backed securities (‘ABS’)
At 31 December 2014
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
Unit-linked
£m
818
673
367
164
176
7,275
2,058
1,588
2,121
496
602
88
153
441
42
2,198
13,538
1,326
23,527
Shareholder and
non-profit funds
£m
1,485
Participating
supported
£m
2,348
Participating
non-supported
£m
8,756
753
506
346
331
2,432
2,192
1,889
569
Unit-linked
£m
661
116
196
445
58
Total
£m
13,250
4,497
5,079
5,074
1,562
4,284
15,838
1,476
29,462
1,262
713
1,859
2,079
552
6,465
1,196
2,185
2,394
604
7,864
Total
£m
6,194
13,250
16,212
13,834
1,601
1,186
52,277
988
116
736
4,652
(14)
58,755
1,858
54,022
5,067
(2,192)
58,755
Total
£m
9,957
3,532
3,967
4,805
1,266
Phoenix Group Holdings Annual Report and Accounts 2015
201
The life companies’ debt portfolio was £23.5 billion at 31 December 2015. Shareholders had direct exposure to £8.7 billion of these assets
(including supported participating funds), of which 99% of rated securities were investment grade. The shareholders’ credit risk exposure to the
non-supported participating funds is primarily limited to the shareholders’ share of future bonuses. Shareholders’ credit risk exposure to the unit-
linked funds is limited to the level of asset management fee, which is dependent on the underlying assets.
Sovereign and supranational debt represented 40% of the debt portfolio in respect of shareholder exposure, or £3.5 billion, at 31 December 2015.
The vast majority of the life companies’ exposure to sovereign and supranational debt holdings is to UK gilts.
The following table sets out a breakdown of the life companies’ sovereign and supranational debt security holdings by country:
31 December 2015
Analysis of sovereign and supranational debt security holdings
by country
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
Unit-linked
£m
UK
Supranationals
USA
Germany
France
Netherlands
Italy
Spain
Other – non-Eurozone
Other – Eurozone
At 31 December 2015
31 December 2014
1,400
310
1
211
31
–
–
–
22
–
905
195
12
232
50
–
–
–
87
10
1,975
1,491
7,560
553
15
593
64
1
–
–
511
36
9,333
609
17
24
14
4
1
5
3
13
–
690
Analysis of sovereign and supranational debt security holdings
by country
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
Unit-linked
£m
UK
Supranationals
USA
Germany
France
Netherlands
Italy
Spain
Other – non-Eurozone
Other – Eurozone
At 31 December 2014
1,605
2,424
9,200
571
3
425
49
–
–
–
18
10
327
7
263
50
–
–
5
10
15
661
119
787
59
4
–
–
282
76
2,681
3,101
11,188
670
24
26
22
5
2
4
3
14
7
777
Total
£m
10,474
1,075
52
1,050
149
2
5
3
633
46
13,489
Total
£m
13,899
1,583
155
1,497
163
6
4
8
324
108
17,747
Phoenix Group Holdings Annual Report and Accounts 2015Financials 202
ASSET DISCLOSURES
ADDITIONAL LIFE COMPANY
ASSET DISCLOSURES
Continued
At 31 December 2015, the life companies had £nil (2014: £5 million) shareholder exposure to sovereign debt of the Peripheral Eurozone, defined as
Portugal, Italy, Ireland, Greece and Spain.
All of the life companies’ debt securities are held at fair value through profit or loss under IAS 39, and therefore already reflect any reduction in value
between the date of purchase and the reporting date.
The life companies have in place a comprehensive database that consolidates credit exposures across counterparties, geographies and business
lines. This database is used for credit monitoring, stress testing and scenario planning. The life companies continue to manage their balance sheets
prudently and have taken extra measures to ensure their market exposures remain within risk appetite.
The following table sets out a breakdown of the life companies’ financial institution corporate debt security holdings by country:
31 December 2015
Analysis of financial institution corporate
debt security holdings by country
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
Unit-linked
£m
UK
USA
Germany
France
Netherlands
Italy
Ireland
Spain
Other – non-Eurozone
Other – Eurozone
At 31 December 2015
31 December 2014
845
449
16
58
189
7
28
3
208
56
1,859
151
39
18
–
52
–
1
–
94
12
367
566
298
86
43
238
7
12
12
272
54
1,588
71
16
3
3
30
–
–
–
29
1
153
Analysis of financial institution corporate
debt security holdings by country
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
Unit-linked
£m
1,181
301
UK
USA
Germany
France
Netherlands
Italy
Spain
Other – non-Eurozone
Other – Eurozone
At 31 December 2014
397
46
126
218
3
2
177
35
2,185
84
3
10
50
–
–
54
4
959
420
44
115
272
13
20
305
44
95
14
–
10
31
–
–
45
1
506
2,192
196
5,079
Total
£m
1,633
802
123
104
509
14
41
15
603
123
3,967
Total
£m
2,536
915
93
261
571
16
22
581
84
Phoenix Group Holdings Annual Report and Accounts 2015 203
The life companies had £39 million (2014: £5 million) shareholder exposure to financial institution corporate debt of the Peripheral Eurozone at
31 December 2015. The £2,226 million (2014: £2,691 million) total shareholder exposure comprised £1,742 million (2014: £1,644 million) senior
debt, £4 million (2014: £215 million) Tier 1 debt and £480 million (2014: £832 million) Tier 2 debt.
The £2,226 million shareholder exposure to financial institution corporate debt comprised £1,281 million (2014: £1,556 million) bank debt and
£945 million (2014: £1,135 million) non-bank debt.
For each of the life companies’ significant financial institution counterparties, industry and other data has been used to assess the exposure of
the individual counterparties. As part of the Group’s risk appetite framework and analysis of shareholder exposure to a potential worsening of the
economic situation, this assessment has been used to identify counterparties considered to be most at risk from defaults. The financial impact
on these counterparties, and the contagion impact on the rest of the shareholder portfolio, is assessed under various scenarios and assumptions.
This analysis is regularly reviewed to reflect the latest economic outlook, economic data and changes to asset portfolios. The results are used to
inform the Group’s views on whether any management actions are required.
The following table sets out a breakdown of the life companies’ corporate – other debt security holdings by country:
31 December 2015
Analysis of corporate – other debt security holdings by country
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
Unit-linked
£m
UK
USA
Germany
France
Netherlands
Italy
Ireland
Spain
Other – non-Eurozone
Other – Eurozone
At 31 December 2015
31 December 2014
1,073
288
142
173
39
56
1
45
190
72
2,079
76
33
24
15
–
2
–
–
13
1
164
1,607
115
93
113
19
27
2
24
77
44
2,121
363
15
15
20
3
3
2
2
11
7
441
Analysis of corporate – other debt security holdings by country
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
Unit-linked
£m
UK
USA
Germany
France
Netherlands
Portugal
Italy
Greece
Spain
Other – non-Eurozone
Other – Eurozone
At 31 December 2014
1,122
436
191
227
51
–
42
3
30
188
104
2,394
166
71
51
32
2
–
2
–
–
21
1
346
1,022
233
151
197
35
1
62
–
28
96
64
1,889
350
16
21
23
5
–
2
–
2
14
12
445
Total
£m
3,119
451
274
321
61
88
5
71
291
124
4,805
Total
£m
2,660
756
414
479
93
1
108
3
60
319
181
5,074
Phoenix Group Holdings Annual Report and Accounts 2015Financials 204
ASSET DISCLOSURES
ADDITIONAL LIFE COMPANY
ASSET DISCLOSURES
Continued
The following table sets out a breakdown of the life companies’ ABS holdings by country:
31 December 2015
Analysis of ABS holdings by country
UK
USA
Germany
France
Netherlands
Italy
Spain
Other – non-Eurozone
Other – Eurozone
At 31 December 2015
31 December 2014
Analysis of ABS holdings by country
UK
USA
Germany
France
Netherlands
Italy
Ireland
Spain
Other – non-Eurozone
At 31 December 2014
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
Unit-linked
£m
499
172
399
41
3
–
–
10
–
–
40
–
–
–
1
–
–
–
–
3
4
28
–
20
12
1
10
22
–
–
–
1
–
–
–
–
Total
£m
1,111
7
28
1
31
12
1
50
25
552
176
496
42
1,266
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
516
43
–
–
19
–
–
–
26
604
323
487
–
2
2
–
–
–
–
4
331
5
23
–
28
5
8
2
11
569
Unit-linked
£m
56
Total
£m
1,382
–
–
–
2
–
–
–
–
48
25
2
49
5
8
2
41
58
1,562
Phoenix Group Holdings Annual Report and Accounts 2015 205
The following table sets out the credit rating analysis of the debt portfolio:
31 December 2015
Credit rating analysis of debt portfolio
AAA
AA
A
BBB
BB
B and below
Non-rated
At 31 December 2015
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
Unit-linked
£m
746
2,336
1,618
1,635
100
1
29
625
1,272
189
92
11
–
9
1,740
8,443
902
1,751
205
327
170
6,465
2,198
13,538
72
487
84
179
21
–
483
1,326
Total
£m
3,183
12,538
2,793
3,657
337
328
691
23,527
97% of rated securities were investment grade at 31 December 2015 (2014: 97%). The percentage of rated securities that were investment grade
in relation to the shareholder and policyholders’ funds were 99% and 96% respectively (2014: 95% and 98% respectively).
