Annual Report and
Accounts 2017
PHOENIX IS THE LARGEST
UK CONSOLIDATOR OF
CLOSED LIFE ASSURANCE
FUNDS, WITH 5.6 MILLION
POLICYHOLDERS.
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FINANCIALS
Independent Auditor’s Report
IFRS Consolidated
Financial Statements
Notes to the Consolidated
Financial Statements
Parent Company Accounts
Notes to the Parent Company
Financial Statements
Additional Life Company
Asset Disclosures
Additional Capital Disclosures
Alternative Performance
Measures
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110
182
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ADDITIONAL INFORMATION
Shareholder Information
Forward-looking Statements
Glossary
202
203
204
STRATEGIC REPORT
Group at a Glance
Chairman’s Statement
Group Chief Executive
Officer’s Report
The Marketplace
Operating Structure
Our Key Products
Our Business Model
Cash Generation Process
Our Strategy and KPIs
Business Review
Cash Generation
Capital Management
IFRS Results
Risk Management
Stakeholder Engagement
CORPORATE GOVERNANCE
Chairman’s Introduction
Board Structure
Board of Directors
Executive Management Team
Corporate Governance Report
Directors’ Remuneration Report
Directors’ Report
Statement of Directors’
Responsibilities
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Overleaf you can
read more about
Phoenix’s strengths
and how this allows
us to deliver value
to stakeholders.
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Phoenix has a
long-term cash
generation profile
with a track record
of enhancing value
Phoenix has a proven track record of
achieving incremental growth through
management actions. The Group’s long-
term cash generation profile supports
our sustainable dividend policy enabling
us to return value to our shareholders.
£653m
cash generation
25.1p
final dividend
per share
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A specialist
operating model
focused on
closed life funds
As closed funds represent the
core of our business, we are
able to focus our energy and
expertise on improving their
performance for the benefit
of customers and shareholders.
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A market leading
platform and scale
as the largest
UK consolidator
of closed life funds
We have 5.6 million policyholders
and £74 billion assets under management.
We aim to maximise economies of
scale and capital efficiencies through
internal fund restructuring and
operational improvements.
5.6m
policyholders
£74bn
assets under
management
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Providing an
effective service to
our policyholders is
critical to our strategy
Our role as steward of our customers’
funds is one we take very seriously.
This year we achieved 92% customer
satisfaction and we continue to seek
ways to improve. We invest in IT systems
and customer communication initiatives
and aspire to deliver high levels of
customer service.
92%
customer
satisfaction score
A wealth of acquisition
opportunities exist
in the sector
We are a consolidator in the closed fund
market for the long-term. Approximately
£380 billion of assets are held in other
closed life funds in the UK (excluding
Phoenix and the proposed Standard Life
Assurance acquisition) and there is also
significant market opportunity in the
Bulk Purchase Annuity space, providing
a wealth of further growth opportunities.
£380bn
of assets are held in closed
life funds in the UK
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Phoenix employs
a talented and
experienced team
Our area of specialisation allows us to
recruit the best and most experienced
individuals in the field, particularly in niche
areas such as with-profits funds. We rely
on the expert skills of our employees to
succeed. We are proud that for the sixth
year running, the Phoenix Group has been
listed as one of Britain’s Top Employers.
80%
employee
engagement score
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Group at a Glance
Our vision is to be
the saver-friendly,
industry solution for
the safe, innovative
and profitable
management of
closed life funds.
Our mission is to
improve returns for
policyholders while
delivering value
to shareholders.
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A focus on
strategic priorities...
Improve
customer
outcomes
Drive
value
Manage
capital
Engage
people
Read more
on page 18
...together with a
specialist business
model delivered through
the Phoenix Way...
Operational
Management
Standardising, streamlining and innovating the
key processes and platforms across the Group
improves efficiency and generates value.
Restructuring
Simplifying the Group’s operating structure
through life company consolidation and fund
mergers reduces complexity and releases capital.
Effective Partnerships
Utilising external outsource partners and
investment managers with proven track records
provides access to expert knowledge and
delivers a scalable cost base.
Read more
on pages 12 to 15
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Phoenix Group Holdings | Annual Report & Accounts 2017
...underpinned by
risk management and
responsible governance...
...delivers value
for stakeholders.
Key performance
indicators
£653m
Operating companies’
cash generation
APM
REM
£368m APM
Operating profit
£1.8bn
PGH Solvency II
surplus (estimated)
164% APM
PGH Shareholder
Capital Coverage ratio
(estimated)
92% REM
Customer
satisfaction score
80%
Employee engagement
index score
Other performance
indicators
25.1p
Final dividend
per share
£(27)m
IFRS loss
after tax
Risk
management
Read more
on page 32
Governance
Read more
on page 47
Stakeholder
engagement
Read more
on page 38
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Read more
on page 18
Note:
All amounts marked with an ‘APM’ are
alternative performance measures.
See ‘Alternative Performance Measures’
note on page 200 for further details of
these measures.
All amounts marked with ‘REM’ are
KPIs linked to executive remuneration.
See ‘Directors Remuneration Report’ on
page 63 for further details of executive
remuneration including the financial and
non-financial performance measures on
which it is based.
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Phoenix Group Holdings | Annual Report & Accounts 2017
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Chairman’s Statement
“ The proposed acquisition of Standard Life
Assurance and the Strategic Partnership with
Standard Life Aberdeen is consistent with
our strategy and financially compelling.”
HENRY STAUNTON
CHAIRMAN
LOOKING AHEAD
The proposed Standard Life Assurance
transaction is testament to the current
re-shaping of the UK life insurance industry.
Economic and regulatory pressures have
resulted in the break-up of the traditional life
insurance model, with certain players re-
focusing their efforts on asset management
and others concentrating on specific areas
of new business whilst divesting legacy
portfolios. This development was also
discussed in the independent ‘Meaning of
Life 2’ report published last November by
the Pensions Institute, which Phoenix is proud
to have sponsored.
Phoenix will continue to target consolidation
opportunities in the closed life market.
The acquisition of Standard Life Assurance
will also provide an existing base in Europe,
extending the market opportunity from
£380 billion of closed life assets in the UK to
£540 billion including Germany and Ireland.
Furthermore, Phoenix will have growth
opportunities through its Strategic Partnership
with Standard Life Aberdeen under which it will
manufacture and administer workplace pension,
SIPP and drawdown business for Standard
Life Aberdeen.
To conclude, I would like to take this opportunity
to thank all my colleagues for their hard work
and commitment in progressing the Phoenix
journey during another highly successful year.
HENRY STAUNTON
CHAIRMAN
14 March 2018
Dear Shareholders,
2017 was another successful year for the Group,
with Phoenix continuing its track record of
meeting or exceeding its publicly stated targets.
In addition, the resilience of the Group’s capital
position was underscored by the issuance
of over £800 million of subordinated bonds.
On 23 February 2018, Phoenix was delighted
to announce the proposed acquisition of
Standard Life Assurance and a Strategic
Partnership with Standard Life Aberdeen plc.
The £2.9 billion acquisition is transformational
for Phoenix, establishing the Group as the
largest closed life consolidator in Europe.
The acquisition will be financed by a fully
underwritten rights issue of £950 million,
with the remaining cash consideration of
£1,021 million funded by a mix of new debt
and Phoenix’s own resources. In addition,
Standard Life Aberdeen will take a 19.99%
equity stake in the enlarged Group on
completion. The Board believes the acquisition
is strategically and financially compelling and
hopes the Group’s shareholders will support
the proposed rights issue.
The integration of both the AXA Wealth and
Abbey Life businesses is ahead of plan with
the Group exceeding its announced acquisition
synergies. The Group has delivered £282 million
of cash from AXA Wealth since the completion
of the acquisition. Cash generation from the
Abbey Life transaction is also on track with
£236 million delivered this year. The recent
experience gained from the integrations positions
the Group to deliver significant value from the
proposed Standard Life Assurance acquisition.
In June 2017 the Group held an Investor
Day which focused on the improvement of
the Phoenix customer journey, the Group’s
integration process and plans to deploy surplus
capital for selective acquisitions in the Bulk
Purchase Annuity (‘BPA’) market. There is
a current lack of capacity in the BPA space
to absorb potential demand and Phoenix’s
existing operating model offers the capability
to compete in this market. BPA transactions
constitute a complementary source of potential
growth, alongside the Group’s key focus on
closed fund consolidation.
RECENT BOARD CHANGES
Against a backdrop of regulatory change and
macroeconomic uncertainty in light of the
prospective withdrawal of the UK from the
EU, the Board aims to maintain the breadth
and depth of experience required to create
shareholder value and improve policyholder
returns whilst navigating these risks. Therefore,
we were delighted to welcome Karen Green
and Belinda Richards to the Board in 2017 who
bring with them a vast array of high quality
executive and non-executive skills. In addition,
as part of the Strategic Partnership, we will
welcome two Standard Life Aberdeen Directors
to the Board in 2018, bringing their additional
skillsets and expertise.
Our Senior Independent Director, Ian Cormack,
will retire from the Board at the Annual General
Meeting (‘AGM’) in May 2018, having been
involved with the Group since 2005. Ian’s
experience and strategic approach have been
central to the success of Phoenix and I would
also like to thank him for his support since I
became Chairman. Ian will be replaced as the
Senior Independent Director by Alastair Barbour
who brings vast experience and business
acumen to the role.
DIVIDEND POLICY
In line with the Group’s previously stated
expectations, the Board proposes a final
2017 dividend per share of 25.1p. This is a
5% increase on the 2016 final dividend and
results in a new annualised dividend per
share level of 50.2p.
Given the long-term run-off nature of the Group’s
business model, the Board believes it is prudent
to maintain a stable and sustainable dividend
per share which is reviewed at the time of an
acquisition, in line with the criterion that any
acquisition needs to at least sustain the current
level of dividend per share. Therefore, following
the announcement of the proposed Standard
Life Assurance transaction, the Board expects
to raise the dividend to an annualised amount
of £338 million from the time of the final 2018
dividend. This corresponded to an equivalent
3% increase of the dividend per share at the
time of announcement of the acquisition,
taking into account the proposed rights issue
and Standard Life Aberdeen shareholding.
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Phoenix Group Holdings | Annual Report & Accounts 2017
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Phoenix Group Holdings | Annual Report & Accounts 2017
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Group Chief Executive Officer’s Report
“ Phoenix has delivered on its objectives in 2017
and the proposed acquisition of Standard Life
Assurance will make Phoenix the pre-eminent
closed life fund consolidator in Europe”
CLIVE BANNISTER
GROUP CHIEF EXECUTIVE OFFICER
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Phoenix Group Holdings | Annual Report & Accounts 2017
Phoenix has substantially
completed the integration
of the AXA Wealth and
Abbey Life acquisitions.
The Group exceeded its
original synergy targets,
delivering significant cost
and capital benefits from
the transactions.
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Phoenix has delivered strong financial
performance during the year, generating
£653 million of cash from Phoenix Life and
strengthening the Group’s capital position
through the issue of subordinated bonds to
replace senior debt. The improved financial
position of Phoenix resulted in a credit ratings
upgrade by Fitch Ratings in July 2017.
These achievements during 2017 position
us to deliver further value from the proposed
acquisition of Standard Life Assurance which
we announced on 23 February 2018.
The Group’s operating model provides a
solid basis for the integration of acquisitions.
A key part of the operating model is the use
of our outsource partners to undertake policy
administration. These relationships allow us
to move additional policies to our outsourcers
on the same contractual terms, delivering
cost synergies and also allowing us to utilise
the outsourcers’ transformation expertise.
The Group’s operating platform is therefore
scalable and fully supports acquisitions.
Phoenix retains a financial management
skillset that delivers value creation through
management actions.
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In parallel to the closed life fund opportunity,
the BPA market is a complementary source
of annuity back books. The market has grown
steadily in recent years and there is projected
demand of approximately £550 billion over the
next 15 years, as pension trustees look to de-
risk current pensioner and deferred liabilities.
We are currently in exclusive discussions for
our first external pensions buy-in transaction.
Given the current capacity in the bulk annuity
market, and recognising that Phoenix
possesses both the skills and financial
resources, the Group will continue to compete
selectively on accretive transactions to generate
incremental value.
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Phoenix Group Holdings | Annual Report & Accounts 2017
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Group Chief Executive Officer’s Report
continued
Key management actions have included
a reduction in expenses charged to the life
companies due to operational synergies,
together with further investments in
illiquid asset classes such as Equity
Release Mortgages.
OPERATING PROFIT
The Group achieved an operating profit of
£368 million in 2017 including £79 million
from management actions, compared
to £351 million in 2016, which included
£157 million of management actions.
FINANCIAL PERFORMANCE
FINANCIAL TARGETS
At the time of Phoenix’s 2016 full year results,
the Group set a cash generation target of
£1.0 billion to £1.2 billion between 2017 and
2018, in line with the expected timeframe to
integrate the recent acquisitions and incorporate
Abbey Life within the Group’s Solvency II
Internal Model. During the year, the Group
generated a total of £653 million of cash and
thus we are on track to achieve the top end
of this short-term target.
The Group has set a new, longer-term cash
generation target of £2.5 billion between
2018 to 2022, replacing the previous 2016 –
2020 target. In addition, we expect a further
£3.8 billion of cash generation from 2023
onwards. Although this illustrative cash
generation after 2023 does not assume any
additional management actions, it is a clear
demonstration of the long-term cash flow
potential of the Group.
PHOENIX LIFE CAPITAL POSITION
The Phoenix Life companies hold capital
management buffers in addition to the required
Solvency Capital Requirement and any excess
over these buffers (‘Free Surplus’) is available for
distribution to the holding companies as cash.
These capital management buffers provide the
life companies with additional resilience in the
event of market volatility.
The Free Surplus has remained constant at
£0.7 billion as at 31 December 2017, with
the remittance of Free Surplus as cash to
the Group’s holding companies during the
year being offset by management actions
undertaken, generation of recurring surplus
and a reduction in capital requirements.
GROUP CAPITAL POSITION
The Group’s surplus under Solvency
II is estimated to be £1.8 billion as at
31 December 2017 compared to £1.1 billion
as at 31 December 2016. The increase in the
Solvency II surplus reflects the issuance of
the subordinated bonds during 2017 together
with management actions completed, offset
partly by the impact of dividend payments
and finance costs. The Shareholder Capital
coverage ratio has increased from 139%
as at 31 December 2016 to 164% as at
31 December 2017. The Group capital position
includes a recalculation of Transitional Measures
as at 31 December 2017 and recognises the
2017 final dividend payable in May 2018.
As part of the ongoing Group simplification
process, Phoenix will put in place a new
UK-registered holding company for the
Group. This will be progressed following the
completion of the proposed Standard Life
Assurance acquisition and will provide greater
clarity for the Group’s stakeholders, including
investors and regulators.
The Abbey Life acquisition comprised
unit-linked policies and annuities in payment,
together with two small with-profit funds.
Abbey Life was already run as a separate
business with an existing outsource
agreement in place with Capita. Therefore,
compared to the integration of the AXA
Wealth businesses, it was relatively less
complex to transition the business to
Phoenix Life.
Enhanced oversight of the business and its
outsource arrangements was put in place
quickly, including new governance and
management structures. This has been
particularly important given the ongoing
enforcement action relating to Abbey Life
that is being undertaken by the FCA.
With the exception of actuarial reporting,
all functions have been fully migrated to
Wythall and integrated into the ‘Phoenix
Way’. Closure of the Bournemouth office
will follow the actuarial reporting migration
and secure pre-tax cost synergies of £10m
per annum from the first quarter of 2018.
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Phoenix Group Holdings | Annual Report & Accounts 2017
REGULATORY AND LEGISLATIVE CHANGES
Following the publication of the thematic review
of the fair treatment of long-standing customers,
Abbey Life received specific feedback and
was informed of the actions that the Financial
Conduct Authority (‘FCA’) expected Abbey Life
to take to address specific issues. Good progress
is being made to address these issues and
Phoenix Life has rolled out its Customer
Oversight Framework and Risk Management
Framework to the Abbey Life business.
In addition, Abbey Life was referred to the FCA
enforcement division to consider whether any
of the issues identified in the thematic review
warrant further intervention from the FCA
and we continue to work with the FCA on the
ongoing investigation.
With regard to annuities sales, Abbey Life has
completed the thematic review of annuities and
has agreed with the FCA to undertake a Past
Business Review. We are working closely with
the FCA on the scope of this review.
Both of these reviews were known issues at
the time of acquisition and we expect that costs
arising from these reviews to be covered by the
indemnity agreed at the time of the acquisition
of Abbey Life.
Integration costs incurred to 31 December
2017 were £10 million before tax.
The Abbey Life business was reinsured
into Phoenix Life Limited in December
2017. This has allowed the Group to access
transitional benefits and will generate further
efficiencies from the annuity portfolio by
extending the Matching Adjustment benefits
to all qualifying annuity liabilities. The use of
Matching Adjustment results in the use of a
higher discount rate for those annuity liabilities,
increasing Free Surplus within Phoenix Life.
Together with the transfer of the Abbey Life
Pension Scheme to a Group holding company
these actions have delivered £236 million of
cash from the acquisition since its completion.
The application to move Abbey Life onto the
Group’s Internal Model was submitted during
the fourth quarter of 2017 and the approval
was granted in March 2018.
With regard to contract-based workplace
pensions, Phoenix Life’s Independent
Governance Committee has published its
second annual report. Given the unique set
of circumstances surrounding this group of
customers, Phoenix’s life company boards
agreed that annual fees on workplace pension
products should be reduced to 1% from the
end of 2017. A £27 million impact from the
fee reduction has been recognised in the
Group’s results.
CUSTOMERS
Phoenix is currently investing in new online
capabilities to connect digitally with as many of
our customers as possible. Our vision is to offer
customers access to information and services
on a platform that is scalable for any future
businesses we acquire.
We have already initiated our Digital Vision
by offering online encashment for smaller
pension pots, without needing to complete any
paperwork. Currently, we see around 5,000
customers with non-GAR pension pots under
£10,000 encash each month. The majority
of these customers have taken advantage of
pension freedoms to access smaller pots before
their selected retirement date. We have seen
an encouraging response from our customers,
with current experience being that 23% of
eligible customers with under £10,000 pots
have transacted online. Along with being one
of the early members of the Government-led
Pensions Dashboard working group, Phoenix
is driving forward with its Digital Vision and
making significant investments to expand this
digital offering in the future.
In addition to these digital enhancements,
Phoenix Life continues to introduce initiatives
to speed up processing and improve the
customer experience. By allowing policyholders
to encash small pension pots fully online, we
have improved the process for many of our
small life insurance claims. Where possible,
we allow bereaved claimants to complete
the claims process over the telephone.
We have a new programme to contact
customers with policies such as endowments
well ahead of the maturity date to encourage
earlier engagement and ensure customers
receive their proceeds rapidly. There are also a
number of tools and calculators on the website,
which aim to inform and educate customers in
an interactive way. These tools, which include
a pension and tax calculator, ensure that
customers understand all considerations and
benefits before making their retirement choice.
The website also signposts various external
services such as Pension Wise and the Money
Advice Service where customers can obtain
free, impartial advice.
Ensuring customers are repatriated with policies
they may have become detached from as a
result of lifestyle changes such as house moves,
marriage and illness is a key part of our strategy.
Lost policies are fairly typical for legacy books
and we have undertaken considerable activity in
the past to improve this issue. During 2017 we
have focused on the repatriation of life insurance
policies we suspect have been left unclaimed
by a deceased’s estate; in most cases because
the beneficiaries were unaware the policy was
in existence. Through our extensive tracing
work, a number of policies have been paid out
to the beneficiaries of the policy.
Phoenix Group provides annuities for vesting
policyholders and wrote a total of £529 million
of annuities in 2017, compared to £542 million
in 2016. The majority of these are annuities with
attractive guaranteed annuity rates (‘GARs’).
For policyholders looking to buy a non-
guaranteed rate annuity, Phoenix has initiated
a new programme which ensures customers
have the opportunity to review the ‘best deal’
for their annuity via a whole-of-market panel of
third party annuity providers. This is particularly
important for customers with lifestyle and
medical conditions who may be better served
by an enhanced annuity. This action ensures
that customers fully understand the financial
implications of buying an annuity as part of
their retirement planning and is in line with the
regulator’s position on the market.
Phoenix Life continues to be committed to
delivering a high level of customer service.
We recognise the importance of timely
payments to our customers and have continued
to deliver our pensions payments made through
the Origo Faster Transfers system in 11.03
days on average, below the industry target of
12 days. Complaint handling is also a key area
of focus and this is demonstrated by our strong
performance as measured by the Financial
Ombudsman Service with an overturn rate of
17%. We are pleased to note this is significantly
below the most recently published industry
average of 36%. We also continue to monitor
customer satisfaction, with the vast majority
of our customers surveyed being satisfied
with the service they receive.
MARCH
JUNE
JULY
OCTOBER
DECEMBER
Approval granted
by the PRA to incorporate
the AXA Wealth
businesses in the Group’s
Internal Model
Transfer of Abbey
Life Pension Scheme
from Abbey Life
Assurance Company
Limited to a Group
holding company
Fitch Ratings announces
an upgrade to the
Group’s credit rating
Acquisition of
£600 million portfolio
of Equity Release
Mortgages
Launch of Customer
Digital pilot scheme
Application made
to incorporate Abbey
Life in the Group’s
Internal Model
Reinsurance of
Abbey Life business
to Phoenix Life Limited
Completion of the
Part VII transfer of the
AXA Wealth policies to
Phoenix Life Limited
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continued
PEOPLE
Phoenix Group’s ability to attract, retain and
motivate outstanding talent was, for the sixth
year in succession, formally recognised in
2017 through our accreditation as one of the
UK’s Top Employers. An engaged workforce
is fundamental to the success of the Group.
Our employee engagement index was 80%,
in line with the high scores achieved in 2016,
despite the challenges of integrating new
colleagues from acquired entities.
We are a signatory to the Women In
Finance Charter initiative and in 2017 made
significant progress against our published
targets on gender pay and on increasing
female representation at senior levels of the
organisation. We remain vigilant in this space
and strive for a wholly inclusive culture for the
benefit of all stakeholders.
Fundamental to our strength as a team is the
continued ability to draw on our established
succession plans for key resourcing
decisions as they arise. Reviewing and
developing succession remains a regular
part of our corporate governance and
management discipline.
The Group’s corporate responsibility agenda
plays a central part in the engagement of
our people. This commitment extends to a
number of community initiatives supported
by the organisation and is a critical part of
our overarching objective to put the financial,
physical and mental wellbeing of our employees
at the heart of our people strategy. I am pleased
to report that staff-led fund raising activities in
2017 raised a total of over £160,000. This was
raised primarily for our corporate partnerships
with Midlands Air Ambulance Charity and
London’s Air Ambulance.
2018 will see us engage with our staff
on a specific initiative to re-invigorate our
commitment to our corporate values.
We want to maintain the conduct of all
our employees, from the leadership team
downwards, at an exemplary level.
PROPOSED ACQUISITION OF
STANDARD LIFE ASSURANCE AND
STRATEGIC PARTNERSHIP WITH
STANDARD LIFE ABERDEEN
The proposed £2.9 billion acquisition of
Standard Life Assurance, representing 84%
of Own Funds, will result in a ‘bigger and
better’ Phoenix. The enlarged Group will have
£240 billion of assets under management
and 10.4 million policyholders. This greater
scale and alignment with Phoenix’s existing
product mix strengthens the Group’s capacity
to generate shareholder value through the
delivery of management actions and future
accretive acquisitions.
The transaction enables both companies to
focus on what they do best – Phoenix will
become the largest closed life consolidator in
Europe and Standard Life Aberdeen will focus
on its world class investment management
business and UK wealth platform.
The Strategic Partnership covers two key areas:
firstly, Standard Life Aberdeen will continue to
manage the majority of Phoenix’s assets and
secondly, Phoenix will underwrite workplace
pensions and SIPP products which Standard
Life Aberdeen will continue to market under its
own brand.
We expect to generate a total of £5.5 billion
of additional aggregate cash flows from the
acquired in-force book, of which £1.0 billion
is expected to be generated between 2018
and 2022 and £4.5 billion from 2023 onwards.
The long-term nature of these cash flows
enhances the sustainability of our dividend and
allows us to increase our 2018 final dividend
to an annualised level of £338 million, which
is equivalent to a 3% uplift in dividend per
share based on the share price on the day of
announcement of the transaction. In addition,
Fitch Ratings reaffirmed the Group’s credit
rating following our announcement of the
proposed acquisition.
Our expectations of cash generation from the
proposed acquisition includes expected cost
savings and capital synergies of £720 million.
Given our experience from integrating previous
acquisitions I am confident that we will once
again successfully deliver value for shareholders
and policyholders.
The acquisition represents a pivotal moment
in the Group’s history. It will establish Phoenix
as the largest closed life consolidator in Europe
and increases Phoenix’s potential market from
around £380 billion of closed life fund assets in
the UK to approximately £540 billion of assets
across the UK, Germany and Ireland.
CONCLUSION
Phoenix has shown during 2017 that it has
the operating platform and integration skills
to deliver capital and cost synergies from
acquisitions. I continue to believe that the
impact of regulatory changes and the desire
of open life companies to redeploy capital
will provide Phoenix with further acquisition
opportunities in future.
Two members of the Group’s Executive
Committee will leave the Group in 2018,
Fiona Clutterbuck and Wayne Snow. I would
like to thank them both for their commitment
to Phoenix over the past years and wish
them well in the future. We have already
recruited internally to cover their responsibilities,
demonstrating the strength and depth
of Phoenix’s management.
I would also like to thank all my colleagues for
their continued hard work during a year that has
seen Phoenix deliver its strategy for the benefit
of both shareholders and policyholders.
CLIVE BANNISTER
GROUP CHIEF EXECUTIVE OFFICER
14 March 2018
FEBRUARY
MARCH
Announced the proposed
acquisition of Standard Life
Assurance and a Strategic
Partnership with Standard
Life Aberdeen plc
Approval granted
to incorporate Abbey
Life into the Group’s
Internal Model
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Phoenix Group Holdings | Annual Report & Accounts 2017
The Marketplace
The UK life and pensions
market is undergoing
fundamental change, driven
by changes in regulation
and customer behaviour.
Phoenix expects continued
consolidation within
the market.
ECONOMIC LANDSCAPE
Investment markets showed positive returns
in 2017, driven by an expectation of stronger
global macro-economic growth.
UK equity markets rose, with the FTSE All Share
Index closing approximately 9% ahead of the
31 December 2016 position. Phoenix seeks to
hedge its life company solvency from declines
in equity markets through the use of derivatives.
The increase in equity markets over the period led
to a decline in value of these put options which
has been recognised in the IFRS results, with
the solvency position unchanged as expected.
Swap yields were broadly unchanged over the
period. Credit spreads narrowed across ratings
and implied future inflation rates increased
during the year.
The decision of the UK to leave the European
Union (‘Brexit’) is not expected to have any
material direct impact on the existing Group.
However, Phoenix may be affected by the
indirect impact on investment markets
from the ongoing Brexit negotiations during
2018. In addition, the proposed Standard
Life Assurance acquisition includes branch
operations in Ireland and Germany which we
expect will be transferred to an Irish subsidiary
(acquired as part of the transaction) by
way of a Part VII transfer.
REGULATORY AND LEGISLATIVE LANDSCAPE
The Solvency II prudential framework which
came into force in 2016 is now fully embedded.
The Group’s approved Internal Model is the
key tool in managing Phoenix’s capital position
under the Solvency II regime. The Prudential
Regulatory Authority (‘PRA’) has recently
announced a number of consultations on a
range of issues relating to Solvency II, including
with regard to Matching Adjustments.
There have been significant changes to
legislation from a conduct perspective in recent
years. This includes the ending of compulsory
annuitisation, reviews on the treatment of legacy
customers and annuity sales, together with
legislation to cap exit charges for customers.
This has resulted in customers having a greater
range of options at retirement and life companies
have had to improve the quality of information
provided to legacy customers.
COMPETITIVE LANDSCAPE
Phoenix sponsored a report by the Pensions
Institute in November 2017 called ‘The Meaning
of Life 2’. This report updated the findings of a
previous report published in 2015 on the UK life
company business model and found that the
life industry is bifurcating, with a number of
players moving away from the traditional risk-
based model to an asset management strategy
that is less capital intensive. Consolidation is
a key feature of this process as players look to
restructure their businesses by disposing of
their traditional capital intensive products and
Phoenix seeks to be an important player in this
industry process.
The Meaning of Life 2 Report
can be accessed at
www.thephoenixgroup.com/media/
sponsored_report.aspx
A
C
A
MARKET
OPPORTUNITIES
BY OWNER
C
MARKET
OPPORTUNITIES
BY PRODUCT TYPE
B
B
A 58% UK life companies
B 30% Foreign owned
C 12% Bank owned
A 37% With-profit
B 40% Unit-linked
C 23% Non-profit
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CLOSED FUNDS
Phoenix estimates that the market opportunity
is approximately £380 billion in terms of assets
held within UK closed life funds (excluding
Phoenix and the proposed Standard Life
Assurance acquisition). The split of these assets
by type of owner and product is set out in the
pie charts below.
The proposed Standard Life Assurance
acquisition includes operations in Germany
and Ireland. Phoenix estimates that there is a
potential additional closed life fund opportunity
of £160 billion of assets in these two countries.
We believe there are a number of key drivers
that will lead to future consolidation of closed
life funds. These include the significant capital
held within closed funds that owners may wish
to redeploy, more intrusive regulation leading
to pressure on owners and fixed cost pressures
as closed funds decline in size over time.
Phoenix has key competitive advantages in
generating value from acquiring and managing
closed life funds. The Group’s scale provides the
ability to generate capital efficiencies through
the diversification of risks and the wide range of
product types that Phoenix currently manages
provides a scalable platform for integrating
further closed funds. The Group’s outsourcing
partners provide policy administration services
and allow Phoenix to run a variable cost model,
whereas the Group’s approved Solvency II
Internal Model provides greater clarity over
capital requirements and the benefits of
undertaking management actions.
BULK PURCHASE ANNUITIES
Many Defined Benefit pension schemes are
now closed to new members but have liabilities
that will continue for many decades into the
future. The BPA market offers employers
the ability to mitigate the risk of their Defined
Benefit pension liabilities whilst allowing the
pension scheme trustees the ability to secure
and protect their members’ benefits.
Phoenix has identified this market as a source
for additional annuity assets, offering the
potential for Phoenix to apply its proven and
pre-existing skills set and acquisition experience
to compete on selective transactions using the
Group’s existing capital resources. The criteria
that Phoenix uses to assess potential BPA
transactions are the same as those used for
closed life fund acquisitions.
The size of the BPA market is significant,
with around £550 billion of transactions
forecasted over the next 15 years. During 2017
alone, transactions amounting to a total of
approximately £12 billion were announced.
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Phoenix Group Holdings | Annual Report & Accounts 2017
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Operating Structure
Phoenix Group’s operating structure is integral
to its success in the closed life fund market.
GROUP FUNCTIONS
PHOENIX LIFE
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Manage corporate and strategic
activity and include the following:
– Group Finance including Tax,
Treasury and Investor Relations
– Group Actuarial
– Group Risk
– Group HR
– Group Internal Audit
– Group Legal
– Strategy, Corporate Development
and Corporate Communications
– Company Secretariat
LIFE
COMPANIES
Manage the
financial assets
for policyholders
DISTRI BUTION
Markets protection
products for the
over 50s
Phoenix Life Limited
SunLife Limited
MANAGEMENT
SERVICES COMPANIES
Provides life companies with
management services
Phoenix Life
Assurance Limited
Abbey Life
Assurance
Company Limited
GROUP FUNCTIONS
The Group operates centralised
functions that provide Group-
wide and corporate-level services
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.
INVESTMENT
MANAGEMENT
OUTSOURCE
PARTNERS
PHOENIX LIFE
Phoenix Life is responsible for the management
of the Group’s life funds. Based in Wythall,
Birmingham, Phoenix Life is led by its Chief
Executive Officer, Andy Moss.
LIFE COMPANIES
The life companies are regulated entities
that hold the Group’s policyholder assets.
The Group simplifies its business model by
bringing together separate life companies and
funds, making more efficient use of the capital
and liquidity in its life companies. This results in
administrative expense savings and increased
consistency of management practices and
principles across the Group.
DISTRI BUTION
We have restructured the SunLife business,
a leader in the over 50s protection sector, as
a distribution company, with the mortality risk
being underwritten by Phoenix Life Limited.
The allows the ring-fenced management team
based in Bristol to focus on their key skills of
marketing and sales.
INVESTMENT MANAGEMENT
Investment management services are provided
to the life companies by a number of external
asset management companies, with the main
partner being Aberdeen Standard Investments.
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. This benefits the life
companies by providing price certainty and
transferring some operational risks.
OUTSOURCE PARTNERS
The management services companies manage
relationships with the outsource partners.
Without further acquisitions, the number of
policies declines over time and the cost of
our operations as a proportion of policies will
increase. This risk is managed by paying a fixed
price per policy to our outsource partners for
policy administration services, which reduces
this fixed cost element of our operations and
converts it to a variable cost structure.
Outsource partners have scale and common
processes to benefit the Group, including
reducing investment requirements, improving
technology and reducing our operational risk.
Finance, actuarial, information technology, risk
and compliance and oversight of the outsource
partners are retained in-house, ensuring that
Phoenix Life retains full control over the core
capabilities necessary to manage and integrate
closed life funds.
12
Phoenix Group Holdings | Annual Report & Accounts 2017
Our Key Products
Phoenix has a wide range of legacy products
which are written across different funds.
The features of each policy influences whether it is the policyholders or
the shareholders who are exposed to the risks and rewards of a policy.
Fund Type
WITH-PROFIT
£29.3bn
Gross policyholder
liabilities at 31 Dec 2017
UNIT-LINKED
£31.3bn
Gross policyholder
liabilities at 31 Dec 2017
NON-PROFIT
(ANNUITIES)
£11.4bn
Gross policyholder
liabilities at 31 Dec 2017
NON-PROFIT
(PROTECTION)
£0.3bn
Gross policyholder
liabilities at 31 Dec 2017
40%
43%
16%
1%
Typical characteristics
Policyholder benefits
Shareholder benefits
These are typically savings
and investment products.
They comprise endowments,
whole of life and pensions
products and (some)
guaranteed annuity options
which guarantee the
annuity that a pension pot
will be able to buy.
The policyholders and
shareholders share in the risks
and rewards of the policy,
depending on the structure
of the fund.
Excess assets created over
time (‘estate’) provide a buffer
to absorb cost of guarantees
and capital requirements.
In the ‘supported’ with-profit
funds, the shareholders
provide capital support to
the fund.
These are insurance or
investment contracts
(savings and pensions)
without guarantees.
The policyholders bear
all of the investment risk.
Policyholders buy units
with their premiums
which are invested in funds.
Units are sold when
a claim is made.
Policyholders make fixed or
variable payments in lieu of
a future lump sum or a future
income stream until death.
Policyholders benefit from
discretionary annual and/or
final bonuses.
The bonuses are designed
to distribute to policyholders
a fair share of the return
on the assets in the fund,
together with other elements
of experience in the fund.
In the ‘supported’ with-profit
funds, the shareholders’
capital is exposed to all
economic movements until
the estate is rebuilt to cover
the required capital, at which
point the fund becomes
‘unsupported’.
In the ‘unsupported’
with-profit funds, typically
shareholders receive
10% of declared bonuses
(90:10 structure) or nil
(100:0 structure).
Policyholders’ benefits
are in the form of unit
price growth (based
on the investment
income and gains, but
subject to management
charges and investment
transaction costs).
Shareholders benefit
from fees earned through
management charges,
bid/offer spreads and/or
policy fees.
Policyholders receive
regular payments which
start immediately
(immediate annuity) or
at some time in the future
(deferred annuity).
Shareholders earn a spread
on the assets supporting
the annuity payments.
The shareholders
are directly exposed
to all market and
demographic risks.
Term assurance policies
which pay a lump sum on
death if death occurs within
a specified period.
Whole of life policies which
cover the entire life and
pay a lump sum on death,
whenever it occurs.
Policyholders have
certainty of the benefits
they will receive.
Profits are generated from
investment returns and
underwriting margins.
Shareholders are exposed to
the majority of the risks and
benefit from 100% of the
profits or losses arising.
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Phoenix Group Holdings | Annual Report & Accounts 2017
13
Our Business Model
Our strategic priorities help enhance
the value we create through our
business model
We are set apart by our strengths
which underpin our business model
Improve
customer
outcomes
Read more
on page 18
Drive
value
Read more
on page 20
Manage
Capital
Read more
on page 22
SCALE OF
OUR PLATFORM
Largest UK closed life fund consolidator
SUSTAINABLE
CASH GENERATION
Track record of generating additional value
SPECIALIST
OPERATING MODEL
A low cost scalable operating model
Engage
People
Read more
on page 24
Read more
on page 12
STEWARDSHIP
Effective service offering to our policyholders
Read more
on page 18
SKILLS OF
OUR PEOPLE
Experienced and talented employees
Read more
on page 24
SIGNIFICANT
GROWTH
Consolidation opportunities in the sector
Read more
on page 11
14
Phoenix Group Holdings | Annual Report & Accounts 2017
Our cash generation helps us
realise opportunities for growth
Resulting outcomes delivered
are positive for all stakeholders
In-force book
cash emergence
Capital requirements of operating
life companies decline as policies mature,
releasing capital in the form of cash
Management
actions
Management track record
of delivering incremental value
Mergers and
acquisitions
Value accretive acquisitions
generate increased cash flows
and synergy opportunities
through scale advantages
Bulk Purchase
Annuity transactions
The Bulk Purchase Annuity
market offers a complementary
source of assets and growth
Read more about our cash generation
process overleaf
Customers
Optimised customer outcomes
92% REM
Customer satisfaction
Shareholders
Shareholder value created
and stable and sustainable
dividends delivered
£653m APM
Cash generation
5%
Increase in 2017 final dividend
Employees
Engaged employees
80%
employee engagement index
Community
and Environment
Support for local communities
and charity partners and
reduced environmental impact
over 3,000
employee volunteer hours
Read more
on page 39
Read more
on pages
26 and 46
Read more
on page 41
Read more
on pages
43 and 44
Read more
on page 16
Phoenix Group Holdings | Annual Report & Accounts 2017
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Cash Generation Process
Opening
Free Surplus
Illustrative sources of life company
cash generation
WHAT IS THE OPENING
FREE SURPLUS?
Life Company Own Funds
Life companies hold capital in accordance with
Solvency II regulations, providing appropriate
security for policyholders. This capital is known
as Solvency II Own Funds
HOW IS FREE
SURPLUS GENERATED?
Margins earned
Life companies earn margins
on different types of life and
pensions products increasing
Own Funds
Management
actions
Cash remitted to
holding companies
less Solvency Capital Requirement
The level of regulatory capital required is
known as the Solvency Capital Requirement
less Capital Policy
The life companies hold additional internal
capital buffers above the regulatory capital
requirement for prudence
Any assets which the life
companies hold in excess
of overall capital buffers
required is known as
Free Surplus
Reduced capital
requirements
As closed funds no longer
actively sell new life or
pensions products, the number
of policies held within the
funds will reduce over time.
The related Solvency Capital
Requirements will also run-off
over a similar period
Management actions
These can either increase
Own Funds or reduce
capital requirements
Reduction
in capital
requirements
Surplus
generated
in life
companies
Opening
Free
Surplus
Closing
free
surplus
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Read more about
cash generation
on page 26
16
Phoenix Group Holdings | Annual Report & Accounts 2017
Illustrative uses of holding company
cash generation
Uses of
remaining cash
Cash remitted
from the life
companies
Head
office
costs
Pensions
Debt
interest and
repayments
Dividends
Remaining
cash at
holding
company
level
WHAT IS THE CASH
REMITTED FROM
THE LIFE COMPANIES
USED FOR?
Head office costs
including salaries and
other administration costs
Pensions
contributions
to Group’s employee
Defined Benefit schemes
Debt interest
and repayments
of outstanding Group
shareholder debt
Dividends
The Group maintains
a stable and
sustainable dividend
WHAT IS THE REMAINING
CASH USED FOR?
Mergers and acquisitions
Transactions must be value accretive
and cash flow generative and needs
to support the dividend level
Bulk purchase annuity
transactions
Generate increased cash flows
over the longer term
Cash at the holding
company level
provides resources
and resilience
for the Group
Opening
cash at
holding
company
level
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Phoenix Group Holdings | Annual Report & Accounts 2017
17
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.
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Improve customer
outcomes
Improving customer outcomes is central to
our vision of being the saver-friendly ‘industry
solution’ for closed life funds.
We have six key areas of focus related to our
customer offering:
– Security: ensuring all policy promises and
guarantees are delivered.
– Improving value and effective with-profit
fund run-off: through accelerating estate
distribution where possible and providing
appropriate investment exposure.
– Effective service delivery: using our
outsourced model to leverage expertise
and ensure costs run-off in line with
policy volumes.
– Clear and effective communication:
recognising the importance of clarity and
simplicity for what can be complex products.
– Product governance: including a rolling
review of our products to ensure they
continue to deliver appropriate outcomes
for our customers.