31 December 2014
Credit rating analysis of debt portfolio
AAA
AA
A
BBB
BB
B and below
Non-rated
At 31 December 2014
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
Unit-linked
£m
1,168
2,257
1,549
2,154
284
284
168
699
2,981
438
140
3
–
23
1,769
10,130
1,392
2,043
129
191
184
7,864
4,284
15,838
62
775
137
207
17
2
276
1,476
Total
£m
3,698
16,143
3,516
4,544
433
477
651
29,462
Phoenix Group Holdings Annual Report and Accounts 2015Financials 206
206
Phoenix Group Holdings Annual Report and Accounts 2015
MCEV
SUPPLEMENTARY
INFORMATION
MCEV SUPPLEMENTARY INFORMATION
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
IN RESPECT OF THE MARKET CONSISTENT
EMBEDDED VALUE
207
When compliance with the CFO Forum MCEV principles published in June 2008 and amended in October 2009 is stated, those principles
require the Directors to prepare supplementary information in accordance with the MCEV principles and to disclose and provide reasons for any
non‑compliance with the principles.
The MCEV methodology adopted by the Group is in accordance with these MCEV principles, with the exception of:
Ɛ risk‑free rates have been defined as the annually compounded UK Government bond nominal spot curve plus ten basis points rather than
as the swap rate curve;
Ɛ the value of the asset management (prior to divestment on 1 July 2014) and the management service companies has been included on an
IFRS basis; and
Ɛ no allowance for the costs of residual non‑hedgeable risk has been made.
Further detail on these exceptions is included in note 1, Basis of preparation.
Specifically, the Directors have:
Ɛ determined assumptions on a realistic basis, having regard to past, current and expected future experience and to relevant external data,
and then applied them consistently;
Ɛ made estimates that are reasonable and consistent; and
Ɛ provided additional disclosures when compliance with the specific requirements of the MCEV principles is insufficient to enable users to
understand the impact of particular transactions, other events and conditions and the Group’s financial position and financial performance.
CLIVE BANNISTER
GROUP CHIEF EXECUTIVE OFFICER
JAMES MCCONVILLE
GROUP FINANCE DIRECTOR
ST HELIER, JERSEY
22 MARCH 2016
Phoenix Group Holdings Annual Report and Accounts 2015Financials 208
MCEV SUPPLEMENTARY INFORMATION
INDEPENDENT AUDITOR’S REPORT TO THE
DIRECTORS OF PHOENIX GROUP HOLDINGS
ON THE CONSOLIDATED GROUP MCEV
We have audited the Consolidated Phoenix Group MCEV (‘Phoenix
Group MCEV’) supplementary information for the year ended
31 December 2015 which comprises the Summarised consolidated
income statement – Group MCEV basis, MCEV earnings per ordinary
share, Statement of consolidated comprehensive income – Group
MCEV basis, Reconciliation of movement in equity – Group MCEV
basis, Group MCEV analysis of earnings, Reconciliation of Group IFRS
equity to MCEV net worth and related notes 1 to 7. The Phoenix Group
MCEV supplementary information has been prepared by the Directors
of Phoenix Group Holdings (‘the Group’) in accordance with the basis of
preparation set out on pages 213 to 215.
DIRECTORS’ RESPONSIBILITIES FOR THE PHOENIX GROUP
MCEV SUPPLEMENTARY INFORMATION
The Directors are responsible for the preparation of the Phoenix Group
MCEV supplementary information in accordance with the basis of
preparation set out on pages 213 to 215 and for such internal control
as the Directors determine is necessary to enable the preparation of
supplementary information that is free from material misstatement,
whether due to fraud or error.
OPINION
In our opinion the Phoenix Group MCEV supplementary information,
for the year ended 31 December 2015, has been prepared, in all
material respects, in accordance with the basis of preparation set out
on pages 213 to 215.
BASIS OF ACCOUNTING AND RESTRICTION ON USE
Without modifying our opinion, we draw attention to pages 213
to 215 of the Phoenix Group MCEV supplementary information,
which describe the basis of preparation. The Phoenix Group MCEV
supplementary information is prepared by Phoenix Group Holdings in
accordance with the basis of preparation set out on pages 213 to 215.
As a result, the Phoenix Group MCEV supplementary information may
not be suitable for another purpose. This report, including the opinion,
has been prepared for and only for the Group’s Directors as a body in
accordance with our letter of engagement dated 10 March 2016 and for
no other purpose. We do not, in giving this opinion, 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.
AUDITOR’S RESPONSIBILITY
OTHER MATTER
We have reported separately on the IFRS consolidated financial
statements of Phoenix Group Holdings for the year ended
31 December 2015.
The information contained in the Phoenix Group MCEV supplementary
information should be read in conjunction with the consolidated financial
statements prepared on an IFRS basis.
ERNST & YOUNG LLP
LONDON
22 MARCH 2016
Our responsibility is to express an opinion on the Phoenix Group
MCEV supplementary information based on our audit. We conducted
our audit in accordance with International Standards on Auditing.
Those standards require us to comply with ethical requirements and
plan and perform the audit to obtain reasonable assurance about
whether the Phoenix Group MCEV supplementary information is free
from material misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the Phoenix Group MCEV
supplementary information. The procedures selected depend on the
auditor’s judgement, including the assessment of the risks of material
misstatement of the Phoenix Group MCEV supplementary information,
whether due to fraud or error. In making those risk assessments,
we consider internal control relevant to the Group’s preparation of
the Phoenix Group MCEV supplementary information in order to
design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness
of the Group’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness
of significant accounting estimates made by the Directors, as well
as evaluating the overall presentation of the Phoenix Group MCEV
supplementary information.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Phoenix Group Holdings Annual Report and Accounts 2015 MCEV SUPPLEMENTARY INFORMATION
SUMMARISED CONSOLIDATED INCOME
STATEMENT – GROUP MCEV BASIS
For the year ended 31 December 2015
209
Life MCEV operating earnings
Management services operating profit
Ignis operating profit – discontinued operations
Group costs
Group MCEV operating earnings before tax
Economic variances on life business
Economic variances on non‑life business
Other non‑operating variances on life business
Non‑recurring items on non‑life business
Finance costs attributable to owners
Group MCEV earnings before tax
Tax on operating earnings
Tax on non‑operating earnings
Total tax
Group MCEV earnings after tax
Analysed between:
Group MCEV earnings after tax from continuing operations
Group MCEV earnings after tax from discontinued operations
Group MCEV earnings after tax
MCEV SUPPLEMENTARY INFORMATION
MCEV EARNINGS PER ORDINARY SHARE
For the year ended 31 December 2015
Group MCEV operating earnings after tax
Basic1
Diluted2
Group MCEV earnings after tax
Basic1
Diluted2
2015
£m
274
30
–
(26)
278
(221)
(8)
98
(39)
(91)
17
(55)
64
9
26
26
–
26
2014
£m
341
36
17
(28)
366
54
(64)
(94)
317
(90)
489
(78)
–
(78)
411
429
(18)
411
2015
2014
99.5p
99.3p
128.4p
128.2p
12.1p
12.1p
183.2p
182.8p
1 Based on 224 million shares (2014: 225 million) as set out in note B3.1 of the IFRS consolidated financial statements.
2 Based on 225 million shares (2014: 225 million), allowing for share options in issue as set out in note B3.2 of the IFRS consolidated financial statements.