– Customer journey: improving customer
experience wherever possible.
KEY INITIATIVES AND PROGRESS IN 2017
– A secure environment for the encashment
journey for our smaller policies has been
delivered, which allows customers to
download a Digital Retirement Pack and
submit their application online, reducing
the overall time taken to them receiving
their funds.
– We have been raising awareness and
equipping our staff with the skills to
actively identify customers in potentially
vulnerable circumstances, understanding
the issues they face, and deal with them
appropriately. We have been engaging
with a number of charities including RNIB,
Age UK and Alzheimer’s Society to help us
in enhancing our offering for dealing with
vulnerable customers.
– An extensive research programme with
some of our customers has been undertaken
to help us make further improvements to
our communications. It has identified some
valuable improvement opportunities which
are being included into new communications
to ensure our customers have all the
information they need to make fully informed
decisions. This work will continue on all of our
mailings throughout 2018.
– A scheme to buy back certain annuities-in-
payment has been introduced, allowing those
in scope customers with small annuities
the option and flexibility to take a lump sum
payment. This will complete during 2018.
– We have put measures in place to limit exit
charges to less than 1% for customers over
the age of 55 looking to access pension
freedoms introduced in 2015.
– Measures have also been put in place to limit
charges on workplace pension schemes to
no more than 1%.
PRIORITIES FOR 2018
– Align the service offering for our recently
acquired customers to the Phoenix Service
Proposition, to make sure that all customers
receive the same fair service.
– Look for further ways to enhance the
customer experience, ensuring a positive
customer journey, with more focus on the
use of the digital channel.
– Explore possibilities to give our customers
more flexibility and options around their
policies, especially those who may no longer
have a need for their product.
– Continued improvements of customer
communications, making sure they
are engaging; and with particular focus
on ensuring they are clear and easy to
understand and cover all the information they
need to make fully informed choices.
Read more about customer
engagement activities undertaken
during the year on page 39
18
Phoenix Group Holdings | Annual Report & Accounts 2017
How we measure delivery
CUSTOMER SATISFACTION SCORE1 %
FINANCIAL OMBUDSMAN SERVICE (‘FOS’)
OVERTURN RATE %
SPEED OF PENSION TRANSFER PAYOUTS – ORIGO
DAYS
91
91
91
92
21.4
18.9
17.8
17.0
10.97
11.31
11.03
9.83
2014
2015
2016
2017
2014
2015
2016
2017
2014
2015
2016
2017
WHY IS IT IMPORTANT?
This is an externally calculated measure of
how satisfied customers are with Phoenix’s
servicing proposition based on the results
of a satisfaction survey managed by the
external research firm Ipsos MORI.
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
Customers surveyed were asked to give
a satisfaction rating between 1 and 5 to a
number of questions asked (with a rating
of 4 or 5 regarded as satisfied) and 92% of
all questions scored a rating of 4 or above.
The Group satisfaction score of 92% reflects
our commitment to ensuring customers
are satisfied with our products and services.
ANALYSIS
The FOS overturn rate of 17.0% has improved
and is significantly below the most recently
published industry average rate of 36% and
also includes our newly acquired businesses.
It is also lower than the 26% average overturn
industry rate in the ’Decumulation, Life and
Pensions’ category (in which the majority of
our business sits).
TARGET
To maintain a customer satisfaction score
of 90%.
TARGET
To maintain a FOS overturn target of less
than 30%.
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.
ANALYSIS
The Group’s pension transfer times are better
than the industry target.
TARGET
12 days in line with the industry stated target
for Origo Pension Transfers.
11.03 days REM
2016: 11.31 days
92% REM
2016: 91%
17.0% REM
2016: 18.9%
1 Excludes the acquired AXA Wealth and
Abbey Life businesses.
Note:
All amounts in the Strategy and KPI section marked with an
‘APM’ are alternative performance measures. See ‘Alternative
Performance Measures’ note on page 200 for further details
of these measures.
All amounts in the Strategy and KPI section marked with
‘REM’ are KPIs linked to executive remuneration. See
‘Directors Remuneration Report’ on page 63 for further
details of executive remuneration including the financial and
non-financial performance measures on which it is based.
Phoenix Group Holdings | Annual Report & Accounts 2017
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Our Strategy and KPIs
continued
Drive
Value
In order to drive value,
the Group looks to
identify and undertake
management actions,
which increase and
accelerate cash flows.
Management
actions can reduce
complexity, cost
and optimise risk,
thereby enhancing
value generation
There are significant opportunities to increase
and accelerate cash flows through the
continued implementation of ‘The Phoenix
Way’. Management actions cover four
key areas: operational management,
risk management, restructuring and
effective partnerships.
With the exception of the SunLife business
acquired during 2016, the life companies are
closed and generally do not write new business,
although they accept additional policyholder
contributions on in-force policies and allow
pension savings plans to be reinvested at
maturity into annuities. The closed life funds
provide predictable fund maturity and liability
profiles, creating stable long-term cash flows
for distribution to shareholders and repayment
of outstanding debt.
Additional value can be generated from further
acquisitions of closed life books of business.
KEY INITIATIVES AND PROGRESS IN 2017
– The Group delivered £653 million in cash
generation in the year against a target of
£1.0 billion to £1.2 billion to be delivered
between 2017 and 2018. This includes
£165 million from the acquired AXA Wealth
businesses and £236 million from Abbey Life.
– The Group delivered £321 million of
management actions that increased Solvency
II Own Funds in the year. This included the
impact of strategic asset allocation initiatives
such as the acquisition of further portfolios
of equity release mortgages.
– The integration of the two acquisitions made
in 2016 is substantially complete, with the
AXA Wealth and Abbey Life businesses
delivering run-rate synergies of approximately
£17 million per year and £10 million per year
respectively. This represents increases on our
estimates which were originally £10 million
for AXA Wealth and £7 million for Abbey Life.
PRIORITIES FOR 2018
– Complete the proposed acquisition
of Standard Life Assurance.
– Complete the final stages of the AXA Wealth
and Abbey Life integration activities.
– Continue strategic asset allocation initiatives
to invest in higher yielding asset classes
such as infrastructure and commercial real
estate debt.
– Explore investment opportunities in the bulk
purchase annuity market as a complementary
source of annuity back books.
– Seek further closed fund
acquisition opportunities.
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Phoenix Group Holdings | Annual Report & Accounts 2017
Read more about cash generation
on page 26 and link to executive
remuneration on page 64
Read more about
operating profit
on page 30
How we measure delivery
OPERATING COMPANIES’ CASH GENERATION £m OPERATING PROFIT £m
817
567
653
486
225
483
439
351
368
324
2013
2014
2015
2016
2017
2013
2014
2015
2016
2017
WHY IS IT IMPORTANT?
Operating companies cash generation
represents cash remitted by the Group’s
operating companies to the holding
companies. Maintaining strong cash flow
delivery underpins debt servicing and
repayment as well as shareholder dividends.
ANALYSIS
Cash remitted reflects the generation
of Free Surplus within the life companies
and the benefit of management actions
implemented in the period. Cash generation
in 2017 was £653 million, of which £236
million arose from the acquired Abbey
Life business and £165 million from the
AXA Wealth businesses.
TARGET
To generate cash flows of £1.0 to £1.2 billion
of cash between 2017 and 2018 and
£2.5 billion of cash between 2018 and 2022.
£653m APM
REM
2016: £486m
WHY IS IT IMPORTANT?
Operating profit is a non-GAAP measure
used by management and is considered a
more representative measure of performance
than IFRS profit or loss after tax as it provides
long-term performance information unaffected
by short-term economic volatility.
A reconciliation of operating profit to the
IFRS loss after tax of £(27)million (2016:
£(100) million) is included in the Business
Review section.
ANALYSIS
Operating profit has increased by £17 million
compared to prior year reflecting the inclusion
of a full year’s performance of the acquired
AXA Wealth and Abbey Life businesses
and net positive actuarial assumption changes.
This has been partly offset by lower
management actions with an operating profit
impact and the benefit of model and
methodology changes recognised in 2016.
£368m APM
2016: £351m
Phoenix Group Holdings | Annual Report & Accounts 2017
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Our Strategy and KPIs
continued
Manage
capital
We continue to focus on
the effective management
of our risks and the
efficient allocation of
capital against those risks.
– Issuance of capital qualifying US$500 million
of Tier 2 subordinated debt and £450 million
of Tier 3 subordinated debt in 2017, allowed
the Group to repay senior debt and fully
repay the Group’s revolving credit facility,
thereby providing additional capacity to fund
future acquisitions.
– Credit rating upgrade of the Group’s main life
company ratings to A+ (strong) was received
from Fitch Ratings in July, thereby enhancing
the Group’s position in the debt capital
markets and improving its financial flexibility
to fund future acquisitions.
– The Group’s Internal Model was extended to
Phoenix Group Holdings (‘PGH’) in 2017 and
the Solvency II Capital adequacy assessment
and Group supervision is now undertaken
at the level of the ultimate parent.
– The on-shoring of the Group is progressing.
PGH became UK resident for tax purposes
in January 2018.
PRIORITIES FOR 2018
– Complete Part VII transfer of Abbey Life into
Phoenix Life Limited.
– Progression of activity to put in place a
new UK-registered holding company for the
Group as soon as practicable post completion
of the proposed acquisition of Standard
Life Assurance.
– Implement further management actions
and continue to execute the hedging strategy
to enhance the Group’s capital position,
including for the proposed Standard Life
Assurance acquisition.
We aim to optimise our capital structure
while addressing the diverse needs of
various stakeholders, including policyholders,
shareholders, lending banks, bondholders
and regulators.
To ensure that unrewarded exposure to market
volatility is minimised or the risks from market
movements are managed, we execute our
hedging strategy.
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 2017
– Incorporation of the AXA Wealth businesses
into the Group’s Internal Model in March
delivered capital synergies arising from the
diversification of AXA Wealth’s mortality risk
with the Group’s existing longevity risk.
– Additional diversification benefits arose on
completion of the Part VII transfer of the AXA
Wealth business into Phoenix Life Limited,
with an effective date of September.
– Including the impacts of the AXA Wealth
actions detailed above, the Group delivered
£232 million of management actions that
decreased SCR in the year. This included the
impacts of risk hedging activities, including
implementing the Group’s equity hedging
strategy to the acquired Abbey Life business.
– An application to include the acquired
Abbey Life business into the Group’s Internal
Model was made in the second half of 2017
and was approved in March 2018.
– Completion in December 2017 of the
reinsurance of the acquired Abbey Life
business into Phoenix Life Limited, allowed
the access of transitional benefits for
Solvency II technical provisions.
22
Phoenix Group Holdings | Annual Report & Accounts 2017
How we measure delivery
SOLVENCY II SURPLUS £bn
SHAREHOLDER CAPITAL COVERAGE RATIO %
Read more about the Solvency II
surplus and Shareholder Capital
Coverage Ratio on page 29
1.8
164
139
(pro
forma)
1.1
(pro
forma)
2016
2017
2016
2017
WHY IS IT IMPORTANT?
The Solvency II surplus is the regulatory
assessment of capital adequacy at PGH level.
It is the excess of Eligible Own Funds over
the Solvency Capital Requirement.
WHY IS IT IMPORTANT?
The Shareholder Capital Coverage
Ratio demonstrates the extent to which
shareholders’ eligible Own Funds cover
the Solvency Capital Requirements.
ANALYSIS
Our Solvency II surplus of £1.8 billion has
increased due to surplus emergence,
management actions undertaken during the
period and the issuance of capital qualifying
debt. This has been partly offset by the debt
financing costs, pension contributions and
dividend payments.
£1.8bn (estimated)
2016: £1.1bn (pro forma)1
It is defined as the ratio of the Group Own
Funds to Group SCR, after adjusting to
exclude amounts relating to unsupported
with-profit funds and PGL Pension Scheme.
ANALYSIS
A coverage ratio of 164% reflects the increase
in the Solvency II surplus in the period and
represents a resilient capital position, well
within the Group’s risk appetite.
164% APM (estimated)
2016: 139% (pro forma)1
Maintaining a
resilient capital
position underpins
our future cash
generation
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adjustments to illustrate the impacts of the issuance in
January 2017 of the £300 million Solvency II qualifying
Tier 3 bond and the receipt of the PRA’s approval
in March 2017 to include the acquired AXA Wealth
businesses within the Group’s Internal Model.
Phoenix Group Holdings | Annual Report & Accounts 2017
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23
Our Strategy and KPIs
continued
Engage
people
Our people are at the
heart of our business
and key to the successful
growth of Phoenix Group.
For the sixth 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.
During 2017, we increased our focus on
ensuring our people were challenged, motivated
and rewarded through opportunities for growth,
both professionally and personally.
KEY INITIATIVES AND PROGRESS IN 2017
LEARNING AND DEVELOPMENT (‘L&D’)
– We designed and piloted a range of people
management, talent and leadership
development programmes, notably the Life
Accounting Talent Programme, the People
Manager Programme and the Leading
Integration Programme. All programmes
were aimed at developing the skills of
management and the pilots were all
successful. The programmes will now
feature on our L&D offering for 2018.
– Following the success of our Open University
Executive Education programme, we
supported a third cohort of people who
successfully completed the programme
in 2017. The delegates worked on current
business challenges and presented their
findings and recommendations to the
Executive Committee in October.
– We have partnered with Moving Ahead and
the Institute and Faculty of Actuaries as one
of the first ten organisations to take part in
a new Actuarial Mentoring Programme for
newly qualified female actuaries. This cross
organisational programme is sponsored by
our Chief Actuary with six mentors and six
mentees currently participating.
– In partnership with the Chartered
Management Institute, we launched an online
self-development tool and created learning to
support the new programmes. We now have
over 200 people signed up and utilising the
content, with a 94% satisfaction rate.
WELLBEING
– Our Corporate Responsibility agenda
continued to play a central part in the
engagement of our people and during
2017 offered a wide range of wellbeing
activities for staff.
VOLUNTEERING
– 61% of staff participated in the 2017
volunteering programme contributing a total
of 3,162 volunteering hours, an 11% increase
on 2016.
– The Group continues to use the Midlands and
London Air Ambulance charity partnerships
to engage staff in fund raising activities,
volunteering and events. Since partnering
in 2014 the Group has raised in excess
of £690,000 for the charities.
REWARD
– Participation figures for Flexit, the
Phoenix Group Flexible Benefits scheme,
are now at 86%.
DIVERSITY AND INCLUSION
– The Group continues to work towards
the targets it set as part of The Women in
Finance (‘WIF’) Charter and is raising further
awareness of an inclusive workforce through
the launch of a number of focused staff
networks including the Professional Working
Women’s Network; Lesbian, Gay, Bisexual
and Transgender (‘LGBT’) Network and the
Working Parents’ Network.
– In line with the WIF Charter targets previously
set, which run to the end of 2018, the Group
currently has women in 25% of the top 100
roles (target 30%), 35% of the Group’s green/
amber successors are female (target 40%)
and the group-wide mean gender pay gap
is 23% (target 22%). The gender pay figure
for the WIF charter target is based on an
internal calculation looking at base salary only,
it is not based on the statutory gender pay
gap calculations.
Phoenix’ statutory gender pay figures
will be made available on the Group’s
website www.thephoenixgroup.com/gpg
– A diversity index was introduced in the 2017
engagement survey and the results will be
used to prioritise actions at a functional level.
– The Group now has mandatory unconscious
bias training, to further contribute towards an
inclusive workplace.
PRIORITIES FOR 2018
– Continue to attract and retain the very best
talent by focusing on developing our people
and strengthening our internal succession
pipeline by the implementation of an online
performance management succession
planning tool.
– Grow the Diversity and Inclusion programme,
providing a wide range of development
opportunities and embedding changes
to existing practices to deliver a diverse,
engaged and inclusive workforce.
– Maintain support of our communities through
employee volunteering and fund raising and
engagement with our community projects.
Read more about employee
engagement activities undertaken
during the year on page 41
24
Phoenix Group Holdings | Annual Report & Accounts 2017
How we measure delivery
EMPLOYEE ENGAGEMENT INDEX %
76
78
78
81
80
2013
2014
2015
2016
2017
WHY IS IT IMPORTANT?
We aim to ensure employees understand
the purpose of their role and feel that their
contribution is valued and we need to
understand how well we are performing
against these aims. The index is an
aggregation of scores against a number of
questions considered the most important
factors for staff engagement.
ANALYSIS
The Group has remained stable with an
employee engagement index of 80%.
This year’s survey was completed by
89% of Phoenix employees.
TARGET
To maintain an employee engagement
index above 72%.
80%
2016: 81%
An engaged
workforce,
one that feels
committed to our
vision, mission and
strategic priorities,
is fundamental
to the success
of the Group
Total workforce
Male
Female
Directors (includes Non-Executive Directors)
Male
Female
Executive Committee1
Male
Female
Workforce that is of Black, Asian
or Minority Ethnic background
1 The number of Executive Committee members excludes Executive Committee members
who are also members of the Board of Directors.
2 Does not include workforce from the acquired AXA Wealth and Abbey Life businesses.
2017
1,249
694
555
11
7
4
6
5
1
2016
1,301
708
593
11
8
3
6
5
1
107
1182
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Phoenix Group Holdings | Annual Report & Accounts 2017
25
Business Review
“I am pleased to
report that the
Group’s financial
performance in
the year has again
demonstrated the
resilience of our
cash generation
and capital position.”
JAMES MCCONVILLE
GROUP FINANCE DIRECTOR
S
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Cash
generation
£653m APM
REM
Operating companies’
cash generation
Maintaining strong cash flow delivery underpins
debt servicing and repayments as well as
shareholder dividends.
Operating companies’ cash generation
represents cash remitted by the Group’s
operating companies to the holding companies.
Please see the Alternative Performance
Measure (‘APM’) note on page 200 for further
details of this measure.
The cash flow analysis that follows reflects the
cash paid by the operating companies to the
Group’s holding companies, as well as the uses
of those cash receipts.
CASH RECEIPTS
Cash remitted by the operating companies
was £653 million (2016: £486 million) including
£165 million generated from the acquired
AXA Wealth businesses and £236 million
generated from the acquired Abbey Life
business (which includes a £74 million cash
receipt in connection with the transfer of the
Abbey Life Pension Scheme from the operating
company to a holding company).
CASH GENERATION SUPPORTED
BY ACQUISITIONS
2017 saw excellent progress on the integration
of the acquired AXA Wealth and Abbey Life
businesses and this has supported the Group’s
cash generation during the year. The Group has
delivered £653 million of cash generation and
is on track to be at the top end of its 2017 to
2018 cash generation target range of between
£1.0 billion and £1.2 billion.
CAPITAL STABILITY
We have strengthened the Group’s Solvency
II capital surplus position through actions such
as the restructuring of the Group’s debt from
senior to subordinated instruments and the
delivery of management actions. The Solvency
II capital surplus of £1.8 billion remains resilient
as a result of the Group’s hedging programme.
IFRS LOSS AFTER TAX IMPACTED BY
OUR HEDGING STRATEGY BUT GROUP
OPERATING PROFIT REMAINS STABLE
The IFRS result for the year has been adversely
impacted by negative investment variances
arising from the hedging programme, which
is calibrated to protect the Group’s Solvency II
surplus. When combined with one-off costs
associated with debt refinancing and integration
activities, the Group generated an IFRS loss
after tax of £27 million for the year.
The Group has reviewed its actuarial
assumptions to reflect the slow down of
mortality improvements experienced in the
industry, which has had a favourable impact on
the results. This has been offset by changes
to the Group’s expectations of persistency
for products with valuable guarantees given
the continued low interest rate environment
and an increase in people retiring later.
Positive expense assumption changes as a
result of operational synergies, together with
the delivery of management actions has
resulted in a positive impact on the Group’s
operating profit.
Note:
All amounts in the Business Review section marked with an
‘APM’ are alternative performance measures. See ‘Alternative
Performance Measures’ note on page 200 for further details
of these measures.
All amounts in the Business Review section marked with
an ‘REM’ are KPIs linked to executive remuneration. See
‘Directors Remuneration Report’ on page 63 for further
details of executive remuneration including the financial and
non-financial performance measures on which is it based.
26
Phoenix Group Holdings | Annual Report & Accounts 2017
RECURRING CASH OUTFLOWS
The operating expenses of £36 million
(2016: £33 million) are broadly in line with
prior year and principally comprise corporate
office costs, net of income earned on holding
company cash and investment balances.
Pension scheme contributions of £92 million
(2016: £55 million) have increased compared
to prior year primarily as a result of £32 million
of contribution payments to the Abbey Life
Staff Pension Scheme for the first time in 2017
and revised timings of contribution payments
to the Pearl Group Staff Pension Scheme.
Contributions are now made to the Pearl
Group Staff Pension Scheme on a monthly
basis, whereas previously an annual payment
of £40 million was made each September.
There is no change in the overall quantum of
agreed future funding. The 2017 figure includes
£10 million settled in respect of the last quarter
of 2016, together with the £40 million annual
payment in respect of 2017 settled monthly.
£10 million of contributions to the PGL Staff
Pension Scheme have also been made in the
year with no further contributions required
under the existing funding agreement with
the Scheme Trustees.
Debt interest increased to £60 million
(2016: £58 million) reflecting the higher coupon
payable on hybrid debt issued in the year which
has more than offset the impact of lower debt
principal balances following repayments.
NON-RECURRING CASH OUTFLOWS
Non-recurring cash outflows of £84 million
include Group costs associated with integration
activity and corporate related projects, the
payment of collateral on hedging transactions
partly offset by the receipt of proceeds from the
disposal of internal holdings of the £428 million
subordinated loan notes.
DEBT REPAYMENTS AND
SHAREHOLDER DIVIDEND
External debt repayments of £1,053 million
comprise full settlement of the £850 million
revolving credit facility balance outstanding
at 31 December 2016 and repayment of
£178 million of the £300 million senior bonds
which were redeemed at a premium of
£25 million.
The 2016 comparative of £239 million
comprised £182 million of the debt facility
used to finance the acquisition of AXA Wealth,
£50 million of the Group’s revolving credit
facility and £6 million redemption of
the Group’s remaining Tier 1 bonds.
The shareholder dividend of £193 million
comprises the payment of the 2016 final
dividend of £94 million and the payment of
the 2017 interim dividend of £99 million, which
reflected the 5% increase in dividend that
followed the Abbey Life acquisition.
EQUITY RAISE (NET OF FEES)
The £908 million in 2016 was in relation
to proceeds, net of fees, from the equity
placement and the rights issue associated with
the financing of the acquisition of the AXA
Wealth and Abbey Life businesses respectively.
DEBT ISSUANCE (NET OF FEES)
The £830 million debt issuance comprises the
net proceeds of the Tier 3 bond issuances of
£300 million and £150 million completed in
January and May 2017 respectively, as well
as the Tier 2 bond issuance of US$500 million
(£385 million), completed in July 2017.
TARGET CASH FLOWS
The Group has previously announced a five-year
cumulative target cash flow for 2016 to 2020 of
£2.8 billion, of which £1.0 billion to £1.2 billion
is expected to be achieved in 2017 and 2018.
With cash generation of £653 million for the
year ended 31 December 2017, the Group
expects to be at the top end of the £1.0 to
£1.2 billion range for 2017 and 2018.
A new cash flow target of £2.5 billion has been
announced in respect of the years 2018 to 2022.
The resilience of the cash generation target is
demonstrated by the following illustrative stress
testing in the table below.
EXPECTED CASH FLOWS AFTER 2022
Cash generation post 2022 is expected to be
£3.8 billion. This assumes no management
actions after 2022.
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
Illustrative stress testing1
1 January 2018
to 31 December
2022
£bn
Cash and cash equivalents at 1 January
Operating companies’ cash generation:
Cash receipts from Phoenix Life
Total cash receipts1
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
Equity raise (net of fees)
Debt issuance (net of fees)
Cost of acquisitions
Cash and cash equivalents
at 31 December
570
653
653
(36)
(92)
(60)
(188)
(84)
(272)
(1,053)
(193)
(1,518)
–
830
–
535
1
Includes amounts received by the holding companies in respect of tax losses
surrendered to the operating companies of £20 million (2016: £84 million).
Phoenix Group Holdings | Annual Report & Accounts 2017
706
Base case five-year target
Following a 20% fall in equity markets
Following a 15% fall in property values
Following a 60bps interest rates rise2
Following a 80bps interest rates fall2
Following credit spread widening3
Following 6% decrease in annuitant mortality rates4
Following a 10% increase in assurance mortality rates
486
486
(33)
(55)
(58)
(146)
Following a 10% change in lapse rates5
Assumes stress occurs on 1 January 2018.
1
2 Assumes recalculation of Transitionals (subject to PRA approval).
3 Credit stress equivalent to an average 150bps spread widening across ratings,
10% of which is due to defaults/downgrades.
4 Equivalent of six months increase in longevity applied to the annuity portfolio.
5 Assumes most onerous impact of a 10% increase/decrease in lapse rates across
different product groups.
(141)
(287)
(239)
(126)
(652)
908
428
(1,306)
570
2.5
2.5
2.5
2.7
2.3
2.3
2.2
2.4
2.4
27
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Business Review
continued
Capital
management
£1.8bn
PGH Solvency II surplus
(estimated)
164% APM
PGH Shareholder
Capital Coverage Ratio
(estimated)
PGH SOLVENCY II SURPLUS OVERVIEW
A Solvency II capital assessment involves a
valuation in line with Solvency II principles
of the Group’s Own Funds and a risk-based
assessment of the Group’s Solvency Capital
Requirement (‘SCR’). Phoenix Group Holdings
(‘PGH’) Own Funds differ materially from the
Group’s IFRS equity for a number of reasons,
including the recognition of future shareholder
transfers from the with-profit funds and future
management charges on investment contracts,
the treatment of certain subordinated debt
instruments as capital items, and a number
of valuation differences, most notably in
respect of insurance contract 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’.
From 1 January 2016, the Solvency II capital
assessment and the Group’s regulatory
supervision were performed at the Phoenix Life
Holdings Level (‘PLHL’) level being the highest
EEA insurance holding company. A waiver that
was in place permitting Group supervision to
take place at the level of the ultimate parent,
PGH, via other methods as opposed to full
Group supervision, expired on 30 June 2017.
The Group’s capital position is now being
managed at the PGH level only.
In December 2015, the Group was granted
the PRA’s approval for use of its Internal Model
to assess capital requirements. Following the
2016 acquisitions of the AXA Wealth and
Abbey Life businesses, the Group obtained
the PRA’s approval to incorporate the acquired
AXA Wealth businesses within the scope of
the Group’s Internal Model in March 2017.
The capital assessment of the Abbey Life
business remained on a Standard Formula
basis as at 31 December 2017. Therefore,
the Solvency II position of the Group at that
date is based partially on the Group’s Internal
Model and partially on Standard Formula.
However, following completion of the
reinsurance of the majority of the Abbey Life
business into Phoenix Life Limited in December
2017, the SCR for the related risks is now being
calculated in accordance with the Group’s
Internal Model.
Approval to include the Abbey Life business
within the scope of the Group’s Internal Model
was received in March 2018.
The Solvency II surplus excludes the surpluses
arising in the Group’s unsupported with-
profit funds and the PGL Pension Scheme
of £0.6 billion (2016: £0.4 billion). In the
calculation of the Solvency II surplus, the SCR
of the with-profit funds and the PGL Pension
Scheme 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 the PGL Pension Scheme,
whilst not included in the Solvency II surplus,
are available to absorb economic shocks.
This means that the headline surplus is resilient
to economic stresses.
As part of the ongoing simplification of the
Group structure, Phoenix intends to put in
place a new UK-registered holding company
following the completion of the Standard Life
Assurance acquisition. The new company
will be the ultimate parent company and the
highest EEA insurance Group holding company.
When complete, the Solvency II capital
assessment and Group supervision will be
performed at this level.
The PGH Solvency II surplus position at 31 December 2017 is set out in the table below:
Own Funds1
SCR2
Surplus3
Estimated
position as at
31 December 2017
£bn
Pro forma position
at 31 December
20164
£bn
6.6
(4.8)
1.8
6.0
(4.9)
1.1
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-transferable and fungible between Group
companies within a period of nine months.
2 The SCR reflects the risks and obligations to which Phoenix Group Holdings is exposed.
3 The surplus equates to a regulatory coverage ratio of 139% as at 31 December 2017. (2016: 122% pro forma).
4 The position at 31 December 2016 included pro forma adjustments to illustrate the impacts of the issuance in January 2017
of the £300 million Solvency II qualifying Tier 3 bond and the receipt of the PRA’s approval in March 2017 to include the
acquired AXA Wealth business within the Group’s Internal Model.
28
Phoenix Group Holdings | Annual Report & Accounts 2017
CHANGE IN PGH SOLVENCY II SURPLUS
(ESTIMATED)
The PGH Solvency II surplus has increased
to £1.8 billion (2016: £1.1 billion on a pro
forma basis).
The increase includes surplus generation and
reduction in capital requirements of £0.2 billion
over the period. Management actions
undertaken, including reductions in expenses
from operating synergies and the impact of
strategic asset allocation and hedging activities,
increased the surplus by £0.4 billion.
The issuance of £150 million of Tier 3 bonds
in May 2017 and US$500 million of Tier 2
bonds in July 2017 has increased the estimated
Solvency II surplus by a total of £0.5 billion.
Assumption, experience and modelling changes
were net neutral on a Solvency II basis, with the
net impact of changes to longevity assumptions
being offset by the impact of the continued
low interest rate environment on the Group’s
expectations of persistency for products with
valuable guarantees and the trend toward
later retirements.
Economic and other variances of £(0.1) billion
include the premium paid on partial redemption
of the Group’s £300 million senior bonds, the
impact of the agreement to reduce annual
charges on workplace pension products to 1%
or lower and project and acquisition integration
costs. Financing costs, pension contributions
and the dividend payments (including the
accrual for the 2017 final dividend) amount
to £(0.3) billion.
SHAREHOLDER CAPITAL COVERAGE RATIO
(ESTIMATED)
The Group focuses on a shareholder view of
the capital coverage ratio which is considered
to give a more accurate reflection of the capital
strength of the Group. The Shareholder Capital
Coverage Ratio is calculated as the ratio of
Eligible Own Funds to SCR adjusted to exclude
Own Funds and the associated SCR relating
to the unsupported with-profit funds and the
PGL Pension Scheme.
Please see the Alternative Performance
Measures note on page 200 for further details
of this measure.
Unsupported with-profit funds and the PGL
Pension Scheme consist of £2.6 billion of Own
Funds and £2.0 billion of SCR. Of the £2.6 billion
of Own Funds, £2.0 billion consists of estate
within the unsupported with-profit funds and
£0.6 billion of Own Funds within the PGL
Pension Scheme. As described on page 28,
surpluses in these funds do not contribute to
the PGH Solvency II surplus.
Excluding the SCR and Own Funds relating
to the unsupported with-profit funds and
the PGL Pension Scheme, the Solvency II
Shareholder Capital Coverage ratio is 164%
as at 31 December 2017 (2016: 139% on
a pro forma basis).
PHOENIX LIFE FREE SURPLUS (ESTIMATED)
Phoenix Life Free Surplus represents the
Solvency II surplus of the Life Companies that
is in excess of their Board-approved capital
management policies.
As at 31 December 2017, the Phoenix Life
Free Surplus is £0.7 billion (2016: £0.7 billion).
The table below analyses the movement
during the period:
Estimated
position as at
31 December 2017
£bn
Opening Free Surplus
Surplus generation and expected
run-off of capital requirements
Management actions
Assumptions, experience and
modelling changes
Impact of economic and
other variances
Free Surplus before
cash remittances
Cash remittances to
holding companies
Closing Free Surplus
0.7
0.2
0.5
(0.1)
–
1.3
(0.6)
0.7
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 testing1,
are provided below and demonstrate the
resilience of the PGH Solvency II surplus.
In relation to the proposed acquisition of Standard
Life Assurance, the Group has undertaken
additional hedging activity in 2018 to protect
the economic value of the acquired business
from adverse equity and currency movements.
Upon completion, the Group’s hedging strategy
will be applied to the business acquired.
The sensitivities below have not been amended
to reflect exposure to that additional hedging
programme in the period prior to completion of
the transaction. The sensitivities represent the
standalone position for the Phoenix Group based
on hedging in place as at 31 December 2017.
Estimated PGH
Solvency II surplus
£bn
1.8
Illustrative stress testing1
Base: 1 January 2018
Following a 20% fall in
equity markets
Following a 15% fall in
property values
Following a 60bps interest
rates rise2
Following a 80bps interest
rates fall2
Following credit spread widening3
Following 6% decrease in
annuitant mortality rates4
Following 10% increase in
assurance mortality rates
Following a 10% change in
lapse rates5
1.8
1.8
1.9
1.7
1.6
1.5
1.7
1.7
Assumes stress occurs on 1 January 2018.
1
2 Assumes recalculation of transitionals
(subject to PRA approval).
3 Credit stress equivalent to an average 150bps spread
widening across ratings, 10% of which is due to
defaults/downgrades.
4 Equivalent of six months increase in longevity applied
to the annuity portfolio.
5 Assumes most onerous impact of a 10% increase/
decrease in lapse rates across different product groups.
CHANGE IN PGH SOLVENCY II SURPLUS £bn
SHAREHOLDER CAPITAL COVERAGE RATIO £bn
0.5
(0.1)
0.4
1.8
(0.3)
164%
139%
4.6
1.8
4.0
1.1
2.8
2.9
0.2
1.1
Pro forma
surplus
as at
FY16
Surplus
generated
and reduction
in capital
requirements
Management
actions
Impact
of debt
issuance
Economic
and other
variances
Financing
costs, pension
contributions
and dividends
Surplus
as at
FY17
(estimated)
FY17
(estimated)
FY16
(pro forma)
Surplus
SCR
Own funds
Phoenix Group Holdings | Annual Report & Accounts 2017
29
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Business Review
continued
IFRS results
£368m APM
Operating profit
£(27)m
IFRS loss after tax
OPERATING PROFIT
Operating profit is a non-GAAP financial
performance measure based on expected
long-term investment returns. It is stated
before amortisation and impairment of
intangibles, other non-operating items,
finance costs and tax.
Please see the APM note on page 200 for
further details of this measure.
The Group has generated an operating
profit of £368 million (2016: £351 million).
The increase compared to the prior year
is primarily driven by the inclusion of the
AXA Wealth and Abbey Life businesses
acquired in 2016, together with the net positive
impacts of actuarial assumption and model
and methodology changes during 2017; partly
offset by the lower impact of management
actions within operating profit in 2017 compared
to the prior year.
IFRS LOSS AFTER TAX
The IFRS loss after tax attributable to owners is
£(27) million (2016: £(100) million). This reflects
adverse economic variances arising on hedging
positions held by the life companies to protect
the Group’s Solvency II surplus position,
together with the impact of non-operating
items. Non-operating items include a £27 million
impact of the agreement to reduce annual
charges on workplace pension products to 1%
or lower, the £25 million premium paid on the
partial redemption of the Group’s £300 million
senior bonds and acquisition integration costs
of £21 million.
PHOENIX LIFE OPERATING PROFIT
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 long-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.
The with-profit operating profit of £84 million
(2016: £81 million) represents the shareholders’
one-ninth share of the policyholder bonuses,
and is in line with the comparative period.
The with-profit funds where internal capital
support has been provided generated an
operating loss of £108 million (2016: £72 million
loss). The loss is principally driven by the
strengthening of actuarial assumptions to
reflect the impact of the continued low interest
rate environment on the Group’s expectations
of persistency for products with valuable
guarantees and the associated assumptions
in relation to late retirements.
The non-profit and unit-linked funds
operating profit increased to £386 million
(2016: £283 million), principally driven by the
impact of updating actuarial assumptions,
which had a net positive impact of £166 million
on the result for the period (2016: £85 million).
This includes the positive impact of updating
longevity base and improvement assumptions
to reflect latest experience analyses and the
most recent Continuous Mortality Investigation
2016 core projection tables. The non-profit and
unit-linked operating profit has also benefited
from updates made to expense assumptions
from operational synergies and the inclusion
of the expected return of the acquired
AXA Wealth and Abbey Life businesses.
The 2016 Phoenix Life operating profit
benefited from the £31 million favourable
impact of updates made to the IFRS reserving
methodology to align more closely with the
requirements of Solvency II.
Operating profit
Phoenix Life
Group costs
Operating profit
Investment return variances and economic
assumption changes on long-term business
Variance on owners’ funds
Amortisation of acquired in-force business,
customer relationships and other intangibles
Other non-operating items
Profit/(Loss) before finance costs
attributable to owners
Finance costs attributable to owners
Loss before the tax attributable to owners:
Tax credit attributable to owners
Loss for the period attributable
to owners
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
Phoenix Life operating profit
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
84
(108)
386
–
5
21
388
81
(72)
283
31
7
27
357
388
(20)
368
(6)
(87)
(119)
(80)
76
(104)
(28)
1
357
With-profit
(6)
351
With-profit where internal capital
support provided
Non-profit and unit-linked
(207)
One-off impact of IFRS methodology change
(5)
Long-term return on owners’ funds
Management services
Phoenix Life operating profit before tax
(82)
(95)
(38)
(90)
(128)
28
(27)
(100)
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Phoenix Group Holdings | Annual Report & Accounts 2017
The long-term return on owners’ funds
of £5 million (2016: £7 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 £21 million (2016: £27 million) comprises
income from the life and holding companies in
accordance with the respective management
service agreements less fees related to the
outsourcing of services and other operating
costs. The decrease compared to the prior period
reflects the impact of life company run-off.
GROUP COSTS
Group costs in the period were £20 million
(2016: £6 million). The increase compared to
the prior period principally reflects a lower return
on the scheme surplus of the PGL Pension
Scheme following the buy-in transaction
entered into with Phoenix Life Limited in the
second half of 2016, the recognition of the
net interest cost on the Abbey Life Pension
Scheme and the impact of higher project
recharges from the service companies.
INVESTMENT RETURN VARIANCES
AND ECONOMIC ASSUMPTION
CHANGES ON LONG-TERM BUSINESS
The net adverse investment return variances
and economic assumption changes on long-
term business of £6 million (2016: £207 million
adverse) primarily arise on hedging positions
held by the life funds following equity market
gains during the year. The Group’s exposure
to equity movements arising from future
profits in relation to with-profit bonuses and
unit-linked charges is hedged to benefit the
regulatory capital position. The impact of equity
market movements on the value of the hedging
instruments is reflected in the IFRS results, but
the corresponding change in the value of future
profits is not. Losses on these hedging positions
have been partly offset by the positive impact
of strategic asset allocation activities, including
investment in higher yielding illiquid assets.
VARIANCE ON OWNERS’ FUNDS
The adverse variance on owners’ funds
of £87 million (2016: £5 million negative) is
principally driven by interest rate swaption
positions held in the life companies’ shareholder
funds. Such positions are held to hedge the
impact of interest rate risk on the Group’s
Solvency I surplus position. With swap yields
remaining relatively stable during the period,
option value associated with these contracts
has fallen due to expected option expiry
and reduced volatility.
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.
Following the acquisition of the AXA Wealth
and Abbey Life businesses in 2016, a further
£0.2 billion of acquired-in-force business and
other intangibles have been recognised in the
Group’s balance sheet.
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 year totalled £102 million
(2016: £68 million). Amortisation of other
intangible assets totalled £17 million in the year
(2016: £14 million).
OTHER NON-OPERATING ITEMS
Other non-operating items of £80 million
negative (2016: £95 million negative)
includes a premium of £25 million paid on
redemption of £178 million principal of the
senior unsecured bond, costs of £21 million
in respect of integration and restructuring of
the Abbey Life and AXA Wealth businesses,
costs of £20 million in respect of short-term
expense overruns arising from the AXA
Wealth businesses prior to the completion of
the implementation of the Phoenix operating
model, a provision of £27 million in respect
of a commitment to the reduction of ongoing
charges for workplace pension products, a
£21 million increase in the provision for costs
for claims relating to historic creditor insurance
underwritten by a subsidiary of the Group,
PA(GI) Limited, offset by the recognition of
reimbursements of £39 million in respect of
recoveries due or received from third parties
under contractual arrangements; and net other
one-off items totalling a cost of £5 million,
including corporate project costs.
The prior period result included a £14 million
gain following completion of data review
procedures associated with the reassurance
of PLAL annuities in 2015 and a £26 million
gain arising from a longevity swap reassurance
contract, offset by the recognition of a
£33 million cost of providing for PA(GI)
Limited creditor insurance claims, £30 million
of acquisition integration costs, £42m of
corporate project costs, £10 million of pension
exit charges and a £20 million adverse
impact of other one-off items.
FINANCE COSTS ATTRIBUTABLE
TO OWNERS
Year ended
31 Dec 2017
£m
Bank finance costs
Other finance costs
Finance costs
attributable
to owners
8
96
104
Year ended
31 Dec 2016
£m
16
74
90
Finance costs have increased by £14 million,
comprising a £8 million decrease in bank
finance costs driven by the repayment of
bank debt; and a £22 million increase in other
finance costs driven by hybrid debt issuances
in the year, together with the impacts of the
acceleration of deferred issue cost recognition
on senior debt repaid in the year.
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 is available in the Corporate
Responsibility section of the Group’s website.
The Group’s tax affairs and tax controls are
managed by an in-house tax team who
report on them to the Board and the Audit
Committee on a regular basis throughout the
year. The Board believes that its Tax Strategy
accords with the Group’s approach to its wider
Corporate Social Responsibility. In the first half
of 2017, the new UK requirement for large UK
businesses to publish their tax strategy came
into effect.
Implicit in the Group’s Tax Strategy and the
management of its tax affairs is a desire for
greater transparency and openness that
will help the Group’s stakeholders better
understand the published tax numbers.
In this way the Group aims to participate in
a substantive manner with HMRC and other
insurance industry stakeholders on consultative
documents and tax law changes that potentially
impact on the insurance sector.
All of the Group’s insurance operations
are based in the UK and are liable to tax in
accordance with applicable UK legislation.
The Group derives a de minimis level of income
from non-UK sources. Phoenix Group Holdings
was a Jersey resident holding company until
31st January 2018 when it became tax resident
in the UK. In 2017, the Company was subject to
a 0% tax rate in Jersey but because its primary
source of income was its UK subsidiaries the
tax residency of Phoenix Group Holdings had
a negligible impact on the UK tax payable by
the Group.
The Group tax credit for the period attributable
to owners is £1 million (2016: £28 million) based
on a loss (after policyholder tax) of £(28) million
(2016: £(128) million). The significant tax
adjustments to loss before the tax attributable
to owners are primarily due to the impact of
non-taxable income of £(16) million offset by
the impacts of current year tax losses not being
recognised of £15 million and the valuation of
current year losses at future lower tax rates of
£4 million. See note C5 to the IFRS consolidated
financial statements for further analysis.
Phoenix Group Holdings | Annual Report & Accounts 2017
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Risk Management
RISK MANAGEMENT FRAMEWORK
“By putting risk at the
heart of what we do,
Phoenix has safely
and successfully
on-boarded both
the AXA Wealth and
Abbey businesses.”
WAYNE SNOW
GROUP CHIEF RISK OFFICER
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
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, adoption of the Risk
Management Framework to the Abbey Life
business has strengthened oversight and
management of the legacy issues and the
ongoing FCA enforcement investigations.
The Group Risk function played a key role in
the successful application to bring AXA Wealth,
PGH and Abbey Life into the Group’s Internal
Model. The function has also led contingency
planning activities in the event of an adverse
outcome to the UK’s exit from the EU. The key
risk management skillsets and processes across
the business support the Group in targeting
transactions in the bulk annuity market.
Finally, I was delighted to see our credit rating
upgraded by Fitch Ratings, reflecting the
Group’s strong capitalisation, reduced leverage
and the progress made in integrating the
acquired businesses.
Further detail on the ten components of
our RMF and the principal risks facing the
Group are provided below.
RISK CULTURE
The Group seeks 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.
To support this goal, the Group defined a
Risk Culture Statement which sets out the
Group’s aspirations for risk management:
‘The Group has a balanced risk culture,
supportive of commercial risk-taking
coupled with strong execution in line
with its risk appetite.
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 2017, Group Risk conducted its latest
annual Risk Culture survey. The results of this
survey enable us to assess and measure the
Group’s Risk Culture over time as well as being
able to tailor training programmes to ensure
the continued engagement and development
of our employees.
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Phoenix Group Holdings | Annual Report & Accounts 2017
OWN RISK AND SOLVENCY
ASSESSMENT (ORSA)
The Group carries out an ORSA process to
assess its risk profile on an ongoing basis.
The ORSA considers risk, capital and return
within the context of the business strategy
on a forward-looking basis.
The ORSA is a fundamental part of the strategic
risk and capital management processes of
the business to prompt consideration of
management actions and help shape strategic
decision-making.
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.
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 ensure that all risks are managed effectively
the Group is committed to:
– embedding a risk aware culture;
– maintaining a strong system of
internal controls;
– enhancing and protecting customer and
shareholder value by continuous and
proactive risk management;
– maintaining an efficient capital structure; and
– ensuring that risk management is embedded
into day-to-day management and decision-
making processes.
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:
– Capital – The Group and each life company
will hold sufficient capital to meet regulatory
requirements in a number of asset and liability
stress scenarios.
– 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.
– Shareholder Value – The Group will take
action to protect its shareholder value.
– 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.
– 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 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 adverse
scenarios. 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
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 category.
The highest risk universe category is Level 1
and includes:
– strategic risk;
– customer risk;
– financial soundness risk;
– market risk;
– credit risk;
– insurance risk; and
– 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 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 Life Company Boards
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 2017. During 2017,
the Risk Committees of the Phoenix Life and
Abbey Life Boards met five times and provided
additional Board Committee focus on risk
matters at Phoenix Life and Abbey 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.
Phoenix Group Holdings | Annual Report & Accounts 2017
33
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Risk Management
continued
POLICIES
The Group policy framework comprises a set
of policies that supports 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.
The policies define:
– the individual risks the policy is intended
to manage;
– the degree of risk the Group is willing to
accept, which is set out in the policy risk
appetite statements;
– the minimum controls required in order to
manage the risk to an acceptable level; and
– 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 the amount of risk capital required is
reviewed regularly.
RISK AND CAPITAL ASSESSMENT
The Group operates a standardised
assessment framework for the identification
and assessment of the risks to which it may be
exposed 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,
Life Boards and the Group Board via regular
risk reporting.
The Life and Group Board Risk Committees
receive a consolidated risk report on a quarterly
basis, detailing the risks facing the Group and
the overall position against risk appetite limits.
The Risk Committees are 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 the Group’s risk management
and internal control systems.
This assessment, described on page 60,
provides assurance to management and the
Boards that the RMF has been implemented
consistently and is operating effectively across
the Group.
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BOARD
PGH Board
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
EXECUTIVES
MANAGEMENT
Group Chief Executive
Officer
Group Executive
Committee
Group Functions
Phoenix Life Companies
Chief Risk Officer
Group Risk and
Compliance
Group Internal Audit
34
Phoenix Group Holdings | Annual Report & Accounts 2017
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, links to the Group’s strategic objectives 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.
Key to Strategic objectives icons
Change in risk from last year
Improve Customer
outcomes
Drive Value
Risk Improving
No Change
Manage Capital
Risk Heightened
Engage People
Risk
Impact
Mitigation
Strategic
priorities
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 may suffer a
loss in value.
MARKET
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 capital position.
Since the introduction of Solvency II
and a swaps-based discount rate, the
Group is more sensitive to movements
in swap yields.
Adverse changes
in experience
versus actuarial
assumptions.
INSURANCE
The Group has liabilities under annuities
and other policies that are sensitive
to future longevity, persistency and
mortality rates. For example, if our
annuity policyholders live for longer
than expected, then their benefits
will be paid for longer. The amount of
additional capital required to meet those
additional liabilities could have a material
adverse impact on the Group’s ability
to meet its cash flow targets.
The Group undertakes regular
monitoring activities in relation to
market risk exposure, including limits
in each asset class, cash flow and
liquidity forecasting, and stress and
scenario testing. In response to this,
the Group has implemented de-risking
strategies to mitigate against adverse
customer and shareholder outcomes
from certain market movements
such as equities and interest rates.
The Group also maintains cash buffers
in its holding companies and has access
to a credit facility to reduce reliance
on emerging cash flows.
The Group’s excess capital position
continues to be closely monitored
and managed, particularly in the low
interest environment and any potential
impact on financial markets as a
result of Brexit.
The Group undertakes regular
reviews of experience and annuitant
survival checks to identify any trends
or variances in assumptions.
The Group continues to actively
manage its longevity risk exposures,
which includes the use of reinsurance
contracts to maintain this risk
within appetite.
Significant
counterparty
failure.
CREDIT
The 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 of these securities.
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.
This risk is reflected in the higher
expected return, or spread, over less
risky assets.
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 value of the Group’s assets.
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.
RISK IMPROVING
Despite the uncertainty and delay in
agreeing the terms of the UK’s exit
from the EU, equity markets continued
to rise over 2017. The expected
increase in the UK base rate occurred
in November.
The Group’s financial strength has
benefited from its hedging strategy,
the extension of the Internal Model to
cover the AXA Wealth and Abbey Life
businesses and the refinancing of debt
from senior to subordinated facilities.
RISK IMPROVING
The continuing trend of reductions
in future mortality improvements
saw the Group amending
assumptions accordingly.
Policyholder persistency rates and
the take-up of guarantees have
been affected by the low interest
rate environment and assumptions
strengthened where indicated by
recent experience.
NO CHANGE
Counterparty exposures continue to be
managed and monitored at a consolidated
level across the Group. There have
been no significant developments in
counterparty exposures over 2017.
Contingency plans are being progressed
in respect of EU-based counterparties
in the event of a ‘Hard Brexit’.
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35
Risk Management
continued
Risk
Impact
Mitigation
Strategic
priorities
Change from last year
NO CHANGE
Phoenix implemented its customer model
and Risk Management Framework to the
Abbey Life business prior to commencing
the transfer of operations to Phoenix Life.
Although FCA investigations remain
ongoing, warranties and indemnities are
in place to mitigate against an adverse
outcome.
The Group’s capital position is managed
and reported at the PGH level following
expiry of the Group regulatory supervision
waiver at 30 June 2017.
RISK HEIGHTENED
Integration of the AXA Wealth and Abbey
Life acquired businesses has progressed
well, with the Group’s Internal Model
extended to include both businesses.
The heightened trend reflects the
expected risks of integrating Standard Life
Assurance upon completion.
RISK IMPROVING
No longer considered a principal risk
at 31 December 2017.
New risk.
Changes in
the regulatory
and legislative
landscape.
OPERATIONAL
The conduct-focused regulator has had
a greater focus on customer outcomes.
This may continue to challenge existing
approaches 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.
Changes in legislation such as the
implications of Brexit can also impact
the Group’s financial position.
The Group fails
to effectively
integrate or
transition
acquired
businesses.
STRATEGIC
Completion of the proposed purchase of
Standard Life Assurance, as announced
on 23 February 2018, is subject to
regulatory approval. On completion, the
challenge of transitioning Standard Life
Assurance into the Group could introduce
structural or operational challenges that
result in Phoenix failing to generate the
expected outcomes for policyholders
or value for shareholders.
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 and legislative change and
the impact on our operations and
lobbies where appropriate.
Although not material in the
context of the overall Group, we
are exploring a range of options to
ensure we can continue to service
our Irish policyholders and manage
the financial implications as part
of Brexit contingency planning.
The financial and operational risks
of the target business were assessed
as part of the acquisition phase.
Transition plans are being developed
and resourced with appropriately
skilled staff to ensure that the target
operating models are delivered in line
with expectations.
High Court ruling that PA(GI) Limited
(‘PAGI’), a Group company, retained
liability in relation to creditor insurance
originally underwritten by PAGI.
The Group has established efficient
processes to review complaints
received, and where appropriate,
provide redress to the policyholder.
Greater than
anticipated
redress cost
relating to
creditor
insurance.
CUSTOMER
Cost of redress for these complaints
may be greater than provisions held
due to uncertainties with regard to the
volumes of future complaints, the rates
by which those complaints are upheld
and the average redress value.
The Group continues to monitor the
level of complaints and emerging
experience to ensure that the provisions
remain appropriate.
The Group has sought to recover
incurred costs from third parties.
(Further details in note G1 to the
IFRS financial statements).
The Group’s outsource strategy
regularly considers our target
operating model in light of the
changing marketplace for policy
administration outsourcing; the term
remaining on current contractual
arrangements and evolving regulatory
and customer demands.
The outcome of these reviews and
related recommendations are shared
with the Life Companies and approval
sought for funding to support initiatives
to implement transition/transformation
activity where appropriate.
Concentration
in the policy
administration
outsource
industry.
OPERATIONAL
Previous consolidation of the industry
has led to an increased exposure for the
Group to a smaller number of suppliers,
with few alternative supply options.
Further market concentration creates
challenges regarding Phoenix’s ongoing
relationships and in the development
and viability of effective exit plans under
stressed conditions.
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Phoenix Group Holdings | Annual Report & Accounts 2017
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.
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.
PRINCIPAL RISKS
h
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H
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Risk Title
Description
MARKET
DISRUPTORS
CYBER RISK
The impact of alternative providers
in the market or those with more
comprehensive digital propositions.
The Group continues to see itself as
a comparatively low target due to the
closed book nature of its business.
Operational
Risk Universe
Category
Strategic
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SOLVENCY II
CHANGES
Changes to the solvency regime as a
result of government review and the
UK’s exit from the EU.
Financial
Soundness
w
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L
Unlikely
RISK
A Market Volatility
B Actuarial Assumptions
C Counterparty Exposure
D Regulatory and Legislative Change
E Acquisition Transition
F PAGI mis-selling (risk removed)
G Outsourcer Market (new risk)
Almost Certain
Likelihood
Movement since HY 2017
In accordance with the provision of section C.2.2 of the 2016
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 2022. The Board
has determined that the five-year period to December 2022 is
an appropriate period for the assessment, this being the period
covered by the Group’s Board approved annual operating plan
(‘AOP’) and therefore the period over which the Directors have
reasonable confidence and set internal and external targets.
In making the viability assessment, the Board has undertaken
the following process:
– It considered Group prospects, taking into account current
position and the principal risks and uncertainties that it is facing;
– it defined that viability is maintaining the capability to satisfy
mandatory liabilities as they fall due and track towards targets;
– it reviewed the AOP which considers profits, liquidity, solvency
and strategic objectives and the impacts of management
actions on the Group. The AOP was finalised in November
2017 and reaffirmed the Group’s strategy;
– 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, persistency and
yield stress, which implies a 1.5 year increase in life expectancy
for a 65 year old male and 1.2 year increase for a 65 year old
female, alongside an increase in persistency and a fall in yields.
– it completed reverse stress testing to understand how
severe the above scenarios would need to be given the
Groups current and expected levels of solvency and liquidity;
– It considered the principal medium to long-term risks facing
the Group which have the potential to impact on viability as
discussed in the Risk report above;
– 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; and
– it reviewed the financials, synergies and risks associated with
the proposed acquisition of Standard Life Assurance, taking
into account its current position and under a market stress.
The Board has also made certain assumptions when making
the assessment and these include the following:
– the stress occurs on 1 January 2018 with no allowance
for any recovery, but do take into account the impact of
transitionals recalculation;
– that whilst the actual impacts of Brexit on the Group are still
unknown, the Group has plans in place to ensure it is able to
service all policyholders in the event of a Hard Brexit; and
– that future acquisitions, including BPAs, are not relevant,
as any transaction would only be progressed on the basis
it was value accretive, in line with the stated criteria.
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.
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37
Stakeholder Engagement
OVERVIEW
Balancing the needs of all our stakeholders is key to the Group’s success in
meeting its strategic priorities. To help with this, the Group has a set of policies
which provide a clear risk and governance framework and which must be
complied with. Key policies and relevant outcomes for each stakeholder group
along with engagement activities are outlined within this report.
Positive stakeholder engagement is also key to the Group’s Corporate
Responsibility agenda.
Go online for the Group’s full Corporate and Social Responsibility Report
www.thephoenixgroup.com/CRreport2017
OUR
CUSTOMERS
5.6 million policyholders with £74 billion of
assets held by the Group’s life companies.
Key products include with-profit, unit-linked,
non-profit (annuities) and non-profit (protection).
OUR
SUPPLIERS
Phoenix has c.800 suppliers of
which 16 are considered Strategic
and Critical Service Providers.
Read more
on page 39
Read more
on page 40
OUR
EMPLOYEES
1,249 staff supporting Phoenix Group,
Phoenix Life and SunLife, based across
operational sites: Wythall, London,
Basingstoke, Bournemouth, Bristol,
Glasgow and Jersey.
OUR
COMMUNITY
PARTNERS
36 partners including charities, schools,
hospices and local community groups.
Read more
on page 41
Read more
on page 43
OUR
ENVIRONMENT
OUR
INVESTORS
The Group is committed to managing and
reducing its environmental impact.
The Group maintains an active dialogue
with its investors throughout the year.
Read more
on page 44
Read more
on page 46
The Group’s mission is
to improve returns for
policyholders, whilst
delivering value for
shareholders. The Group
has responsibilities to
a number of stakeholders,
including its investors,
customers, suppliers,
employees and
community partners.
Stakeholders’ needs are
therefore considered
in everything we do.
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Phoenix Group Holdings | Annual Report & Accounts 2017
The Group recognises the
responsibility it has to all
of its customers, as both
custodian of their financial
assets and supplier of
their pension needs or life
cover. Treating Customers
Fairly is at the heart of the
business, aiming to provide
a responsible, fair and
helpful service.
The Phoenix Life website can be
accessed at www.phoenixlife.co.uk
Read more about key customer
engagement activities undertaken
during the year on page 18
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LISTENING TO CUSTOMERS
Listening to the needs and wants of customers
is helpful in delivering good customer outcomes,
whilst underpinning this with a positive customer
journey. Feedback is gathered through automated
telephone surveys, individual research projects
and most recently through talking with the wider
‘customer community’ about their experiences
and how they like to engage with the Group.
These interactions help to shape communications
and future propositions that may be of interest.
Customer research enables improvements
to be made to the customer journey.
Recent examples include an online facility for
the retirement process, to enable some Phoenix
Life customers to select retirement options
online, secure e-mail launched as an alternative
communication channel for customers to
make contact, and improvements to annual
statements and communications, ensuring
that key information can be easily understood
and highlighted.
DIGITAL PROPOSITION
During the year the Group has continued to
develop its digital offering for customers to
enhance the value of customer relationships
with Phoenix. The Phoenix Life website allows
visitors greater access to information regarding
policy information, whilst reducing the volume
of paperwork routinely issued.
CUSTOMERS IN VULNERABLE
CIRCUMSTANCES
Phoenix recognises the diversity of its customers
and appreciates that a proportion could be living
with issues that make them vulnerable and
in need of support with their decision-making.
The Group’s goal is to ensure that customer
vulnerability is recognised and acted upon
appropriately, to ensure that it does not have
a negative impact on customer outcomes.
To help raise awareness internally an online
training module on customer vulnerability was
designed and delivered by Money Advice Trust.
The completion of this training is a mandatory
requirement for staff and the increased
awareness and understanding from this training
will influence the Group’s approach to design
solutions for customers. The digital team is
currently working on an online solution, providing
accessibility to as many customers as possible,
irrespective of any impairment they might have.
PROTECTING CUSTOMERS FROM
PENSION SCAMS
The Group is dedicated to protecting its
customers from pension scams. The Group
continues to engage with Regulatory Authorities
and Industry Working Groups on pension
scams and looks at ways to better protect
customers from becoming victims of pension
scams. A dedicated phone line was set up with
The Pension Advisory Service to refer customers
when concerns were raised around wanting
to transfer their pension funds. The Group
continues to raise awareness of scams and
warns its policyholders to remain vigilant
of the evolving methods of fraudsters.
The Group’s Customer Treatment Risk
policy covers risks arising from the design or
management of products, or from the failure
to meet or exceed reasonable customer
expectations, taking account of regulatory
requirements. Customer treatment risks
are aligned to the areas of focus in the
Phoenix Group Customer Strategy.
The Association of British Insurers (‘ABI’) has appointed our Customer
Director Susan McInnes as chair to its Long-Standing Customers
Committee. Created in 2015, the Committee focuses on addressing the
challenges to ensure all long-standing pension products are fit for purpose
for customers and has provided input into the work of the Dormant
Assets Commission, including work to help customers find policies
which have transferred to other companies. The Committee also plays
a critical role in developing the ABI’s overall retirement and savings policy.
“I’m delighted to have the opportunity to help shape the work of
the Long-Standing Customer Committee, as I believe it has the
potential to help the industry address issues affecting older products
and long-standing customers. Phoenix continually looks to improve
customer experience, whilst looking for opportunities to improve
outcomes and I look forward to working with the industry to do so.”
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Stakeholder Engagement
continued
Phoenix has circa
800 suppliers of which
16 are considered the
most Strategic and
Critical Service Providers¹
representing circa
70% of total spend.
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SUPPLY CHAIN MANAGEMENT
Phoenix relies heavily on its Strategic Service
Providers to support the delivery of its corporate
objectives and management actions, whilst
satisfying the outcomes required for all
stakeholder groups. A key part of ensuring this
takes place is managing the Group’s supply
chain in a sustainable and ethical manner.
Sourcing and Procurement at Phoenix is
far broader than the initial evaluation and
selection process in that it ensures that a
beneficial relationship for our key stakeholders
is implemented and managed. The Group
works closely with its partners in order to
closely monitor the operational and financial
performance from Strategic Service Providers
for any indications of instability and steps are
taken where necessary and appropriate to
mitigate risks to Phoenix or its stakeholders.
For Strategic and Critical Service Providers,
Phoenix has a dedicated professional
relationship manager assigned. Their role is to
govern the relationship, measure and monitor
performance and work to continually improve
outcomes for all stakeholders.
The Group’s Sourcing and Procurement
policy sets the minimum operating standards
relating to the management of sourcing and
procurement risk throughout the Group and
forms part of the sourcing and procurement
control framework.
Phoenix is organised so that the Commercial
Partnerships team manage a decentralised
procurement model for low value / low
volume spend, to enable the business to
operate flexibly but within the controls of the
Sourcing and Procurement policy. This has
a robust oversight and governance model,
administered and managed by the Commercial
Partnerships team.
PROMPT PAYMENT CODE
The Group’s culture is to meet its obligations
including paying suppliers promptly. The Group
voluntarily signed the Government’s Prompt
Payment Code in 2012. The Group’s intention
was to show its commitment to supply chain
sustainability and to aid in the transformation
of the culture of late invoice payments in the
business community. As at the end of 2017
c.80% of all invoices presented to the Group
were paid within 40 days of the invoice being
created to allow for invoices to be received
via post. This is actively monitored throughout
the business and the Group is exploring means
to improve on this percentage.
MODERN SLAVERY
Phoenix Group takes active steps to ensure
its supply chain is not engaging in any form
of modern slavery or human trafficking.
In March 2017 a statement was published
on the Group website pursuant to Section
54, Part 6 of the Modern Slavery and Human
Trafficking Act 2015, which has been adopted
by all subsidiaries. The statement details the
policies Phoenix has in place and the ongoing
actions that will be taken to continue to support
the combating of modern slavery and human
trafficking in supply chains.
The Group’s Modern Slavery and
Human Trafficking Statement is available
on the Group’s website:
www.thephoenixgroup.com/mss
ANTI-BRIBERY AND CORRUPTION
In order to ensure that any anti-corruption and
bribery matters or occurrences are effectively
managed, the Group has a number of policies
and practices in operation. The Group’s Anti-
Bribery policy addresses bribery and corruption
risks alongside the Financial Crime policy which
addresses risks such as anti-money laundering
and fraud. Both policies detail the minimum
control standards and risks that are to be
managed to mitigate any potential issues.
Adherence to the Anti Bribery and Financial
Crime policies is managed by the Financial
Crime team via assessments of the minimum
control standards that make up the policies as
well as themed Financial Crime Reviews and
Assurance testing.
Staff are required to complete annual computer-
based training around both financial crime
prevention and adherence with the Code of
Business Ethics and Ethical Conduct. Staff are
also required to complete a Gifts and Hospitality
Register which is overseen and managed by
the Financial Crime team.
The Group has a zero tolerance towards bribery
and corruption in all its forms and adheres to
the 2010 Bribery Act. Service Providers are
advised of and engaged in the zero tolerance
approach to bribery and corruption and are
expected to comply with Phoenix’s minimum
control standards.
No instances or breaches were recorded
during the year.
The Group’s Anti-Bribery Statement
is available on the Group’s website:
www.thephoenixgroup.com/abs
1 A Strategic Service Provider is classified as a supplier who
the Group has made a conscious decision to work closely
with due to the strategic nature of the services they
provide. Critical Supply are service providers where the
nature of the service provision is limited to few suppliers,
and barriers to change are complex.
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Phoenix Group Holdings | Annual Report & Accounts 2017
We are an employer of
choice offering rewarding
careers and opportunities,
promoting physical
and mental wellbeing
in the workplace and
empowering a wholly
inclusive workforce.
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The Group’s Human Resources (‘HR’) policy
defines people risk, which, if unmanaged, could
result in a reduction in earnings or value, through
financial or reputational loss. The minimum
control standards in place enable effective
management around the attraction, recruitment,
development and engagement of staff, whilst
ensuring compliance with any legislation and
external regulatory requirements.
Adherence to this policy is managed by the
Group Human Resources department via
quarterly assessment of the minimum control
standards. There were no material issues raised
during the year.
This section will detail the actions taken and
outcomes achieved across the year.
EMPLOYEE CONSULTATION
In response to the 2016 employee engagement
survey, where 62% of staff (excluding former
Abbey and AXA Wealth employees) answered
positively that they ‘feel safe to speak up
and challenge’, a series of focus groups and
surveys were held. The purpose was to
raise the level of dialogue around Phoenix’s
values and to give greater clarity on associated
working behaviours. Planning for the launch of
the Big Conversation took place towards the
end of 2017, which will provide all employees
with an opportunity to voice their opinions.
The outcomes of staff workshops will provide
a clear behavioural framework aligned to the
values and organisational strategy. This will
then be embedded into the Group’s recruitment,
development and retention programmes.
The Group operates a Whistleblowing policy,
prompting staff to disclose information where
they believe wrongdoing, malpractice or risk
exists across any of Phoenix’s operations.
Employees are encouraged to speak up
about matters that concern them, with
the understanding that confidentiality will
be maintained, and that they will not be
treated inappropriately.
EMPLOYEE SURVEY
88% of employees across Phoenix Group
participated in the annual employee
engagement survey. The 2017 survey results
included responses from former Abbey and
AXA Wealth employees and revealed an
Employee Engagement Index value of 80%,
which compares positively to the Financial
Services benchmark.
EMPLOYEE NETWORKS
The Group values the power of its employee
voice and has several networks in operation.
The ‘Engagement Forum’ is the longest standing
network, which welcomes members from all
functions and levels of seniority. This group is
invited to meet with Phoenix Management team
members on a quarterly basis to share views and
shape future engagement activity across sites.
Phoenix Group Holdings | Annual Report & Accounts 2017
More recently the Group has launched a
‘Professional Women’s Network’, a ‘LGBT
Network’ and a ‘Working Parents’ Network’.
The purpose of each network is to encourage
connections, skills development and provide
a safe place to share common experiences,
issues or challenges. The network groups
meet regularly in work hours.
LEARNING AND DEVELOPMENT
A team of Learning and Development
professionals offer a programme of
development activities which include
leadership development, individual skills
training, online learning and coaching.
As part of the Group’s HR processes, there
is an established succession plan. This tracks
internal succession across all material roles
and enables appropriate assessment of skills
gaps. Internal succession continues to deliver
the Group’s most senior appointments.
The Group also works with external
organisations to provide a wide range of
learning and continual professional development
opportunities including the Chartered
Management Institute and The Institute of
Chartered Accountants in England and Wales.
Relationships with business schools such as
Ashridge and the London Business School and
with The Open University continue to develop
the Group’s most senior talent pipeline.
73% of staff positively noted they have the
‘opportunity for personal development and
growth’ in the 2017 engagement survey.
REWARD
The Group continues to attract, develop
and retain talented staff by offering a
comprehensive range of benefits and
development opportunities. All employees
are paid at least the Living Wage as set by
the Living Wage Foundation.
86% of staff participate in the flexible benefits
scheme, which allows benefits to be selected
that meet personal circumstances. For 2017
buying and selling annual leave remained the
most utilised, followed by childcare vouchers
and insurance related products. For 2018,
private medical insurance cover will be available
to all staff and their partner regardless of their
status within the organisation.
All Group employees participate in an
Annual Incentive Plan and are able to become
shareholders in the Company. Over half of the
staff population are voluntarily participating in
one or more of the share-save or share incentive
plans, benefiting in the Group’s increased
share performance.
Read more about key employee
engagement activities undertaken
during the year on page 24
41
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HEALTH AND SAFETY
The Group operates a Health and Safety policy
which helps the organisation to effectively
manage risks and any adverse effects.
Health and Safety risks that are not properly
managed could lead to a reduction in earnings
and / or value through financial or reputation loss
associated with adverse impacts on the health
and safety of employees, customers and third
parties in the workplace.
All staff are required to complete annual Health
and Safety training which includes a review of
their individual workstation. The Group had no
reportable accidents under the Reporting of
Incidents, Disease and Dangerous Occurrence
Regulations (‘RIDDOR’) during 2017.
Stakeholder Engagement
continued
EMPLOYEE WELLBEING
The Group’s wellbeing programme covers
physical, mental and financial matters, offering
staff and their dependents information and
support across a range of areas. A programme
of wellbeing activity took place during the
year which included onsite health-checks, flu
vaccinations, nutritional information talks and
stress management sessions.
The Group operates an Employee
Assistance Programme which is a service
designed to provide free, independent and
confidential advice on matters affecting an
individual’s wellbeing.
The Group was a sponsor of National Walking
Month 2017, working with Living Streets charity
to create a series of cultural city walks for staff
based at the London office.
94%
of staff are happy to
‘go the extra mile’ at work
87%
of staff believe Phoenix does
a good job of offering tools
and initiatives that help support
their health and wellbeing
Britain’s Healthiest Workplace benchmark
was completed for the fourth consecutive
year, resulting in improved scores. The Group
achieved fourth position from 139 participating
companies in the ‘Healthy Employer’ category,
and second position when compared with only
mid-sized companies.
HUMAN RIGHTS
The Group is committed to ensuring that
human rights are respected and processes
are in place to remove any human rights
issues both internally and externally via
outsourced relationships.
In line with the Equality Act 2010 and in order
to ensure that the Group is aligned to relevant
Articles of the United Nations Universal
Declaration of Human Rights, the Group has
a Dignity at Work policy in place. The policy
covers bullying and harassment of and by
managers, employers, contractors, suppliers,
agency staff and other individuals engaged
with the Group. All staff are required to comply
with the policy and take appropriate measures
to ensure harassment and bullying does not
occur. Adherence to the policy is managed
by the Group Human Resources department
via assessments of the minimum control
standards, which ensure effective resolution
of employee disputes. In addition all staff are
required to complete annual computer based
training in business ethics and ethical conduct.
During the year the Group effectively resolved
all employee disputes and as a result was
involved in no employment tribunals.
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Phoenix launched its Professional Women’s
Network in September 2017. The network’s
vision is to support and inspire women in the
Group to achieve their full potential and help
break down barriers through the development
of their skills and competencies and through
sharing their knowledge and experience.
To date, 1 in 4 women have joined the
network and over 100 employees attended
the launch event.
Phoenix Group is serious about diversity and
inclusion and in 2016 was one of the first
72 companies to sign up to the Government’s
Women in Finance Charter.
In 2018 there will be further coaching,
mentoring and learning opportunities available
to members, including an accelerated
development programme for women.
We contribute to our
local communities –
providing donations,
skills, time and resources
to the cause.
Charity partners of the year
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OF THE YEAR
Now into its fourth year of the six-year
partnership with Midlands Air Ambulance
Charity and London’s Air Ambulance, the
Group is continuing to use this collaboration
to engage staff in fundraising, volunteering
and events for the cause.
Since partnering in 2014 the Group has donated
in excess of £690,000 to the charities.
OTHER CHARITABLE DONATIONS
Through the Group’s ‘Our Community, Your
Choice’ programme staff are able to fundraise
for any UK registered charity, providing the
cause meets the Group’s charity criteria.
The Group does not support any political or
religious causes.
Over £22,000 was donated to other charities
across the year, helping causes from within
the communities in which our employees
are based. Examples include: Birmingham
St Mary’s Hospice, Guide Dogs for the Blind,
Macmillan Cancer Support, Ark Cancer Centre
Charity, Dorset and Somerset Air Ambulance
and Jessie May Trust.
The Group also offers a staff-matched
fundraising scheme whereby staff can
participate in charitable activity in their own
time and request matching of the amount
they raise. Over £25,000 has been donated
across the year.
COMMUNITY INVESTMENT
The Group has worked closely with
36 community partners over the year.
With the assistance of The Money Charity,
Phoenix sponsored 40 financial workshops
in local secondary schools, reaching
1,100 pupils across academic term 2016-2017.
The workshops explained the difference
between credit and interest along with
manageable and unmanageable debt. The main
objective was to get young people thinking
about real-life budgeting and how to make
difficult decisions around prioritisation of money.
The Group was also premier sponsor of the
‘Wythall and Hollywood Fun Run’ which
included a 10km, 5km and 1.5km run through
the heart of Wythall’s community and entered
the site’s grounds as part of the official distance.
VOLUNTEERING
Employees regularly volunteer on either
an individual basis or with their team to
make a difference in their local community.
Employees within the Group are permitted
14 hours per year to support a variety of causes.
61% of staff participated in this year’s
volunteering programme contributing
3,162 hours, an increase of 11%. There has
been a shift in more staff wishing to participate
in skills-based volunteering, offering their time
to be mentors, reading buddies and number
partners at local schools.
At the SunLife operations in Bristol, volunteering
is also a key part of their culture, with 43% of
staff contributing 408 hours across the year to
causes within their local community.
Our Wythall office continues its partnership with Ark Kings Academy
in Kings Norton and sessions were run onsite for all year-11 pupils to
attend GCSE maths revision, as well as a second session focussing
on CV writing, interview skills and social media presence – both
helping pupils prepare for their future. The school launched a new
library during the year, which was designed and supported by
Phoenix, and fully supports the work of the 2017 Vision for Literacy
Business Pledge.
In London the Group supported Draper’s Sixth Form Academy by
offering pupils work experience opportunities within Actuarial and
Group Finance functions. In addition, the Group’s CEO welcomed
maths pupils to a Future Forums event, where they could hear first-
hand what it is like to work for the Group.
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Stakeholder Engagement
continued
Our Corporate
Responsibility programme
supports our commitment
to monitoring and reducing
our environmental footprint.
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Staff actively take an interest in outdoor
environmental-based volunteering projects
and have supported the Canal and River
Trust, Warwickshire Wildlife Trust, London
Wildlife Trust and Bromsgrove District Council
across the year. Onsite at the Wythall office,
a nature walk was launched, highlighting bio-
diversity elements.
INTERNAL PRINT RESOURCE
Reducing print and paper consumption
onsite remained one of the Group’s primary
environmental focuses for 2017. Staff within
Phoenix Group and Life received personalised
dashboards detailing print usage and ratio of
colour print, so they could directly manage
what impact their print habits have on the
wider environment.
With technological advances and greater
availability to online content the Group’s print
and paper consumption is moving in the
right direction.
The Group’s environmental aim is to ‘put
back’ what it takes out. As a financial services
organisation, the Group’s impact on the
environment is minimal when compared with
other industries.
Various staff-led initiatives took place during the
year, focusing largely on internal resource-use,
and the 3 R’s – reduce, re-use and recycle.
The Corporate Responsibility Steering
Committee reviews environmental progress
and agrees activity for future implementation
such as the current investigation into electric
vehicle charging facilities onsite in 2018.
CONSERVATION
The Group has been partners with the Heart
of England Forest since 2013 and now boasts
over 6,000 trees within its own Phoenix
Way Wood. The charity has continued to
provide opportunities for staff to get involved
in woodland management, tree planting and
conservation. Pupils from partner school Ark
Kings Academy were given the opportunity
to plant trees within the wider Heart of
England Forest allowing them to spend time
in the greater outdoors, give back to future
generations and directly help the charity with
its aim of ‘creating the largest broadleaf forest
in the UK’. The SunLife operations in Bristol
are also members of the Woodland Trust.
Employees based in Wythall have been assisting Bromsgrove
District Council in various conservation projects within their
local parklands.
Staff helped thin woodland at Millennium Wood, within
Arrow Valley Country Park, in Redditch and subsequently used
fallen branches to create a natural hedge-way and hibernaculum
to house local wildlife onsite. In addition, at Sanders Park,
Bromsgrove teams assisted with removing Himalayan balsam
from the water-ways, an invasive weed which if left would overly
consume the natural stream habitat. A third team assisted with
removing overgrowth from the water-ways at Lickey End Park,
near Bromsgrove helping to protect the resident water vole.
Volunteering opportunities such as these give staff the
opportunity to team-build, provide networking opportunities
and a chance to boost wellbeing. This volunteering encouraged
healthy exercise whilst taking part in environmentally-focused
activities which will benefit future generations.
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WASTE MANAGEMENT
All core sites continue to divert 100% of its
waste from landfill. The London office which is
shared tenancy achieved two accolades for its
achievements in waste management, waste
minimisation and re-use in the form of the
Green Apple Awards and Clean City Awards
Scheme. Donations of old furniture, carpet tiles
and electrical equipment were distributed to
various community partners in the London and
Wythall areas, reducing the requirement for
waste removal, but adding value by creating a
new lease of life for the items being donated.
In addition, following the city-centre office
move for staff based at SunLife in Bristol, any
unwanted furniture and accessories were
donated to the Julian Trust for the Homeless.
ENVIRONMENTAL REPORTING
This section includes an update on our annual
greenhouse gas emissions. Emissions disclosed
relate to facilities and activities where the
Group has operational control.
Since the acquisitions of AXA Wealth’s
pension and protection business from AXA
UK plc and Abbey Life Assurance Company
Limited, Abbey Life Trustee Services Limited
and Abbey Life Trust Securities Limited from
Deutsche Bank Holdings No. 4 Ltd in late 2016,
the three properties acquired (Winterthur
Way in Basingstoke and 100 Holdenhurst
Way and Marlborough House in Bristol), have
been included under the Group’s operational
control. These three properties have therefore
been included in the Group’s carbon footprint
(absolute GHG emissions) for the 2017 calendar
year. However, as these three properties were
not owned for the whole two-year period that
is used for intensity measurement calculations,
they have been excluded from these metrics
to avoid skewed intensity results.
The emissions reported are based on the
main requirements of the ISO14064 Part 1
and the GHG Protocol Corporate Standard
(revised edition). Data was gathered at
meter level to compile the carbon footprint.
The Government’s 2017 Conversion Factors
for GHG Company Reporting have been used
to convert energy data into carbon dioxide
equivalent (CO2e) emissions.
The Group reports Scope 2 emissions using
the GHG Protocol dual-reporting methodology,
stating two figures to reflect the GHG emissions
from purchased electricity, using both:
– A location-based method that reflects
the average emissions intensity of the UK
electricity grids from which consumption is
drawn; and
– A market-based method that reflects
emissions from electricity specific to each
supply / contract. Currently, the Group has
used residual mix factors in the absence of
contractual instruments.
In 2017 absolute emissions have increased by
18% due to the inclusion of the three ex-AXA
Wealth and Abbey Life acquired properties.
This increase has outweighed the reduction
in the emission factor for consumption of
purchased electricity (Scope 2) and the reduced
consumption at the end of the year due to the
ex-AXA Wealth Bristol office lease expiring on
the 21st December 2017. Approximately 7.7%
of 2017 emissions are estimated as full year
data were not available for all facilities. A sample
of emissions from fuel use for company-owned
transport, backup generation and fugitive
emissions from refrigerants were calculated
and were determined to be non-material to the
overall footprint, so have not been included.
Intensity reduced from 2016 to 2017 due
to a reduction in electricity and natural gas
consumption at the Juxon House and Wythall
offices as well as the reduction in emissions
factors from the UK electricity grid.
GREENHOUSE GAS EMISSIONS
GLOBAL ABSOLUTE GHG EMISSIONS DATA IN TONNES OF CO2e
2017
2016
Emissions, tonnes of CO2e, from:
(location-based)
(market-based)
(location-based)
Combustion of fuel and operation of facilities
(Scope 1)
Electricity, heat, steam and cooling purchased
for own use (Scope 2)
Total Carbon Footprint (Scopes 1 + 2)
1,203
1,203
2,754
3,957
3,119
4,322
1,078
2,286
3,364
PHOENIX GROUP’S CHOSEN INTENSITY MEASUREMENT1
2017
2016
(location-based)
(location-based)
Emissions reported above on a per floor area intensity
64 kg CO2e/m2
81 kg CO2e/m2
Emissions reported above on a per full-time equivalent
employee (FTE) intensity
3.5 tonnes
CO2e/FTE
4.3 tonnes
CO2e/FTE
1 Our intensity measurement calculations exclude former AXA Wealth and Abbey Life subsidiaries to avoid skewed intensity
results over the two-year period.
Go online for the Group’s full Corporate and Social Responsibility Report
www.thephoenixgroup.com/CRreport2017
To download a copy of the Group’s complete Economic, Social and Governance measures, please
visit the Corporate Responsibility section of the Group website. www.thephoenixgroup.com/esg
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Phoenix Group Holdings | Annual Report & Accounts 2017
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Stakeholder Engagement
continued
We value an active
dialogue with the Group’s
financial audiences
including institutional
investors, private investors,
buy and sell-side analysts
and prospective investors.
Phoenix therefore conducts
a comprehensive investor
relations programme co-
ordinating the interaction
with these stakeholders.