The earnings on life business are calculated on a post‑tax basis and are grossed up at the effective rate of shareholder tax for presentation in the
consolidated income statement. The tax rate used is the UK corporate tax rate of 20.25% (2014: 21.5%).
Phoenix Group Holdings Annual Report and Accounts 2015Financials 210
MCEV SUPPLEMENTARY INFORMATION
STATEMENT OF CONSOLIDATED COMPREHENSIVE
INCOME – GROUP MCEV BASIS
For the year ended 31 December 2015
Group MCEV earnings after tax
Other comprehensive income:
Remeasurements and pension scheme contributions on defined benefit pension schemes (net of tax)
Fair value gains on owner‑occupied property
Total comprehensive income for the year
2015
£m
26
(44)
4
(14)
2014
£m
411
(27)
–
384
MCEV SUPPLEMENTARY INFORMATION
RECONCILIATION OF MOVEMENT IN EQUITY –
GROUP MCEV BASIS
For the year ended 31 December 2015
Opening Group MCEV equity
Total comprehensive income for the year
Issue of ordinary share capital, net of associated commissions and expenses
Dividends paid on ordinary shares
Dividends paid on shares held by the employee trust and Group entities
Shares sold by Group entities
Movement in equity for equity‑settled share‑based payments
Shares acquired by the employee benefit trust
Total capital and dividend flows – external
Closing Group MCEV equity
2015
£m
2,647
2014
£m
2,378
(14)
384
2
(120)
–
–
4
(6)
(120)
1
(120)
1
4
7
(8)
(115)
2,513
2,647
Phoenix Group Holdings Annual Report and Accounts 2015 MCEV SUPPLEMENTARY INFORMATION
GROUP MCEV ANALYSIS OF EARNINGS
For the year ended 31 December 2015
211
Group MCEV at 1 January 2015
Operating MCEV earnings (after tax)
Non‑operating MCEV earnings (after tax)
Total MCEV earnings
Other comprehensive income/(expense)
Transfers from covered to non‑covered business2
Capital and dividend flows – internal
Capital and dividend flows – external
Non-covered business
Covered
business
MCEV
£m
Management
services
IFRS
£m
Other Group
companies1
IFRS
£m
2,856
142
(351)
220
(98)
122
–
(138)
(166)
–
24
3
27
4
–
(8)
–
(21)
(102)
(123)
(44)
138
174
(120)
Group
MCEV
£m
2,647
223
(197)
26
(40)
–
–
(120)
Closing value at 31 December 2015
2,674
165
(326)
2,513
1 Comprises the Group holding and other companies that do not form part of the Phoenix Life division.
2 Following the de‑authorisation of Opal Reassurance Limited in December 2015, its remaining net assets have been transferred from covered business to non‑covered business.
For the year ended 31 December 2014
Group MCEV at 1 January 2014
Operating MCEV earnings (after tax)
Non‑operating MCEV earnings (after tax)
Total MCEV earnings
Other comprehensive income
Divested businesses4
Capital and dividend flows – internal
Capital and dividend flows – external
Non‑covered business
Covered
business
MCEV
£m
3,059
Management
services
IFRS
£m
Asset
Management3
IFRS
£m
Other Group
companies1
IFRS
£m
134
108
(923)
268
(32)
236
–
(18)
(421)
–
28
(8)
20
–
–
(12)
–
(22)
165
143
(27)
109
462
(115)
14
(2)
12
–
(91)
(29)
–
–
Group
MCEV
£m
2,378
288
123
411
(27)
–
–
(115)
Closing value at 31 December 2014
2,856
142
(351)
2,647
3 Relates to the Ignis division disposed of on 1 July 2014, classified as discontinued operations. The Asset Management MCEV earnings after tax of £12 million includes intra‑group income of
£30 million.
4 Comprises capital flows relating to the disposal of Ignis and BA(GI) Limited.
Phoenix Group Holdings Annual Report and Accounts 2015Financials 212
MCEV SUPPLEMENTARY INFORMATION
RECONCILIATION OF GROUP IFRS EQUITY
TO MCEV NET WORTH
For the year ended 31 December 2015
Group net assets attributable to owners of the parent as reported under IFRS
Goodwill and other intangibles in accordance with IFRS removed (net of tax)
Value of in‑force business in accordance with IFRS removed (net of tax)
Adjustments to IFRS reserving
Tax adjustments
Revalue listed debt to market value
Eliminate after tax pension scheme surpluses (including IFRIC 14 adjustments)1
Other adjustments2
MCEV net worth attributable to owners of the parent
MCEV value of in‑force business included (net of tax) as set out in note 2
Closing Group MCEV
2015
£m
2,434
(204)
(906)
(117)
11
(87)
(560)
–
571
1,942
2,513
2014
£m
2,365
(217)
(1,011)
(130)
33
(68)
(492)
(14)
466
2,181
2,647
1 Pension scheme surpluses valued on an IFRS basis are removed. This includes the IFRIC 14 adjustments as described in note G6 of the IFRS consolidated financial statements.
2 Includes adjustments to revalue unlisted debt carried at amortised cost under IFRS at face value.
Phoenix Group Holdings Annual Report and Accounts 2015 MCEV SUPPLEMENTARY INFORMATION
NOTES TO THE MCEV FINANCIAL STATEMENTS
213
1. BASIS OF PREPARATION
OVERVIEW
The supplementary information on pages 209 to 220 has been
prepared on a MCEV basis except for the items described
further below.
The MCEV methodology adopted by the Group is in accordance with
the MCEV principles and guidance published by the CFO Forum in
June 2008 and amended in October 2009, except that:
Ɛ risk‑free rates have been defined as the annually compounded UK
Government bond nominal spot curve plus 10bps rather than as
the swap rate curve;
Ɛ no allowance for the cost of residual non‑hedgeable risk (‘CNHR’)
has been made because, in the opinion of the Directors, the Group
operates a robust outsourcer model in terms of operational risk, does
not write new business, is focused entirely on the back book, and
has succeeded in closing out significant legacy risks. The theoretical
value of CNHR is disclosed separately in note 1(b); and
On 2 December 2015, the Group completed the sale of its entire
interest in Scottish Mutual International Limited (‘SMI’) for cash
consideration of £14 million following a pre‑completion return of
capital by SMI. The results of SMI have been included in the MCEV
supplementary information up to the date of the disposal, and a loss
on disposal of £4 million has been recorded in ‘Other non‑operating
variances on life business’.
COVERED BUSINESS
The MCEV calculations cover all long‑term insurance business written
by the Group, but exclude Ignis (prior to its divestment on 1 July 2014)
and the management service companies.
Opal Re was included within covered business prior to its
de‑authorisation as an insurance company in December 2015, and
was valued on a basis consistent with the annuity business within the
UK life companies. Following the de‑authorisation, the residual net
assets of Opal Re are included within non‑covered business and valued
in accordance with IFRS.
Ɛ the asset management (prior to its divestment on 1 July 2014)
MCEV METHODOLOGY
and management service companies’ values are calculated and
presented on a basis consistent with IFRS. Under CFO Forum
principles and guidance, productivity gains should not be recognised
until achieved. This treatment is inconsistent with the cost profile
of a closed fund where continual cost reductions are expected to
maintain unit costs as the business runs off. In the opinion of the
Directors, if the MCEV principles and guidance were to be applied
to the asset management and the management service companies,
it would not provide a fair reflection of the Group’s financial position.
These companies are therefore reported alongside the Group’s other
holding companies at their IFRS net asset value.
In January 2015, the Group announced the successful exchange of
99% of the Group’s Perpetual Reset Capital Securities (‘Tier 1 notes’)
for £428 million of new listed subordinated notes issued by PGH
Capital Limited and maturing in 2025. The terms of the new notes
meet the requirement of Tier 2 capital under Solvency II and have a
coupon of 6.625%. Upon exchange, new notes with a face value of
£32 million were held by Group companies and continue to be held as
at 31 December 2015.
The Finance (No.2) Act 2015 was enacted in November 2015 and set
out reductions in rates of corporation tax from 20% to 19% in April 2017
and from 19% to 18% in April 2020. The impact of these changes has
been reflected in the Group’s MCEV at 31 December 2015.