MEETINGS WITH INSTITUTIONAL
EQUITY INVESTORS
Throughout the year members of the
Executive Committee and the Investor
Relations department held meetings with
investors to provide updates on the Group’s
strategy and operations. This involved a total
of 23 shareholder roadshows conducted
in the UK, Continental Europe and the US.
The Investor Relations department, together
with the Executive Committee thus met
with 211 investors, holding circa 72% of the
Group’s outstanding share capital.
The Chairman and Non-Executive Directors
are available for investor meetings to discuss
subjects such as strategy, corporate governance
and Director’s remuneration as required.
RESULTS PRESENTATIONS AND
INVESTOR DAYS
Full year and interim results were presented
to analysts and investors by the Group.
The presentations were webcast live on
Phoenix’s website and presentation materials
were also made available.
Phoenix held an Investor Day on 14 June in
London with presentations focused on the
improvement of the Phoenix customer journey,
the Group’s integration process, Solvency II
and the Group’s plans to examine selective
acquisitions in the BPA market. The event
also provided attendees with the opportunity
to meet with management. Investor day
presentations are filmed and the video as
well as the presentation materials and transcript
are made available on the Group’s website.
CONFERENCES
Conferences enable the Group to meet with a
significant number of investors and at the same
time are important platforms for presenting
on Phoenix’s investment proposition. This year,
Phoenix attended seven conferences in the
UK and one in the US, including conferences
organised by Bank of America Merrill Lynch,
Barclays, Berenberg, J.P. Morgan Cazenove
and Morgan Stanley.
ANALYSTS AND EQUITY SALES FORCES
Phoenix maintains an active dialogue with
its equity and debt research analysts who,
in addition to results presentations, are
invited to attend investor events such as the
Investor Day. The Executive Directors also held
seven presentations to the sales force teams
at major investment banks to promote the
Phoenix investment case.
DEBT INVESTORS
The debt investor relations programme
is managed by the Investor Relations
department in collaboration with the Group
Treasury department.
Senior management conducted eight deal and
non-deal related debt investor roadshows in
the UK, Continental Europe and Asia, meeting
circa 140 debt investors overall. In addition, the
team held a non-deal group lunch in London
on 2 October where Phoenix presented on its
credit story and provided debt investors with
the opportunity to meet with management.
CREDIT RATING AGENCIES AND BANKS
Phoenix’s life companies and outstanding
bonds have credit ratings by Fitch Ratings.
The Group meets with the rating agency at
least once per year for the annual ratings review.
The Group Treasury Team and management
last provided Fitch with an update in June 2017.
The Group Treasury department and senior
management also keep a constant dialogue
with the Group’s relationship banks.
PRIVATE SHAREHOLDERS
Private shareholders are encouraged to engage
with the Group through the Investor Relations
department and Company Secretariat.
ANNUAL GENERAL MEETING (‘AGM’)
The Group uses its AGM as an opportunity
to communicate with shareholders.
Business to be discussed at the meeting is
notified to shareholders in advance through
the Notice of Meeting and comprises topics
such as the annual election of Directors,
the appointment of the Auditor and the
dividend declaration.
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In May of this year, the Group engaged
HSBC to undertake an independent, in-
depth shareholder consultation focused
particularly on investor attitudes toward
management actions, balance sheet
strength as well as M&A and financing of
acquisitions. HSBC spoke to 14 institutions
through face to face and telephone
interviews between May to June.
The results disclosed to the Group in July
showed that there was a high degree of
confidence in management as well as broad
support for the Group’s M&A strategy.
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Phoenix Group Holdings | Annual Report & Accounts 2017
In this section
IN THIS SECTION
Chairman’s Introduction
Board Structure
Board of Directors
Executive Management Team
Corporate Governance Report
Directors’ Remuneration Report
Directors’ Report
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I am also pleased with our increasing gender
diversity, such that our independent Non-
Executive Directors are anticipated to be
majority female from our May 2018 AGM.
We are also giving considerable attention to
increasing the proportion of female senior
executives. Please see pages 24 and 42 for
details of the initiatives being undertaken.
Our most recent Board Evaluation Review,
undertaken towards the end of 2017 under the
external facilitation of Equity Communications
concluded that we have a ‘highly committed
Board with an impressive and carefully
selected range of skills and experience.’
Further details are contained in our Corporate
Governance Report.
SHAREHOLDERS
As ever, I am grateful for the strong support of
our shareholders. At our May 2017 AGM, all
20 resolutions were passed with a majority of
at least 95% of votes cast for each resolution.
UK CORPORATE GOVERNANCE CODE
As detailed in the Corporate Governance Report
on pages 53 to 62, we complied in 2017 with all
the provisions of the UK Corporate Governance
Code (‘the Code’), such that in the last five
years we have had only one matter of non-
compliance with the Code.
The following sections provide more detail on
our Board of Directors, Executive Management
team, operation of governance and
remuneration practices as follows:
– Board and committee structure;
– Board of Directors;
– Executive Management Team;
– Corporate Governance Report;
– Directors’ Remuneration Report; and
– Directors’ Report.
Chairman’s Introduction
BOARD OF DIRECTORS
I would like to start my introduction to this
Governance section by commenting on
the renewal of our Board membership over
the last 18 months, which has focused on the
skills required to drive the Group forward in
its M&A strategy and generating value for our
shareholders and policyholders.
Our recent Board appointees, who have a
strong mix of experience and skills gained at
senior industry level (please see biographies
on pages 50 to 51 for further information), are:
– Wendy Mayall (appointed September 2016) –
Asset management;
– John Pollock (appointed September
2016) – Life insurance and pensions,
customer, FTSE 100 financial services
board experience;
– Nicholas Shott (appointed September 2016) –
M&A, corporate finance;
– Karen Green (appointed July 2017) –
Insurance, M&A, corporate finance; and
– Belinda Richards (appointed October
2017) – Life insurance and pensions, M&A
integration, FTSE 100 financial services
board experience.
“Our Board is
committed to keeping
strong governance
at the heart of our
business, providing
robust protection
for our current and
future shareholders
and customers.”
HENRY STAUNTON
CHAIRMAN
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The appointments in 2017 responded to a Board
skills audit we undertook at the start of 2017,
which took account of anticipated retirements
from our Board, and followed a thorough
recruitment process. Isabel Hudson and David
Woods left our Board at the May 2017 AGM,
both after over seven years of sterling service.
Our Senior Independent Director, Ian Cormack,
will retire from the Board at the AGM in
May 2018. Ian has been on the Board since
September 2009 and prior to that from 2005
was on the Pearl Group Board when Pearl
acquired Resolution in 2008 to form what is
now the Phoenix Group. He has been the
Senior Independent Director since October
2013 and Chairman of the Remuneration
Committee from 2010 until the 2017 AGM.
During his tenure, Ian’s logical approach, huge
financial services experience and strategic
expertise have been central to the success of
the Board and the Group. I am very grateful to
him for his support to me since my appointment
as Chairman from September 2015.
The Board has selected Alastair Barbour to
succeed Ian Cormack as Senior Independent
Director. Alastair has chaired our Audit
Committee since his appointment to the Board
in 2013 and brings vast experience and business
acumen to the role.
I am very pleased that our recruitment has set
our Board up to continue to successfully drive
the Group forward. It is our intention that the
Board will, from our May 2018 AGM, comprise
of ten directors, which for several years has been
considered by the Board as its optimum number.
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Phoenix Group Holdings | Annual Report & Accounts 2017
Board Structure
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.
AUDIT
COMMITTEE
Alastair Barbour
(Chair)
Karen Green
John Pollock
Kory Sorenson
RISK
COMMITTEE
John Pollock
(Chair)
Alastair Barbour
Wendy Mayall
Belinda Richards
Financial Reporting
Internal Controls
External Audit
Internal Audit
Risk Appetite and
high-level Risk Matters
The Group’s Risk
Management
Framework
PHOENIX GROUP
HOLDINGS BOARD
Henry Staunton
(Chair)
Ian Cormack – SID
Clive Bannister
James McConville
Alastair Barbour
Karen Green
Wendy Mayall
John Pollock
Belinda Richards
Nicholas Shott
Kory Sorenson
Group Strategy
Major Transactions
Group Budget
Group Risk Appetite
Performance
Monitoring
External/Shareholder
Reporting
External Debt
NOMINATION
COMMITTEE
REMUNERATION
COMMITTEE
Henry Staunton
(Chair)
Ian Cormack
Alastair Barbour
Nicholas Shott
Kory Sorenson
(Chair)
Karen Green
Nicholas Shott
Board Appointments
Senior Executive
Appointments
Diversity and Inclusion
Board and
Senior Executive
Succession Planning
Group Remuneration
Framework
Executive Director
Remuneration
Employee Share
Schemes
Phoenix Group Holdings | Annual Report & Accounts 2017
49
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Board of Directors
The Group is governed by our Board of Directors.
Biographical details of all Directors are shown below.
HENRY STAUNTON
CHAIRMAN
COMMITTEE MEMBERSHIP
Nomination Committee (Chairman)
APPOINTED TO THE BOARD
1 September 2015
EXPERIENCE
Henry Staunton was appointed Chairman of the
Board of Directors with effect from 1 September
2015. Mr Staunton is Non-Executive Chairman of
WH Smith plc, the leading FTSE 250 retail group, and a
Non-Executive Director of Capital & Counties Properties
plc. From 2004 until 2013, Mr 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. He was also
a Non-Executive Director of Ashtead Group from 1997
to 2004 including as Chairman from 2001. 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.
CLIVE BANNISTER
GROUP CHIEF EXECUTIVE OFFICER
APPOINTED TO THE BOARD
28 March 2011
JAMES MCCONVILLE
GROUP FINANCE DIRECTOR
APPOINTED TO THE BOARD
28 June 2012
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.
EXPERIENCE
Between April 2010 and December 2011, Mr McConville
was Chief Finance 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 a Non-Executive Director.
Mr McConville qualified as a Chartered Accountant
whilst at Coopers and Lybrand.
ALASTAIR BARBOUR
INDEPENDENT NON-EXECUTIVE DIRECTOR
IAN CORMACK
SENIOR INDEPENDENT DIRECTOR
COMMITTEE MEMBERSHIP
Audit Committee (Chairman), Nomination Committee,
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 insurance 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 and Liontrust Asset Management
plc (both 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 group listed on the New York Stock Exchange
and in Bermuda.
COMMITTEE MEMBERSHIP
Nomination Committee
APPOINTED TO THE BOARD
2 September 2009
EXPERIENCE
Ian Cormack was appointed to the Board of Directors
of the Company on 2 September 2009 and was
appointed Senior Independent Director on 1 October
2013. Mr Cormack is Non-Executive Chairman of Maven
Income & Growth VCT 4 plc and a Non-Executive
Director of Just Group plc and Hastings Group 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 and
UK Country Head.
50
Phoenix Group Holdings | Annual Report & Accounts 2017
KAREN GREEN
INDEPENDENT NON-EXECUTIVE DIRECTOR
WENDY MAYALL
INDEPENDENT NON-EXECUTIVE DIRECTOR
JOHN POLLOCK
INDEPENDENT NON-EXECUTIVE DIRECTOR
COMMITTEE MEMBERSHIP
Audit Committee, Remuneration Committee
COMMITTEE MEMBERSHIP
Risk Committee
COMMITTEE MEMBERSHIP
Risk Committee (Chairman), Audit Committee
APPOINTED TO THE BOARD
1 July 2017
APPOINTED TO THE BOARD
1 September 2016
APPOINTED TO THE BOARD
1 September 2016
EXPERIENCE
Karen Green is the former Chief Executive of Aspen
UK, which comprised the UK insurance companies
of the global US-listed insurer and reinsurer, Aspen
Insurance Holdings and was a member of the Aspen
Group Executive Committee for 12 years. She also held
a number of other senior positions including as Group
Head of Corporate Development, Strategy, and Office
of the Group CEO. She remains Deputy Chairman of
Aspen Managing Agency Limited, which conducts
Aspen’s interests at Lloyd’s of London and continues
to act for the Aspen Group on a wide range of corporate
development activities.
Prior to that, she held various senior private equity
and corporate finance roles from 1997 to 2005 at
GE Capital and then MMC Capital, gaining substantial
M&A experience, having worked previously at Baring
Brothers and Schroders. Ms Green is a Council Member
of Lloyd’s of London. She is also a Vice President of
the Insurance Institute of London.
EXPERIENCE
Wendy Mayall has over 30 years of asset management
experience, including as Group Chief Investment Officer
and later consultant at Liverpool Victoria from 2012 to
2015, having previously been Chief Investment Officer
for Unilever’s UK pension fund from 1996 to 2011 and
holding management responsibility for Unilever’s pension
funds globally. From 2006 to 2009, Mrs Mayall was the
Chair of the Investment Committee of the Mineworkers
Pension Scheme, a British government appointment to
one of the largest government backed pension schemes
in the UK. Mrs Mayall is a Non-Executive Director of
Aberdeen Global Funds (Luxembourg) and Old Mutual
Wealth Oversight Council. She is also the Senior
Independent Director and Audit Committee Chair of
Fidelity Investments Life Insurance Company and Chair
of the Funding Committee for TPT Retirement Solutions.
Limited and Chair of the Funding Committee for TPT
Retirement Solutions.
EXPERIENCE
John Pollock had a career in life assurance at the
Legal & General Group from 1980 to 2015, including
as an Executive Director of Legal & General Group plc
from 2003 to 2015. Mr Pollock held numerous senior
roles, gaining wide strategic and technical experience,
finally as Chief Executive Officer of LGAS (L&G
Assurance Society), one of Legal and Generals’ three
primary business units. Prior to Mr Pollock’s retirement
from Legal and General in 2015, he held positions as
Deputy Chair of the FCA Practitioner Panel, Chairman
of investment platform Cofunds, and as a Non-Executive
Director of the Cala Homes Group.
BELINDA RICHARDS
INDEPENDENT NON-EXECUTIVE DIRECTOR
NICHOLAS SHOTT
INDEPENDENT NON-EXECUTIVE DIRECTOR
KORY SORENSON
INDEPENDENT NON-EXECUTIVE DIRECTOR
COMMITTEE MEMBERSHIP
Risk Committee
APPOINTED TO THE BOARD
1 October 2017
COMMITTEE MEMBERSHIP
Nomination Committee, Remuneration Committee
COMMITTEE MEMBERSHIP
Remuneration Committee (Chair), Audit Committee
APPOINTED TO THE BOARD
1 September 2016
APPOINTED TO THE BOARD
1 July 2014
EXPERIENCE
Belinda Richards has held senior executive positions
at KPMG, EY, and latterly Deloitte from 2000 to 2010
where she was a senior corporate finance Partner and
the Global Head of Merger Integration and Separation
Advisory Services. She is an experienced Non-Executive
Director, currently on the Boards of WM Morrison
Supermarkets plc, The Monks Investment Trust plc and
Schroder Japan Growth Fund plc. Previously, she has
also been on the Boards of Aviva UK Life & Pensions,
Grainger plc and Balfour Beatty plc.
EXPERIENCE
Nicholas Shott is an investment banker, who has been
European Vice Chairman of Lazard since 2007 and
Head of UK Investment Banking at Lazard since 2009.
Mr Shott joined Lazard in 1991 and became a partner
in 1997. He is also a Non-Executive Director on the
Board of the Home Office.
EXPERIENCE
Kory Sorenson is currently a Non-Executive Director and
Chairman of the Audit Committee of SCOR SE, and a
Non-Executive Director of Pernod Ricard SA, a member
of the Supervisory Board of Uniqa Insurance Group AG,
a member of Supervisory Board of the privately-owned
Bank Gutmann AG and Non-Executive Director of
Aviva Insurance Limited (from which Ms Sorenson has
resigned with effect from 31 March 2018). Ms Sorenson
has over 25 years of experience in the financial services
sector, most of which has been focused on insurance and
banking. She was Managing Director, Head of Insurance
Capital Markets of Barclays Capital and held senior
positions in the financial institutions divisions of Credit
Suisse, Lehman Brothers and Morgan Stanley. She began
her career in the finance department of Total SA.
Phoenix Group Holdings | Annual Report & Accounts 2017
51
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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
FIONA CLUTTERBUCK
HEAD OF STRATEGY,
CORPORATE DEVELOPMENT
AND COMMUNICATIONS
STEPHEN JEFFORD
GROUP HUMAN
RESOURCES DIRECTOR
Roles and responsibilities
Roles and responsibilities
Roles and responsibilities
Roles and responsibilities
– Leads the development of the
Group’s strategy for agreement
by the Board
– Develops and delivers the
Group’s financial business plan
in line with strategy
– Leads and directs the Group’s
– Ensures the Group’s finances
businesses in delivery of
the Group’s strategy and
business plan
– Leads the Group to safeguard
returns for policyholders and
grow shareholder value
– Embeds a risk-conscious Group
culture which recognises
policyholder obligations in terms
of service and security
– Manages the Group’s key
external stakeholders.
and capital are managed
and controlled
– Develops and delivers the
Group’s debt capital strategy
and other treasury matters
– Ensures the Group has effective
processes in place to enable all
reporting obligations to be met
– Supports the Group Chief
Executive Officer in managing
the Group’s key external
stakeholders
– Enhances shareholder
value through clear, rigorous
assessment of business
opportunities.
– Supports the Group Chief
Executive Officer in the
formulation of the strategy
and the business planning
for the Group
– Leads implementation of the
Group’s strategy as regards
any potential acquisitions
or disposals
– Leads external Group
Communications in liaison with
the Group Finance Director and
Head of Investor Relations.
– Leads the implementation of
the Group’s employee strategy
in order to recruit, retain,
motivate and develop high
quality employees
– Provides guidance and support
on all HR matters to the Group
Chief Executive Officer,
ExCo and the Group Board
and Remuneration Committee
– Delivers HR services to
the Group.
ANDY MOSS
CHIEF EXECUTIVE, PHOENIX LIFE
WAYNE SNOW
GROUP CHIEF RISK OFFICER
SIMON TRUE
GROUP CHIEF ACTUARY
QUENTIN ZENTNER
GENERAL COUNSEL
Roles and responsibilities
Roles and responsibilities
Roles and responsibilities
Roles and responsibilities
– Leads the development and
delivery of the Phoenix Life
business strategy, including
the continued integration of
life businesses
– Leads the Phoenix Life business
to optimise outcomes for
customers in terms of both
value and security
– Ensures Phoenix Life deploys
capital efficiently and effectively,
with due regard to regulatory
requirements, the risk universe
and strategy.
– Leads the Group’s risk
management function,
embracing changes in best
practice and regulation including
Solvency II
– Oversees and manages the
Group’s relationship with the
FCA and PRA
– Supports the Group Board Risk
Committee in the oversight of
the Group’s risk framework,
in line with risk strategy
and appetite.
– Ensures capital is managed
efficiently across the Group
– Manages the Group’s
solvency position
– Leads the development of the
Group’s investment strategy
– Identifies and delivers
opportunities to enhance
shareholder value across
the Group.
– Leads provision of legal advice
to the Group Board, other Group
company Boards, ExCo and
senior management
– Oversees and co-ordinates
maintenance of, and adherence
to, appropriate corporate
governance procedures across
the Group
– Designs and implements
a framework to manage
legal risk within the Group,
including compliance by Group
companies and staff with
relevant legal obligations.
52
Phoenix Group Holdings | Annual Report & Accounts 2017
Corporate Governance Report
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 2017 with the provisions set down in the Code.
THE BOARD
The Board comprises the Non-Executive
Chairman, the Group Chief Executive
Officer, the Group Finance Director and
eight independent Non-Executive Directors.
Biographical details of all Directors are
provided on pages 50 to 51.
The Board considers that the following
Directors are independent: Alastair Barbour,
Ian Cormack, Karen Green, Wendy Mayall,
John Pollock, Belinda Richards, Nicholas
Shott and Kory Sorenson. The Board has
considered the criteria proposed by the
Code in assessing the independence of
the Directors.
THE CHAIRMAN, GROUP
CHIEF EXECUTIVE OFFICER AND
SENIOR INDEPENDENT DIRECTOR
Henry Staunton is Chairman of the Board of
Directors of the Company, having joined the
Board as Chairman 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 50.
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, which occurred
in November 2017.
Evolution since January 2016
A
B
GROUP BOARD
Projected post-
May 2018 AGM
C
A
A
B
B
C
C
P
GROUP BOARD
Projected post
May 2018 AGM
December
2017
January
2016
A Chairman
B Executive Directors
C Independent
Non-Executive Directors
10%
20%
70%
9% 10%
18%
73%
20%
70%
A
GROUP BOARD
Projected post-
May 2018 AGM
B
A
A
B
B
% FEMALEM
CT
DIRECTORS
A Female
B Male
Projected post
May 2018 AGM
40%
60%
December
2017
January
2016
36%
64%
20%
80%
Market Cap
FTSE position
December 2017
January 2016
£3.1bn
£2.1bn
137
164
AGM votes in favour of all resolutions
May 2017 – 95% May 2016 – 91%
UK Corporate Governance Code
Fully compliant
in 2017
Fully compliant
in 2016
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Phoenix Group Holdings | Annual Report & Accounts 2017
53
Corporate Governance Report
continued
BOARD SUCCESSION PLANNING
AND CHANGES
The Board undertakes regular reviews of
executive and non-executive succession
planning, as it did on several occasions in
2017, to ensure that robust plans are in place.
Succession planning for executive directors and
other senior management takes consideration
of both external and internal markets.
Please refer to the Chairman’s Introduction on
page 48 for details of how the Board succession
planning has worked over the last two years.
BOARD EFFECTIVENESS AND INDUCTION
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 2017.
The process was externally facilitated by Equity
Communications, who have no connection
with the Group. The process involved individual
in-depth interviews between the evaluators
and each Director and also the Company
Secretary and Head of Strategy, who is a
regular Board attendee. The interviews covered
various aspects of Board, Committee and
Director effectiveness, concluding in a Board
report which was discussed by the Board in
November 2017.
Specific key focus areas covered by the review
were Performance & Strategy, Board Dynamics
& Structure, and Succession. The review
recommended a set of actions which will be
taken forward and their progress reviewed by
the Board.
All actions related to matters of Board process
to support the Board’s focus of successfully
taking forward the Group’s strategy.
– In terms of Board composition, the review
stated: “You all think that the Board is greatly
improved in terms of composition, and has
the right balance in terms of experience
and skills to be an effective Board. It is clear
that Board members are highly committed
and actively enjoy being part of this group
of Directors.”
– In terms of skills and experience, the review
stated: “The Board of Phoenix Group
Holdings is a good example of a solidly
reliable, highly committed Board with an
impressive and carefully selected range of
skills and experience.”
– In terms of challenge and culture for the
future, the review stated: “It is clear that your
Board members feel that, given the scale of
challenge you have faced in the not-so-distant
past, this Board with its strong culture and
healthy dynamic is well placed to take PGH
to its next stage.”
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.
All Directors receive a tailored induction on
joining the Board in accordance with a process
approved by the Board. The new Non-Executive
Directors in 2017, Karen Green and Belinda
Richards, undertook a comprehensive induction,
including detailed strategic and operational
briefings and information, before and following
their appointments in July and October 2017
respectively. Their comments on the induction
process are shown below.
Our two new Directors,
who joined the
Board in 2017, share
their insights on
their induction.
Karen
Green
WHAT DID YOUR
INDUCTION INVOLVE?
WHAT WERE YOUR
OVERALL IMPRESSIONS?
The induction comprised a good mix of formal
introductory sessions with the Executive
team and other key Group function holders
supplemented by less formal sessions and
meetings at the Group’s principal operating
company in Wythall. Through this, I was able
to get a very good feel for how the Group
thinks about strategy, the risk management
framework and capital/solvency considerations
which underpin it at the centre, before spending
a day with the life company management team
in Wythall and seeing how this is executed
in practice.
The induction process was very well structured
and thorough. I experienced an open culture
and a general willingness to arrange follow up
sessions where I wanted to explore aspects
of the business further. This is reflective of the
culture of the Group as a whole.
Phoenix Group Holdings | Annual Report & Accounts 2017
Belinda
Richards
I spent three days meeting senior managers
at the Group’s head office in London in order
to understand the structure and operation of
the Group functions and the risk and solvency
model. Following this I spent a full day at
the life company in Wythall, meeting the
management team and understanding more
about the business operations.
I thought that the induction process at
Phoenix was excellent. I have spent nearly
eight years as a Non Exec in the UK Life
and Pensions sector and the induction truly
enabled me to get a good grasp of Phoenix’s
approach. The management team has been
very open and helpful, and I look forward to
spending more time in the business over the
coming year.
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OPERATION OF THE BOARD
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:
– Group strategy and business plans;
– Major acquisitions, investments and
capital expenditure;
– Financial reporting and controls;
– Dividend policy;
– Capital structure;
– The constitution of Board committees;
– Appointments to the Board and
Board committees;
– Senior executive appointments; and
– Key Group policies.
BOARD ALLOCATION OF AGENDA TIME
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 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 2018, 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 with other FTSE 250 companies.
The remuneration of the Directors is shown
in the Directors’ Remuneration Report on
pages 63 to 87. 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 Ian Cormack, who is standing
down from the Board) will submit themselves
for election or re-election at the Company’s
AGM on 2 May 2018.
The Nomination Committee has confirmed it’s
absolute satisfaction with the time and overall
commitment given to Phoenix by all Directors.
The Board met seven times during 2017
and is scheduled to meet seven times in
2018 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 2017.
G
A
F
E
D
AGENDA
TIME
A 30% CEO Report
B 30% Strategy and Planning
C 15% CFO/MI Report
D 10% Financial Reporting
E 5% Reports from Chairs of Board,
Committees and Subsidiary Boards
Strategy, performance, governance and regulatory overview
Strategic and Operational planning; consideration of corporate transactions
Monitoring performance against objectives
Approval of external financial reporting
Audit, Nomination, Remuneration and Risk Committee activity
B
C
F 5% Board and Board Committee Changes and Issues
G 5% Other Matters
Appointments, succession and performance
BOARD/COMMITTEE ATTENDANCE 2017
Board meetings
Maximum
Actual
Maximum
Audit
Actual
Risk
Nomination
Remuneration
Maximum
Actual
Maximum
Actual
Maximum
Actual
Chairman
Henry Staunton
Executive Directors
Clive Bannister (Group CEO)
James McConville (Group FD)
Non-Executive Directors
Alastair Barbour
Ian Cormack3
Karen Green1
Isobel Hudson2
Wendy Mayall
John Pollock
Belinda Richards1
Nicholas Shott
Kory Sorenson
David Woods2
7
7
7
7
7
4
3
7
7
2
7
7
3
7
7
7
7
5
4
3
7
7
2
7
7
3
7
2
3
4
7
3
7
2
3
4
7
3
6
6
6
2
3
5
6
6
1
3
1 Karen Green and Belinda Richards were appointed to the Board on 1 July and 1 October 2017 respectively.
2
3
Isabel Hudson and David Woods resigned from the Board on 11 May 2017.
Ian Cormack did not attend two Board Meetings due to other unavoidable commitments.
Phoenix Group Holdings | Annual Report & Accounts 2017
6
6
6
6
3
3
5
4
3
3
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The composition of the Audit Committee is in
accordance with the requirements of the Code
and also with DTR 7.1.1AR that the majority
of members should be Independent Non-
Executive Directors, that at least one member
of the committee has recent and relevant
financial experience and the members of the
Committee as a whole have competence
relevant to the sector in which the Company
is operating. The Audit Committee met seven
times during 2017. 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.
Corporate Governance Report
Board Committees
AUDIT
COMMITTEE
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.
“As we pursue our
acquisition strategy,
the Audit Committee
will continue to
focus on ensuring
that robust controls
are both in place
and are applied
across the Group.”
ALASTAIR BARBOUR
AUDIT COMMITTEE CHAIRMAN
OTHER CURRENT MEMBERS
Karen Green
John Pollock
Kory Sorenson
Changes during 2017:
– John Pollock was appointed to the Committee
with effect from 11 May 2017.
– Karen Green was appointed to the Committee
with effect from 1 July 2017.
– Isabel Hudson was a member of the Committee
up to 11 May 2017.
– David Woods was a member of the Committee
up to 11 May 2017.
56
Phoenix Group Holdings | Annual Report & Accounts 2017
AUDIT COMMITTEE’S ROLE
– Receiving and reviewing the Annual Report
and Accounts and other financial results,
statements and disclosures, although the
ultimate responsibility for these matters
remains with the Board.
– Monitoring the overall integrity of the financial
reporting by the Company and its subsidiaries
and the effectiveness of the Group’s
internal controls.
– 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.
– Responsible for making recommendations to
the Board on the appointment of the external
auditors and their terms of engagement
including approval of external auditor fees
and non-audit services 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.
– Considering and approving the remit of
the Internal Audit Function and reviewing
its effectiveness.
– 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. This has been
enhanced through the occasional attendance
at the Audit Committee by the Phoenix Life
Audit Committee Chairman.
AUDIT COMMITTEE’S PRINCIPAL
ACTIVITIES DURING 2017
EXTERNAL REPORTING AND CONTROLS
– Reviewed the Company’s 2016 Annual
Report and Accounts and 2017 Interim
Financial 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.
– Considered and addressed a number of
significant matters in relation to the IFRS
consolidated financial statements for 2016
(annual), 2017 (interim) and 2017 (annual)
as summarised in the table on page 59.
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
pages 95 to 97.
– 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, the Group’s ongoing viability
and in support of dividend payments.
– Reviewed the Line 1 risk and controls report
from management, the annual internal
controls effectiveness report (and the half
year update) prior to its consideration by
the Board and received reports regarding
consequential actions; and received a
dedicated briefing on acquisition accounting
and continued consideration of the future
impact of IFRS17.
– Reviewed reports from Internal Audit on the
control environment in the Group’s outsource
service providers and on the effectiveness of
the internal audit work undertaken within the
outsource service providers, noting that this
was addressed in more detail at the Phoenix
Life Audit Committee.
– Considered and noted the independence of
KPMG in relation to post-acquisition audit
work undertaken with regard to Abbey Life
for the year ended 31 December 2016.
EXTERNAL AUDIT
– Undertook a review of the effectiveness,
engagement and remuneration of the
current external auditors. This culminated in
a recommendation to re-appoint EY, which
was approved by the Board and subsequently
approved by shareholders at the May 2017
AGM – see ‘Assessment of the effectiveness
of the external audit process’ and ‘Auditor’s
Appointment’ on page 58.
– Reviewed and monitored the independence
of the external auditors including their
provision of non-audit services and fees– see
Auditor’s Independence and External Auditor
Policy on page 58.
INTERNAL AUDIT
– Assessed the effectiveness of Internal Audit,
noting the positive responses received
from Management.
– Approved the Group Internal Audit
Proposition for 2018 and the continuation of
the move from a static policy approach to a
plan more focused on thematic audits based
on emerging risks and topical matters.
– 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.
– Reviewed the control environment
supporting the hedging processes
surrounding the EU referendum.
– Reviewed the internal audit control
environment opinion which included Internal
Audit’s view of the risk management
framework across the Group.
AUDIT COMMITTEE’S PERFORMANCE
– The Committee’s performance was
reviewed as part of the overall Board
Evaluation Review by external facilitators,
Equity Communications who stated
that the Committee was “seen as high-
performance.”
GENERAL
– Reviewed arrangements for whistleblowing
(and whistleblowing activity) should an
employee wish to raise concerns, in
confidence, about any possible improprieties;
and approved an updated whistleblowing
policy which complied with the FCA
and PRA’s whistleblowing rules and the
appointment of the Phoenix Life Audit
Committee Chairman as Whistleblowing
Champion under the Senior Insurance
Managers Regime.
– Reviewed and approved updates to
the Group Tax Policy, Group External
Auditor Policy and the Group Liquidity &
Funding Policy.
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Corporate Governance Report
Board Committees continued
AUDITOR’S APPOINTMENT
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 undertook a competitive
audit tender in 2016 to take effect for the 2017
statutory audit, which it considered to be in the
best interests of its shareholders in light of the
length of association with the current auditors.
The tender process in 2016 was overseen by
the Audit Committee. The Audit Committee
concluded, and recommended to the Board,
that the incumbent audit firm, EY, should be
retained as the external auditor of the Group
from 2017 and supported the recommendation
for the re-appointment of the external auditor
for the 2017 statutory audit. EY also became
auditor for Abbey Life for the first time in 2017.
The current audit partner is Ed Jervis, who
has held that role from the 2014 statutory
audit and will rotate off that role after the 2018
statutory audit.
ASSESSMENT OF THE EFFECTIVENESS
OF THE EXTERNAL AUDIT PROCESS
The effectiveness of the external audit process
was assessed through the completion of a
questionnaire by the key divisions and Group
functions within Phoenix Group covering
EY’s performance during the 2016 financial
reporting cycle.
AUDITOR’S INDEPENDENCE AND
EXTERNAL AUDITOR POLICY
The Company has an external auditor policy
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 engagement of EY to perform any
non-audit service is subject to a process of pre-
approval by the Audit Committee. Furthermore,
the Group’s external auditor policy prescribes
a limit for fees associated with non-audit
services of 70% of the average statutory audit
fee for the three preceding years. This aligns
with requirements introduced by the EU Audit
Directive and Regulations in 2016. In 2017,
total fees of £6 million were paid to EY, of
this amount £4.2 million related to statutory
audit fees of the parent and its subsidiaries,
with a further £0.9 million incurred in relation
to services provided pursuant to legal or
regulatory requirements. The remaining fees of
£0.9 million are classified as non-audit services
under the EU Directive and Regulations, and
give rise to a ratio of 22% non-audit to audit
fees in 2017.
The Audit Committee is satisfied that the non-
audit services performed during 2017 have not
impaired the independence of EY in its role as
external auditor. Further information on non-
audit fees is provided in Auditor’s Remuneration
in Notes to the IFRS Consolidated Financial
Statements on page 119.
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Phoenix Group Holdings | Annual Report & Accounts 2017
SIGNIFICANT MATTERS CONSIDERED BY THE AUDIT COMMITTEE IN RELATION TO THE FINANCIAL STATEMENTS
Significant matters in relation to the
2017 IFRS financial statements
How these issues were addressed
Review of the actuarial valuation
process, to include the setting
of actuarial assumptions
and methodologies, and the
robustness of actuarial data
– 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, with focus on longevity, persistency and expenses,
prior to their approval.
– 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.
– 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.
– 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.
– 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.
– The valuation information was then presented for oversight review by the Audit Committee who considered
and confirmed the appropriateness of the basis of valuation.
Valuation of complex and illiquid
financial assets
Acquisition Accounting
– The Audit Committee considered the impact of the acquisitions of the AXA Wealth businesses and
Abbey Life on the Group consolidated IFRS financial statements including consideration as to whether any
adjustments were required to the initial acquisition fair values recognised. This included consideration of the
adoption of Group accounting policies and methodologies by the acquired businesses.
– Management presented details on the key judgement areas in deriving the acquisition balance sheets for the
AXA Wealth and Abbey businesses, including the valuation of tangible net assets in accordance with IFRS 3,
valuation of Acquired Value of In-Force, other intangibles and residual goodwill.
– The Audit Committee considered and confirmed the appropriateness of the result of annual impairment
testing carried out in respect of goodwill balances and reviews for indicators of impairment performed in
respect of definite life intangibles.
Operating Profit
– 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.
Assessment of whether the
Annual Report and Accounts are
fair, balanced and understandable
– The Audit Committee considered an analysis of the processes 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 from management and EY as to the review processes that operated
over the production of the Annual Report and Accounts.
Going concern analysis
– A comprehensive going concern assessment was undertaken by the Audit Committee for the 2017 year-end
Viability Statement
and 2017 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.
– The Audit Committee reviewed the process to support, and the contents of, the Viability Statement.
The Committee concluded that the period covered by the Viability Statement should continue to be
five years to align it to the Group’s strategic plan.
Please note that references in this table to the Phoenix Life Audit Committee include the Audit Committee for the acquired Abbey Life business.
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Board Committees continued
RISK
COMMITTEE
“Having become Risk
Committee Chairman
less than a year ago,
I am keen to drive
a forward-looking
agenda as well as
maintaining and
enhancing the strong
Risk Management
Framework and
governance inherent
in Phoenix.”
JOHN POLLOCK
RISK COMMITTEE CHAIRMAN
OTHER CURRENT MEMBERS
Alastair Barbour
Wendy Mayall
Belinda Richards
Changes during 2017:
– David Woods was Chair of the Committee up to his
resignation from the Board on 11 May 2017.
– John Pollock was appointed Chair of the Committee
with effect from 11 May 2017.
– Belinda Richards was appointed to the Committee
on 1 October 2017.
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, comprised totally 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 2017. 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 32 to 34.
RISK COMMITTEE’S PRINCIPAL
ACTIVITIES DURING 2017
– Reviewed the Group’s risk appetite and
recommended to the Board the Group’s
overall risk management strategy.
– Monitored progress against the 2017
Group Risk Function plan.
– Considered any breaches of the Group’s
risk appetite.
– Monitored compliance with the Group’s
principal risk policies, satisfying itself that
action plans to address significant breaches
of those policies were sufficient.
– Monitored implementation of the
Group’s Risk Management Framework
in acquired entities.
– 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 as well as
contingency planning.
– Received regular updates on Cyber Security.
– Reviewed Reverse Stress Testing analysis.
– Approved updates to the Group counterparty
concentration framework.
– Implemented recommendations
from the Oliver Wyman Financial Risk
Framework review.
– Provided oversight of, and challenge to, the
design and execution of the Group’s stress
and scenario testing, including any changes
of assumptions.
– Considered a Line 2 review of the 2018
Annual Operating Plan.
– Undertook horizon scanning to consider
emerging risks that could impact the
Group including more prominent badging
of forward-looking work in risk papers.
– Considered risks, issues and matters that
are escalated from the Phoenix Life Risk
Committee and Abbey Life Risk Committee.
– Informed the Remuneration Committee
regarding the management of the Group’s
material risks to support their consideration
of executive’s Annual Incentive Plan rewards.
– Provided oversight and due diligence on risk
issues relating to material transactions and
strategic proposals.
– Held a joint briefing session with the
Phoenix Life Risk Committee.
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 14 March 2018. 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 2017,
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.
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Phoenix Group Holdings | Annual Report & Accounts 2017
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.
The Nomination Committee met six times
in 2017.
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
appointments of Karen Green and Belinda
Richards in 2017. The search consultancy
used in 2017 for Director appointments was
The Zygos Partnership which has no other
connection with the Company.
NOMINATION
COMMITTEE
“I am very pleased
with the Nomination
Committee’s role in
the continual and
effective renewal of
skills and experience,
and enhanced
gender diversity, on
our Board through
the appointment
of two new Non-
Executive Directors in
2017 following three
new Non-Executive
Directors in 2016.”
HENRY STAUNTON
NOMINATION COMMITTEE CHAIRMAN
OTHER CURRENT MEMBERS
Alastair Barbour
Ian Cormack
Nicholas Shott
Changes during 2017:
– David Woods was a member of the Committee
up to 11 May 2017.
– Nicholas Shott was appointed to the Committee
on 11 May 2017.
NOMINATION COMMITTEE’S PRINCIPAL
ACTIVITIES DURING 2017
– Delivered recommendations to the Board
for the appointments of Karen Green and
Belinda Richards as Non-Executive Directors
following a comprehensive search process
led by the Nomination Committee with Zygos
search consultancy.
– Delivered recommendations to the Board
for Kory Sorenson to be appointed Board
Remuneration Committee Chair and John
Pollock Board Risk Committee Chair, having
considered their skills and experience for
the roles.
– Undertook a skills audit to re-assess the ideal
blend of skills and knowledge on the Board,
aligned to the Group’s strategy, and taking
account of Board departures. The output
of this audit informed the requirements
for the two new Non-Executive Director
appointments in 2017.
– 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.
– In conjunction with the skills audit and taking
account of the Board Evaluation Review,
reviewed the structure, size and composition
of the Board.
– 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.
– Reviewed the succession plan for
Executive and Non-Executive Directors and
recommended its approval to the Board.
– Reviewed progress updates on Diversity
and Inclusion, supporting initiatives being
undertaken to accelerate and enhance
management diversity.
The Board’s policy on diversity is as follows:
– The Board supports the enhancement of
diversity, including gender, as a consideration
when recruiting new Directors.
– 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.
– The Board will undertake regular skills
audits to ensure the Board’s skills remain
appropriate for its strategy and providing
diversity where possible.
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Board Committees continued
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 2017.
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 2017 are provided in
the Directors’ Remuneration Report on pages
63 to 87.
FIT Remuneration Consultants provided advice
to the Remuneration Committee in 2017 and
are independent of the Group.
REMUNERATION
COMMITTEE
“Our key aim is to
align remuneration
to the achievement
of our strategy and
value generation. We
greatly appreciated
the high level of
exchange with our
shareholders that
we have enjoyed
over the past year.”
KORY SORENSON
REMUNERATION COMMITTEE CHAIR
OTHER CURRENT MEMBERS
Karen Green
Nicholas Shott
Changes during 2017:
– Kory Sorenson was appointed Chair with effect from
11 May 2017.
– Ian Cormack resigned as Chairman with effect from 11 May
2017 although remained on the Committee until 1 July 2017.
– Karen Green was appointed to the Committee with effect
from 1 July 2017.
– Isabel Hudson was a member of the Committee up to
11 May 2017.
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Phoenix Group Holdings | Annual Report & Accounts 2017
Directors’ Remuneration Report
Remuneration Committee Chairman’s letter
DEAR SHAREHOLDER
I am delighted to write to you as the Chairman of the Remuneration
Committee of Phoenix Group Holdings having served on the Committee
as a member since 2014 and becoming its Chairman in May 2017. I am
particularly grateful to Ian Cormack for his hard work and guidance as my
predecessor in this role.
On behalf of the Board, I am pleased to present our Directors’ Remuneration
Report for the year ended 31 December 2017. This report covers remuneration
for Executive Directors and Non-Executive Directors of the Company.
COMPANY PERFORMANCE
2017 was a year of further progression 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. These achievements demonstrate a
strong performance by the Company’s management team. Accordingly,
the Remuneration Committee (‘Committee’) concluded that the outturns
of the Annual Incentive Plan (‘AIP’) and Long-Term Incentive Plan (‘LTIP’)
are appropriate, as more fully described below.
Particular highlights for the year which were considered by the
Committee included:
Corporate highlights
– Cash generation of £653 million in 2017, with the Group on track to
• Management Actions are those measures taken by management
to increase cash generation and long-term value which are relatively
insensitive to external factors and the natural unwind of the closed life
assurance funds. Management Actions are a key performance indicator
for the Group, tracked closely by management, the Board and investors
to assess the success of management’s execution of our strategy.
The total figure relating to Management Actions is published annually
in the Annual Report and Accounts.
– At the same time, to reflect feedback received from our shareholders
during our consultation at the end of 2017, we have increased the
weighting on Corporate measures within the AIP to 80% (from 70%
in 2017) and correspondingly reduced the weighting on Personal
measures to 20% (from 30% in 2017).
– With respect to the LTIP, the Committee has also included the Adjusted
Shareholder Solvency II Own Funds metric, again to reflect the more
balanced scorecard between year-on-year cash generation and long-
term value that we are aiming to achieve.
The metrics for 2018 onwards are set out below. The metrics for 2017
have been provided for reference only.
ANNUAL INCENTIVE PLAN (‘AIP’) FOR 2018
Weightings
achieve towards the top end of the 2017 to 2018 target range for cash
generation of £1.0 billion to 1.2 billion.
Metric
Cash Generation
– Successful integration of the AXA Wealth and Abbey Life acquisitions,
realising significant cost and capital synergies from both transactions.
– Issuance of over £800 million of subordinated debt, increasing the
Group’s Solvency II surplus to £1.8 billion as at 31 December 2017.
– The upgrading of the Group’s credit rating by Fitch Ratings in July 2017,
with its two principal operating life companies, Phoenix Life Limited
and Phoenix Life Assurance Limited being assigned Insurer Financial
Strength ratings of ‘A+’.
– Recognition for the sixth successive year, that Phoenix has been
formally acclaimed as one of ‘Britain’s Top Employers’.
Customer highlights
– Delivery of a secure environment for the encashment of smaller
policies, which allows customers to submit their application online,
reducing the overall time taken for them to receive their funds.
– Further improved Financial Ombudsman Service overturn rate
to 16.7%, well below the industry benchmarks.
– Strong Customer Satisfaction scores of 92%.
REMUNERATION POLICY FOR 2018
Key points are as follows:
– Shareholders gave over 99% approval to the renewal of our Directors’
Remuneration Policy at the 2017 AGM.
– In Ian Cormack’s letter introducing last year’s Directors’ Remuneration
Report, he said that we would be undertaking a wider review of
remuneration in 2017. Having undertaken the review and consulted
with shareholders, we concluded that our current policy as approved
at the 2017 AGM remains appropriate. We are thus not seeking to
amend our policy at the 2018 AGM.
– Following the review, however, the Committee determined that
a broader range of metrics for both the AIP and LTIP should be
introduced given the evolving nature of the Company. This will ensure
that management incentives continue to be aligned to the success
of the Company and the experience felt by the shareholder.
– To this end, the Committee has included two new metrics in the
AIP to complement the existing cash generation metric:
• Adjusted Shareholder Solvency II Own Funds to balance
short-term cash release with the preservation of long-term value.
Calculated as Shareholder Solvency II Own Funds minus subordinated
debt, it is a transparent proxy measure of value, based on publicly
disclosed information that can be used to determine value generation.
Adjusted Shareholder Solvency II
Own Funds
Management Actions
2017
2018 onwards
50% (71% of Corporate
component)
24% (30% of Corporate
component)
–
–
24% (30% of Corporate
component)
12% (15% of Corporate
component)
Customer Experience
20% (29% of Corporate
component)
20% (25% of Corporate
component)
Personal Objectives
30%
20%
LONG-TERM INCENTIVE PLAN (‘LTIP’) FOR 2018
Weightings
Metric
Cash Generation
Return on Adjusted Shareholder Solvency II Own Funds
TSR
Current
2018 onwards
50%
–
50%
40%
35%
25%
These modifications are permitted within our current policy, so no
formal resolution is required. However, we engaged with our largest
shareholders and their representative bodies to validate this approach
before introducing these changes and received positive feedback.
Following the year-end, Phoenix announced a proposal to acquire
Standard Life Assurance. Consistent both with best practice guidelines
and with past practice at Phoenix, following completion, the Committee
will review any adjustments to the targets within our variable pay plans
(including the potential to review in-flight LTIP targets) that might be
necessary to ensure that the plans operate as originally intended and
properly reflect our aim to reward long-term value generation for our
shareholders. Given the scale of the proposed acquisition, the Committee
will of course review our reward policy to ensure that it remains
appropriate for the dynamics of the new business.
The Committee values greatly the support that we have received from
our shareholders in recent years, and hopes that the modifications
that we have made within the scope of our policy, as explained in this
Directors’ Remuneration Report, will receive their support and they will
vote in favour of the resolutions proposed at the 2018 AGM.
Yours sincerely,
KORY SORENSON
REMUNERATION COMMITTEE CHAIR
14 March 2018
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At a glance
HOW WE PERFORMED IN 2017
GROUP PERFORMANCE MEASURES
Annual Incentive Plan (‘AIP’):
Below we show the target ranges and outturn against the metrics within the 2017 AIP. More details of the 2017 AIP can be
found on page 71. AIP metrics that are stated Group KPIs are flagged below and evidences the direct link between Company
strategy and remuneration outcomes.
OPERATING COMPANIES’ CASH
GENERATION (£m)
CUSTOMER SATISFACTION (%)
CAT. A INCIDENT CLOSURES (%)
KPI
£653m
600
90
91
93
92%
KPI
100%
80
82.5
85
525
450
Threshold level for AIP
Target level for AIP
Maximum level for AIP
Performance
ORIGO TIMESCALES (DAYS)
KPI
FOS OVERTURN RATE (%)1
KPI
SERVICING COMPLAINT CLOSURE (%)
<12
<11
11.03 DAYS
<9.5
≤22
≤20
≤18
16.7%
60
57%
70
65
Threshold level for AIP
Target level for AIP
Maximum level for AIP
Performance
1 See Note 5 on page 71 for detail of the FOS Overturn Rate used in the AIP.
Long-Term Incentive Plan (‘LTIP’):
Below, we show outturn against the measures which apply for the 2015 LTIP awards which are reflected in the Single
Figure Table on page 70. Embedded value growth, cumulative cash generation and TSR performance are shown over the
3-year performance period (financial years 2015, 2016 and 2017). TSR is measured against the constituents of the FTSE 250
(excluding Investment Trusts), with median being the 50th percentile and upper quintile the 80th percentile.
GROWTH IN EMBEDDED VALUE (%)
CUMULATIVE CASH GENERATION (£bn)
TOTAL SHAREHOLDER RETURN (Percentile)
7.9%
1.032
£1.067bn
1.182
80
50
54th
percentile
5
3
Threshold target
Maximum target
Performance
Median
Upper quintile
Performance
64
Phoenix Group Holdings | Annual Report & Accounts 2017
HOW MUCH THE EXECUTIVE DIRECTORS EARNED IN 2017 (£000)
The charts below compare the maximum levels of Total Remuneration payable under the Directors’ Remuneration Policy (see page 80)
and the actual payments for 2017 detailed in the Single Figure Table.
TOTAL REMUNERATION OPPORTUNITY (£000)
Group Chief Executive Officer – Clive Bannister
Group Finance Director – James McConville
Minimum
100%
856
Minimum
100%
On-target
50%
30% 20%
1,734
On-target
50% 30% 20%
Maximum
26%
32%
26%
32%
Maximum
with growth
21%
26%
42%
34%
3,309
Maximum
42%
19%
4,109
Maximum
with growth
26%
26%
32%
42%
32%
21%
26%
34%
42%
19%
Actual
29%
31%
31% 9%
2,902
Actual
29% 31%
31%
9%
Total fixed pay
AIP
LTIP
Share price growth and dividends
544
1,097
2,087
2,590
1,833
–
Minimum, on-target and maximum represent the scenario charts required by the Directors’ Remuneration Policy – see the data assumptions below
which are unchanged from our 2016 Directors’ Remuneration Report (as no element of our Executive Directors’ Remuneration has been changed).
– Maximum with growth is the maximum scenario, but with the LTIP element increased to reflect a 10% CAGR share price growth assumption and
assumed current dividend yields being maintained for three years until LTIP vesting. The element of the total representing the value from these
assumptions on share price growth and dividends is shown separately.
– Actual represents the values shown in the 2017 Single Figure Table. Within this, the actual share price growth and dividends in the three-year period
until LTIP vesting are shown separately.
Name
Clive Bannister
James McConville
Minimum
Base salary
£000
700
440
Benefits
£000
16
16
Pension
£000
140
88
Total fixed
£000
856
544
Consists of base salary, benefits and pension:
– Base salary is the salary to be paid in 2018 (unchanged from 2017).
– Benefits measured as benefits paid in 2017 as set out in the Single Figure Table.
– Pension measured as the full entitlement of 20% of base salary receivable either as a pension contribution or as cash,
and ignoring the reduction to payments made in cash for employers’ national insurance contributions.
On-target
Based on what the Executive Director would receive if performance was on-target:
– AIP: consists of the on-target annual incentive (75% of base salary).
– LTIP: consists of the threshold level of vesting (50% of base salary). In addition, the potential value of Sharesave and Share
Incentive Plan (‘SIP’) participation is also recognised.
Maximum
Based on the maximum remuneration receivable:
– AIP: consists of the maximum annual incentive (150% of base salary).
– LTIP: assumes maximum vesting of awards and valued as on the date of grant (normal award 200% of base salary).
Sharesave and SIP valued on the same basis as in the on-target row.
Phoenix Group Holdings | Annual Report & Accounts 2017
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Directors’ Remuneration Report
continued
INTRODUCTION
This report contains the material required to be set out as the Directors’
Remuneration Report (‘Remuneration Report’) for the purposes of Part 4
of The Large and Medium-sized Companies and Groups (Accounts and
Reports) (Amendment) Regulations 2013, which amended The Large
and Medium-sized Companies and Groups (Accounts and Reports)
Regulations 2008 (‘the DRR regulations’).
The Company has complied with the DRR regulations as a matter of
good practice although it is not strictly required to do so as a non-UK
incorporated quoted company.
DIRECTORS’ REMUNERATION POLICY
The Directors’ Remuneration Policy (‘Remuneration Policy’) was approved
by the Company’s shareholders at the Company’s AGM on 11 May 2017
and has been in effect for all payments made to Directors from that date.
The Remuneration Policy is included at the end of this Remuneration
Report for information and ease of reference – it is not subject to the
advisory vote on the Remuneration Report at the 2018 AGM. Within the
Remuneration Policy, the ‘scenario charts’ have been deleted as this
material is now reproduced in the ‘At a Glance’ section of this report
on page 64.
The Remuneration Policy is also available within the Remuneration
Committee (‘Committee’) section under Board Committees on the
Company’s website.
ANNUAL IMPLEMENTATION REPORT – UNAUDITED INFORMATION
IMPLEMENTATION OF REMUNERATION POLICY IN 2018
Element of Remuneration Policy
Detail of Implementation of Policy for 2018
Base Salary
Benefits
Pension
Base salaries are set by reference to appropriate market comparables. Salaries in 2018 will remain unchanged at
£700,000 for the Group Chief Executive Officer (unchanged from 2011) and £440,000 for the Group Finance Director
(unchanged from 2014). This means that their salaries will not have increased for seven and four years respectively.
There are no proposed changes to the benefits offered to Executive Directors in 2018.
There are no proposed changes to the pension benefits offered to Executive Directors in 2018.
Annual Incentive Plan (‘AIP’) The AIP for 2018 will operate on a basis that is consistent with how the AIP operated in 2017, although there have
been changes to the precise measures and weightings of the Corporate (financial and strategic) performance
measures to reflect our evolving business focus, and to the percentage weighting for Corporate versus Personal
measures to reflect feedback from investors.
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.
The overall weightings between Corporate and Personal performance measures for AIP in 2018 are:
– Corporate (financial and strategic) performance measures – 80% (2017: 70%).
– Personal (individual objectives) – 20% (2017: 30%).
The weightings of the AIP performance measures for 2018 are summarised below:
Performance measure
Corporate measure
Operating Companies’ Cash Generation
Adjusted Shareholder Solvency II Own Funds
Management Actions
Customer Experience
Personal
Individual Objectives
TOTAL
% of incentive potential
(30% of Corporate component) 24%
(30% of Corporate component) 24%
(15% of Corporate component) 12%
(25% of Corporate component) 20%
20%
100%
The changes made from 2017’s Corporate performance measures for AIP are designed to provide a more balanced
scorecard that better aligns remuneration to the success of the Company and the experience felt by the shareholder:
– Adjusted Shareholder Solvency II Own Funds has been added as a new performance measure to balance
short-term cash release with the preservation of long-term value. Calculated as Shareholder Solvency II Own Funds
minus subordinated debt, it is a transparent proxy measure of value based on publicly disclosed information that can
be used to determine value generation.
– Management Actions has been added as a new performance measure. Management Actions are those
measures taken by management to increase cash generation and long-term value which are relatively insensitive
to external factors and the natural unwind of the closed life assurance funds. Management Actions are a key
performance indicator for the Group, tracked closely by management, the Board and investors to assess the
success of management’s execution of our strategy. The total figure relating to Management Actions is published
annually in the Annual Report and Accounts.
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Phoenix Group Holdings | Annual Report & Accounts 2017
Element of Remuneration Policy
Detail of Implementation of Policy for 2018
Annual Incentive Plan (‘AIP’)
(continued)
– To reflect feedback received from our shareholders during our consultation at the end of 2017, we have also
increased the weighting on corporate measures within the AIP to 80% (from 70% in 2017) and correspondingly
reduced the weighting on personal measures to 20% (from 30% in 2017).
Outcomes from performance measures for 2018’s AIP may be moderated by the Committee in line with the approved
Remuneration Policy. This will include a review by the Committee that the Company has operated within its stated risk
appetite and that there are no other risk-related concerns before any 2018 AIP outcomes are confirmed.
The targets for the specific performance measures for AIP in 2018 are regarded as commercially sensitive by the
Company but will be disclosed retrospectively in the Remuneration Report for 2018.
40% of AIP outcomes for 2018 will be delivered as an award of deferred shares under the Deferred Bonus Share
Scheme which will vest after a three-year deferral period.
Deferred Bonus Share
Scheme (‘DBSS’)
DBSS awards made in 2018 (in respect of 2017’s AIP outcome) will be made automatically on the fourth dealing day
following the announcement of the Company’s 2017 annual results in accordance with the Remuneration Policy.
The number of shares for DBSS awards will be calculated using the average share price for the three dealing days
before the grant of the DBSS awards.
The three-year deferral period will run to the three-year anniversary of the making of the DBSS awards.
Dividend entitlements for the shares subject to DBSS awards will accrue over the three-year deferral period.
Long-Term Incentive Plan
(‘LTIP’)
Awards under the LTIP will be made automatically on the fourth dealing day following the announcement of the
Company’s 2017 annual results under a procedure similar to that described above for awards under the DBSS.
The number of shares for LTIP awards will be calculated using the average share price for the three dealing days
before the grant of the LTIP awards.
The initial three-year vesting period will run to the three-year anniversary of the making of the LTIP awards. At this time,
the performance conditions will be determined.
All annual LTIP awards made to Executive Directors are subject to a holding period so that any LTIP awards for which
the performance conditions 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.
Award levels for Executive Directors for 2018 are unchanged at 200% of base salary.
The weightings of the LTIP performance measures for 2018 are summarised below:
Performance measure
Cumulative cash generation
Return on Adjusted Shareholder Solvency II Own Funds
TSR
TOTAL
Weighting of performance measure
40%
35%
25%
100%
Return on Adjusted Shareholder Solvency II Own Funds is included as an LTIP measure for 2018 awards as it is a
proxy value metric and thus rewards the preservation of long-term value as a balance to year-on-year cash generation.
The performance measures are measured over a period of three financial years, commencing with financial year 2018.
All 2018 LTIP awards are subject to a further underpin measure relating to debt and risk management within the
Group, 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 2018’s LTIP awards.
The relative TSR measure is calculated against the constituents of the FTSE 250 (excluding Investment Trusts), with
vesting commencing at median (where 25% of this part of the award vests) and full vesting at upper quintile levels,
subject to an underpin regarding underlying financial performance.
The performance targets for the Cumulative cash generation measure are £1,474 million (where 25% of this part
of the award vests) and £1,674 million (full vesting of this part of the award).
The performance targets for the return on Adjusted Shareholder Solvency II Own Funds measure are 4% in excess
of the risk-free rate (where 25% of this part of the award vests) and 6% in excess of the risk-free rate (full vesting of
this part of the award).
All-Employee Share Plans
Executive Directors have the opportunity to participate in HMRC tax advantaged Sharesave and Share Incentive Plans
on the same basis as all other UK employees.
Shareholding requirements Requirement levels are 200% of base salary for the Executive Directors.
Where any performance vested LTIP awards are subject to a holding period requirement, the relevant LTIP award
shares (discounted for anticipated tax liabilities) will count towards the shareholding requirements. Unvested awards
under the LTIP and DBSS are not included in this assessment. Details of current shareholding levels are shown
on page 77.
Phoenix Group Holdings | Annual Report & Accounts 2017
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Directors’ Remuneration Report
continued
Element of Remuneration Policy
Detail of Implementation of Policy for 2018
Chairman and Non-Executive
Directors’ fees
Fee levels for the Chairman are £325,000. Whilst the base for Non-Executive Directors remains unchanged, following
a market review carried out in 2017, it was considered appropriate to make certain increases. As a result, with effect
from 1 July 2017, the fees for serving as Senior Independent Director (‘SID’) increased from £5,000 to £10,000 and
the fee for chairing each of the Audit, Remuneration and Risk Committees increased from £10,000 to £20,000.
The fee levels for 2018 are £325,000 for the Chairman (although as part of our normal governance process this fee will
be reviewed in 2018), £105,000 for the role of Non-Executive Director with additional fees of: (i) £10,000 payable for
the role of SID; and/or (ii) £20,000 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.
Note: All incentive plans are subject to malus/clawback. See page 85 ‘Notes to the Remuneration Policy’ for details.
DISTRIBUTION STATEMENT
The DRR 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 (% change +24%)
Overall expenditure on pay (% change +29%)
2016
2017
160
2016
99
198
2017
128
Profit distributed by way of dividend has been taken as the dividend paid and proposed in respect of the relevant financial year. For 2017 this is the
interim dividend paid (£99 million) and the recommended final dividend of 25.1p per share multiplied by the total share capital issued at the date
of the Annual Report as set out in note D1 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 as set out in note C2 ‘Administrative expenses’ in the notes to the consolidated
financial statements. Expenditure on pay has increased by 29%, primarily due to the current year expenditure including a full year of costs for both
the acquired AXA Wealth and Abbey Life businesses, whereas 2016 included only two months of costs for AXA Wealth and none for Abbey Life.
This expenditure excludes redundancy costs which are included within ‘restructuring and integration costs’ in note C2. The year-on-year increase
excluding the AXA Wealth and Abbey Life costs is 7%, which reflects small increases in share-based payment costs (see note I2) and AIP costs,
and also the impact of the salary increase for staff during the year.
PERFORMANCE GRAPH AND TABLE
The graph below shows the value to 31 December 2017 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).
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.
TOTAL SHAREHOLDER RETURN
300
250
200
150
100
50
Jul
2010
Dec
2010
Dec
2011
Dec
2012
Dec
2013
Dec
2014
Dec
2015
Dec
2016
Dec
2017
Phoenix Group Holdings
FTSE 250 Index (excluding Investment Trusts)
Source: Thomson Reuters Datastream
The DRR 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).
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GROUP CHIEF EXECUTIVE OFFICER REMUNERATION
2017
2016
2015
2014
2013
2012
2011
Clive Bannister
Clive Bannister
Clive Bannister
Clive Bannister
Clive Bannister
Clive Bannister
Clive Bannister4
Jonathan Moss4,5
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’)
2,902
2,8781
2,867
3,104
2,737
1,583
1,333
704
2,307
86%
84%
82%
68%
69%
69%
73%
n/a
88%
64%
55%
57%
57%2
67%2
n/a3
n/a3
n/a
100%
1
2
The single figure of total remuneration for 2016 has been restated and now reflects the actual price of shares on the day the 2014 LTIP vested (26 March 2017: 787.5p per share) rather than
the three-month average share price to 31 December 2016 (730.0761p per share) which was required to be used last year for the single figure of total remuneration.
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 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.
4 Jonathan Moss left the role of Group Chief Executive Officer on 7 February 2011 and left Phoenix 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.
5 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 2016 TO 2017
In accordance with the DRR 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 2016 and 2017 and the equivalent percentage
changes in the average of all staff (representing all permanent staff during 2016 and 2017 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 annual report and accounts.
Year-on-year % change
Group Chief Executive Officer
Staff
Salary
Taxable Benefits
Annual incentive
0.00%
3.76%
0.29%
3.03%
2.16%
3.77%
Total
1.20%
5.34%
Overall the data shows minimal change in the level of remuneration for the Group Chief Executive; the small increase in annual incentive being due to
a higher outcome under the Corporate element of the AIP. Staff more generally have experienced a small overall increase, due in part again to higher
outcomes under the Corporate element of the AIP. The increase in taxable benefits reflects an increase in the cost of funding private medical insurance
for eligible employees to maintain their same level of benefit. The median salary increase for staff was 2.25%; this is lower than the figures above which
are based on averages.
VOTING OUTCOMES FROM THE 2017 AGM
The table below shows the votes cast to approve the Directors’ Remuneration Report for the year ended 31 December 2016 and to approve the
Directors’ Remuneration Policy at the 2017 AGM held on 11 May 2017.
To approve the Directors’ Remuneration Report
for the year ended 31 December 2016
To approve the Directors’ Remuneration Policy
Number
296,340,105
296,336,785
For
% of
votes cast
99.70
99.67
Number
883,405
976,191
Against
% of
votes cast
0.30
0.33
Abstain
Number
95,909
2,243
DILUTION
The Company monitors the number of shares issued under the Phoenix Group employee share plans and their impact on dilution limits. The Company’s
practice is for all the executive share plans to use market purchase shares on exercise of any awards. For the Company’s Sharesave scheme only, new
shares are issued. Therefore the usage of shares compared to the relevant dilution limits set by the Investment Association in respect of all share plans
as at 31 December 2017 is 0.68%, and no shares count towards the dilution limit for executive plans only (5% in any rolling ten-year period).
Phoenix Group Holdings | Annual Report & Accounts 2017
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Directors’ Remuneration Report
continued
CONSIDERATION OF EMPLOYEE PAY
When determining Executive Directors’ remuneration, the Committee takes into account pay throughout the Group to ensure that the arrangements
in place remain appropriate.
As required by Solvency II regulations, the Group has one consistent reward policy for all levels of employees, and this policy is made available to all staff.
Therefore, the same reward principles guide reward decisions for all Group employees, including Executive Directors, although remuneration packages
differ to take into account appropriate factors in different areas of the business:
– Fixed Pay – the Remuneration Committee reviews the average Group-wide base salary increase each year. All employees are paid at least the Living
Wage as set by the Living Wage Foundation. All Group employees are invited to participate in the Company’s Group Pension Plan or contributory
defined contributions pension arrangement in accordance with the plans that are open at that time. Death in service benefits are provided for all staff.
– Benefits – All Group employees have access to a range of benefits under our flexible benefits scheme and, from 2018, all are eligible to receive
private medical insurance cover.
– AIP – all Group employees participate in the AIP, although the quantum and balance of corporate to individual objectives varies by grade (and may
also vary between different business lines). The most senior staff are subject to the regulatory requirements of Solvency II, and these individuals
also receive part of their bonus in Company shares deferred for a period of three years. A different scorecard of AIP performance measures applies
for employees in ‘control functions’ (risk, compliance, internal audit and actuarial) to exclude financial performance measures.
– LTIP – our most senior employees participate in the LTIP currently based on the same performance conditions as those for Executive Directors,
although the Committee reserves the discretion to vary the performance conditions for awards made to employees below Board level or to grant
restricted stock for future awards to such employees. In addition, selected individuals may receive ad-hoc share awards contingent on continued
employment. More bespoke incentive plans may be operated in stand-alone subsidiaries.
– All-employee share plans – the Committee considers it important for all employees to have the opportunity to become shareholders in the
Company. The Company offers two HMRC tax advantaged arrangements in which all UK employees can participate and acquire shares on
a discounted and tax advantaged basis (Sharesave and SIP).
The Remuneration Committee acknowledges requests from, amongst others, the Investment Association, for companies to publish ratios comparing
CEO to employee pay in remuneration reports. Once a common methodology is determined the Company’s expectation is that it will publish ratios
showing comparisons in future years.
IMPLEMENTATION REPORT – AUDITED INFORMATION
SINGLE FIGURE TABLE
Salary/fees¹
Benefits²
Annual Incentive³
Long-term incentives
Pension6
£000
Clive Bannister
James McConville
2017
700
440
20165
700
440
2017
2016
16
16
16
16
2017
902
567
2016
883
555
20165
(restated)
20174
1,161
1,156
733
727
2017
123
77
2016
123
77
Total
20165
(restated)
2017
2,902
2,878
1,833
1,815
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 £16,157. Benefits for James McConville comprise car allowance and private medical insurance
totalling £15,926.
4
3 Annual incentive amounts are presented inclusive of any amounts which must be deferred into shares for three years (i.e. 40% of the AIP award for 2017; 33.33% for 2016). In 2017 and 2016,
£360,835 and £294,490 respectively of Clive Bannister’s incentive payment is subject to three-year deferral delivered in shares, and £226,810 and £185,108 of James McConville’s incentive
payment is subject to a similar deferral. Details of the performance measures and targets applicable to the AIP for 2017 are set out below.
In accordance with the requirements of the DRR regulations, the 2017 value for long-term incentives is an estimate of the vesting outcomes for LTIP awards granted in 2015 and which
are due to vest on 28 September 2018 for Clive Bannister and James McConville. These estimated vesting levels are at 64.28% reflecting outcomes against the embedded value growth,
cumulative cash generation and TSR performance measures to 31 December 2017 (see page 72) and assumptions regarding dividends for the period until vesting. This vesting outcome is
then applied to the average share price between 1 October 2017 and 31 December 2017 (759.8462p) to produce the estimated long-term incentives figures shown for 2017 in the above table.
These assumptions will be trued up for actual share prices and dividends on vesting in the report for 2018. For James McConville the total also includes the intrinsic gain made on a Sharesave
option granted on 13 April 2017 when the share price was 747p.
5 For 2014’s LTIP awards which are reflected in the 2016 long-term incentives column above, the performance conditions were met as to 55% of maximum. The 2016 long-term incentives
values in the above table reflect the value of the Company’s shares on the date of vesting which was 26 March 2017 (787.5p per share) multiplied by the number of shares vesting, whereas
the equivalent figure within the published 2015 Single Figure Table was an estimate which reflected the average share price between 1 October 2016 and 31 December 2016 (730.0761p 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. Both Clive Bannister and
James McConville received the pension contributions as cash supplements. No Director participated in a defined benefit pension arrangement in the year.
There were no payments made to former Directors and no payments for loss of office in the year.
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AIP OUTCOMES FOR 2017
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.
Against the specific Corporate measures, outturns were as follows:
Performance measure
Threshold
performance
level for
2017 AIP
Target
performance
level for
2017 AIP
Maximum
performance
level for
2017 AIP
Performance
level attained for
2017 AIP
% of incentive
potential based
on Performance
Measure
Operating companies’ cash generation
£450m
£525m
£600m
£ 653m
71.43
Customer experience
Customer satisfaction1,6
Origo timescales2
CAT A incident closures3,6
Servicing complaint closure4
FOS overturn rate5,6
Total
90%
91%
93%
92%
<12 days
<11 days
<9.5 days
11.03 days
80%
60%
<=22%
82.5%
65%
<=20%
85%
70%
<=18%
100%
57%
16.7%
8.57
8.57
5.71
2.86
2.86
100.00
% achieved
71.43%
6.43%
4.16%
5.71%
–
2.86%
90.59%
1 The rating is a customer satisfaction score based on the results of a 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 (with a rating of 4 or 5 regarded as satisfied). 92% of all questions asked scored a rating of 4 or above.
2 The Origo Options service is a recognised industry-wide initiative for processing Pension Transfers to ensure payments are made in a timely fashion. The service has set a benchmark standard
of a 12 calendar day average elapsed time for processing transfers.
3 This measure looks at the resolution of incidents for which there could be customer detriment (financial or non-financial). It measures the timeliness of actions when things go wrong.
4 This measure looks at servicing (i.e. not product or advice) complaints which are closed within three days.
5 This measure looks at the proportion of cases where the Financial Ombudsman Service disagrees with our decision making in dealings with customers or an aspect of it. For the AIP the FOS
overturn rate is calculated based on an average of the H1 current year and H2 prior year rates. This is due to the timing of when the FOS rates are published. The 17.0% FOS overturn disclosed
in the KPI section on page 19 is the latest available 2017 year end position and includes our newly acquired businesses.
6 Excludes the AXA Wealth and Abbey Life operating business. All five customer experience measures in 2018 will include the performance of the AXA Wealth and Abbey Life businesses.
Before confirming these outcomes for the 2017 AIP, the Committee undertook a review which confirmed that the Company had operated within
its stated risk appetite during the year and that there were no other risk-related concerns that required the moderation of 2017 AIP outcomes.
Personal objectives were agreed by the PGH Board and shared with the Remuneration Committee at the start of the year.
The Board regards a number of the personal objectives set for the Executive Directors as commercially sensitive and, accordingly, it is not appropriate
for such objectives to be disclosed. However a number of achievements for the Executive Directors are shown below:
– Executive Director Strategic Achievements:
In addition to the significant achievements of meeting all financial KPIs (including in relation to expense management), exceeding staff engagement
target levels, and maintaining a satisfactory risk and control environment across the Group, further specific individual achievements by the Executive
Directors which were considered by the Remuneration Committee included the following:
– Clive Bannister:
• Progression of our on-shoring strategy enabling the announcement to the market of this major corporate restructure;
• Maintaining a rigorous discipline in delivering across the full range of Phoenix KPI’s ;
• Successful integration of AXA Wealth and Abbey Life delivering favourable synergies and value to the Group; and
• Sustaining a strategy that balances opportunity, value, and price discipline in reviewing assets in the Closed Life sector.
– James McConville:
• Strengthened the Group’s investor coverage with an increase from 9 to 12 in the number of analysts covering Phoenix;
• Delivery of the Group’s debt strategy including over £800m of subordinated debt issuance;
• Securing an improved credit rating for the Group; and
• As Chairman of the Group’s Diversity and Inclusion (‘D&I’) Committee, promoting commitments under the Women in Finance Charter
and spearheading the implementation of a programme of initiatives to help women achieve promotion to senior roles.
For the Personal objectives element of 2017 AIP, the performance of both the Executive Directors was discussed with the Board, and the
Remuneration Committee considered individual performance in light of their objectives, on the basis of a 5-point scale, separately assessing
both ‘what’ was achieved and ‘how’ it was delivered, with equal weightings given to each assessment.
Taking account of the attainment of objectives, each of the Group Chief Executive Officer and the Group Finance Director received a 75% payout
for this element, consistent with their ratings for 2017.
Phoenix Group Holdings | Annual Report & Accounts 2017
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Directors’ Remuneration Report
continued
The table below shows the actual outturn against the annual incentive maximum. For 2017 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
As a %
of maximum
corporate element
90.59
90.59
Corporate
As a %
of salary
95.12
95.12
As a %
of maximum
personal element
75.00
75.00
Personal
Total
Maximum
As a %
of salary
33.75
33.75
As a %
of salary
128.87
128.87
As a %
of salary
150.00
150.00
As described in the Annual Implementation Report for AIP 2018 on page 67, 40% of 2017 AIP outcomes will be delivered as an award of deferred
shares under the Deferred Bonus Share Scheme which will vest after a three-year deferral period.
In addition, whilst the performance measures for the AIP for 2018 have been disclosed (see Implementation of Remuneration Policy for 2018), 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 2018’s AIP retrospectively in next year’s Remuneration Report on a similar basis to the
disclosures made above in respect of 2017’s AIP.
LTIP OUTCOMES FOR 2015 AWARDS
Performance measure and weighting
Target range
Embedded Value growth1
(40%)
Target range between Embedded Value growth in excess of the
risk-free rate by 3% per annum and Embedded Value growth in
excess of the risk-free rate by 5% per annum.
Performance
achieved
7.9%
Vesting
outcome
100%
% achieved
40.00%
Cumulative cash generation
(40%)
Target range between Cumulative cash generation of £1.032 billion
and Cumulative cash generation of £1.182 billion.
1.067bn
43%
17.02%
TSR (20%)
Total
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.
54th
36%
7.26%
64.28%
As disclosed on page 68 of the 2015 Directors’ remuneration report, with the introduction of Solvency II, Phoenix no longer reports MCEV.
1
MCEV growth for the Company’s LTIP is measured using a combination of the growth in balance sheet values plus the value of dividends paid over a three-year performance period.
As MCEV is no longer reported by Phoenix from 31 December 2015, for the proportion of the 2015 LTIP awards subject to an MCEV growth measure, the Remuneration Committee
considered it appropriate to measure the balance sheet element of MCEV growth using growth in MCEV over the period of one financial year to 31 December 2015 as reported, and
then deriving the growth rate for the 2016 and 2017 financial years by using the percentage growth in Solvency II Own Funds, which has been adjusted for Solvency II specific items
(‘Adjusted Shareholder Solvency II Own Funds’). Adjusted Shareholder Solvency II Own Funds is considered appropriate as it is the economic value of an entity calculated on a Solvency II
basis. With the addition of dividends paid over the period to 31 December 2017, the MCEV growth achieved for the 2015 LTIP awards was 7.9%.
The above targets were all measured over the period of three financial years 1 January 2015 to 31 December 2017.
In addition to the above targets, the Committee confirmed that the underpin performance condition relating to debt levels and associated interest costs,
and management of debt, capital restructuring and risk management within the Group (as described more fully on page 75 had been achieved in the
performance period.
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Phoenix Group Holdings | Annual Report & Accounts 2017
NON-EXECUTIVE FEES
The emoluments of the Non-Executive Directors for 2017 based on the current disclosure requirements were as follows:
Name
Non-Executive Chairman
Henry Staunton
Non-Executive Directors
Rene-Pierre Azria2
Alastair Barbour
Ian Cormack
Tom Cross-Brown3
Karen Green4
Isabel Hudson5
Wendy Mayall6
John Pollock7
Belinda Richards8
Nicholas Shott9
Kory Sorenson
David Woods10
Total
Directors’
salaries/fees
2017
£000
Directors’
salaries/fees
2016
£000
Benefits1
2017
£000
Benefits1
2016
£000
Total
2017
£000
Total
2016
£000
325
–
150
116
–
52
39
118
136
26
105
116
53
1,236
325
96
145
140
46
–
105
35
35
–
35
105
145
1,212
–
–
3
–
–
–
–
–
–
–
–
–
2
5
–
–
6
–
–
–
–
–
–
–
–
–
13
19
325
–
153
116
–
52
39
118
136
26
105
116
55
1,241
325
96
151
140
46
–
105
35
35
–
35
105
158
1,231
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 Rene-Pierre Azria retired from the Board 30 November 2016.
3 Tom Cross-Brown retired from the Board 11 May 2016.
4 Karen Green joined the Board 1 July 2017.
5
Isabel Hudson retired from the Board 11 May 2017.
6 Wendy Mayall joined the Board 1 September 2016.
7 John Pollock joined the Board 1 September 2016.
8 Belinda Richards joined the Board 1 October 2017.
9 Nicholas Shott joined the Board 1 September 2016.
10 David Woods retired from the Board 11 May 2017.
The aggregate remuneration of all Executive and Non-Executive Directors under salary, fees, benefits, cash supplements in lieu of pensions
and annual incentive was £4.082 million (2016: £4.041 million).
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Directors’ Remuneration Report
continued
SHARE-BASED AWARDS
As at 31 December 2017, Directors’ interests under long-term share-based arrangements were as follows:
LTIP
Clive Bannister
LTIP
LTIP
LTIP
LTIP5
James McConville
LTIP
LTIP
LTIP
LTIP
LTIP5
Date of grant
26 Mar 2014
28 Sept 2015
2 Jun 2016
24 Mar 2017
15 Nov 2013
26 Mar 2014
28 Sept 2015
2 Jun 2016
24 Mar 2017
Share price
on grant1
No. of shares
as at 1 Jan
20171
No. of shares
granted
in 2017
No. of dividend
shares
accumulated as
at vesting2
No. of shares
exercised3
No. of shares
not vested4
No. of shares
as at 31 Dec
2017
Vesting
date6
630.5p
703.8p
746.1p
788.1p
605.4p
630.5p
703.8p
746.1p
788.1p
222,048
198,931
187,634
–
608,613
90,535
139,573
125,041
117,940
–
473,089
–
–
177,627
177,627
–
–
–
–
111,651
111,651
44,856
(146,797)
(120,107)
–
26 Mar 2017
–
–
–
–
–
–
–
–
–
198,931
28 Sept 2018
187,634
2 Jun 2019
177,627
24 Mar 2020
44,856
(146,797)
(120,107)
564,192
–
(90,535)
–
28,192
(92,270)
(75,495)
–
–
15 Nov 2016
26 Mar 2017
–
–
–
–
–
–
–
–
–
125,041
28 Sept 2018
117,940
2 Jun 2019
111,651
24 Mar 2020
28,192
(182,805)
(75,495)
354,632
1 The number of shares for outstanding LTIP awards granted between 2013 and 2016 were increased to take into account the impact of the rights issue which took place on 9 November 2016.
This adjustment was based on the Theoretical Ex-Rights Price (‘TERP’) and approved by the Remuneration Committee. The share price on grant shown has also been adjusted to reflect the
impact of the rights issue on all share prices.
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
3 Gains of Directors from share options exercised and vesting shares under the LTIP in 2017 were £2,533,277 (2016: £1,121,682). Clive Bannister’s gain was £1,136,810 arising from an LTIP
award exercised on 29 March 2017 at a share price of £7.744097; James McConville’s gain totalled £1,396,467 arising from an LTIP award exercised on 5 January 2017 at a share price of
£7.532102 (£681,919) and an LTIP award exercised on 29 March 2017 at a share price of £7.744097 (£714,548).
4 The 2014 LTIP award vested at 55% of maximum.
5 The face value of LTIP awards granted as nil cost options n in 2017 is £1,399,996 for Clive Bannister and £879,996 for James McConville. This represents the maximum vesting of awards
granted (but before any credit for dividends over the period to vesting) and is calculated using a share price of £7.881667p being the average of the closing middle market prices of Phoenix
shares for the three dealing days preceding the award date. The vesting percentage at threshold performance (2017 awards) for Clive Bannister and James McConville is 25%.
6 As detailed earlier, for 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.
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Phoenix Group Holdings | Annual Report & Accounts 2017
The performance conditions for the 2015, 2016 and 2017 awards are set out below:
2015 award
(40% Embedded value growth, 40%
Cumulative cash generation and 20% TSR)
2016 award
(50% Cumulative cash generation and
50% TSR)
2017 award
(50% Cumulative cash generation
and 50% TSR)
Not applicable.
Not applicable.
Target range between Embedded
value growth in excess of the
risk-free rate by 3% per annum
and Embedded value growth in
excess of the risk-free rate by 5%
per annum.
Target range of £1.032 billion to
£1.182 billion.
Target range of £1.311 billion to
£1.511 billion.
Target range of £1.372 billion to
£1.572 billion.
Target range as for 2015.
Target range as for 2015.
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
Embedded value growth1
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 Embedded value 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. For 2016 and 2017 awards, the underpin has
been extended to include consideration of customer satisfaction and, to meet Solvency II requirements, in exceptional cases, personal performance.