A further 1% reduction, to 17%, effective from April 2020 has been
announced in the 2016 Budget and will be introduced by future
legislation. The impact of this change has not been reflected in the
Group’s MCEV at 31 December 2015.
On 9 November 2015 the Group entered into an agreement with
RGA International, effective from 1 November 2015, to reinsure
substantively all of the PLAL annuity liabilities previously ceded
to Opal Re, a subsidiary undertaking of the Company. The Group
paid a reinsurance premium of £1,346 million to RGA International.
A favourable impact of £13 million has arisen as a result of entering the
reassurance arrangement, consisting of an £18 million gain recognised
in ‘Other non‑operating variances on life business’ and attributable
transaction expenses of £5 million recognised in ‘Non‑recurring items
on non‑life business’.
The embedded value of covered business is based on a market‑
consistent methodology. Under this methodology, assets and liabilities
are valued in line with market prices and consistently with each other.
The key components of MCEV are net worth plus the value of in‑force
covered business.
a) Net worth
For the Group’s life companies, net worth is defined as the market
value of shareholder funds plus the shareholders’ interest in surplus
assets held in long‑term business funds less the market value of any
outstanding debt of the life companies.
Loans from the life companies to holding companies have been
consolidated out such that they do not appear as an asset in the life
company or as a liability in the holding company. This presentation has
no impact on the overall MCEV but does affect the allocation of net
assets between covered and non‑covered business.
b) Value of in-force business (‘VIF’)
The market consistent VIF represents the present value of profits
attributable to shareholders arising from the in‑force business, less
an allowance for the time value of financial options and guarantees
embedded within life insurance contracts and frictional costs of
required capital.
The approach adopted to calculate VIF combines deterministic and
stochastic techniques (each of which is discussed in more detail below):
Ɛ deterministic techniques have been used to value cash flows whose
values vary in a linear fashion with market movements. These cash
flows are valued using discount rates that reflect the risk inherent
in each cash flow. In practice, it is not necessary to discount each
cash flow at a different discount rate, as the same result is achieved
by projecting and discounting all cash flows at risk‑free rates. This is
known as the ‘certainty equivalent approach’; and
Phoenix Group Holdings Annual Report and Accounts 2015Financials 214
MCEV SUPPLEMENTARY INFORMATION
NOTES TO THE MCEV FINANCIAL STATEMENTS
Continued
1. BASIS OF PREPARATION continued
MCEV METHODOLOGY continued
Ɛ stochastic techniques have been used to value cash flows that
have an asymmetric effect on cash flows to shareholders. Here, the
calculation involves the use of stochastic models developed for the
purposes of realistic balance sheet reporting.
The VIF consists of the following components:
Present value of future profits (‘PVFP’)
The PVFP represents the present value of profits attributable to
shareholders arising from the in‑force business. The PVFP is calculated
by projecting and discounting using risk‑free rates, with an allowance for
liquidity premiums where appropriate.
The projection is based on actively reviewed best estimate
non‑economic assumptions. Best estimate assumptions make
appropriate allowance for expected future experience where there is
sufficient evidence to justify; for example, in allowing for future mortality
improvements on annuity business.
Time value of financial options and guarantees (‘TVFOGs’)
The Group’s embedded value includes an explicit allowance for the
TVFOGs embedded within insurance contracts, including investment
performance guarantees on participating business and guaranteed
vesting annuity rates. The cost of these options and guarantees to
shareholders is calculated using market‑consistent stochastic models
calibrated to the market prices of financial instruments as at the
period end.
The TVFOGs allow for the impact of management actions, consistent
with those permitted by the Principles and Practices of Financial
Management. The modelling of management actions vary for each of
the funds but typically include management of bonus rates and policy
enhancements, charges to asset shares to cover increases to the cost
of guarantees and alterations to investment strategy.
Frictional cost of capital (‘COC’)
COC is defined as the difference between the market value of
shareholder‑owned assets backing required capital and the present
value of future releases of those assets allowing for future investment
returns on that capital, investment expenses and taxes.
Required capital is defined as the minimum regulatory capital
requirement, which is the greater of Solvency I Pillar 1 and Pillar 2
capital requirements, plus the capital required under the Group’s capital
management policy. This equates to 146% of the Solvency I Pillar
1 minimum regulatory capital requirement or 123% of the Solvency I
Pillar 2 minimum regulatory capital requirement (2014: 142% Pillar 1,
124% Pillar 2).
Solvency II introduces a new capital regime for insurers with effect
from 1 January 2016. No allowance has been made within the Group’s
MCEV information for the impact of this, in accordance with the
additional guidance issued by the CFO Forum in October 2015.
Costs of residual non‑hedgeable risks (‘CNHR’)
The CNHR should allow for risks that can have an asymmetric impact
on shareholder value to the extent these risks have not already been
reflected in the PVFP or TVFOGs. The majority of such risks within the
Group are operational and tax risks.
No allowance for the CNHR has been made, as in the opinion of
the Directors, the CNHR calculated in accordance with CFO Forum
principles and guidance does not anticipate further risk management
actions, and therefore does not provide a fair reflection of the Group’s
ongoing risk.
However, the CNHR calculated in accordance with the CFO Forum
principles and guidance, and therefore without anticipating further risk
management actions, has been disclosed below.
For with‑profits business the CNHR would increase the TVFOGs by
£23 million (2014: £14 million).
For other business the cost would be £106 million (2014: £105 million).
This equates to an equivalent average cost of capital charge of 0.76%
(2014: 0.95%). The level of capital assumed in this calculation is
determined based on a 99.5% confidence level over a 1 year time
horizon, consistent with the ICA methodology. Allowance is made for
diversification benefits between non‑hedgeable risks, but not between
hedgeable and non‑hedgeable risks.
c) Valuation of debt
Listed debt issued by the Group is valued at the market value quoted
at the reporting date which is consistent with MCEV principles.
The National Provident Life Limited recourse bonds are backed by
surpluses that are expected to emerge on blocks of its unit‑linked and
unitised with‑profits business. This securitisation has been valued on
a cash flow basis, allowing for payments expected to be due based on
the projected level of securitised surpluses emerging. The full VIF of the
securitised unit‑linked and unitised with‑profits business is expected to
be payable to bondholders; therefore, no additional value accrues to the
embedded value.
Unlisted bank debt owed by the holding companies is included at
face value.
d) Taxation
Full allowance has been made for the value of tax that would become
payable on the transfer of surplus assets out of non‑profit funds.
This allowance reflects the projected pace of releases of surplus from
non‑profit funds that is not required to support with‑profit funds.
Allowance has also been made for the tax relief arising from interest
payments made on the debt of the holding companies. The value of the
tax relief is determined by offsetting the tax payable on profits emerging
from covered business against the tax relief afforded by interest
payments on the debt. Interest payments are projected assuming that
current levels of debt are reduced and then refinanced to maintain a
long‑term level of debt that the Directors consider to be supported by
the projected embedded value of the Group’s businesses.
Phoenix Group Holdings Annual Report and Accounts 2015 215
e) New business
The MCEV places a value on the profits expected to be earned on annuities arising from policies vesting with guaranteed annuity terms.
The value is calculated based on management’s assumptions as to long‑term profit margins and projected take‑up rates. As at 31 December 2015,
the Group MCEV included £165 million in respect of these policies (2014: £180 million). These policies are excluded from the definition of new
business on the basis that the annuity being provided is an obligation under an existing policy and the life companies are already reserving for the
cost of these guarantees.
Policies with guarantees are fully reserved for on an economic basis.
New business includes all other annuities written by the life insurance companies.
f) Participating business
Allowance is made for future bonus rates on a basis consistent with the projection assumptions and established company practice.
The time value of options and guarantees used in the calculation of MCEV also allows for expected management and policyholder responses to the
varying external economic conditions simulated by the economic scenario generators. Policyholder response has been modelled based on historical
experience. Management actions have been set in accordance with each life company’s Principles and Practices of Financial Management.
g) Pension schemes
The MCEV allows for pension scheme deficits as calculated on an IFRS basis, but no benefit is taken for pension scheme surpluses.