1 Please see footnote 1 on page 72 regarding the discontinuation of reporting on MCEV Growth.
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Phoenix Group Holdings | Annual Report & Accounts 2017
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Directors’ Remuneration Report
continued
DBSS
Clive Bannister
DBSS
DBSS
DBSS
DBSS3
James McConville
DBSS
DBSS
DBSS
DBSS3
Date of grant
28 Mar 2014
28 Sept 2015
2 Jun 2016
24 Mar 2017
28 Mar 2014
28 Sept 2015
2 Jun 2016
24 Mar 2017
Share price
on grant1
No. of shares
as at 1 Jan
20171
No. of shares
granted
in 2017
No. of dividend
shares
accumulated as
at vesting
No. of shares
exercised2
No. of shares
lapsed/
waived
No. of shares
as at 31 Dec
2017
Vesting date
554.4p
703.8p
746.1p
788.1p
554.4p
703.8p
746.1p
788.1p
40,020
33,917
38,464
–
112,401
24,011
22,491
25,283
–
71,785
–
–
–
37,363
37,363
–
–
–
23,485
23,485
8,081
(48,101)
–
–
–
–
–
–
8,081
(48,101)
4,847
(28,858)
–
–
–
–
–
–
4,847
(28,858)
–
–
–
–
–
–
–
–
–
–
–
28 Mar 2017
33,917
19 Mar 2018
38,464
24 Mar 2019
37,363
20 Mar 2020
109,744
–
28 Mar 2017
22,491
19 Mar 2018
25,283
24 Mar 2019
23,485
20 Mar 2020
71,259
1
The number of shares for all outstanding DBSS awards was increased to take into account the impact of the rights issue which took place on 9 November 2016. This adjustment was based on
the Theoretical Ex Rights Price (‘TERP’) and approved by the Remuneration Committee. The share price on grant shown has also been adjusted to reflect the impact of the rights issue on all
share prices.
2 Gains of Directors from share options exercised and vesting shares under the DBSS in 2017 were £595,978 (2016: £530,014). Clive Bannister’s gain was £372,499 arising from an award
exercised on 29 March 2017 at a share price of £7.744097. James McConville’s gain was £223,479 arising from an award exercised on 29 March 2017 at a share price of £7.744097.
3 The face value of DBSS awards granted as nil cost options in 2017 is £294,482 for Clive Bannister and £185,101 for James McConville. This is calculated using a share price of £7.881667,
being the average closing market price on the three days preceding the award date.
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.
SHARESAVE
Clive Bannister
James McConville
As at
1 Jan
2017
–
–
Shares
granted
in 2017
–
2,852
Shares
exercised
Shares
lapsed
–
–
–
–
As at
31 Dec
2017
–
2,852
Exercise
price
Exercisable
from
–
–
Date of
expiry
–
£6.31
1 Jun 2020
1 Dec 2020
Gains of Directors from share options exercised under Sharesave during 2017 were nil (2016: £4,998). Sharesave options are granted with an option
price that is a 20% discount to the three-day average share price when invitations are made. This is permitted by HMRC regulations for such options.
Aggregate gains of Directors from share options exercised and vesting shares under all share plans in 2017 were £3,129,255 (2016: £1,656,694).
During the year ended 31 December 2017, the highest mid-market price of the Company’s shares was 798.5p and the lowest mid-market price was
723.0p. At 31 December 2017, the Company’s share price was 782.0p.
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Phoenix Group Holdings | Annual Report & Accounts 2017
DIRECTORS’ INTERESTS
The number of shares and share plan interests held by each Director are shown below:
Name
Clive Bannister
James McConville
Alastair Barbour
Ian Cormack
Karen Green
Isabel Hudson1
Wendy Mayall
John Pollock
Belinda Richards
Nicholas Shott
Kory Sorenson
Henry Staunton
David Woods2
As at
1 January 2017
or date of
appointment
if later
As at
31 December
2017
or retirement
if earlier
Total share plan
interests as at
31 December
2017
– LTIP
Total share plan
interests as at
31 December
2017
– DBSS
Total share plan
interests as at
31 December
2017
– Sharesave
614,521
123,465
6,625
5,779
–
6,142
–
–
–
–
2,185
70,000
5,541
727,329
187,493
564,192
354,632
109,744
71,259
–
2,852
6,625
5,779
–
6,142
25,000
10,000
–
5,000
2,185
70.000
5,541
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
Isabel Hudson retired from the Board 11 May 2017.
2 David Woods retired from the Board 11 May 2017.
There have been no changes in the Directors’ share interests between 31 December 2017 and 27 February 2018 (being one month prior to the date of
the notice of the AGM).
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 2017 (using the share price of 782.0p as at 31 December
2017) can be summarised as follows:
Position
Clive Bannister
James McConville
Shareholding
Guideline
(minimum
% of salary)
200%
200%
Value of
shares held at
31 December
2017
(% of salary)
813%
333%
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 & Accounts 2017
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continued
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. The Executive Directors are entitled to retain any external fees. During 2017, Clive Bannister received £45,000
from Punter Southall Group and CHF 50,000 from UniGestion in respect of two external directorships. James McConville received £112,000 from
Tesco Personal Finance plc.
NON-EXECUTIVE DIRECTORS’ CONTRACTS
Name
Alastair Barbour
Ian Cormack
Karen Green
Wendy Mayall
John Pollock
Nicholas Shott
Belinda Richards
Kory Sorenson
Henry Staunton
Date of letter of appointment
Date of Joining the Board
Appointment end date
Unexpired term (months)
30 September 2016
1 October 2013
25 May 2016
2 September 2009
29 June 2017
1 July 2017
2 May 2018
2 May 2018
1 July 2020
24 August 2016
1 September 2016
1 September 2019
24 August 2016
1 September 2016
1 September 2019
24 August 2016
1 September 2016
1 September 2019
29 June 2017
1 October 2017
1 October 2020
9 May 2014
1 July 2014
2 May 2018
19 August 2015
1 September 2015
1 September 2018
2
2
28
18
18
18
31
2
6
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 2017 in respect of the application of the Remuneration Policy are summarised in the Committee Chairman’s letter
to shareholders at the start of the Remuneration Report.
The table below shows the independent Non-Executive Directors who served on the Committee during 2017 and their date of appointment:
Member
Ian Cormack (Committee Chairman to 11 May 2017)
Isabel Hudson
Nicholas Shott
Kory Sorenson (Committee Chair from 11 May 2017)
Karen Green
From
18 February 2010
18 February 2010
20 October 2016
3 July 2014
1 July 2017
To
1 July 2017
11 May 2017
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 2017, six Committee
meetings were held and details of attendance at meetings are set out in the Corporate Governance Report on page 55.
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.
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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 remuneration 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 the Committee was satisfied that the advice provided by FIT was objective and independent. FIT’s fees in respect of 2017 were £190,945,
all of which were attributed to work relating to the Committee. FIT’s fees were charged on the basis of the firm’s standard terms of business for
advice provided.
As part of our normal governance process, a review of the independent remuneration adviser was undertaken by the Committee in 2017.
Following tender submissions and a full review, the Committee decided to appoint PwC as adviser from May 2018.
The Committee consulted with the Group Chief Executive Officer, Group HR Director and Deputy Group Finance Director 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. The Chief
Risk Officer is asked to confirm each year that the Company has operated within its stated risk appetite during the year and also to confirm whether
there were otherwise any risk-related concerns that required the Committee to consider using its judgement to moderate incentive plan outcomes.
There were no such concerns in 2017.
APPROVAL
This report in its entirety has been approved by the Remuneration Committee and the Board of Directors and signed on its behalf by:
KORY SORENSON
REMUNERATION COMMITTEE CHAIR
14 March 2018
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Directors’ Remuneration Policy
The information in this supplement is the Directors’ Remuneration Policy as approved
by the Company’s shareholders at the Company’s 2017 AGM on 11 May 2017. It does
not form part of the Directors’ Remuneration Report for 2017 and is not subject to the
advisory vote at the 2018 AGM on the Directors’ Remuneration Report for 2017.
GENERAL POLICY
The Remuneration Policy for Executive Directors is summarised in the table below along with the position of the Chairman’s and the Non-Executive
Directors’ fees:
Overall Positioning*
The Company’s overall positioning on remuneration for Executive Directors remains unchanged from prior years:
– An appropriate balance is maintained between fixed and variable components of remuneration.
– 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 is positioned appropriately between these data sets.
* This section does not form part of the Remuneration Policy and is for information only.
Summary of Changes from Previous Policy:
As more fully detailed in the ‘Changes from Previous Policy’ column in the Remuneration Policy table, the key changes to the Remuneration Policy are
the following:
Element
Changes from previous policy
Base salary
– Confirmation of caps for each element of the policy, including base salary. For base salaries, we have clarified the target positioning
of Executive Directors’ base salaries as between the FTSE 31-100 and FTSE 250 data sets.
Annual
Incentive Plan
Long-Term
Incentive Plan
– Increasing the level of bonus deferral to 40% of outcomes (from 33% of outcomes).
– Confirming that at least 50% of performance measures in any year will relate to financial measures.
– Confirming the automatic grant of deferred shares on the fourth dealing day following the announcement of annual results each year.
– Confirming the automatic grant of LTIP awards on the fourth dealing day following the announcement of annual results each year.
– Confirming the application of holding periods (which have applied to LTIP awards from 2015 onwards).
– Confirming that no material changes will be made to the current performance measures or the current mix of performance
measures for LTIP awards made in any year without consulting major shareholders.
Remuneration Policy table
Element and purpose
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
Policy and operation
– Base salaries are reviewed each year against companies of similar size and complexity. Both salary levels and overall remuneration are set by
reference to the median data of comparators which the Remuneration Committee considers to be suitable using both the FTSE 31-100 and the
FTSE 250 as a whole, and positioning the Executive Directors’ salaries around the average of the median positions in these pan-sector groups.
Consideration is also given to other relevant insurance company data.
– The Remuneration Committee uses this data as a key reference point in considering the appropriate level of salary. Other relevant factors including
corporate and individual performance and any changes in an individual’s role and responsibilities, and the level of salary increases awarded to other
employees of the Group are also considered.
– Base salary is paid monthly in cash.
– Changes to base salaries normally take effect from 1 January.
Maximum
– The Remuneration Committee will apply the factors set out in the previous column in considering any salary adjustments during the duration of this
policy. No increase will be made if it would take an Executive Director’s salary above £780,000 (being the median level of salaries for CEOs in the
FTSE 31-100), provided that this figure may be increased in line with UK RPI inflation for the duration of this policy.
Performance measures
– N/A
Changes from previous policy
– No material changes. ‘Cap’ for base salaries re-expressed as a monetary amount and relative positioning is confirmed.
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Remuneration Policy table continued
Element and purpose
Benefits
To provide other benefits valued by recipient
Policy and operation
– The Group provides market competitive benefits in kind. Details of the benefits provided in each year will be set out in the Implementation Report.
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.
– Where appropriate, the Company will meet certain costs relating to Executive Director relocations.
Maximum
– It is not possible to prescribe the 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.
– 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.
– Relocation expenses are subject to a maximum limit of £150,000.
Performance measures
– N/A
Changes from previous policy
– No material changes.
Element and purpose
Pension
To provide retirement benefits and remain competitive within the market place
Policy and operation
– The Group provides a competitive employer sponsored defined contribution pension plan.
– 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. Any such cash payments are reduced for the
effect of employers’ National Insurance Contributions.
– Phoenix will honour the pensions obligations entered into under all previous policies in accordance with the terms of such obligations.
Maximum
– A contribution limit of 20% of base salary per annum per Executive Director has been set for the duration of this policy.
Performance measures
– N/A
Changes from previous policy
– No material changes.
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Directors’ Remuneration Policy
continued
Remuneration Policy table continued
Element and purpose
Annual Incentive Plan (‘AIP’) and Deferred Bonus Share Scheme (‘DBSS’)
To motivate employees and incentivise delivery of annual performance targets
Policy and operation
– AIP levels and the appropriateness of measures are reviewed annually to ensure they continue to support the Group’s strategy.
– AIP outcomes are paid in cash in one tranche (less the deferred share award).
– At least 40% 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 deferral level or the period of deferral.
– Deferral of AIP outcomes into shares is currently made under the DBSS.
– Awards under DBSS will be in the 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).
– DBSS awards are made automatically each year on the fourth dealing day following the announcement of annual results, using the average of the
preceding three dealing days’ share prices to calculate the number of shares in awards.
– The three-year period of deferral will run to the third anniversary of the award date.
– Dividend entitlements will accrue over the three-year deferral period and be delivered as additional vesting shares.
– Malus/clawback provisions apply to the AIP and to amounts deferred under DBSS as explained in the notes to this table.
Maximum
– The maximum annual incentive level for an Executive Director is 150% of base salary per annum.
Performance measures
– 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. However, the weighting of financial performance measures will not
be reduced below 50% of total AIP potential in any year for the duration of this policy.
– 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 performance level produces an annual incentive outcome that is 10% of the weighting given to
these measures.
– 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.
– 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 take account of such activity and ensure the targets continue to reflect
performance as originally intended.
ii. There is a specific adjustment factor of 80%-120% of the provisional outturn 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 universe of stakeholders. 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 outturn (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.
Changes from previous policy
Increased the minimum level of compulsory deferral from 33% to 40%.
Confirmed that financial performance measures will always have at least a 50% weighting for any year.
Provides for the automatic making of DBSS awards on the fourth dealing day following the announcement of annual results.
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Remuneration Policy table continued
Element and purpose
Long-Term Incentive Plan (‘LTIP’)
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
Policy and operation
– Awards under the LTIP may be in any of the forms of awards to receive shares for nil-cost (as described for DBSS above).
– LTIP awards are made automatically each year on the fourth dealing day following the announcement of annual results, using the average of the
preceding three dealing days’ share prices to calculate the number of shares in awards.
– The vesting period will be at least three years and run until the third anniversary of the award date (unless a longer vesting period is introduced).
– A holding period will apply so that Executive Directors may not normally exercise vested LTIP awards until the fifth anniversary of the award date.
– Dividend entitlements will accrue until the end of the holding period in respect of performance vested shares and be delivered as additional vesting
shares.
– Malus/clawback provisions apply on a basis consistent with the equivalent provisions in the AIP and DBSS and as explained in the notes to
this table.
– The Company will honour the vesting of all awards granted under previous policies in accordance with the terms of such awards.
Maximum
– The formal limit under the LTIP is 300% of base salary per annum (and 400% per annum in exceptional cases).
– The Remuneration Committee’s practice is to make LTIP awards to Executive Directors each year over shares with a value (as at the award date) of
200% of the individual’s annual base salary although discretion is reserved to make awards up to the maximum levels for the policy as stated above.
Performance measures
– The Remuneration Committee may set such performance measures for LTIP awards as it considers appropriate (whether financial or non-financial
and whether corporate, divisional or individual). The Remuneration Committee would expect to consult with its major shareholders if it proposed
changing materially the current performance measures applied for LTIP awards made to Executive Directors or the relative weightings between
these performance measures.
– For every LTIP award, appropriate disclosures regarding the proposed performance conditions will be made in the annual Implementation Report.
– 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 measures, provided that any adjusted performance measure is, in its opinion, neither
materially more nor less difficult to satisfy than the original measure.
– For each part of an LTIP award subject to a specific performance condition, the threshold level of vesting is 25% of that part of the LTIP award. The
Remuneration Committee reserves the discretion to make changes to these levels which it considers non-material.
– The performance period for LTIP awards will be at least three years, but the Remuneration Committee reserves discretion to lengthen the
applicable performance periods for LTIP awards.
Changes from previous policy
– Provides for the automatic making of LTIP awards on the fourth dealing day following the announcement of annual results.
– Recognises the introduction of holding periods on LTIP awards since the previous policy was approved (holding periods have applied to all LTIP
awards for Executive Directors since 2015).
– Confirms that material changes to either the current performance measures or the relative weightings of such measures would be subject to
consultation with major shareholders.
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Directors’ Remuneration Policy
continued
Remuneration Policy table continued
Element and purpose
All-employee share plans
To encourage share ownership by employees, thereby allowing them to participate in the long-term success of the Group and align their interests with
those of the shareholders
Policy and operation
– Executive Directors are able to participate in all-employee share plans on the same terms as other Group employees as required by
HMRC legislation.
Maximum
– Sharesave – the Remuneration 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% of the market price set at the launch of each scheme.
– 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 and receive up to two matching shares for every purchased share. Maximum saving is £150 each month (or
up to such level as permitted by the Company in line with HMRC legislation). 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).
Performance measures
– Consistent with normal practice, such awards are not subject to performance conditions.
Changes from previous policy
– No material changes.
Element and purpose
Shareholding guidelines
To encourage share ownership by the Executive Directors and ensure interests are aligned
Policy and operation
– 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 minimum of 200% of their base salary in shares.
– 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).
– 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.
Maximum
– N/A
Performance measures
– N/A
Changes from previous policy
– No material changes.
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Remuneration Policy table continued
Element and purpose
Chairman and Non-Executive Director fees
Policy and operation
– 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.
– Fee levels are periodically reviewed. 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.
– Additional fees are paid to Non-Executive Directors who chair a Board committee, or sit on the board of a subsidiary company or on the Solvency II
Model Governance Committee, and to the Senior Independent Director (‘SID’). No separate Board committee membership fees are currently paid.
– Fees are paid monthly in cash.
– Fee levels for Non-Executive Directors are reviewed annually with any changes normally taking effect from 1 January.
Maximum
– 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).
– The Company reserves the right to vary the structure of fees within this limit including, for example, introducing time-based fees or reflecting the
establishment of new board committees.
Performance measures
– N/A
Changes from previous policy
– No material changes.
NOTES TO THE REMUNERATION POLICY TABLE
1. Differences between the Policy on Remuneration for Directors
and the Policy on Remuneration of other employees
When determining Executive Directors’ remuneration, the Committee takes
into account pay throughout the Group to ensure that the arrangements in
place remain appropriate.
The Group has (as required by Solvency II regulations) one consistent reward
policy for all levels of employees and this policy is made available to all staff.
Therefore, the same reward principles guide reward decisions for all Group
employees, including Executive Directors, although remuneration packages
differ to take into account appropriate factors in different areas of the business:
– AIP – all Group employees participate in the AIP, although the quantum and
balance of corporate to individual objectives varies by level. The most senior
staff are subject to the regulatory requirements of Solvency II, and these
individuals also receive part of their bonus in Company shares deferred for
a period of three years. A different scorecard of AIP performance measures
applies for employees in ‘control functions’ (risk, compliance and internal
audit) to exclude financial performance measures.
– LTIP – our most senior employees participate in the LTIP currently based on
the same performance conditions as those for Executive Directors, although
the Committee reserves the discretion to vary the performance conditions
for awards made to employees below the Board for future awards.
– All-employee share plans – the Committee considers it is important
for all employees to have the opportunity to become shareholders in the
Company. The Company offers two HMRC tax advantaged arrangements in
which all UK employees can participate and acquire shares on a discounted
and tax advantaged basis (Sharesave and SIP). In recent years, the terms of
both plans have been made more generous to encourage employee take-up
(increasing the Sharesave discount to 20% and in 2017 increasing the SIP
match from 1 for 6 to 1 for 3). In addition, selected individuals may receive
ad hoc share awards contingent on continued employment.
2. Stating maximum amounts for the Remuneration Policy
The DRR regulations and related investor guidance encourages companies to
disclose a cap within which each element of remuneration policy will operate.
Although the Company is not subject to these provisions, the Remuneration
Committee has decided to set and disclose limits in this report on a voluntary
basis. Where maximum amounts for elements of remuneration have been
set within the Remuneration Policy, these will operate simply as caps and are
not indicative of any aspiration.
3. Malus and clawback
Malus (being the forfeiture of unvested awards) and clawback (being the ability
of the Company to claim repayment of paid amounts as a debt) provisions
apply to the AIP, DBSS and LTIP. These provisions may be applied where the
Remuneration Committee considers it appropriate to do so following:
– a review of the conduct, capability or performance of an individual;
– a review of the performance of the Company or a Group member;
– any material misstatement of the Company’s or a Group member’s financial
results for any period;
– any material failure of risk management by an individual, a Group member or
the Company; or
– any other circumstances that have a sufficiently significant impact on the
reputation of the Company.
4. Travel and hospitality
While the Remuneration Committee does not consider this to form part of
benefits in the normal usage of that term, it has been advised that corporate
hospitality (whether paid for by the Company or another) and certain instances
of business travel (including any related tax liabilities settled by the Company
or another Group company) for Directors may technically be considered as
benefits and so the Remuneration Committee expressly reserves the right to
authorise such activities and reimbursement of associated expenses within its
agreed policies.
5. Discretions reserved in operating incentive plans
The Remuneration Committee will operate the AIP, DBSS and LTIP
according to their respective rules and the above Remuneration Policy table.
The Remuneration Committee retains certain discretions, consistent with
market practice, in relation to the operation and administration of these
plans including:
– (as described in the Remuneration Policy table) the determination of
performance measures and targets and resultant vesting and pay-out levels;
– (as described in the Remuneration Policy table) the ability to adjust
performance measures and targets to reflect events and/or to ensure the
performance measures and targets operate as originally intended;
– (as described in the Termination Policy section below) determination of the
treatment of individuals who leave employment, based on the rules of the
incentive plans, and the treatment of the incentive plans on exceptional
events, such as a change of control of the Company; and
– the ability to make adjustments to existing awards made under the incentive
plans in certain circumstances (e.g. rights issues, corporate restructurings
or special dividends).
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Directors’ Remuneration Policy
continued
DIRECTORS’ SERVICE CONTRACTS
Executive Directors
Executive Director service contracts, which do not contain expiry dates,
provide that compensation provisions for termination without notice
will only extend to 12 months of salary, certain fixed benefits and
pension (which may be payable in instalments and subject to mitigation).
By excluding any entitlement to compensation for loss of the opportunity
to earn variable pay, the Remuneration Committee believes the contracts
to be consistent with best practice. The Remuneration Committee also
has discretion to mitigate further by paying on a phased basis with unpaid
instalments ceasing after the initial period of six months if the Executive
Director finds alternative employment. Contracts do not contain change of
control provisions. The template contract is reviewed from time-time and
may be amended provided it is not overall more generous than the terms
described above.
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.
Non-Executive Directors
The Non-Executive Directors, including the Chairman, have letters
of appointment which set out their duties and responsibilities.
Appointment is for an initial fixed term of three years (which may be
renewed), terminable by one month’s notice from either side (six months
in the case of the Chairman). Non-Executive Directors are not eligible to
participate in incentive arrangements or receive pension provision or other
benefits such as private medical insurance and life insurance.
RECRUITMENT REMUNERATION POLICY
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.
– 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 DRR 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.
– The AIP and LTIP will operate (including the maximum award levels)
as detailed in the general policy in relation to any newly appointed
Executive Director.
– 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.
– For external and internal appointments, the Remuneration Committee
may agree that the Company will meet certain relocation expenses
as it considers appropriate.
– For external candidates, it may be necessary to make awards in
connection with the recruitment to buy-out awards forfeited by
the individual on leaving a previous employer. For such buy-out
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 buy-out awards will be appropriately disclosed.
– All such buy-out awards, whether under the AIP, LTIP or otherwise (for
example, specific arrangements made under Listing Rule 9.4.2), 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 buy-out awards subject to what are, in its opinion, comparable
requirements in respect of service and performance. However, the
Remuneration 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 interests of shareholders and
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.
– For the avoidance of doubt, such buy-out awards are not subject to a
formal cap.
– A new Non-Executive Director would be recruited on the terms
explained in the Remuneration Policy for such Directors.
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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 Leaver1
Bad Leaver
Exceptional Events
AIP
DBSS
LTIP
A participant is considered a Good Leaver if
leaving through redundancy, serious ill health
or death or otherwise at the discretion of the
Remuneration Committee
A participant would typically be
considered a Bad Leaver following
a voluntary resignation or leaving for
disciplinary reasons
For example change in control or
winding-up of the Company
Pro-rated annual incentive. Pro-rating to reflect
only the period worked. Performance metrics
determined by the Remuneration Committee
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 at the end of the original
vesting period
Will receive a pro-rated award subject to the
application of the performance conditions at
the normal measurement date and, generally,
any holding period will continue to apply
Remuneration Committee discretion to
disapply pro-rating or to accelerate vesting to
the date of leaving (subject to pro-rating and
performance conditions) and/or the release of
any holding period
Deferred awards normally lapse
Deferred awards vest
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
1 Where the reason for leaving is retirement, the individual will be required to provide confirmation of his continued retirement before any payments are released to him after the end of the
vesting period.
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.
In the event of cessation of a Non-Executive Director’s appointment (excluding the Chairman) they would be entitled to a one month’s notice period.
The Chairman, as detailed in his letter of appointment, would be entitled to a six months’ notice period.
CONSIDERATION OF EMPLOYMENT CONDITIONS ELSEWHERE IN THE GROUP
As explained in the notes to the Remuneration Policy table, the Remuneration Committee takes into account Group-wide pay and employment
conditions. The Remuneration Committee reviews the average Group-wide base salary increase and annual incentive costs and is responsible for all
discretionary and all-employee share arrangements.
Consistent with normal practice, the Remuneration Committee did not consult with employees in preparing the Remuneration Policy.
The Remuneration Committee is cognisant of the requests from, amongst others, the Investment Association, for companies to publish ratios
comparing CEO to employee pay. The Remuneration Committee has not however published this data in the Directors’ Remuneration Report given the
absence of a common methodology for these comparisons; the Company’s expectation is that it will publish ratios showing comparisons in future years
when, as can be expected, UK regulations or guidance develop a common methodology.
CONSIDERATION OF SHAREHOLDERS’ VIEWS
Each year the Remuneration Committee takes into account the approval levels of remuneration-related matters at our AGM in determining that the
current Remuneration Policy remains appropriate for the Company.
The Remuneration Committee also seeks to build an active and productive dialogue with investors on developments in the remuneration aspects of
corporate governance generally and any changes to the Company’s executive pay arrangements in particular. The Remuneration Committee consulted
with its largest shareholders before proposing the changes reflected in this Remuneration Policy.
Phoenix Group Holdings | Annual Report & Accounts 2017
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Directors’ Report
The Directors of the Group present their report for the year ended
31 December 2017.
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
Paid interim dividend
25.1p per share (2016: 22.7p1 per share)
Recommended final dividend
25.1p per share (2016: 23.9p per share)
Total ordinary dividend
50.2p per share (2016: 46.6p1 per share)
1 2016 dividends per share figures have been rebased to take into account the bonus element
of the rights issue completed in November 2016.
As a result of regulatory changes applicable to the Group under Solvency
II, dividends declared in respect of the Company’s ordinary shares must
be capable of being cancelled and withheld or deferred at any time prior to
payment. This is in order that the Company’s ordinary shares be counted
towards Group capital. Accordingly, the final dividend will be declared on a
conditional basis and the Directors reserve the right to cancel or defer the
recommended dividend. The Directors do not expect to exercise this right
other than where they believe that it may be necessary to do so as a result
of legal or regulatory requirements.
SHARE CAPITAL
The issued share capital of the Company was increased by 382,827
ordinary shares during 2017 which related to shares issued under the
Company’s Sharesave Scheme.
At 31 December 2017, the issued ordinary share capital totalled
393,232,644. Subsequently, 18,792 ordinary shares have been issued in
2018 in connection with the Company’s Sharesave Scheme to bring the
total in issue to 393,251,436 at the date of this report.
Full details of the authorised, issued and fully paid share capital as at
31 December 2017 and movements in share capital during the period
are presented in note D1 to the IFRS consolidated financial statements.
At the Company’s AGM held on 11 May 2017, 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.
Subject to obtaining shareholder approval for the renewal of this authority
at the forthcoming AGM on 2 May 2018, 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), 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.
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 Phoenix Group 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.
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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 individual authorisation to deal in
the Company’s 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 13 March 2018, 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
Standard Life Aberdeen plc
Prudential plc group of companies
BlackRock Inc.
31,443,586
20,632,741
20,268,506
Ameriprise Financial Inc. and its group
20,065,999
Aviva plc & its subsidiaries
19,863,516
7.99%
5.24%
5.15%
5.10%
5.05%
ANNUAL GENERAL MEETING (‘AGM’)
The AGM of the Company will be held at Stationers’ Hall Ave, Maria Lane,
London, ECM4 7DD on Wednesday 2 May 2018 at 10.00am.
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.
COMMUNICATION WITH INVESTORS AND SHAREHOLDERS
The Company places considerable importance on communication with
investors/shareholders and regularly engages with them on a wide range
of issues.
The Company’s Investor Relations department is dedicated to facilitating
communication with investors and analysts and an active investor relations
programme is maintained. Please see page 46 for further details regarding
the Company’s engagement with investors.
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 insurance 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. The Company also undertakes perception studies, when
appropriate, designed to determine the investment community’s view of
the core business.
The Company’s AGM provides another opportunity to communicate
with its shareholders. At the 2017 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 2018 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 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.
BOARD
BOARD OF DIRECTORS
The membership of the Board of Directors during 2017 is given within the
Corporate Governance Report on pages 53 and 55, which is incorporated
by reference into this report. Details of Directors’ (and persons closely
associated with them) interests in the shares of the Company are shown
in the Directors’ remuneration report.
During 2017 and up to the date of this report, the following changes to the
Board took place:
– Isobel Hudson and David Woods resigned from the Board on
11 May 2017.
– Karen Green and Belinda Richards were appointed to the Board with
effect from 1 July and 1 October 2017 respectively.
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 I4 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.
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 for Ian Cormack who is
standing down from the Board, should be put forward for election/re-
election at the forthcoming AGM to be held on 2 May 2018.
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 (amended), 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.
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.
DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE
The Company maintains Directors’ and Officers’ liability insurance cover
which is renewed annually.
EMPLOYEES
DIVERSITY AND INCLUSION
The Group is committed to creating a work environment free of
discrimination where everyone is treated with dignity and respect.
We value the individuality, diversity, and creativity that every employee
brings to the workplace. Everyone has the right to be treated with dignity
and respect and not to be disadvantaged in any way as a result of their
age, race, gender, disability, religion or belief, sexual orientation, gender
re-assignment, marriage and civil partnership or pregnancy and maternity.
The Company is committed to achieving equality of opportunity and the
equal treatment of all our people and those applying to join us. Equality of
opportunity, which includes equality of pay, is seen as an integral part of
our employment practices, policies and procedures. 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 Company will not tolerate bullying and harassment of any kind.
All allegations of bullying and harassment will be investigated and, if
appropriate, disciplinary action will be taken. The Company will also
not tolerate victimisation of a person for making allegations of bullying
or harassment in good faith or supporting someone to make such
a complaint.
Phoenix Group Holdings | Annual Report & Accounts 2017
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Directors’ Report
continued
EMPLOYEE ENGAGEMENT
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 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 engagement.
VIABILITY STATEMENT
The Viability Statement, as required by section C.2.2 of the Code, has
been undertaken for period of five years to align to the Group’s business
planning and is contained in the Risk Management section on page 37.
CORPORATE GOVERNANCE STATEMENT
The disclosures required by section 7.2 of the FCA’s Disclosure Guidance
and Transparency Rules can be found in the Corporate Governance
Report on pages 47 to 62 which is incorporated by reference into this
Directors’ Report and comprises the Company’s Corporate Governance
Statement. The disclosures required in respect of the Company’s diversity
policy are addressed in the Strategy and KPIs section of the Strategic
Report on page 24. 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.
EMPLOYEE SHAREHOLDING
The Group also provides the opportunity for employees to participate in
the Company’s all-employee share schemes, Sharesave and the Share
Incentive Plan, to encourage broader share ownership in the Company.
GREENHOUSE GAS EMISSIONS
All disclosures concerning the Group’s greenhouse emissions are
contained in the Environmental Report forming part of the Strategic
Report on page 45.
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. Changes proposed at the 2 May 2018 AGM will be
set out in the notice for that meeting.
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
2 May 2018.
There is no cap on auditor liability in place in relation to audit work carried
out on the IFRS consolidated financial statements and the Group’s UK
subsidiaries’ individual financial statements.
Details of fees paid to EY during 2017 for audit and non-audit work
are disclosed in note C3 to the IFRS consolidated financial statements.
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 35 to 37.
In addition, the IFRS consolidated financial statements include, amongst
other things, notes on the Group’s borrowings (note E5), management
of its financial risk including market, credit and liquidity risk (note E6), its
commitments and contingent liabilities (notes I6 and I7) and its capital and
management (note I3). The Strategic Report (on pages 2 to 38) sets out
the business model and how the Group creates value for shareholders
and policyholders.
The Board has followed the 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.
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 2017.
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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 2017 financial period was
Gerald Watson.
CONTRACTUAL/OTHER
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 £900million 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.
DISCLOSURES UNDER LISTING RULE 9.8.4R
For the purposes of Listing Rule 9.8.4C, the information required to be
disclosed under Listing Rule 9.8.4R 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
Deleted
Details of long-term
incentive schemes
Not applicable
Not applicable
Not applicable
Waiver of emoluments by a
Director
Not applicable
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
Not applicable
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
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Statement of Directors’ Responsibilities in respect
of the Annual Report and Accounts
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:
– The Directors’ statement under LR 9.8.6R(3) (statement by the
Directors that the business is a going concern);
– The Directors’ remuneration disclosures made under LR 9.8.8R(2) – (5)
and (11) – (12); and
– 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.
The Strategic Report and the Directors’ Report were approved by the
Board of Directors on 14 March 2018.
By order of the Board
CLIVE BANNISTER
GROUP CHIEF EXECUTIVE OFFICER
JAMES MCCONVILLE
GROUP FINANCE DIRECTOR
14 March 2018
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 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 2017, 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 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:
– Select suitable accounting policies and then apply them consistently;
– Make judgements and accounting estimates that are reasonable
and prudent;
– 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
– 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.
The Directors are responsible for 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 Company and the Group. They are also
responsible for safeguarding the assets of the Group and hence for
taking reasonable steps for the prevention and detection of fraud and
other irregularities.
The Directors as at the date of this report, whose names and functions are
listed in the Board of Directors section on pages 50 to 51, confirm that, to
the best of their knowledge:
– 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
– 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.
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In this section
Independent Auditor’s Report
IFRS Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Parent Company Accounts
94
103
110
182
Notes to the Parent Company Financial Statements 185
Additional Life Company Asset Disclosures
Additional Capital Disclosures
Alternative Performance Measures
191
198
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Independent Auditor’s Report to the Members
of Phoenix Group Holdings
BASIS FOR OPINION
We conducted our audit in accordance with International Standards
on Auditing (UK) (‘ISAs’) and applicable law. Our responsibilities under
those standards are further described in the Auditor’s responsibilities
for the audit of the financial statements section of our report below.
We are independent of the Group and parent company in accordance
with the ethical requirements that are relevant to our audit of the financial
statements in the UK, including the FRC’s Ethical Standard as applied
to listed public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
USE OF OUR REPORT
This report is made solely to the company’s members, as a body, in
accordance with our engagement letter dated 7 March 2018 and with
Chapter 3 of Part 16 of the Companies Act 2006. 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.
CONCLUSIONS RELATING TO PRINCIPAL RISKS, GOING
CONCERN AND VIABILITY STATEMENT
We have nothing to report in respect of the following information in the
Annual Report, in relation to which the ISAs require us to report to you
whether we have anything material to add or draw attention to:
– the disclosures in the Annual Report set out on page 32- 37 that
describe the principal risks and explain how they are being managed
or mitigated;
– the Directors’ confirmation set out on page 37 in the Annual Report
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;
– the Directors’ statement set out on page 90 in the consolidated
financial statements 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 12 months from the date of
approval of the financial statements
– whether the Directors’ statement in relation to going concern required
under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge obtained in the audit; or
– the Directors’ explanation set out on page 37 in the Annual Report
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.
OUR OPINION ON THE FINANCIAL STATEMENTS
In our opinion:
– 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 2017 and of the Group’s loss and of the
parent company’s profit for the year then ended; and
– 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 financial statements for the year ended 31 December 2017,
included within the Annual Report and Accounts, which comprise:
Group
Parent company
– The consolidated income
statement for the year then
ended
– The statement of comprehensive
income for the year then ended
– The consolidated statement of
– The statement of financial
comprehensive income
for the year then ended
position as at 31 December 2017
– The pro forma reconciliation of
– The statement of cash flows for
the year then ended
– The statement of changes in
equity for the year then ended
– Related notes 1 to 17 to the
financial statements
Group operating profit
to results attributable to owners
for the year then ended
– The statement of consolidated
financial position
as at 31 December 2017
– The statement of consolidated
cash flows for the year then
ended
– The statement of consolidated
changes in equity for the year
then ended
– Related notes A1 to I8 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.
REPORT ON MATTERS PRESCRIBED BY OUR ENGAGEMENT LETTER
In our opinion:
– 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;
– the information given in the Corporate Governance Report set out on
pages 53 to 62 with respect to internal control and risk management
systems in relation to financial reporting processes is consistent with
the financial statements; and
– 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.
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Phoenix Group Holdings | Annual Report & Accounts 2017
OVERVIEW OF OUR AUDIT APPROACH
Materiality
– Group materiality is £63 million (2016: £67 million) which represents 2.0% (2016: 2.0%) of total equity attributable to
owners of the parent (‘Group equity’).
Audit scope
– We performed an audit of the complete financial information of the Group Function and Phoenix Life Division, and
audit procedures on specific balances for Other Group Companies. We further subdivided Phoenix Life Division into
two locations, separately identifying Abbey Life Assurance Company Limited (‘ALAC’) and the remaining Life Division
operations. Our scope is explained further on page 98.
– The reporting units where we performed full or specific audit procedures accounted for more than 99% of the equity and
loss before tax of the Group.
Key audit matters
– Valuation of insurance contract liabilities, comprising of the following risk areas:
• actuarial assumptions;
• actuarial modelling; and
• data.
– Valuation of complex and illiquid financial investments
KEY AUDIT MATTERS
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current
period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included
those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement
team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not
provide a separate opinion on these matters. This is not a complete list of all the risks identified in our audit.
Risk
Valuation of insurance contract liabilities (£45.4 billion; 2016: £46.7 billion)
Refer to the Audit Committee Report (page 59); Critical accounting estimates (page 111); Accounting policies and notes F1 of the consolidated financial
statements (pages 145 to 146) .
We considered the valuation of insurance contract liabilities to be a significant risk for the Group. Specifically we considered the actuarial assumptions
and modelling that 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 resultant valuation. Additionally, the valuation process is conditional upon the accuracy and
completeness of the data.
We have split the risks relating to the valuation of insurance contract liabilities into the following component parts:
– actuarial assumptions;
– actuarial modelling; and
– data.
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Independent Auditor’s Report to the Members
of Phoenix Group Holdings continued
We assessed management’s analysis of movements in insurance contract liabilities over the year 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:
Key observations communicated
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.
We determined that the models
used are appropriate and that
changes to the models were
implemented as intended and
that controls over management’s
processes for modelling insurance
contract liabilities outside of the
actuarial modelling system were
operating effectively.
Risk area
Actuarial assumptions
There has been no change in our
assessment of this risk from the prior year.
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
base and trend longevity and persistency
assumptions.
These assumptions are used as inputs
into a valuation model which uses
standard actuarial methodologies.
Actuarial modelling
There has been no change in our
assessment of this risk from the prior year.
We consider the integrity and
appropriateness of models to be critical to
the overall valuation of insurance contract
liabilities.
Over £41.3 billion of the £45.4 billion of
insurance contract liabilities are modelled
using the actuarial modelling systems
with the residual balance modelled
outside these systems to cater for
ancillary business. The key risk is therefore
associated with the modelling systems
but risks also exist in the calculation of
amounts outside these systems.
Our response to the risk
To obtain sufficient audit evidence to conclude on the
appropriateness of actuarial assumptions, we:
– tested the design and operating effectiveness of key controls
over management’s process for setting and updating actuarial
assumptions;
– 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;
– 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;
– in respect of mortality we have 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;
– benchmarked the demographic and economic assumptions
against those of other industry participants; and
– reviewed the disclosures made in the consolidated financial
statements regarding the sensitivity of the valuation of
insurance contract liabilities to changes in the key actuarial
assumptions.
We performed full scope audit procedures over this risk area in
two locations, which covered 100% of the risk amount.
To conclude on actuarial models, including those models outside
the core system, we:
– have for existing businesses, confirmed in prior periods that
the core system appropriately values liabilities, and tested the
design, implementation and operating effectiveness of key
controls over management’s process for testing and approval of
model changes during the year;
– for ALAC, being the first year of our appointment as auditors,
performed independent re-projections based on underlying
policy terms to substantiate the reserve calculated;
– evaluated the methodology, inputs and assumptions used for
a sample of model changes based on our knowledge of the
Group, industry standards and regulatory and financial reporting
requirements;
– reviewed the governance process around model changes and
assessed the completeness of identified model changes;
– assessed the results of the analysis of movements in insurance
contract liabilities in order to confirm the completeness of
model changes; and
– tested the design, implementation and operating effectiveness
of key controls over management’s process for modelling
insurance contract liabilities outside the actuarial modelling
systems.
We performed full scope audit procedures over this risk area in
two locations, which covered 100% of the risk amount.
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Phoenix Group Holdings | Annual Report & Accounts 2017
Key observations communicated
to the Audit Committee
We determined based on our audit
work that the data used for the
actuarial model inputs is materially
complete and accurate.
Our response to the risk
To obtain sufficient audit evidence to assess the integrity of
actuarial data we:
– 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;
– confirmed that the actuarial model data extracts provided by the
OSPs were those used as an input to the actuarial model;
– tested the design and operating effectiveness of key controls,
including information technology general controls, over
management’s data collection, extraction and validation
process;
– assessed the integrity of policy level data, performing
corroborative testing on i) changes to static data during the
period and ii) unusual trends and anomalies in the data. We
did this based upon our knowledge of the Group’s products,
industry standards and through using advanced data analytics;
– assessed the appropriateness of management’s grouping of
data for input into the actuarial model; and
– tested the reconciliations of premiums and claims information
from the actuarial data extract to the general ledger, where
applicable.
We performed full scope audit procedures over this risk area in
two locations, which covered 100% of the risk amount.
To obtain sufficient audit evidence to conclude on the valuation of
complex and illiquid financial investments, we:
– tested the design and operating effectiveness of key controls
over management’s process in respect of the valuation of
complex and illiquid financial investments such as ERMs, IRSs
and Corporate Transactions;
Based on our procedures
performed on the ERM and
IRS models and Corporate
Transactions, we are satisfied that
the valuation of these complex and
illiquid assets is reasonable.
– evaluated the methodology, inputs and assumptions used
(such as voluntary early repayment, house price inflation and
mortality improvement), and compared them to published
market benchmarks and other demographic and economic
assumptions used by other industry participants, to confirm that
key valuation inputs were consistent with industry norms and
our understanding of the asset type;
– considered the results of management’s experience analysis
and assessed the reasonableness of the movement in valuation
during the year;
– tested the completeness and accuracy of data used in the
valuation model;
– assessed the reasonableness of a sample of property
valuations within the IRS model; and
– reviewed that disclosures have been made in the financial
statements regarding the sensitivity of the valuation of certain
illiquid and complex assets to changes in the key assumptions.
We performed full scope audit procedures over this risk area in
two locations, which covered 99% of the risk amount.
Risk area
Data
There has been no change in 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.
Valuation of complex and illiquid
financial investments (£1.4 billion;
2016: £1.8 billion)
We have refined our assessment of risk
from the prior year, focussing on those
investments with the highest degree
of judgement such as Equity Release
Mortgages (‘ERM’), In Retirement
Services property reversions (‘IRS’), a
form of equity release product, and the
Abbey Life longevity contracts (known as
Corporate Transactions).
Refer to the Audit Committee Report
(page 59); Critical accounting estimates
(page 111); Accounting policies and notes
E1 and E2 of the consolidated financial
statements (page 123-127).
The extent of judgement 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 performed additional audit procedures
on the ERM and IRS financial investments
as well as the longevity contracts which
require judgement 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.
We have removed the significant risk identified in the prior year in relation to ‘Acquisition of AXA Wealth Limited and Abbey Life Assurance Company
Limited’, as this related to the one-off risk arising in the year of acquisition.
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Independent Auditor’s Report to the Members
of Phoenix Group Holdings continued
CHANGES FROM THE PRIOR YEAR
During the year, we were appointed as the auditor of ALAC.
This component continues to be designated as a full scope component.
AXA Wealth Limited was incorporated into the Phoenix Life Division
component during the year, and is no longer a separate identifiable
component of the Group.
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 continued to follow a programme of planned
visits that has been designed to ensure that the Senior Statutory Auditor
visited each of the locations where the Group audit scope was focused
at least once every year and the most significant of them more than once
a year. For all full audit components, in addition to the location visit, the
Group audit team reviewed key working papers and participated in the
component team’s planning, including the component team’s discussion
of fraud and error. The Group team attended the closing meetings with
the management of the Phoenix Life Division and ALAC 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.
THE SCOPE OF OUR AUDIT
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 consolidated financial statements,
we selected four reporting components of the Group. The Group
reporting components consists of Phoenix Life Division, ALAC, Group
Function and ‘Other Companies’. In the Phoenix Life Division 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, PA(GI) Limited and the
pension schemes of the Group. The Other Companies include the
service companies.
Details of the four components which were audited by component teams
are set out below:
Component
Phoenix Life Division
Abbey Life Assurance Company Limited
Group Function
Other Companies
Scope
Auditor
Full
Full
Full
Specific
EY
EY
EY
EY
Management refers to Phoenix Life as a reporting segment in the
accounts. This includes the Phoenix Life Division, Abbey Life Assurance
Company Limited and Service Companies as defined in our scope.
For the Other Companies component, we performed audit procedures
on provisions, accruals and deferred income, and administrative expenses
for the service companies. The extent of audit work in respect of 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 98% (2016: 98%) of the equity and 99% (2016: 92%) of
the Group’s loss before tax. The specific scope component contributed
2% (2016: 1%) of the Group’s equity and 1% (2016: 7%) of the Group’s
loss before tax. The audit scope of these components may not have
included testing of all significant accounts of the component but will have
contributed to the coverage of significant accounts tested for the Group.
The charts below illustrate the coverage obtained from the work
performed by our audit teams.
A
D E
EQUITY
C
B
A 57% Phoenix Life Division
(full scope)
B 24% Abbey Life (full scope)
C 17% Group function (full scope)
D 2% Other companies
(specific scope)
E Less than 1% (out of scope)
B
A D E
C
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BEFORE TAX
A 1% Phoenix Life Division
(full scope)
B 16% Abbey Life (full scope)
C 82% Group function (full scope)
D 1% Other companies
(specific scope)
E Less than 1% (out of scope)
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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 £3.0 million (2016: £3.0 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.
REPORTING THRESHOLD
The other information comprises the information included in the annual
report set on pages 2 to 92, other than the financial statements and
our auditor’s report thereon. The Directors are responsible for the
other information.
Our opinion on the financial statements does not cover the other
information and , except to the extent otherwise explicitly stated in this
report, we do not express any form of assurance conclusion thereon.
OUR APPLICATION OF MATERIALITY
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 £63 million
(2016: £67million), which is 2.0% (2016: 2.0%) of Group equity.
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 Solvency
II capital requirements and Own Funds. However, as these measures are
non-GAAP measures, we consider equity to be most appropriate.
We determined materiality for the parent company to be £22 million
(2016: £23 million), which is 2% (2016: 2%) of parent company equity.
We have used a capital based measure for determining materiality for
consistency with the approach taken for the Group where we consider
equity to be the most appropriate basis when considering against other
measures such as IFRS profit before tax with its inherent volatility
considering the nature of the parent company as a holding company.
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% (2016: 50%) of our planning materiality,
namely £31 million (2016: £34 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 £6 million to
£24 million (2015: £7 million to £25 million).
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of Phoenix Group Holdings continued
IN CONNECTION WITH OUR AUDIT OF THE FINANCIAL
STATEMENTS
Our responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent with
the financial statements or our knowledge obtained in the audit or
otherwise appears to be materially misstated. If we identify such material
inconsistencies or apparent material misstatements, we are required
to determine whether there is a material misstatement in the financial
statements or a material misstatement of the other information. If, based
on the work we have performed, we conclude that there is a material
misstatement of the other information, we are required to report that fact.
We have nothing to report in this regard.
In this context, we also have nothing to report in regard to our
responsibility to specifically address the following items in the other
information and to report as uncorrected material misstatements of
the other information where we conclude that those items meet the
following conditions:
• Fair, balanced and understandable set out on page 92 – the
statement given by the Directors that they consider the annual
report and financial statements taken as a whole is fair, balanced
and understandable and provides the information necessary for
shareholders to assess the Group’s performance, business model
and strategy, is materially inconsistent with our knowledge obtained
in the audit; or
• Audit committee reporting set out on pages 56 to 59 – the section
describing the work of the audit committee does not appropriately
address matters communicated by us to the audit committee; or
• Directors’ statement of compliance with the UK Corporate
Governance Code set out on page 92 – the parts of the directors’
statement required under the Listing Rules relating to the Company’s
compliance with the UK Corporate Governance Code containing
provisions specified for review by the auditor in accordance with
Listing Rule 9.8.10R(2) do not properly disclose a departure from a
relevant provision of the UK Corporate Governance Code.
MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY
EXCEPTION
In the light of the knowledge and understanding of the Group and the
parent company and its environment obtained in the course of the audit,
we have not identified material misstatements in the strategic report or
the Directors’ Report.
We have nothing to report in respect of the following matters in relation
to which the Companies Act 2006 requires us to report to you if, in
our opinion:
• adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been received
from branches not visited by us; or
• the parent company financial statements and the part of the
Directors’ Remuneration Report to be audited are not in agreement
with the accounting records and returns; or
• certain disclosures of Directors’ remuneration specified by law are
not made; or
• we have not received all the information and explanations we require
for our audit.
RESPONSIBILITIES OF DIRECTORS
As explained more fully in the Statement of Directors’ Responsibilities set
out on page 92, the Directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and fair
view, and for such internal control as the directors determine is necessary
to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible
for assessing the Company’s ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using
the going concern basis of accounting unless the Directors either intend
to liquidate the Company or to cease operations, or have no realistic
alternative but to do so.
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AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL
STATEMENTS
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that
includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with
ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material
if, individually or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of these
financial statements.
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:
– 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;
– 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;
– 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
– report if we are not satisfied that:
• adequate accounting records have been kept (including returns from
those branches which have not been visited); or
• the financial statements are in agreement with the records and
returns; or
• we have obtained all the information and explanations which we
consider necessary for the purposes of the audit.
Explanation as to what extent the audit was considered
capable of detecting irregularities, including fraud
The objectives of our audit:
– in respect of fraud, are; to identify and assess the risks of material
misstatement of the financial statements due to fraud; to obtain
sufficient appropriate audit evidence regarding the assessed risks
of material misstatement due to fraud, through designing and
implementing appropriate responses; and to respond appropriately
to fraud or suspected fraud identified during the audit. However,
the primary responsibility for the prevention and detection of fraud
rests with both those charged with governance of the entity and
management; and
– in respect of irregularities, considered to be non-compliance with laws
and regulations, are to obtain sufficient appropriate audit evidence
regarding compliance with the provisions of those laws and regulations
generally recognised to have a direct effect on the determination of
material amounts and disclosures in the financial statements (‘direct
laws and regulations’), and perform other audit procedures to help
identify instances of non-compliance with other laws and regulations
that may have a material effect on the financial statements. We are not
responsible for preventing non-compliance with laws and regulations
and our audit procedures cannot be expected to detect non-
compliance with all laws and regulations.
Our approach was as follows:
– we obtained a general understanding of the legal and regulatory
frameworks that are applicable to the Company and its subsidiaries
and determined that the relevant laws and regulations related to
elements of company law and tax legislation, and the financial
reporting framework. Our considerations of other laws and regulations
that may have a material effect on the financial statements included
permissions and supervisory requirements of the Prudential Regulation
Authority (‘PRA’) and the Financial Conduct Authority (‘FCA’) and UK
Listing Authority (‘UKLA). We obtained a general understanding of
how Phoenix Group Holdings is complying with those frameworks
by making enquiries of management and those responsible for legal
and compliance matters. We also reviewed correspondence between
the Company and UK regulatory bodies; reviewed minutes of the
Board and Executive Committee; and gained an understanding of the
Company’s approach to governance, demonstrated by the Board’s
approval of the Company’s governance framework.
– for direct laws and regulations, we considered the extent of compliance
with those laws and regulations as part of our procedures on the
related financial statement items.
– for both direct and other laws and regulations, our procedures
involved: making enquiry of those charged with governance and senior
management for their awareness of any non-compliance of laws or
regulations, inquiring about the policies that have been established
to prevent non-compliance with laws and regulations by officers and
employees, inquiring about the Company’s methods of enforcing
and monitoring compliance with such policies, inspecting significant
correspondence with the FCA and PRA.
– the Company operates in the insurance industry which is a highly
regulated environment. As such the Senior Statutory Auditor
considered the experience and expertise of the engagement team to
ensure that the team had the appropriate competence and capabilities,
which included the use of specialists where appropriate.
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Phoenix Group Holdings | Annual Report & Accounts 2017
101
Independent Auditor’s Report to the Members
of Phoenix Group Holdings continued
– we assessed the susceptibility of the Company’s financial statements
to material misstatement, including how fraud might occur by
considering the controls that the Company has established to address
risks identified by the entity, or that otherwise seek to prevent, deter
or detect fraud. We also considered areas of significant judgement,
including complex transactions, performance targets, external
pressures and the impact these have on the control environment.
Where this risk was considered to be higher, we performed audit
procedures to address each identified fraud risk (valuation of insurance
contract liabilities). These procedures included testing manual journals
and were designed to provide reasonable assurance that the financial
statements were free from fraud or error.
A further description of our responsibilities for the audit of the financial
statements is located on the Financial Reporting Council’s website at
https://www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditor’s report.
OTHER MATTERS WE ARE REQUIRED TO ADDRESS
– we were appointed as auditors by the Company in May 2009 to audit
the financial statements for the year ending 31 December 2009 and
subsequent financial periods.
– the period of total uninterrupted engagement including previous
renewals and reappointments is nine years, covering the years ending
31 December 2009 to 31 December 2017.
– the non-audit services prohibited by the FRC’s Ethical Standard were
not provided to the Company and we remain independent of the
Company in conducting the audit.
– the audit opinion is consistent with the additional report to the
Audit Committee.
ERNST & YOUNG LLP
LONDON
14 MARCH 2018
102
Phoenix Group Holdings | Annual Report & Accounts 2017
Consolidated Income Statement
For the year ended 31 December 2017
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 (to)/from unallocated surplus
Net policyholder claims and benefits incurred
Change in investment contract liabilities
Acquisition costs
Change in present value of future profits
Amortisation of acquired in-force business
Amortisation of other intangibles
Administrative expenses
Net income attributable to unitholders
Total operating expenses
Profit before finance costs and tax
Finance costs
Loss for the year before tax
Tax charge attributable to policyholders’ returns
Loss before the tax attributable to owners
Tax charge
Add: tax attributable to policyholders’ returns
Tax credit attributable to owners
Loss 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)
Notes
F3
C1
F2
G7
G7
G7
C2
C4
C5
C5
C5
C5
D3
2017
£m
1,130
(205)
925
173
4,986
6,084
–
5
2016
£m
999
(75)
924
88
6,361
7,373
52
20
6,089
7,445
(3,897)
443
1,392
(423)
(46)
(2,531)
(3,726)
456
(1,970)
(281)
4
(5,517)
(2,673)
(1,194)
(6)
5
(109)
(17)
(590)
(43)
(5,964)
125
(132)
(7)
(21)
(28)
(20)
21
1
(27)
(27)
–
(27)
(9)
(11)
(76)
(14)
(506)
(66)
(7,393)
52
(122)
(70)
(58)
(128)
(30)
58
28
(100)
(101)
1
(100)
B3.1
B3.2
(7.0)p
(7.0)p
(34.3)p
(34.3)p
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Phoenix Group Holdings | Annual Report & Accounts 2017
103
Statement of Comprehensive Income
For the year ended 31 December 2017
Loss for the year
Other comprehensive (expense)/income:
Items that are or may be reclassified to profit or loss:
Cash flow hedges:
Fair value losses arising during the year
Reclassification adjustments for amounts recognised in profit or loss
Items that will not be reclassified to profit or loss:
Owner-occupied property revaluation gains
Remeasurements of net defined benefit asset/liability
Tax credit/(charge) 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
2017
£m
(27)
2016
£m
(100)
(13)
2
1
43
3
36
9
9
–
9
G8
G6
C5
D3
Pro forma Reconciliation of Group Operating Profit
to Result attributable to owners
For the year ended 31 December 2017
Operating profit
Phoenix Life
Group costs
Total operating profit
Investment return variances and economic assumption changes on long-term business
Variance on owners’ funds
Amortisation of acquired in-force business
Amortisation of other intangibles
Other non-operating items
Profit/(loss) before finance costs attributable to owners
Finance costs attributable to owners
Loss before the tax attributable to owners
Tax credit attributable to owners
Loss for the year attributable to owners
104
Phoenix Group Holdings | Annual Report & Accounts 2017
Notes
B2.2
B2.3
B1.2
B1.2
2017
£m
388
(20)
368
(6)
(87)
(102)
(17)
(80)
76
(104)
(28)
1
(27)
–
–
–
219
(1)
218
118
117
1
118
2016
£m
357
(6)
351
(207)
(5)
(68)
(14)
(95)
(38)
(90)
(128)
28
(100)
Statement of Consolidated Financial Position
As at 31 December 2017
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Share premium
Shares held by the employee benefit trust
Foreign currency translation reserve
Owner-occupied property revaluation reserve
Cash flow hedging reserve
Retained earnings
Total equity
Liabilities
Pension scheme 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
Total liabilities
Total equity and liabilities
Notes
2017
£m
2016
£m
D1
D2
–
1,452
(2)
96
5
(11)
–
1,643
(7)
96
4
–
1,615
1,597
3,155
3,333
G6
633
680
F1
F2
E5
E3
E1
G1
G2
G3
G2
G4
G5
44,435
925
45,360
45,807
879
46,686
26,733
27,332
1,778
368
1,242
840
1,961
2,036
392
1,567
1,040
1,623
32,922
33,990
134
366
23
522
5
179
144
109
378
21
484
12
204
102
80,288
82,666
83,443
85,999
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105
Statement of Consolidated Financial Position
As at 31 December 2017
continued
Notes
2017
£m
2016
£m
G6
322
225
57
1,298
202
1,557
26
612
1,812
2,760
17,234
550
26,998
18,901
6,085
74,340
57
1,407
214
1,678
25
646
1,232
3,003
17,759
525
29,290
18,432
6,808
77,049
3,320
3,744
32
7
37
11
3,359
3,792
47
355
580
2,245
83,443
44
361
513
1,666
85,999
G7
G8
G9
E3
E1
F1
G2
G10
G11
ASSETS
Pension scheme asset
Intangible assets
Goodwill
Acquired in-force business
Other intangibles
Property, plant and equipment
Investment property
Financial assets
Loans and deposits
Derivatives
Equities
Investment in associate
Fixed and variable rate income securities
Collective investment schemes
Reinsurers’ share of investment contract liabilities
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
Total assets
106
Phoenix Group Holdings | Annual Report & Accounts 2017
Statement of Consolidated Cash Flows
For the year ended 31 December 2017
Cash flows from operating activities
Cash generated/(utilised) by operations
Taxation paid
Net cash flows from operating activities
Cash flows from investing activities
Acquisition of AXA subsidiaries, net of cash acquired
Acquisition of Abbey Life subsidiaries, net of cash acquired
Net cash flows from investing activities
Cash flows from financing activities
Proceeds from issuing ordinary shares, net of associated commission and expenses
Ordinary share dividends paid
Coupon paid on Perpetual Reset Capital Securities
Cash settlement of Perpetual Reset Capital Securities
Fees associated with the amendment of existing bank facility
Repayment of policyholder borrowings
Repayment of shareholder borrowings
Proceeds from new shareholder borrowings, net of associated expenses
Proceeds from sale of internal holding in £428 million subordinated notes
Interest paid on policyholder borrowings
Interest paid on shareholder borrowings
Net cash flows from financing activities
Net increase/(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
I2
H2.1
H2.2
D1
B4
G11
2017
£m
1,156
(35)
1,121
–
–
–
2
(193)
–
–
–
(77)
(1,053)
830
32
(8)
(75)
(542)
579
1,666
2,245
2016
£m
(1,845)
(52)
(1,897)
(343)
(886)
(1,229)
908
(126)
(1)
(6)
(3)
(38)
(882)
1,079
–
(6)
(73)
852
(2,274)
3,940
1,666
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107
Statement of Consolidated Changes in Equity
For the year ended 31 December 2017
Share
capital
(note D1)
£m
–
–
–
–
–
–
–
–
–
–
Share
premium
£m
1,643
–
–
–
2
(193)
–
–
–
1,452
Shares held
by the
employee
benefit trust
(note D2)
£m
Foreign
currency
translation
reserve
£m
Owner-
occupied
property
revaluation
reserve
£m
Cash flow
hedging
reserve
£m
(7)
96
–
–
–
–
–
–
9
(4)
(2)
–
–
–
–
–
–
–
–
96
4
–
1
1
–
–
–
–
–
5
–
–
(11)
(11)
–
–
–
(11)
Retained
earnings
£m
1,597
Total
£m
3,333
(27)
(27)
46
19
–
–
8
(9)
–
36
9
2
(193)
8
–
(4)
1,615
3,155
At 1 January 2017
Loss 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
Credit to equity for equity-settled
share-based payments
Shares distributed by the employee
benefit trust
Shares acquired by the employee
benefit trust
At 31 December 2017
108
Phoenix Group Holdings | Annual Report & Accounts 2017
Statement of Consolidated Changes in Equity
For the year ended 31 December 2016
Share capital
(note D1)
£m
At 1 January 2016
(Loss)/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
Coupon paid to non-controlling
interests, net of tax relief
Credit to equity for equity-settled
share-based payments
Redemption of non-controlling
interests
Elimination of non-controlling interest
following loss of control
Shares distributed by the employee
benefit trust
Shares acquired by the employee
benefit trust
At 31 December 2016
–
–
–
–
–
–
–
–
–
–
–
–
Share
premium
£m
861
–
–
–
908
(126)
–
–
–
–
–
1,643
Shares held
by the
employee
benefit trust
(note D2)
£m
Foreign
currency
translation
reserve
£m
Owner-
occupied
property
revaluation
reserve
£m
(5)
96
–
–
–
–
–
–
–
–
5
(7)
(7)
–
–
–
–
–
–
–
–
–
–
96
4
–
–
–
–
–
–
–
–
–
–
4
Retained
earnings
£m
Total
£m
Non-
controlling
interests
(note D3)
£m
Total
£m
1,478
2,434
570
3,004
(101)
(101)
218
117
–
–
–
7
–
(5)
–
218
117
908
(126)
–
7
–
–
–
(7)
1,597
3,333
1
–
1
–
–
(1)
–
(6)
(100)
218
118
908
(126)
(1)
7
(6)
(564)
(564)
–
–
–
–
(7)
3,333
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.
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Phoenix Group Holdings | Annual Report & Accounts 2017
109
Notes to the Consolidated Financial Statements
A. SIGNIFICANT ACCOUNTING POLICIES
A1. BASIS OF PREPARATION
The consolidated financial statements for the year ended 31 December
2017 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:
– power over the investee;
– exposure, or rights, to variable returns from its involvement with the
investee; and
– 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.
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:
– assets and liabilities are translated at the closing rate at the period end;
– income, expenses and cash flows denominated in foreign currencies
are translated at average exchange rates; and
– 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.
110
Phoenix Group Holdings | Annual Report & Accounts 2017
respect of the key assumptions used in the valuation of these financial
instruments. The details of this sensitivity analysis are included in note
E2.3.
A3.3 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.
A3.4 Pension scheme obligations
The valuation of pension scheme obligations is determined using actuarial
valuations that depend upon a number of assumptions, including discount
rate, inflation and longevity. External actuarial advice is taken with
regard to setting the financial assumptions to be used in the valuation.
As defined benefit pension schemes are long-term in nature, such
assumptions can be subject to significant uncertainty.
Further detail on these estimates and the sensitivity of the defined
benefit obligation to key assumptions is provided in note G6.
A3.5 Recognition of pension scheme surplus
A pension scheme surplus can only be recognised to the extent that the
sponsoring employer can utilise the asset through a refund of surplus or a
reduction in contributions. A refund is available to the Group where it has
an unconditional right to a refund on a gradual settlement of liabilities over
time until all members have left the scheme. A review of the Trust Deeds
of the Group’s pension schemes that recognise a surplus has highlighted
that the Scheme Trustees are not considered to have the unilateral power
to trigger a wind-up of the Scheme and the Trustees’ consent is not
needed for the sponsoring company to trigger a wind-up. Where the last
beneficiary died or left the scheme, the sponsoring company could close
the Scheme and force the Trustees to trigger a wind-up by withholding
its consent to continue the Scheme on a closed basis. This view is
supported by external legal opinion and is considered to support the
recognition of a surplus. Further details of the Group’s pension schemes
are provided 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.
A3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
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. Disclosures of judgements made by management
in applying the Group’s accounting policies include those that have
the most significant effect on the amounts that are recognised in the
Group’s financial statements. Disclosures of estimates and associated
assumptions include those that have a significant risk of resulting in a
material change to the carrying value of assets and liabilities within the
next year. 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, income tax assets and liabilities
and valuation of pension scheme assets and liabilities. Impairment of
intangible assets is no longer included as a critical accounting estimate
as management currently believes that a reasonably foreseeable change
in key assumptions would not result in a material change to the carrying
value of the intangible assets.
The application of critical accounting judgements that could have the
most significant effect on the recognised amounts include recognition of
pension surplus, the determination of operating profit and the recognition
of an investment as an associate. There were no acquisitions during the
current year and consequently the identification of intangibles is no longer
considered to be a critical accounting judgement. Details of all critical
accounting estimates and judgements are included below.
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. Economic assumptions are set 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 practice, regulations and expectations
about future trends.
The valuation of insurance contract liabilities is sensitive to the
assumptions which have been applied in their calculation. Details of
sensitivities arising from significant non-economic assumptions are
detailed on page 148 in note F4.
A3.2 Fair value of financial 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 using 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. In relation
to the Level 3 financial instruments, sensitivity analysis is performed in
Phoenix Group Holdings | Annual Report & Accounts 2017
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Notes to the Consolidated Financial Statements
continued
A. SIGNIFICANT ACCOUNTING POLICIES continued
A3.7 Recognition of the investment in UK Commercial Property
Trust Limited (‘UKCPT’) as an associate
UKCPT is a property investment company which the Group
deconsolidated in 2016 and now classifies as an associate held at fair
value. Judgement continues to be applied in determining whether the
Group controls the activities of UKCPT. The Group held 47.9% of the
issued share capital of UKCPT as at 31 December 2017 and deemed
that it did not control its investment in UKCPT throughout the year ending
on that date. The Group does not hold a unilateral power of veto in
general meetings and is restricted by the terms of an existing relationship
agreement it has with UKCPT.
A4. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
IN 2017
The consolidated financial statements for the year ended 31 December
2017, set out on pages 103 to 181, were authorised by the Board of
Directors for issue on 14 March 2018.
In preparing the consolidated financial statements, the Group has adopted
the following amendments effective from 1 January 2017:
Amendments to IAS 7 Disclosure initiative
The Group has applied these amendments for the first time in the current
year. The amendments require an entity to provide disclosures that enable
users of financial statements to evaluate changes in liabilities arising from
financing activities, including both cash and non-cash changes.
The Group’s liabilities arising from financing activities consist of
borrowings (for which further details are provided in note E5).
A reconciliation between the opening and closing balances of these
items is provided in that note. Consistent with the transition provisions of
the amendments, the Group has not disclosed comparative information
for the prior period. Apart from the additional disclosure in note E5 the
application of these amendments has had no impact on the Group’s
consolidated financial statements.
Amendments to IAS 12 Recognition of Deferred Tax Assets for
Unrealised Losses
The Group has applied these amendments for the first time in the current
year. The amendments clarify how an entity should evaluate whether
there will be sufficient future taxable profits against which it can utilise a
deductible temporary difference.
The application of these amendments has had no impact on the Group’s
consolidated financial statements as the Group’s existing approach to
assessing the sufficiency of future taxable profits is consistent with that
required under the amended standard.
Annual Improvements to IFRSs 2014-2016 Cycle
The Group has applied the amendments to IFRS 12 Disclosure of
Interests in Other Entities included in the Annual Improvements to
IFRSs 2014-2016 Cycle for the first time in the current year. The other
amendments included in this package are not yet mandatorily effective
and have not been early adopted by the Group (see note A5).
IFRS 12 states that an entity need not provide summarised financial
information for interests in subsidiaries, associates or joint ventures that
are classified (or included in a disposal group that is classified) as held for
sale. The amendments clarify that this is the only concession from the
disclosure requirements of IFRS 12 for such interests.
The application of these amendments has had no effect on the Group’s
consolidated financial statements as none of the Group’s interests in
these entities have been classified, or included in a disposal group that is
classified, as held for sale in either the current or prior period.
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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.
– IFRS 9 Financial Instruments (2018 – Deferred to 2021). 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.
In relation to the impairment of financial assets, IFRS 9 requires the
use of an expected credit loss model, as opposed to the incurred credit
loss model required under IAS 39. The expected credit loss model will
require the Group to account for expected credit losses and changes in
those expected credit losses at each reporting date to reflect changes
in credit risk since initial recognition.
The Group has taken advantage of the temporary exemption granted
to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 until
1 January 2021 as a result of meeting the exemption criteria as
at 31 December 2015. As at this date the Group’s activities were
considered to be predominantly connected with insurance as the
percentage of the total carrying amount of its liabilities in relation to
insurance relative to the total carrying amount of all its liabilities was
greater than 90%. There have been no changes to the activities of
the Group that require this assessment to be re-performed. IFRS 9
will instead be implemented at the same time as the new insurance
contracts standard (IFRS 17 Insurance Contracts). The Group expects
to continue to value the majority of its financial assets as at fair value
through profit or loss on initial recognition, so as to eliminate or reduce
any potential accounting mismatch. When applying the exemption,
IFRS 4 requires that a number of disclosures be made in 2018 to
provide information to allow comparison with entities adopting the
standard in 2018.
– 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 or financial instruments within the
scope of IAS 39 Financial Instruments: Recognition and Measurement.
Accordingly, a detailed impact assessment has been performed to
consider the impact of IFRS 15 in relation to revenue streams from
the Group’s investment contracts and the provision of investment
management services. As a result of the outcome of the assessment,
the Group considers that the application of IFRS 15 will not have a
significant impact on the financial position and/or financial performance
of the Group. IFRS 15 introduces additional disclosure requirements
which will be reflected in the 2018 consolidated financial statements.
– Classification and measurement of share-based payment transactions
(Amendments to IFRS 2) (2018). The Group does not anticipate that
the application of the amendments in the future will have a significant
impact on the Group’s consolidated financial statements as the Group
does not have any cash-settled share-based payment arrangements
or any withholding tax arrangements with tax authorities in relation to
share-based payments.
– Transfers of Investment Property (Amendments to IAS 40) (2018).
The amendments clarify that a transfer to, or from, investment
property necessitates an assessment of whether a property meets,
or has ceased to meet, the definition of investment property,
supported by observable evidence that a change in use has occurred.
The amendments further clarify that situations other than the ones
listed in IAS 40 may evidence a change in use, and that a change in
use is possible for properties under construction (i.e. a change in use
is not limited to completed properties). The Group anticipates that the
application of these amendments may have an impact on the Group’s
consolidated financial statements in future periods should there be a
change in use of any of its properties.
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. For reporting purposes,
business units are aggregated where they share similar economic
characteristics including the nature of products and services, types
of customers and the nature of the regulatory environment. As such,
Phoenix Life is considered to be the Group’s only reportable segment,
which includes all of the operating insurance entities and management
services entities in the Group.
Segment performance is evaluated based on profit or loss which,
in certain respects, is presented differently from profit or loss in the
consolidated financial statements. 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.
– Annual Improvements to IFRSs 2014-2016 Cycle (2018). The Annual
Improvements include amendments to IFRS 1 and IAS 28 which are
not yet mandatorily effective for the Group. The package also includes
amendments to IFRS 12 which is mandatorily effective for the Group
in the current year (see note A4). The Group does not anticipate that
the application of the amendments in the future will have any impact
on the Group’s consolidated financial statements as the Group is
neither a first-time adopter of IFRS nor a venture capital organisation.
Furthermore, the Group does not have any associate or joint venture
that is an investment entity.
– IFRIC 22 Foreign Currency Transactions and Advance Consideration
(2018). IFRIC 22 addresses how to determine the ‘date of transaction’
for the purpose of determining the exchange rate to use on initial
recognition of an asset, expense or income, when consideration for
that item has been paid or received in advance in a foreign currency
which resulted in the recognition of a non-monetary asset or non-
monetary liability (e.g. a non-refundable deposit or deferred revenue).
The Group does not anticipate that the application of the amendments
in the future will have an impact on the Group’s consolidated
financial statements.
– 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
following the application of IFRS 16 the Group will need to amend
the accounting for its operating leases (see note I5). Given the limited
number of these contracts and their relative values, we expect
the impact on the Group’s consolidated financial statements to
be immaterial.
– IFRIC 23 Uncertainty over Income Tax Treatments (2019).
This interpretation clarifies the accounting for income tax treatments
that have yet to be accepted by tax authorities, whilst also aiming to
enhance transparency.
– IFRS 17 Insurance Contracts (2021). IFRS 17 is expected to significantly
change the way the Group measures and reports its insurance
contracts. The new standard uses three measurement approaches
and the principles underlying these measurement approaches will
significantly change the way the Group measures its insurance
contracts and investment contracts with DPF. These changes will
impact profit emergence patterns and add complexity to valuation
processes, data requirements and assumption setting. As a
consequence, during 2017 the Group commenced a project to perform
an assessment of the impact of the standard on the Group and to
produce a detailed implementation plan. Implementation activities will
continue in 2018/19.
– Sale or Contribution of Assets between an Investor and its Associate or
Joint Venture (Amendments to IFRS 10 and IAS 28) (Effective date to
be determined).
Where not specifically stated, the impact on the Group of adopting
the above standards, amendments and interpretations is subject
to evaluation.
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Notes to the Consolidated Financial Statements
continued
B. EARNINGS PERFORMANCE continued
B1. SEGMENTAL ANALYSIS continued
B1.1 Segmental result
2017
Net premiums written
Fees
Net investment income
Other operating income
Net income
Net policyholder claims and
benefits incurred
Amortisation:
Amortisation of acquired
in-force business
Amortisation of other intangibles
Change in investment
contract liabilities
Other expenses
Phoenix
Life
£m
Unallocated
Group
£m
925
173
4,977
5
6,080
(2,531)
(109)
(17)
(126)
(2,673)
(528)
–
–
9
–
9
–
–
–
–
–
(106)
2016
Net premiums written
Fees
Net investment income
Gain on transfer of business
Other operating income
Net income
Net policyholder claims and
benefits incurred
Amortisation:
Amortisation of acquired
in-force business
Amortisation of other intangibles
Change in investment
contract liabilities
Other expenses
Total
£m
925
173
4,986
5
6,089
(2,531)
(109)
(17)
(126)
(2,673)
(634)
Phoenix
Life
£m
Unallocated
Group
£m
924
88
6,357
52
20
7,441
(5,517)
(76)
(14)
(90)
(1,194)
(486)
–
–
4
–
–
4
–
–
–
–
–
(106)
Total
£m
924
88
6,361
52
20
7,445
(5,517)
(76)
(14)
(90)
(1,194)
(592)
Total operating expenses
(5,858)
(106)
(5,964)
Total operating expenses
(7,287)
(106)
(7,393)
Profit/(loss) before finance
costs and tax
222
(97)
125
Profit/(loss) before finance
costs and tax
154
(102)
52
Finance costs
(52)
(80)
(132)
Finance costs
(56)
(66)
(122)
Profit/(loss) before tax
98
(168)
Tax attributable to
policyholders’ returns
Segmental result before the
tax attributable to owners
(70)
(58)
(58)
–
40
(168)
(128)
Profit/(loss) before tax
170
(177)
Tax attributable to
policyholders’ returns
Segmental result before the
tax attributable to owners
(21)
–
149
(177)
(7)
(21)
(28)
114
Phoenix Group Holdings | Annual Report & Accounts 2017
B1.2 Reconciliation of operating profit to the segmental result
The Company 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
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.
Annuity new business profits are included in operating profit using
valuation assumptions consistent with the pricing of the business
(including the Company’s expected longer-term asset allocation
backing the business).
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 Company’s core operating activities (for example,
actuarial modelling enhancements and data reviews). Operating profit
is reported net of policyholder finance charges and policyholder tax.
Operating profit excludes the impact of the following items:
– the difference between the actual and expected experience
for economic items and the impacts of changes in economic
assumptions on the valuation of liabilities (see notes B2.2 and B2.3);
– amortisation and impairments of intangible assets (net of
policyholder tax);
– finance costs attributable to owners;
– gains or losses on the disposal of subsidiaries, associates or joint
ventures (net of related costs of disposal);
– the financial impacts of mandatory regulatory change;
– integration, restructuring or other significant one-off projects; and
– 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 Company’s financial performance. This is
typically the case where the nature of the item is not reflective of
the underlying performance of the operating companies.
Whilst the excluded items are important to an assessment of the
consolidated financial performance of the Group, management
considers that the presentation of the operating profit metric
provides useful information for assessing the performance of
the Group’s operating companies on an ongoing basis. This is
considered particularly important given the Group’s acquisitive
strategy of closed life fund consolidation and the underlying long
term business. The IFRS results are significantly impacted by the
amortisation of intangible balances arising on acquisition, the one-off
costs of integration activities and the costs of servicing debt used to
finance acquisition activity, which are not indicative of the underlying
operational performance of the Group’s segments.
Furthermore, the hedging strategy of the Group is calibrated to protect
the Solvency II surplus position and cash generation capability of the
operating companies, as opposed to the IFRS financial position. This
can create additional volatility in the IFRS result which is excluded from
the operating profit metric.
The Company therefore considers that operating profit provides a
more representative indicator of the ability of the Group’s operating
companies to generate cash available for the servicing of the Group’s
debts and for distribution to shareholders. Accordingly, the measure is
more closely aligned with the business model of the Group and how
performance is managed by those charged with governance.
2017
Operating profit/(loss)
Investment return variances and
economic assumption changes on
long-term business
Variance on owners’ funds
Amortisation of acquired
in-force business
Amortisation of other intangibles
Other non-operating items
Financing costs attributable
to owners
Segmental result before the
tax attributable to owners
Other non-operating items include:
Phoenix
Life
£m
Unallocated
Group
£m
388
(20)
(6)
(72)
(102)
(17)
(18)
–
(15)
–
–
(62)
Total
£m
368
(6)
(87)
(102)
(17)
(80)
(24)
(80)
(104)
149
(177)
(28)
– a premium of £25 million paid on redemption of £178 million principal of
the senior unsecured bond;
– costs of £21 million in respect of integration and restructuring of the
Abbey Life and AXA Wealth businesses;
– costs of £20 million in respect of short-term expense overruns
arising from the AXA Wealth businesses prior to completion of the
implementation of the Phoenix operating model;
– a provision of £27 million in respect of a commitment to the reduction
of ongoing charges for workplace pension products;
– a £21 million increase in the provision for costs for claims relating to
historic creditor insurance underwritten by a subsidiary of the Group,
PA(GI) Limited, offset by the recognition of recoveries due or received
from third parties under contractual arrangements of £39 million; and
– net other one-off items totalling a cost of £5 million, including corporate
project costs.
Further details of the investment return variances and economic
assumption changes on long-term business, and the variance on owners
funds are included in note B2.
2016
Operating profit/(loss)
Investment return variances and
economic changes on long-term
business
Variance on owners’ funds
Amortisation of acquired
in-force business
Amortisation of other intangibles
Other non-operating items
Financing costs attributable
to owners
Segmental result before the tax
attributable to owners
Phoenix
Life
£m
Unallocated
Group
£m
357
(6)
(207)
11
(68)
(14)
(15)
(24)
–
(16)
–
–
(80)
(66)
Total
£m
351
(207)
(5)
(68)
(14)
(95)
(90)
40
(168)
(128)
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Notes to the Consolidated Financial Statements
continued
B. EARNINGS PERFORMANCE continued
B1. SEGMENTAL ANALYSIS continued
Other non-operating items include:
– a gain of £26 million on the implementation of a longevity swap
reassurance contract on a portfolio of the Group’s annuities;
– a gain of £14 million arising as a result of a premium adjustment on
the 2015 reassurance arrangement with RGA International following
completion of a data review;
– acquisition related costs of £31 million, comprising £12 million of
transaction costs related to the acquisition of AXA Wealth’s pensions
and protection business and £19 million of transaction costs related to
acquisition of Abbey Life;
– a provision for costs of £30 million associated with the integration and
restructuring of the acquired AXA Wealth businesses;
– the costs of providing for claims and associated costs relating to
creditor insurance underwritten prior to 2016 by a subsidiary of the
Group, PA(GI) Limited, of £33 million;
– recognition of costs of £10 million associated with the introduction of
regulations that cap early exit charges for pension customers aged over
55 at 1%, which came into force from 2017;
– costs of £6 million associated with the transfer of non-profit annuities
from with-profit funds to non-profit matching adjustment funds;
– the costs of £4 million on PGL pension scheme buy-in;
– other corporate project costs of £19 million; and
– net other one-off items totalling a cost of £2 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, and reflects hedging arrangements the Group has in place .
The long-term risk-free rate used as a basis for deriving the long-term
investment return is set by reference to the swap curve at the 15 year
duration plus 10bps at the start of the year. A risk premium of 350bps
is added to the risk-free yield for equities (2016: 350bps), 250bps
for properties (2016: 250bps), 150bps for other fixed interest assets
(2016: 150bps) and 50bps for gilts (2016: 50bps).