Under IFRIC 14, an interpretation of IAS 19, pension funding contributions are considered to be a minimum funding requirement and, to the
extent that the contributions payable would result in a surplus that would not be recoverable, a liability is recognised when the obligation arises.
The IFRS IFRIC 14 adjustments are not reflected in the Group MCEV as the Group anticipates that its ultimate contributions into the pension
schemes will not give rise to an unrecoverable surplus.
h) Events after the reporting period
On 22 March 2016, the Board recommended a final dividend of 26.7p per share (2014: 26.7p per share) for the year ended 31 December 2015.
Payment of the final dividend is subject to shareholder approval at the AGM. The cost of this dividend will be charged to the Reconciliation of
Movement in Equity – Group MCEV basis in 2016.
2. COMPONENTS OF THE MCEV OF COVERED BUSINESS
Net worth
PVFP
TVFOG
COC
Total VIF
2015
£m
732
2014
£m
675
2,025
2,238
(58)
(25)
1,942
2,674
(38)
(19)
2,181
2,856
The net worth of covered business of £732 million at 31 December 2015 (2014: £675 million) consists of £190 million of free surplus in excess of
required capital (2014: £196 million).
Phoenix Group Holdings Annual Report and Accounts 2015Financials 216
MCEV SUPPLEMENTARY INFORMATION
NOTES TO THE MCEV FINANCIAL STATEMENTS
Continued
3. ANALYSIS OF COVERED BUSINESS MCEV EARNINGS (AFTER TAX)
2015
Life MCEV at 1 January 2015
New business value
Expected existing business contribution (reference rate)1
Expected existing business contribution (in excess of reference rate)2
Transfer from VIF to net worth
Experience variances
Assumption changes
Other operating variances
Life MCEV operating earnings
Economic variances
Other non‑operating variances
Total Life MCEV earnings
Transfer from covered business to non‑covered business
Capital and dividend flows
Life MCEV at 31 December 2015
Net worth
£m
675
(2)
19
(1)
188
(20)
(5)
90
269
(63)
136
342
(138)
(147)
732
VIF
£m
2,181
4
52
39
(188)
(1)
25
20
(49)
(113)
(58)
(220)
–
(19)
Total life
MCEV
£m
2,856
2
71
38
–
(21)
20
110
220
(176)
78
122
(138)
(166)
1,942
2,674
1 Expected existing business contribution (reference rate) represents the expected return on the opening MCEV at the long‑term risk‑free rate at 2.29% (2014: 3.55%).
2 Expected existing business contribution (in excess of reference rate) represents the additional expected return above the risk‑free rate arising from long‑term risk premiums on equities,
property and corporate bonds.
2014
Life MCEV at 1 January 2014
New business value
Expected existing business contribution (reference rate)
Expected existing business contribution (in excess of reference rate)
Transfer from VIF to net worth
Experience variances
Assumption changes
Other operating variances
Life MCEV operating earnings
Economic variances
Other non‑operating variances
Total Life MCEV earnings
Divested business
Capital and dividend flows
Life MCEV at 31 December 2014
Net worth
£m
VIF
£m
802
2,257
Total life
MCEV
£m
3,059
7
31
(8)
179
45
20
71
345
(28)
(34)
283
(18)
(392)
675
4
79
35
(179)
8
(35)
11
(77)
70
(40)
(47)
–
(29)
11
110
27
–
53
(15)
82
268
42
(74)
236
(18)
(421)
2,181
2,856
Phoenix Group Holdings Annual Report and Accounts 2015 217
4. NEW BUSINESS
The value generated by new business written during the period is calculated as the present value of the projected stream of after‑tax distributable
profits from that business. This contribution has been valued using economic and non‑economic assumptions at the point of sale. The value of new
business is shown after the effect of frictional costs of holding required capital on the same basis as for the in‑force covered business.
Year ended 31 December 2015
Year ended 31 December 2014
Premium
£m
MCEV
£m
141
154
2
11
MCEV/
Premium
%
1%
7%
5. MATURITY PROFILE OF BUSINESS
This note sets out how the PVFP is expected to emerge into net worth over future years. Surpluses are projected on a certainty equivalent basis
with allowance for liquidity premiums as appropriate and are discounted at risk‑free rates.
Present value of future profits (PVFP)
31 December 2015
31 December 2014
6. ASSUMPTIONS
REFERENCE RATES
(a) Risk-free rates
1–5
£m
845
859
6–10
£m
533
556
Years
11–15
£m
322
387
16–20
£m
194
250
20+
£m
131
186
Total
£m
2,025
2,238
Risk‑free rates are based on the annually compounded UK Government bond nominal spot curve plus 10bps, extrapolated as necessary to meet
the term of the liabilities.
The risk‑free rates assumed for a sample of terms were as follows:
Term
1 year
5 years
10 years
15 years
20 years
2015
Gilt yield
+10bps Swap yield
0.36%
1.45%
2.15%
2.59%
2.85%
0.85%
1.60%
2.04%
2.22%
2.25%
2014
Gilt yield
+10bps
0.43%
1.31%
1.97%
2.38%
2.62%
Swap yield
0.98%
1.46%
1.87%
2.12%
2.26%
Had the Group used the swap rate curve as set out in the CFO Forum principles, the MCEV would have been £309 million lower
(2014: £218 million lower).
(b) Liquidity premiums
In October 2009, the CFO Forum published an amendment to the MCEV principles to reflect the inclusion of a liquidity premium. The changes
affirm that the reference rate may include a liquidity premium over and above the risk‑free yield curve for liabilities which are not liquid, given that
the matching assets are able to be held to maturity.
The liabilities to which a liquidity premium is applied include immediate annuities, pensions policies with benefits defined as an annuity or
in‑the‑money guaranteed annuity options. The liquidity premium is determined by reference to the yield on the bond portfolios held after allowing
for credit risk by deducting margins for best estimate defaults and unexpected default risk premiums. The additional yield above risk‑free rates
implied by the calculated liquidity premium is as follows:
Additional yield over risk‑free rates
INFLATION
2015
2014
0.52%
0.46%
For purposes of the MCEV calculation, the rate of increase in the UK Retail Price Index (‘RPI’) as at 31 December 2015, was taken from the
implied inflation curve at a term appropriate to the liabilities. The rate of increase in UK National Average Earnings inflation is assumed to be
RPI plus 100bps as at 31 December 2015 (2014: RPI plus 100bps).
Phoenix Group Holdings Annual Report and Accounts 2015Financials 218
MCEV SUPPLEMENTARY INFORMATION
NOTES TO THE MCEV FINANCIAL STATEMENTS
Continued
6. ASSUMPTIONS continued
STOCHASTIC ECONOMIC ASSUMPTIONS
The time value of options and guarantees is calculated using an economic scenario generator. The model is calibrated to market conditions as at
31 December 2015. The scenario generator and calibration are consistent with that used for realistic balance sheet reporting.
A LIBOR Market Model with displaced diffusion and stochastic volatility is used to generate risk‑free rates over a complete yield curve, calibrated
to the UK nominal spot curve plus 10bps, consistent with the deterministic projections. Interest rate volatility is calibrated to swaption implied
volatilities, as per the sample below.
Interest rate volatility
2015 Swap term (years)
5
10
20
30
Interest rate volatility
2014 Swap term (years)
5
10
20
30
5
10
15
20
25
30
Option term (years)
35.3%
30.9%
28.1%
28.3%
32.6%
29.8%
28.6%
29.0%
31.2%
29.3%
29.0%
28.9%
30.6%
29.3%
28.8%
28.0%
30.4%
29.2%
28.0%
26.6%
30.2%
28.7%
27.1%
25.7%
5
10
15
20
25
30
Option term (years)
37.4%
29.9%
24.6%
23.6%
32.1%
27.0%
23.8%
23.3%
29.1%
25.4%
23.4%
22.7%
27.4%
24.6%
22.9%
21.9%
26.5%
24.1%
22.0%
20.8%
25.7%
23.2%
21.0%
19.8%
Real interest rates have been modelled using the two‑factor Hull‑White model, calibrated to index‑linked gilts.
Equity volatility is calibrated to replicate the prices on a range of FTSE equity options with a range of terms and strikes. The equity volatility model
used allows volatility to vary with both term and strike of the options.
Equity implied volatility (ATM)
2015
2014
Term (years)
5
21.0%
20.8%
10
22.1%
22.2%
15
22.7%
23.0%
20
23.1%
23.4%
25
23.3%
23.7%
30
23.5%
23.9%
Best estimate levels of volatility are assumed for directly held property. The model implied volatility for 31 December 2015 is 15% (2014: 15%).
The modelling of corporate bonds allows for credit transitions and defaults, calibrated to historic data, derived from current markets.
Phoenix Group Holdings Annual Report and Accounts 2015 219
OPERATING EARNINGS
The Group uses normalised investment returns in calculating the expected existing business contribution. The Group considers that an average
return over the remaining term of its in‑force business is more appropriate than using a short‑term rate and is more consistent with the Group’s
expectation of longer‑term rates of return. Therefore, the Group calculates the expected contribution on existing business using a 15‑year gilt rate
at the beginning of the reporting period plus 10bps and long‑term expectations of excess investment returns.
The table below sets outs the asset risk premiums used:
Equities
Property
Gilts
2015
3.0%
2.0%
0.0%
2014
3.0%
2.0%
0.0%
The return assumed on corporate bond portfolios is the redemption yield for the portfolio less an allowance for credit risk.
EXPENSES
Each life company’s projected per policy expenses are based on agreements with the Group’s management service companies, adjusted to allow
for additional costs incurred directly by the life companies, including, for example, regulatory fees and one‑time expenses.
The life companies’ projected investment expenses are based on the fees agreed with the Group’s fund managers, allowing for current and
projected future asset mixes.
VALUATION OF DEBT AND NON-CONTROLLING INTERESTS
The Group’s statement of consolidated financial position as at 31 December 2015 includes Perpetual Reset Capital Securities with principal
outstanding of £6 million (2014: £394 million), Phoenix Life Limited subordinated debt with a face value of £200 million (2014: £200 million), the
PGH Capital Limited senior bond with a face value of £300 million (2014: £300 million) and the PGH Capital Limited subordinated notes issued
during the year, with principal outstanding of £396 million (net of internal holdings). These listed securities have been included within the MCEV
at their market value quoted at the reporting date.
The table below summarises the face and market values of these debt obligations after adjustment for internal holdings in the Perpetual Reset
Capital Securities and the PGH Capital subordinated notes:
Listed debt and non-controlling interests
Perpetual Reset Capital Securities
Phoenix Life Limited subordinated debt
PGH Capital Limited senior bond
PGH Capital Limited subordinated notes
Unlisted debt has been included at face value:
Unlisted debt
PGH Capital Limited facility
2015
2014
Face value
£m
Market
value
£m
Face value
£m
Market
value
£m
6
200
300
396
6
212
324
400
394
200
300
–
387
212
324
–
2015
Face value
£m
2014
Face value
£m
650
840
Phoenix Group Holdings Annual Report and Accounts 2015Financials 220
MCEV SUPPLEMENTARY INFORMATION
NOTES TO THE MCEV FINANCIAL STATEMENTS
Continued
7. SENSITIVITY TO ASSUMPTIONS
The table below summarises the key sensitivities of the MCEV of covered business at 31 December 2015
(1) Base
(2) 1% decrease in risk‑free rates
(3) 1% increase in risk‑free rates
(4) 10% decrease in equity market values
(5) 10% increase in equity market values
(6) 10% decrease in property market values
(7) 10% increase in property market values
(8) 100 bps increase in credit spreads1
(9) 100 bps decrease in credit spreads1
(10) 25% increase in equity/property implied volatilities
(11) 25% increase in swaption implied volatilities
(12) 25% decrease in lapse rates and paid‑up rates
(13) 5% decrease in annuitant mortality
(14) 5% decrease in non‑annuitant mortality
(15) Required capital equal to the minimum regulatory capital2
2015
Life MCEV
£m
2014
Life MCEV
£m
2,674
2,856
194
(157)
(25)
27
(19)
18
(158)
162
(22)
(7)
(40)
(109)
15
20
59
(68)
(46)
46
(46)
45
(164)
157
(9)
(9)
(30)
(140)
15
16
1 25bps is assumed to relate to default risk.
2 Minimum regulatory capital is defined as the greater of Solvency I Pillar 1 and Pillar 2 capital requirements without any allowance for the Group’s capital management policy.
No expense sensitivity has been shown as maintenance costs incurred by the covered business are largely fixed under the terms of agreements
with the management services companies.
Phoenix Group Holdings Annual Report and Accounts 2015 Phoenix Group Holdings Annual Report and Accounts 2015
221
IN THIS SECTION
Shareholder information
Glossary
222
225
A
D
D
I
T
I
O
N
A
L
I
N
F
O
R
M
A
T
I
O
N
222
SHAREHOLDER INFORMATION
ANNUAL GENERAL MEETING
Our Annual General Meeting (‘AGM’) will be held on 11 May 2016 at 12:30pm.
The voting results for our 2016 AGM, including proxy votes and votes withheld, will be available on the Group’s website shortly after the meeting.
SHARE PRICE PERFORMANCE
PHOENIX GROUP HOLDINGS SHARE PRICE PERFORMANCE
Price (rebased to PHNX) pence
1,000
950
900
850
800
750
700
Jan
2015
Feb
2015
Mar
2015
Apr
2015
May
2015
Jun
2015
Jul
2015
Aug
2015
Sep
2015
Oct
2015
Nov
2015
Dec
2015
Phoenix Group
FTSE 250 (ex Inv Trusts)
FTSE 350 Life Assurance
SHAREHOLDER PROFILE AS AT 31 DECEMBER 2015
Range of shareholdings
1–1,000
1,001–5,000
5,001–10,000
10,001–250,000
250,001–500,000
500,001 and above
Total
No. of
shareholders
625
482
105
299
44
70
1625
%
38.5
29.6
6.5
18.4
2.7
4.3
100
No. of
shares
301,280
1,088,957
753,488
20,086,625
16,084,163
187,104,933
%
0.1
0.5
0.4
8.9
7.1
83
225,419,446
100
Phoenix Group Holdings Annual Report and Accounts 2015
223
SHAREHOLDER SERVICES
MANAGING YOUR SHAREHOLDING
Our registrar, Computershare, maintains the Company’s register of
members. Shareholders may request a hard copy of this Annual Report
from our registrar and if you have any further queries in respect of
your shareholding, please contact directly using the contact details set
out below.
REGISTRAR DETAILS
Computershare Investor Services (Cayman) Limited
Queensway House
Hilgrove Street
St Helier
Jersey, JE1 1ES
Shareholder helpline number
Fax number
Shareholder helpline email address
+44 (0) 870 707 4040
+44 (0) 870 873 5851
info@computershare.co.je
DIVIDEND MANDATES
Shareholders may find it convenient to have their dividends paid directly
to their bank or building society account. If you wish to take advantage
of this facility please call Computershare and request a ‘Dividend
Mandate’ form.
SCRIP DIVIDEND ALTERNATIVE
The Company does not currently offer a scrip dividend alternative.
WARNING TO SHAREHOLDERS
Over recent years, many companies have become aware that their
shareholders have received unsolicited phone calls or correspondence
concerning investment matters. These are typically from overseas-
based ‘brokers’ who target UK shareholders, offering to sell them
what often turn out to be worthless or high-risk shares in US or UK
investments. These operations are commonly known as ‘boiler rooms’.
Shareholders are advised to be very wary of any unsolicited advice,
offers to buy shares at a discount or offers of free reports about
the Company.
If you receive any unsolicited investment advice:
Ɛ make sure you get the correct name of the person and organisation;
Ɛ check that they are properly authorised by the Financial Conduct
Authority (‘FCA’) before getting involved by visiting www.fca.org.uk/
firms/systems-reporting/register;
Ɛ report the matter to the FCA by calling the FCA Consumer Helpline
on 0800 111 6768; and
Ɛ if the calls persist, hang up.
If you deal with an unauthorised firm, you will not be eligible to receive
payment under the Financial Services Compensation Scheme (‘FSCS’).
The FCA can also be contacted by completing an online form available
at www.fca.org.uk/consumers/scams/investment-scams/share-fraud-
and-boiler-room-scams/reporting-form.
Details of any share dealing facilities that the Company endorses will be
included in Company mailings.
More detailed information on this or similar activity can be found on the
FCA website available at www.fca.org.uk/consumers.
Phoenix Group Holdings Annual Report and Accounts 2015Additional information
224
SHAREHOLDER INFORMATION
Continued
SHARE PRICE
You can access the current share price of Phoenix Group Holdings on the Group’s website together with electronic copies of the Group’s financial
reports and presentations at www.thephoenixgroup.com/investor-relations.aspx.
ORDINARY SHARES – 2015 FINAL DIVIDEND
Ex-dividend date
Record date
Payment date for the recommended final dividend
GROUP FINANCIAL CALENDAR FOR 2016
Annual General Meeting
Announcement of unaudited six months’ Interim Results
FORWARD-LOOKING STATEMENTS
7 April 2016
8 April 2016
13 May 2016
11 May 2016
25 August 2016
The 2015 Annual Report and Accounts contains, and the Group may make other statements (verbal or otherwise) containing, forward-looking
statements and other financial and/or statistical data about the Group’s current plans, goals and expectations relating to future financial conditions,
performance, results, strategy and/or objectives.
Statements containing the words: ‘believes’, ‘intends’, ‘will’, ‘may’, ‘should’, ‘expects’, ‘plans’, ‘aims’, ‘seeks’, ‘targets’, ‘continues’ and ‘anticipates’
or other words of similar meaning are forward-looking. Such forward-looking statements and other financial and/or statistical data involve risk
and uncertainty because they relate to future events and circumstances that are beyond the Group’s control. For example, certain insurance risk
disclosures are dependent on the Group’s choices about assumptions and models, which by their nature are estimates. As such, actual future gains
and losses could differ materially from those that we have estimated. Other factors which could cause actual results to differ materially from those
estimated by forward-looking statements include but are not limited to:
Ɛ domestic and global economic and business conditions;
Ɛ asset prices;
Ɛ market-related risks such as fluctuations in interest rates and exchange rates, the potential for a sustained low-interest rate environment, and the
performance of financial markets generally;
Ɛ the policies and actions of governmental and/or regulatory authorities, including, for example, new government initiatives related to the financial
crisis and the effect of the European Union’s ‘Solvency II’ requirements on the Group’s capital maintenance requirements;
Ɛ market developments and government actions regarding the referendum on UK membership of the European Union;
Ɛ the impact of inflation and deflation;
Ɛ market competition;
Ɛ changes in assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, gender pricing
and lapse rates);
Ɛ the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries;
Ɛ risks associated with arrangements with third parties;
Ɛ inability of reinsurers to meet obligations or unavailability of reinsurance coverage; and
Ɛ the impact of changes in capital, solvency or accounting standards, and tax and other legislation and regulations in the jurisdictions in which
members of the Group operate.
As a result, the Group’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set
out in the forward-looking statements within the 2015 Annual Report and Accounts.
The Group undertakes no obligation to update any of the forward-looking statements contained within the 2015 Annual Report and Accounts or any
other forward-looking statements it may make or publish.
The 2015 Annual Report and Accounts has been prepared for the members of the Company and no one else. The Company, its Directors or
agents do not accept or assume responsibility to any other person in connection with this document and any such responsibility or liability is
expressly disclaimed.
Nothing in the 2015 Annual Report and Accounts is or should be construed as a profit forecast or estimate.
Phoenix Group Holdings Annual Report and Accounts 2015 GLOSSARY
225
ABS
ACSM
ALM
ANNUITY POLICY
ASSET MANAGEMENT
Asset Backed Securities – A collateralised security whose value and income payments are derived from
a specified pool of underlying assets
Alternative Coupon Satisfaction Mechanism – The mechanism under the Tier 1 Notes, under which, if Pearl
Group Holdings (No. 1) Limited opts to defer a coupon payment, the deferred coupon payment may only be
satisfied through the proceeds of the issue of certain forms of securities, which may be made at any time
Asset Liability Management – Management of mismatches between assets and liabilities within risk appetite
A policy that pays out regular benefit amounts, either immediately and for the remainder of a policyholder’s
lifetime (immediate annuity), or deferred to commence at some future date (deferred annuity)
The management of assets using a structured approach to guide the act of acquiring and disposing
of assets, with the objective of meeting defined investment goals and maximising value for investors,
including policyholders
BLACK-SCHOLES
A mathematical model used to calculate the value of an option
CFO FORUM
A high-level discussion group formed of the Chief Financial Officers of major European insurance companies.
Its aim is to influence the development of financial reporting and related regulatory developments for insurance
companies on behalf of its members
CLOSED LIFE FUND
A fund that no longer accepts new business. The fund continues to be managed for the existing policyholders
COC
CNHR
DPF
EBT
Frictional Cost of Capital – The difference between the market value of shareholder-owned assets backing
required capital and the present value of future releases of those assets allowing for future investment returns
on that capital, investment expenses and taxes
Cost of residual non-hedgeable risk – The expected cost of non-hedgeable risks that can have an asymmetric
impact on shareholder value to the extent these risks have not already been reflected in the present value of
future profits or time value of financial options and guarantees within the MCEV
Discretionary Participation Feature – A contractual right under an insurance contract to receive, as a
supplement to guaranteed benefits, additional benefits whose amount or timing is contractually at the
discretion of the issuer
Employee Benefit Trust – A trust set up to enable its Trustee to purchase and hold shares to satisfy
employee share-based incentive plan awards. The Company’s EBT is the Phoenix Group Holdings Employee
Benefit Trust
ECONOMIC ASSUMPTIONS Assumptions related to future interest rates, inflation, market value movements and tax
EEA
European Economic Area – Established on 1 January 1994 and is an agreement between Norway, Iceland,
Liechtenstein and the European Union. It allows these countries to participate in the EU’s single market without
joining the EU
EMBEDDED VALUE
The value to equity shareholders of the net assets and expected future profits of a life company
EXPERIENCE VARIANCES
Current period differences between the actual experience incurred and the assumptions used in the calculation
of MCEV or IFRS insurance liabilities
FINANCIAL LEVERAGE
Gross shareholder debt (financial leverage basis) as a percentage of the gross MCEV
FINANCIAL REPORTING
COUNCIL
The UK’s independent regulator responsible for promoting high-quality corporate governance and reporting to
foster investment
FREE SURPLUS
The amount of capital held in life companies in excess of that needed to support their minimum regulatory
capital requirement, plus the capital required under the Group’s capital management policy
FCA
FOS
GAR
GEARING
GROSS MCEV
Financial Conduct Authority – The body responsible for supervising the conduct of all financial services firms
and for the prudential regulation of those financial services firms not supervised by the Prudential Regulation
Authority (‘PRA’), such as asset managers and independent financial advisers
Financial Ombudsman Service – An ombudsman established in 2000, and given statutory powers in 2001
by the Financial Services and Markets Act 2000, to help settle disputes between consumers and UK-based
businesses providing financial services
Guaranteed Annuity Rate – A rate available to certain pension policyholders to acquire an annuity at
a contractually guaranteed conversion rate
Gross shareholder debt (gearing basis) as a percentage of the gross MCEV
Gross MCEV is the sum of the Group MCEV and the value of the shareholder and hybrid debt as included
in the MCEV
Phoenix Group Holdings Annual Report and Accounts 2015Additional information 226
GLOSSARY
Continued
GROSS SHAREHOLDER
DEBT (FINANCIAL
LEVERAGE BASIS)
Gross shareholder debt (financial leverage basis) is defined as the sum of the notional face value of shareholder
debt and 100% of the face value of the Tier 1 notes
GROSS SHAREHOLDER DEBT
(GEARING BASIS)
Gross shareholder debt (gearing basis) is defined as the sum of the IFRS carrying value of shareholder debt
(as disclosed in the Borrowings note in the IFRS financial statements) and 50% of the IFRS carrying value of
the Tier 1 Notes given the hybrid nature of that instrument
HMRC
Her Majesty’s Revenue and Customs
HOLDING COMPANIES
ICA
IFRS
IGD
IMC
Refers to Phoenix Group Holdings, PGH Capital Limited, Phoenix Life Holdings Limited,
Pearl Group Holdings (No. 2) Limited, Impala Holdings Limited, Pearl Group Holdings (No. 1) Limited,
PGH (TC1) Limited, PGH (TC2) Limited, PGH (MC1) Limited, PGH (MC2) Limited, PGH (LCA) Limited,
PGH (LCB) Limited, PGH (LC1) Limited, PGH (LC2) Limited and Pearl Life Holdings Limited
Individual Capital Assessment – A life company’s Pillar 2 assessment of its capital requirements to ensure that
assets exceed liabilities 99.5% of the time over a 1 year period or (in other words) to be able to withstand a
1 in 200 year event
International Financial Reporting Standards – Accounting standards, interpretations and the framework adopted
by the International Accounting Standards Board
Insurance Groups Directive – The European Directive setting out the current capital adequacy regime for
insurance groups as implemented by the PRA
Investment Management Contract – A contract between an investor and an investment manager
INCREMENTAL EMBEDDED
VALUE
Enhancement of MCEV through management actions
IN-FORCE
Long-term business written before the period end and which has not terminated before the period end
INHERITED ESTATE
LIBOR
LSE
LTIP
MCEV
MSA
The assets of the long-term with-profit funds less the realistic reserves for non-profit policies written into
the non-profit fund, less asset shares aggregated across the with-profit policies and any additional amounts
expected at the valuation date to be paid to in-force policyholders in the future in respect of smoothing costs
and guarantees
London Interbank Offer Rate – The average interbank interest rate at which a selection of banks on the London
money market are prepared to lend to one another
London Stock Exchange
Long-Term Incentive Plan – The part of an executive’s remuneration designed to incentivise long-term value
for shareholders through an award of shares with vesting contingent on employment and the satisfaction of
stretching performance conditions linked to Group strategy
Market Consistent Embedded Value – A measure of the consolidated value of shareholders’ interests
calculated using the Group’s MCEV methodology as described in the Basis of preparation section of the
MCEV supplementary information
Management Services Agreement – Contracts that exist between Phoenix Life and management services
companies or between management services companies and their outsource partners
NET SHAREHOLDER DEBT
Shareholder debt (including the Tier 1 Notes) less holding company cash and cash equivalents
NON-ECONOMIC
ASSUMPTIONS
Assumptions related to future levels of mortality, morbidity, persistency and expenses
NON-PROFIT FUND
A fund which is not a with-profit fund, where risks and rewards of the fund fall wholly to shareholders
OPEN ENDED INVESTMENT
COMPANIES
A type of company or a fund in the UK that is structured to invest in other companies with the ability to adjust
its investment criteria and fund size
OPERATING COMPANIES
Refers to the trading companies within Phoenix Life (which includes Opal Reassurance Limited)
ORIGO
An electronic pensions transfer system
PART VII TRANSFER
The transfer of insurance policies under Part VII of FSMA 2000. The insurers involved can be in the same
corporate group or in different groups. Transfers require the consent of the High Court, which will consider
the views of the PRA and FCA and of an Independent Expert
PARTICIPATING BUSINESS
See with-profit fund
PERIPHERAL EUROZONE
Refers to Portugal, Ireland, Italy, Greece and Spain
Phoenix Group Holdings Annual Report and Accounts 2015 227
PIK
PILLAR 1
PILLAR 2
PLHL ICA
PPFM
PRA
Payment-in-kind – Interest on a bond is paid other than in cash, most commonly by increasing the principal
EU-directive-based capital requirements as implemented by the PRA for insurance companies. The Pillar 1
surplus is the excess of available capital resources over the regulatory capital resource requirements
The PRA’s Pillar 2 risk-based capital requirements for insurance companies that have been implemented in the
UK. The Pillar 2 surplus is the excess of available capital resources over capital calculated on an economic basis
required to ensure entities can meet their liabilities. It is based on a self-assessment methodology called the
ICA (‘Individual Capital Assessment’)
PLHL ICA is an assessment, on an economic basis, of the capital resources and requirements arising from
the obligations and risks which exist outside the Group’s life companies
Principles and Practices of Financial Management – A publicly available document which explains how a
company’s with-profit business is run. As part of demonstrating that customers are treated fairly, the Board
certifies that the PPFM has been complied with
Prudential Regulation Authority – The body responsible for the prudential regulation and supervision of banks,
building societies, credit unions, insurers and major investment firms. The PRA and FCA use a Memorandum
of Understanding to co-ordinate and carry out their respective responsibilities
PROTECTION POLICY
A policy which provides benefits payable on certain events. The benefits may be a single lump sum or a series
of payments and may be payable on death, serious illness or sickness
PVFP
SOLVENCY II
TIER 1 NOTES
TSR
Present Value of Future Profits – The present value of profits attributable to shareholders arising from the
relevant in-force business
A new regime for the prudential regulation of European insurance companies that came into force on
1 January 2016
£500 million Perpetual Reset Capital Securities issued by Pearl Group Holdings (No. 1) Limited. In January
2015, the Group announced the exchange of 99% of the Group’s Tier 1 notes for £428 million of new
subordinated notes
Total Shareholder Return – The total return, over a fixed period, to an investor in terms of share price growth and
dividends (assuming that dividends paid are re-invested, on the ex-dividend date, in acquiring further shares)
UK CORPORATE
GOVERNANCE CODE
Standards of good corporate governance practice in the UK relating to issues such as board composition and
development, remuneration, accountability, audit and relations with shareholders
UKCPT
UK GAAP
UK Commercial Property Trust Limited – A property subsidiary of the Group which is domiciled in Guernsey
and listed on the London Stock Exchange
Generally Accepted Accounting Principles adopted within the UK
UNIT-LINKED POLICY
A policy where the benefits are determined by the investment performance of the underlying assets in the
unit-linked fund
VIF
WITH-PROFIT FUND
The Value of In-Force business in the MCEV – The Present Value of Future Profits (‘PVFP’) plus the Time Value
of Financial Options and Guarantees (‘TVFOG’) less the Frictional Cost of Required Capital (‘COC’)
A fund where policyholders are entitled to a share of the profits of the fund. Normally, policyholders receive
their share of the profits through bonuses. Also known as a participating fund as policyholders have a
participating interest in the with-profit funds and any declared bonuses. Generally, policyholder and shareholder
participation in the with-profit funds in the UK is split 90:10
WPICC
With-Profit Insurance Capital Component – The WPICC is the amount by which the regulatory surplus exceeds
the realistic surplus for with-profit funds
Phoenix Group Holdings Annual Report and Accounts 2015Additional information F O C U S
Our highly focused area of
specialisation allows us to
recruit the very best and most
experienced individuals in
the field, particularly in niche
areas such as with-profit funds.
Online resources
REDUCING OUR ENVIRONMENTAL IMPACT
In line with our Corporate Responsibility programme, and as part of our desire to
reduce our environmental impact, you can view key information on our website.
Go online
www.thephoenixgroup.com
INVESTOR RELATIONS
Our Investor Relations section includes information such as our most recent
news and announcements, results presentations, annual and interim reports,
share-price performance, AGM and EGM information, UK Regulatory Returns
and contact information.
Go online
www.thephoenixgroup.com/investor‑relations
NEWS AND UPDATES
To stay up-to-date with Phoenix Group news and other changes to our site’s content,
you can sign up for email alerts, which will notify you when content is added.
To sign up visit
www.thephoenixgroup.com/site‑services/email‑alerts.aspx
PAPER INFORMATION
Printed by Park Communications on FSC® certified paper. Park is an EMAS
certified company and its Environmental Management System is certified
to ISO 14001. 100% of the inks used are vegetable oil based, 95% of press
chemicals are recycled for further use and, on average 99% of any waste
associated with this production will be recycled. This document is printed on
Edixion Offset, a paper containing 100% Environmental Chlorine Free (ECF)
virgin fibre sourced from well managed, responsible, FSC® certified forests.
Design and production Radley Yeldar
P
H
O
E
N
I
X
G
R
O
U
P
H
O
L
D
I
N
G
S
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
5
Millions of customers trust Phoenix
to manage their funds effectively and
communicate clearly and honestly
with them. To honour this trust,
we have created a wide‑ranging
programme to solicit and respond
to policyholders’ views.
T R U S T
Phoenix Group Holdings
Registered address
Phoenix Group Holdings
PO Box 309
Ugland House
Grand Cayman KY1-1104
Cayman Islands
Cayman Islands Registrar of
Companies Number 202172
Principal place of business
Phoenix Group Holdings
1st Floor
32 Commercial Street
St Helier JE2 3RU
Jersey