The principal assumptions underlying the calculation of the long-term
investment return are:
Equities
Properties
Gilts
Other fixed interest
2017
%
2016
%
5.0
4.0
2.0
3.0
5.8
4.8
2.8
3.8
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.
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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
2017
£m
2016
£m
(6)
(207)
The net adverse investment return variances and economic assumption
changes on long-term business of £6 million (2016: £207 million adverse)
primarily arise on hedging positions held by the life funds following equity
market gains during the year. The Group’s exposure to equity movements
arising from future profits in relation to with-profit bonuses and unit-linked
charges is hedged to benefit the Solvency II surplus position. The impact
of equity market movements on the value of the hedging instruments is
reflected in the IFRS results, but the corresponding change in the value
of future profits is not. Losses on these hedging positions have been
partly offset by the positive impact of strategic asset allocation activities,
including investment in higher yielding illiquid assets.
The net adverse investment return variances and economic assumption
changes on long-term business for the year ended 31 December 2016
of £207 million primarily resulted from the adverse impact of a fall in
yields on the life funds, which increased the margin held within insurance
liabilities in respect of longevity risk. The investment return variances were
adversely impacted by losses arising on equity hedging positions held
by life funds following equity market gains in the period. Included in the
negative variance is the minority share of the result of the consolidated
UKCPT property investment structure prior to its deconsolidation during
2016 of a positive £1 million.
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.
Variances on owners’ funds of subsidiary
undertakings
2017
£m
2016
£m
(87)
(5)
The adverse variance on owners’ funds of £87 million (2016: £5 million
adverse) is principally driven by interest rate swaption positions held in
the life companies’ shareholder funds. Such positions are held to hedge
the impact of interest rate risk on the Group’s Solvency II surplus position.
With swap yields remaining relatively stable during the period, option
value associated with these contracts has fallen due to expected option
expiry and reduced volatility.
The adverse variance on owners’ funds for the year ended 31 December
2016 of £5 million was principally driven by losses from equity hedging
positions held in the Group holding companies offset by gains on interest
rate hedging positions held in the life companies’ shareholder funds
arising from falling yields.
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.
Loss for the period
Share of result attributable to non-controlling
interests
Loss attributable to owners of the parent
2017
£m
(27)
–
(27)
2016
£m
(100)
(1)
(101)
The weighted average number of ordinary shares outstanding during the
period is calculated as detailed below:
Issued ordinary shares at beginning of the period
(restated for bonus element of rights issue)
Effect of ordinary shares issued
Own shares held by the employee benefit trust
Basic earnings per share is as follows:
Basic earnings per share
2017
Number
million
2016
Number
million
393
–
–
266
30
(1)
393
295
2017
pence
(7.0)
2016
pence
(34.3)
B3.2 Diluted earnings per share
The result attributable to owners of 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 also the
same as that used in the basic earnings per share calculation in B3.1
above. As losses have an anti-dilutive effect, none of the share-based
awards have a dilutive effect for the years ended 31 December 2017 and
31 December 2016.
Diluted earnings per share is as follows:
Diluted earnings per share
2017
pence
(7.0)
2016
pence
(34.3)
5 million warrants issued on 2 September 2009 to certain entities
providing finance to the Group could potentially dilute basic earnings per
share in the future. The warrants would not have had a dilutive effect for
the periods presented due to the exercise price being significantly higher
than the share price of the Company. Details of the warrants are given in
note E3.3.
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Weighted average number of
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Phoenix Group Holdings | Annual Report & Accounts 2017
117
Notes to the Consolidated Financial Statements
continued
B. EARNINGS PERFORMANCE continued
B4. DIVIDENDS
C. OTHER INCOME STATEMENT NOTES
C1. NET INVESTMENT INCOME
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.
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 2017
2017
£m
193
2016
£m
126
On 17 March 2017, the Board recommended a final dividend of 23.9p per
share in respect of the year ended 31 December 2016. The dividend was
approved at the Company’s Annual General Meeting, which was held
on 11 May 2017. The dividend amounted to £94 million and was paid on
15 May 2017.
On 23 August 2017, the Board declared an interim dividend of 25.1p per
share for the half year ended 30 June 2017. The dividend amounted to
£99 million and was paid on 2 October 2017.
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, financial
liabilities 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 and financial liabilities
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 deposits 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 (expense)/income on Group
defined benefit pension scheme liability/asset
Fair value gains
Financial assets and financial liabilities at fair
value through profit or loss:
Designated upon initial recognition
Held for trading – derivatives
Investment property
Net investment income
2017
£m
2016
£m
1
1
972
1,073
23
859
902
38
(11)
21
2,058
1,821
2,754
165
9
2,928
4,986
3,236
1,278
26
4,540
6,361
118
Phoenix Group Holdings | Annual Report & Accounts 2017
C2. ADMINISTRATIVE EXPENSES
C3. AUDITOR’S REMUNERATION
Administrative expenses are recognised in the consolidated income
statement as incurred.
During the year the Group obtained the services from its auditor at
costs as detailed in the table below.
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 service costs
Pension administrative expenses
Advertising and sponsorship
Movement in PA(GI) provision, net of
reimbursement (see note G1)
Integration and restructuring costs
Premium paid on part redemption
of the £300 million senior bond
Other
Employee costs comprise:
Wages and salaries
Social security contributions
2017
£m
128
129
39
34
160
2
7
1
4
43
(18)
21
25
15
590
2017
£m
115
13
128
2016
£m
99
91
55
25
129
6
11
3
4
7
33
30
–
13
506
2016
£m
90
9
99
Average number of persons employed
2017
Number
1,304
2016
Number
837
Audit of the consolidated financial statements
Audit of the Company’s subsidiaries
Audit-related assurance services
Reporting accountant assurance services
Total fee for assurance services
Corporate finance services
Other non-audit services
Total fees for other services
Total auditor’s remuneration
2017
£m
2016
£m
0.7
3.5
4.2
0.5
0.1
4.8
0.7
0.5
1.2
6.0
0.7
3.5
4.2
0.5
0.3
5.0
3.6
0.1
3.7
8.7
No services were provided by the Company’s auditors to the Group’s
pension schemes in either 2017 or 2016.
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. In 2016,
this included public reporting associated with the issuance of equity as
part of the acquisition of Abbey Life and the issuance of a Medium Term
Note Programme.
Corporate finance services fees were £0.7 million (2016: £3.6 million).
These fees include the provision of assurance services to the Board and
sponsoring banks in support of disclosures made in public transaction
documentation relating to debt issuances undertaken in the period.
It also includes fees associated with the performance of due diligence
activities. The 2016 balance reflects services provided in connection with
the acquisition of AXA Wealth and Abbey Life. £1.9 million of the fees
related to the engagement of the external auditors to perform actuarial
and finance due diligence procedures where synergies were anticipated
to arise with subsequent audit work. The remaining balance of £1.7m
related to the provision of assurance services to the Board and the
sponsoring banks in support of disclosures made in the public transaction
documentation relating to the two acquisitions.
Other non-audit services of £0.5 million (2016: £0.1 million) include
£0.4 million of fees associated with a review of Abbey Life past business
practices undertaken at the request of the regulator. This engagement
was entered into prior to the firm’s appointment as auditors of Abbey Life.
The remaining fees were incurred in connection with other assurance
activities. The 2016 fees for other non-audit services were primarily in
respect of assurance provided over aspects of the Group’s Solvency II
internal model.
Further information on auditor’s remuneration and the assessment of the
independence of the external auditor is set out in the Audit Committee
report on page 58.
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119
Notes to the Consolidated Financial Statements
continued
C. OTHER 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
2017
£m
118
14
132
28
104
132
2016
£m
109
13
122
32
90
122
C5. TAX CHARGE
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 charge
Current tax:
UK corporation tax
Overseas tax
Adjustment in respect of prior years
Total current tax charge
Deferred tax:
Origination and reversal of temporary
differences
Change in the rate of UK corporation tax
Write up of deferred tax assets
Total deferred tax credit
Total tax charge
Attributable to:
policyholders
owners
Total tax charge
2017
£m
2016
£m
13
21
34
(9)
25
(1)
4
(8)
(5)
20
21
(1)
20
46
15
61
(8)
53
(13)
(10)
–
(23)
30
58
(28)
30
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 charge attributable to policyholder
earnings was £21 million (2016: £58 million).
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Phoenix Group Holdings | Annual Report & Accounts 2017
C5.2 Tax (credited)/charged to other comprehensive income
2017
£m
2016
£m
Current tax credit on share schemes
Deferred tax (credit)/charge on defined benefit
schemes
Deferred tax credit on share schemes
C5.3 Reconciliation of tax charge
Loss before tax
Policyholder tax charge
Loss before the tax attributable to owners
Tax credit at standard UK rate of 19.25%1
(2016: 20%)
Non-taxable income and gains2
Disallowable expenses3
Prior year tax credit for shareholders
Movement on acquired in-force amortisation
at less than 19.25% (2016: 20%)
Profits taxed at rates other than 19.25%
(2016: 20%)
Recognition of previously unrecognised
deferred tax assets
Deferred tax rate change4
Current year losses not valued5
Other
Owners’ tax credit
Policyholder tax charge
Total tax charge for the period
(1)
(2)
–
(3)
2017
£m
(7)
(21)
(28)
(5)
(16)
1
(7)
3
2
(2)
4
15
4
(1)
21
20
(1)
3
(1)
1
2016
£m
(70)
(58)
(128)
(26)
(10)
24
(6)
2
–
(5)
(9)
–
2
(28)
58
30
1 The Phoenix Life operating segment operates predominantly in the UK. The reconciliation
of the tax 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 was applicable
to Phoenix Group Holdings during the period.
Includes non-taxable dividends and gains, non-taxable pension scheme items, non-taxable
hedge accounting adjustment on consolidation and non-taxable recoveries from third
parties relating to the claims for redress on creditor insurance underwritten by PA(GI)
Limited.
2
3 2016 included non-recurring disallowable deductions in relation to claims and other
costs relating to creditor insurance underwritten by PA(GI) Limited of £7 million and a
consolidation adjustment on the PGL Pension scheme ‘buy-in’ agreement £12 million.
4 Represents current year losses carried forward and recognised at future lower tax rates.
(2016 represented the effect of the 1% reduction in tax rate from April 2020).
5 Represents current year losses carried forward on which the recognition of an asset cannot
be supported by current short-term tax projections.
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 (2016: 410 million) ordinary shares of
€0.0001 each
31,750
31,750
2017
£
2016
£
Issued and fully paid:
393.2 million (2016: 392.8 million) ordinary
shares of €0.0001 each
33,145
33,112
The value of the authorised share capital was translated at a historical rate.
Issued and fully paid share capital transactions are translated at the rate
prevailing at the date of issue.
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:
2017
Shares in issue at 1 January
Number
£
392,849,817
33,112
Ordinary shares issued in the period
382,827
33
Shares in issue at 31 December
393,232,644
33,145
During the year, the Company issued 382,827 shares at a premium
of £2 million in order to satisfy its obligations to employees under the
Group’s sharesave schemes (see note I1).
2016
Shares in issue at 1 January
Placement of ordinary shares
Number
£
225,419,446
18,463
22,542,000
1,748
Ordinary shares issued under the rights issue 144,727,282
12,888
Other ordinary shares issued in the period
161,089
13
Shares in issue at 31 December
392,849,817
33,112
On 1 June 2016, the Group completed an equity placing of 22,542,000
new ordinary shares in association with the acquisition of the AXA Wealth
businesses which raised gross proceeds of £194 million. The proceeds
from the equity placing, net of deduction of commissions and expenses,
were £190 million.
On 9 November 2016, the Group issued 144,727,282 shares following
a rights issue undertaken in connection with the acquisition of Abbey
Life, where 7 rights issue shares were issued at 508 pence per share for
every 12 existing Phoenix Group Holdings shares held. The rights issue
raised gross proceeds of £735 million and proceeds, net of deduction of
commission and expenses, were £717 million.
During 2016, the Company issued 161,089 shares at a premium of
£1 million in order to satisfy its obligations to employees under the
Group’s sharesave schemes.
Phoenix Group Holdings | Annual Report & Accounts 2017
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Notes to the Consolidated Financial Statements
continued
D. EQUITY continued
D2. SHARES HELD BY THE EMPLOYEE BENEFIT TRUST
Where the Phoenix Group Employee Benefit Trust (‘EBT’) 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 EBT are charged or credited to the own
shares account in equity.
The EBT holds shares to satisfy awards granted to employees under the
Group’s share-based payment schemes.
At 1 January
Shares acquired by the EBT in year
Shares awarded to employees by the EBT in
year
At 31 December
2017
£m
2016
£m
7
4
(9)
2
5
7
(5)
7
During the year 1,217,505 (2016: 690,711) shares were awarded to
employees by the EBT and 445,560 (2016: 1,196,011) shares were
purchased. The number of shares held by the EBT at 31 December 2017
was 320,689 (2016: 1,092,634).
The Company provides the EBT with an interest-free facility arrangement
to enable it to purchase the shares. Details of this loan are included in note
10.4 to the parent company accounts.
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 for the relevant share of subsequent changes in
equity. The Group did not recognise any non-controlling interests as at
31 December 2016 or 31 December 2017.
UK
Commercial
Property
Trust
Limited
£m
563
1
–
–
Total
£m
570
1
(1)
(6)
(564)
(564)
–
–
Perpetual
Reset Capital
Securities
£m
7
–
(1)
(6)
–
–
At 1 January 2016
Profit for the year
Coupon paid, net of tax relief
Redemption of Notes
Derecognition of non-controlling
interest following loss of control
At 31 December 2016 and
31 December 2017
D3.1 Perpetual Reset Capital Securities (‘the Notes’)
On 25 April 2016 the coupon that was due on the remaining Notes was
settled and Pearl Group Holdings (No.1) Limited redeemed the remaining
£6 million of Notes at par.
D3.2 UK Commercial Property Trust Limited
UK Commercial Property Trust Limited (‘UKCPT’) is a property
investment company which is domiciled in Guernsey and is admitted to
the Official List of the UK Listing Authority and to trading on the London
Stock Exchange. In February 2016, the Group reduced its holdings to
48.9% of the issued share capital of UKCPT. The Group deems that it
no longer exercises control over UKCPT and as a result UKCPT has been
deconsolidated from the effective date of this loss of control. The Group’s
remaining interest in UKCPT is recognised as an associate and held at fair
value (see note H3 for further details).
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E. FINANCIAL ASSETS & LIABILITIES
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.
The majority of the Group’s loans and deposits are designated as
loans and receivables and are non-derivative financial assets with fixed
or determinable payments that are not quoted in an active market and
only include assets where a security has not been issued. These loans
and deposits 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 also holds a portfolio of loans that are designated
at fair value through profit or loss.
Derivative financial instruments are largely 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. Derivative
financial instruments are not classified as held for trading where
they are designated and effective as a hedging instrument. For such
instruments, the timing of the recognition of any gain or loss that
arises on remeasurement to fair value in profit or loss depends on the
nature of the hedge relationship.
Equities, fixed and variable rate income securities, collective
investment schemes and certain loans and deposits 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.
Reinsurers share of investment contract liabilities without DPF are
valued on a basis consistent with investment contract liabilities
without DPF as detailed under Financial liabilities below.
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.
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.
Associates
Investments in associates 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 associates 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 without DPF 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:
– 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
– 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.
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S
T
R
O
P
E
R
E
C
N
A
N
R
E
V
O
G
E
T
A
R
O
P
R
O
C
I
S
L
A
C
N
A
N
I
F
N
O
I
T
A
M
R
O
F
N
I
L
A
N
O
I
T
I
D
D
A
Notes to the Consolidated Financial Statements
continued
Hedge accounting
The Group designates certain derivatives as hedging instruments
in order to effect cash flow hedges. At the inception of the hedge
relationship, the Group documents the relationship between
the hedging instrument and the hedged item, along with its risk
management objectives and its strategy for undertaking various
hedge transactions. Furthermore, at the inception of the hedge and
on an ongoing basis, the Group documents whether the hedging
instrument is highly effective in offsetting changes in fair values or
cash flows of the hedged item attributable to the hedged risk. Note
E3 sets out details of the fair values of the derivative instruments used
for hedging purposes.
Where a cash flow hedging relationship exists, the effective portion of
changes in the fair value of derivatives that are designated and qualify
as cash flow hedges is recognised in other comprehensive income
and accumulated under the heading of cash flow hedging reserve.
The gain or loss relating to the ineffective portion is recognised
immediately in profit or loss, and is included in net investment income.
Amounts previously recognised in other comprehensive income and
accumulated in equity are reclassified to profit or loss in the periods
when the hedged item affects profit or loss, in the same line as the
recognised hedged item.
Hedge accounting is discontinued when the Group revokes the
hedging relationship, when the hedging instrument expires or is sold,
terminated, or exercised, or when it no longer qualifies for hedge
accounting. Any gain or loss recognised in other comprehensive
income and accumulated in equity at that time is recycled to profit or
loss over the period the hedged item impacts profit or loss.
E. FINANCIAL ASSETS & LIABILITIES continued
E1. FAIR VALUES continued
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.
124
Phoenix Group Holdings | Annual Report & Accounts 2017
The table below sets out a comparison of the carrying amounts and fair values of financial instruments as at 31 December 2017:
2017
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 deposits
Equities1
Investment in associate1 (see note H3)
Fixed and variable rate income securities
Collective investment schemes1
Reinsurers’ share of investment contract liabilities1
Financial assets measured at amortised cost:
Loans and deposits at amortised cost
Total financial assets2
2017
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 unitholders1
Investment contract liabilities1
Financial liabilities measured at amortised cost:
Borrowings
Deposits received from reinsurers
Obligations for repayment of collateral received3
Total financial liabilities
Carrying value
Amounts due for
settlement after
12 months
£m
Total
£m
Fair value
£m
2,760
2,613
2,760
1,444
17,234
550
26,998
18,901
6,085
368
74,340
1,424
–
–
26,069
–
–
13
1,444
17,234
550
26,998
18,901
6,085
368
74,340
Carrying value
Amounts due for
settlement after
12 months
£m
Total
£m
Fair value
£m
1,242
1,170
1,242
182
840
26,733
1,596
368
1,961
32,922
143
–
–
1,584
339
–
182
840
26,733
1,812
368
–
31,177
1 These assets and liabilities have no expected settlement date.
2 Total financial assets includes £1,115 million (2016: £1,196 million) of assets held in a collateral account pertaining to the PGL pension scheme buy-in agreement. See note G6.2 for
further details.
3 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 & Accounts 2017
125
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A
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T
S
T
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O
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E
R
E
C
N
A
N
R
E
V
O
G
E
T
A
R
O
P
R
O
C
I
S
L
A
C
N
A
N
I
F
N
O
I
T
A
M
R
O
F
N
I
L
A
N
O
I
T
I
D
D
A
Notes to the Consolidated Financial Statements
continued
E. FINANCIAL ASSETS & LIABILITIES continued
E1. FAIR VALUES continued
2016
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 deposits
Equities1
Investment in associate1
Fixed and variable rate income securities
Collective investment schemes1
Reinsurers’ share of investment contract liabilities1
Loans and deposits at amortised cost
Total financial assets2
2016
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 unitholders1
Investment contract liabilities1
Financial liabilities measured at amortised cost:
Borrowings
Deposits received from reinsurers
Obligations for repayment of collateral received3
Total financial liabilities
Carrying value
Amounts due for
settlement after
12 months
£m
Total
£m
Fair value
£m
3,003
2,909
3,003
812
17,759
525
29,290
18,432
6,808
420
77,049
789
–
–
26,408
–
–
14
Carrying value
Amounts due for
settlement after
12 months
£m
Total
£m
812
17,759
525
29,290
18,432
6,808
420
77,049
Fair value
£m
1,567
1,482
1,567
270
1,040
27,332
1,766
392
1,623
33,990
270
–
–
1,735
363
–
270
1,040
27,332
1,879
392
–
32,480
1 These assets and liabilities have no expected settlement date.
2 Total financial assets includes £1,196 million of assets held in a collateral account pertaining to the PGL pension scheme buy-in agreement. See note G6.2 for further details.
3 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.
Fair value hierarchy information for non-financial assets measured at fair value is included in note G8 for property held at valuation and in note G9 for
investment property.
126
Phoenix Group Holdings | Annual Report & Accounts 2017
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 indicate 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, derivatives
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 Group 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) during each reporting period.
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.
2017
Financial assets measured
at fair value
Level 1
£m
Level 2
£m
Level 3
£m
Total fair
value
£m
Derivatives
28
2,588
144
2,760
Financial assets designated at
fair value through profit or loss
upon initial recognition:
Loans and deposits
Equities
Investment in associate
Fixed and variable rate
income securities
–
16,621
550
–
6
–
1,444
1,444
607
17,234
–
550
19,194
7,393
411 26,998
Collective investment schemes 17,923
929
49
18,901
Reinsurers’ share of
investment contract liabilities
Total financial assets measured
at fair value
Financial assets for which
fair values are disclosed
Loans and deposits at
amortised cost
2017
Financial liabilities measured
at fair value
–
6,085
–
6,085
54,288
14,413
2,511
71,212
54,316
17,001
2,655
73,972
–
368
–
368
54,316
17,369
2,655
74,340
Level 1
£m
Level 2
£m
Level 3
£m
Total fair
value
£m
Derivatives
39
1,103
100
1,242
Financial liabilities designated at
fair value through profit or loss
upon initial recognition:
Borrowings
Net asset value attributable
to unitholders
–
840
–
–
Investment contract liabilities
–
26,733
182
182
–
–
840
26,733
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
I
C
G
E
T
A
R
T
S
T
R
O
P
E
R
E
C
N
A
N
R
E
V
O
G
E
T
A
R
O
P
R
O
C
I
S
L
A
C
N
A
N
I
F
N
O
I
T
A
M
R
O
F
N
I
L
A
N
O
I
T
I
D
D
A
840
26,733
182
27,755
879
27,836
282 28,997
1,521
291
1,812
368
–
368
–
–
–
1,889
291
573
2,180
31,177
127
Phoenix Group Holdings | Annual Report & Accounts 2017
879
29,725
Notes to the Consolidated Financial Statements
continued
E2. FAIR VALUE HIERARCHY continued
E2.2 Fair value hierarchy of financial instruments continued
2016 Restated1
Financial assets measured
at fair value
Level 1
£m
Level 2
£m
Level 3
£m
Total fair
value
£m
Derivatives
74
2,876
53
3,003
Financial assets designated at fair
value through profit or loss upon
initial recognition:
Loans and deposits
Equities
Investment in associate
–
17,078
525
–
10
–
812
671
–
812
17,759
525
Fixed and variable rate income
securities
17,282
11,862
146 29,290
Collective investment schemes 17,235
1,108
89 18,432
Reinsurers’ share of investment
contract liabilities
Total financial assets measured
at fair value
Financial assets for which
fair values are disclosed
Loans and receivables at
amortised cost
2016
Financial liabilities measured
at fair value
–
6,808
–
6,808
52,120
19,788
1,718 73,626
52,194 22,664
1,771
76,629
–
420
–
420
52,194 23,084
1,771
77,049
Level 1
£m
Level 2
£m
Level 3
£m
Total fair
value
£m
Derivatives
25
1,270
272
1,567
Financial liabilities designated at
fair value through profit or loss
upon initial recognition:
Borrowings
Net asset value attributable
to unitholders
–
1,040
–
–
Investment contract liabilities
–
27,332
270
270
–
–
1,040
27,332
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
1,040
27,332
270 28,642
1,065 28,602
542 30,209
–
–
–
748
1,131
1,879
392
–
392
1,140
1,131
2,271
1,065
29,742
1,673 32,480
1 Comparative figures have been restated following a re-assessment of the lowest level
input that is significant to the fair value measurement of collective investment schemes
on the Abbey Life acquisition balance sheet. This resulted in £3,687 million of collective
investment schemes being reclassified from Level 2 to Level 1.
128
Phoenix Group Holdings | Annual Report & Accounts 2017
E2.3 Level 3 financial instrument sensitivities
Level 3 investments in equities (including private equity and unlisted
property investment vehicles) 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 income securities categorised as Level 3
investments are valued using broker quotes with the exception of a
property investment structure, certain local authority loans and private
placements. 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 equities and fixed and variable rate income
securities include equity and debt holdings in a property investment
structure with a value of £1 million (2016: £22 million) and £41 million
(2016: £22 million) respectively.
During the period, the investment was restructured affecting the
weighting between the Group’s debt and equity holdings and prompting
an amendment to the valuation methodology. The valuation is now
performed for the structure as a whole on a discounted cash flow basis
and allocated to the debt and equity components in order of priority.
The valuation is sensitive to the discount rate applied. A decrease in the
discount rate of 175bps would increase the value by £5 million whilst an
increase of 200bps would decrease the value by £7 million. Due to the
restructuring of the investment in the period, no comparative sensitivities
have been disclosed.
Included within fixed and variable rate income securities are investments
in local authority loans with a value of £185 million (2016: £46 million).
These investments are valued using a calculation model that takes a
comparable UK Treasury stock and applies 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 £6 million (2016: £1 million) and a
decrease of 25bps would increase the value by £7 million (2016: £nil).
Also included within fixed and variable rate income securities are private
placements, which are loans secured on various assets, with a value
of £116 million (2016: £nil). The loans are valued using a discounted
cash flow model. The discount rate is made up of a risk-free rate and a
spread. The risk-free rate is taken from an appropriate gilt of comparable
duration. The spread is taken from a basket of comparable securities.
The valuations are sensitive to movements in the spread. An increase of
25bps would decrease the value by £2 million and a decrease of 25bps
would increase the value by £2 million.
Included within loans and deposits are investments in equity release
mortgages with a value of £1,255 million (2016: £433 million). 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 the yield curve, inflation rate and
house prices.
An increase of 100bps in the yield curve would decrease the value by
£108 million (2016: £42 million) and a decrease of 100bps would increase
the value by £118 million (2016: £47 million). An increase of 1% in the
inflation rate would increase the value by £7 million (2016: £3 million)
and a decrease of 1% would decrease the value by £14 million
(2016: £4 million).
E2.4 Transfers of financial instruments between Level 1 and
Level 2
From
Level 1 to
Level 2
£m
From
Level 2 to
Level 1
£m
–
5
23
6
138
–
2017
Financial assets measured at fair value
Financial assets designated at fair value
through profit or loss upon initial recognition:
Derivatives
Fixed and variable rate income securities
Collective investment schemes
Financial liabilities measured at fair value
Financial liabilities designated at fair value
through profit or loss upon initial recognition:
Derivatives
–
3
From
Level 1 to
Level 2
£m
From
Level 2 to
Level 1
£m
2016
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
155
153
Consistent with the prior year, all of 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, resulted in an
overall net movement of financial assets from Level 2 to Level 1 in the
current period and from Level 1 to Level 2 in the comparative period.
An increase of 10% in house prices would increase the value by
£3 million (2016: £1 million) and a decrease of 10% would decrease the
value by £9 million (2016: £2 million).
Also included within loans and deposits are investments in commercial
real estate loans of £77 million entered into during the period. The loans
are valued using a model which discounts the expected projected future
cash flows at the risk-free rate plus a spread derived from a proxy basket
of asset backed securities. The valuation is sensitive to changes in the
discount rate. An increase of 100bps in the discount rate would decrease
the value by £5 million and a decrease of 100bps would increase the
value by £5 million.
Included within borrowings measured at fair value and categorised as
Level 3 financial liabilities are property reversion loans with a value of
£131 million (2016: £183 million), 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 increase the value by £3 million (2016: £5 million) and a decrease of
1% would decrease the value by £3 million (2016: £5 million). An increase
of 1% in the house price inflation rate would increase the value by
£3 million (2016: £6 million) and a decrease of 1% would decrease the
value by £3 million (2016: £6 million).
Included within financial assets and liabilities are related loans
and deposits of £112 million (2016: £380 million), borrowings of
£51 million (2016: £87 million) and derivative liabilities of £21 million
(2016: £255 million) pertaining to a reinsurance and retrocession
arrangement assumed following the acquisition of Abbey Life.
These assets and liabilities are valued using a discounted cash flow
model that includes valuation adjustments in respect of liquidity and
credit risk. At 31 December 2017, the net of these balances was an asset
of £40 million (2016: asset of £38 million). The valuation is sensitive to
movements in the euro swap curve. An increase of 100bps in the swap
curve would decrease the aggregate value by £3 million (2016: £4 million)
and a decrease of 100bps would increase the aggregate value by
£3 million (2016: £4 million).
During 2017, the valuation methodology for each leg of this transaction
was revised such that the period covered by the cash flow projections for
the valuation of both the derivative liability and loan asset were restricted
to the date of the expected contractual novation of the arrangement.
The change reduced the fair value of both instruments but did not impact
the valuation of the arrangement on a net basis.
Also included within derivative assets and derivative liabilities are
longevity swap contracts with corporate pension schemes assumed
following the acquisition of Abbey Life with a fair value of £144 million
(2016: £53 million) and £77 million (2016: £17 million) respectively.
These derivatives are valued on a discounted cash flow basis, key
inputs to which are the EIOPA interest rate swap curve and RPI and CPI
inflation rates.
An increase of 100bps in the swap curve would decrease the value by
£13 million (2016: £10 million) and a decrease of 100bps would increase
the value by £17 million (2016: £10 million). An increase of 1% in the
RPI and CPI inflation rates would increase the value by £10 million
(2016: £5 million) and a decrease of 1% would decrease the value by
£10 million (2016: £5 million).
Phoenix Group Holdings | Annual Report & Accounts 2017
129
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A
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N
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E
V
O
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E
T
A
R
O
P
R
O
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I
S
L
A
C
N
A
N
I
F
N
O
I
T
A
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R
O
F
N
I
L
A
N
O
I
T
I
D
D
A
Notes to the 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
2017
Financial assets
Derivatives
Financial assets designated at fair
value through profit or loss upon
initial recognition:
Loans and deposits
Equities
Fixed and variable rate income
securities
Collective investment schemes
2017
Financial liabilities
Derivatives
Financial liabilities designated at
fair value through profit or loss upon
initial recognition:
Borrowings
At
1 January
2017
£m
Net gains/
(losses)
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
2017
£m
Unrealised
gains/(losses)
on assets
held at end
of period
£m
53
98
–
(7)
812
671
146
89
1,718
1,771
(223)
55
8
(18)
(178)
(80)
937
53
281
5
1,276
1,276
(82)
(171)
(18)
(46)
(317)
(324)
–
–
–
–
19
19
19
–
144
93
–
(1)
(6)
–
(7)
(7)
1,444
607
411
49
2,511
2,655
(223)
50
5
(4)
(172)
(79)
At
1 January
2017
£m
Net gains
in income
statement
£m
Purchases
£m
Sales/
repayments
£m
Transfers
from
Level 1
and Level 2
£m
Transfers to
Level 1
and Level 2
£m
At
31 December
2017
£m
Unrealised
gains on
liabilities
held at end
of period
£m
272
(172)
270
542
(23)
(195)
–
–
–
–
(65)
(65)
–
–
–
–
–
–
100
(172)
182
282
(23)
(195)
130
Phoenix Group Holdings | Annual Report & Accounts 2017
2016
Financial assets
Derivatives
Financial assets designated at
fair value through profit or loss upon
initial recognition:
Loans and deposits
Equities
Investment in joint venture
Fixed and variable rate income
securities
Collective investment schemes
Less amounts classified as held for
sale
2016
Financial liabilities
Derivatives
Financial liabilities designated at
fair value through profit or loss upon
initial recognition:
Borrowings
At 1 January
2016
£m
Net gains/
(losses) in
income
£m
Effect of
acquisitions/
purchases
£m
Transfers from
Level 1 and
Level 2
£m
Transfers to
Level 1 and
Level 2
£m
At
31 December
2016
£m
Sales
£m
Unrealised
gains on assets
held at end of
period
£m
–
–
53
–
268
606
149
330
82
1,435
(149)
1,286
31
89
–
(2)
11
129
–
129
536
83
–
20
8
647
–
700
(23)
(106)
(149)
(209)
(12)
(499)
149
(350)
–
–
1
–
31
–
32
–
32
–
53
–
–
(2)
–
(24)
–
(26)
–
(26)
812
671
–
146
89
1,718
–
1,771
31
91
–
7
7
136
–
136
At 1 January
2016
£m
Net losses in
income
£m
Effect of
acquisitions
£m
Repayments
£m
Transfers from
Level 1
and Level 2
£m
Transfers to
Level 1
and Level 2
£m
At
31 December
2016
£m
Unrealised
losses on
liabilities held at
end of period
£m
–
–
272
–
194
194
15
15
87
359
(26)
(26)
–
–
–
–
–
–
272
–
270
542
15
15
During the year, updates to the Group’s observations, in particular with regard to the nature and liquidity of underlying assets held within a collective
investment scheme, resulted in a net transfer from Levels 1 and 2 to Level 3.
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.
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Phoenix Group Holdings | Annual Report & Accounts 2017
131
Notes to the Consolidated Financial Statements
continued
E. FINANCIAL ASSETS & LIABILITIES continued
E3. DERIVATIVES
The Group purchases derivative financial instruments principally
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. The Group also holds derivatives to
hedge financial liabilities denominated in foreign currency.
Derivative financial instruments are largely classified as held for
trading. Such instruments are recognised initially at fair value and
are subsequently remeasured to fair value. The gain or loss on
remeasurement to fair value is recognised in the consolidated income
statement. Derivative financial instruments are not classified as
held for trading where they are designated as a hedging instrument
and where the resultant hedge is assessed as effective. For such
instruments, any gain or loss that arises on remeasurement to fair
value is initially recognised in other comprehensive income and
is recycled to profit or loss as the hedged item impacts the profit
or loss. See note E1 for further details of the Group’s hedging
accounting policy.
E3.1 Summary
The fair values of derivative financial instruments are as follows:
Assets
2017
£m
Liabilities
2017
£m
Assets
2016
£m
Liabilities
2016
£m
Forward currency
Credit default options
Contract for differences
58
–
1
21
1
–
24
4
1
83
9
–
Interest rate swaps
2,212
1,032
2,437
1,160
Total return bond
swaps
Swaptions
Inflation swaps
Equity options
Stock index futures
Fixed income futures
Retrocession contracts
Longevity swap
contracts
Currency futures
Cross currency swap
held for hedging
purposes
21
278
17
4
8
16
–
144
1
–
1
–
16
–
33
6
21
77
2
32
21
364
19
64
7
8
–
53
1
–
–
–
14
3
20
6
255
17
–
–
2,760
1,242
3,003
1,567
132
Phoenix Group Holdings | Annual Report & Accounts 2017
E3.2 Corporate transactions
Abbey Life, a Group entity, has in place longevity swap arrangements
with corporate pension schemes which do not meet the definition of
insurance contracts under the Group’s accounting policies. Under these
arrangements the majority of the longevity risk has been passed to
third parties. Derivative assets of £144 million and derivative liabilities
of £77 million have been recognised as at 31 December 2017
(2016: £53 million and £17 million respectively).
In addition, Abbey Life has entered into a transaction under which it
has accepted reinsurance on a portfolio of single and regular premium
life insurance policies and retroceded the majority of the insurance risk.
Taken as a whole, this transaction does not give rise to the transfer of
significant insurance risk to the Group and therefore does not meet
the definition of an insurance contract under the Group’s accounting
policies. The fair value of amounts due from the cedant are recognised
within loans and deposits (see note E1). The fair value of amounts due
to the retrocessionaire are recognised as a derivative liability and totalled
£21 million at 31 December 2017 (2016: £255 million). A loan liability has
been recognised in respect of financing obtained for the initial reinsurance
premium (see note E5). During 2017, the valuation methodology for these
instruments was changed (see note E2.3).
E3.3 Warrants over shares
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 2017 the terms of Lenders’
warrants entitled the holders to purchase 1.027873 (2016: 1.027873)
ordinary shares per Lenders’ warrant for an exercise price of £14.59
(2016: £14.59).
The exercise period terminates on the first to occur of:
– 15th anniversary of the date issued;
– date fixed for the redemption of the warrants; and
– 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 (2016: £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 2017 are:
– the share price as at 31 December 2017 of £7.82 (2016: 7.35);
– volatility of 25% (2016: 25%);
– the warrants are adjusted for a dividend yield of 6.3%; and
– 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 £56,000 (2016: £143,000).
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
2017 (2016: 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.
2017
Related amounts not offset
Financial assets
OTC derivatives
Exchange traded derivatives
Stock lending
Total
Financial liabilities
OTC derivatives
Exchange traded derivatives
Total
2016
Financial assets
OTC derivatives
Exchange traded derivatives
Stock lending
Total
Financial liabilities
OTC derivatives
Exchange traded derivatives
Total
Phoenix Group Holdings | Annual Report & Accounts 2017
Gross and net
amounts of
recognised
financial assets
£m
Financial
instruments and
cash collateral
received
£m
2,731
29
578
3,338
2,089
–
578
2,667
Derivative
liabilities
£m
Net
amount
£m
562
17
–
579
80
12
–
92
Related amounts not offset
Gross and net
amounts of
recognised
financial
liabilities
£m
Financial
instruments and
cash collateral
received
£m
1,193
50
1,243
631
18
649
Derivative
assets
£m
Net
amount
£m
562
17
579
–
15
15
Related amounts not offset
Gross and net
amounts of
recognised
financial assets
£m
Financial
instruments and
cash collateral
received
£m
2,927
76
446
3,449
2,050
–
446
2,496
Derivative
liabilities
£m
Net
amount
£m
683
4
–
687
Related amounts not offset
Gross and net
amounts of
recognised
financial liabilities
£m
Financial
instruments and
cash collateral
received
£m
1,543
24
1,567
625
16
641
Derivative
assets
£m
683
4
687
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72
–
266
Net
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£m
235
4
239
133
Notes to the Consolidated Financial Statements
continued
E4.3 Stock lending collateral arrangements
The Group lends listed financial assets held in its investment portfolio to
other institutions.
The Group conducts 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 £623 million
(2016: £474 million).
The maximum exposure to credit risk in respect of stock lending
transactions is £578 million (2016: £446 million) of which credit risk
of £578 million (2016: £446 million) is mitigated through the use of
collateral arrangements.
E4.4 Other collateral arrangements
Collateral has also been pledged and charges have been granted in
respect of certain Group borrowings. The details of these arrangements
are set out in note E5.
E. FINANCIAL ASSETS & LIABILITIES continued
E4.2 Derivative collateral arrangements
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 £466 million (2016: £820 million).
The amounts recognised as financial assets and liabilities from cash
collateral received at 31 December 2017 are set out below.
Financial assets
Financial liability
OTC derivatives
2017
£m
1,961
(1,961)
2016
£m
1,628
(1,628)
The maximum exposure to credit risk in respect of OTC derivative
assets is £2,731 million (2016: £2,927 million) of which credit risk of
£2,651 million (2016: £2,733 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 £29 million
(2016: £76 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 2017 in respect of OTC
derivative liabilities of £1,193 million (2016: £1,543 million) amounted to
£631 million (2016: £625 million).
134
Phoenix Group Holdings | Annual Report & Accounts 2017
E5. BORROWINGS
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 borrowings where there is either no or
limited shareholder exposure, for example, borrowings attributable to the Group’s with-profit operations or secured on a block of business
E5.1 Analysis of borrowings
Limited recourse bonds 2022 7.59% (note a)
Property Reversions loan (note b)
Retrocession contracts (note c)
Total policyholder borrowings
£200 million 7.25% unsecured subordinated loan (note d)
£300 million senior unsecured bond (note e)
£900 million unsecured revolving credit facility (note f)
£428 million subordinated notes (note g)
£450 million Tier 3 subordinated notes (note h)
US $500 million Tier 2 bonds (note i)
Total shareholder borrowings
Carrying value
Fair value
2017
£m
56
131
51
238
177
121
–
426
448
368
2016
£m
65
183
87
335
167
298
843
393
–
–
2017
£m
66
131
51
248
225
137
–
513
481
390
2016
£m
74
183
87
344
207
332
850
416
–
–
1,540
1,701
1,746
1,805
Total borrowings
1,778
2,036
1,994
2,149
Amount due for settlement after 12 months
1,727
2,005
a.
b.
c.
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 ranked 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 £60 million (2016: £72 million) have an average remaining life of 2 years and
mature in 2022. Phoenix Life Assurance Limited (’PLAL’) has provided collateral of £26 million (2016: £29 million) to provide security to the holders
of the recourse bonds in issue. During 2017, repayments totalling £12 million were made (2016: £11 million).
The Property Reversions loan from Santander UK plc (’Santander’) was recognised in 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 2017, repayments totalling
£24 million were made (2016: £27 million). Note G9 contains details of the assets that support this loan.
In July 2012, AXIA Insurance Limited (’AXIA’) provided financing to Abbey Life, a Group company, for Abbey Life to in turn provide the financing
for the securitisation of the future surplus arising on a block of 1.7 million life insurance policies originating from the wholly owned Spanish and
Portuguese insurance subsidiaries of Banco Santander, S.A. (the ’Cedants’). This transaction was executed in the form of a reinsurance and
retrocession arrangement that, taken as a whole, does not meet the definition of an insurance contract under the Group’s accounting policies (see
note E3.2). Abbey Life received an upfront reinsurance commission from AXIA and makes monthly repayments based on the surplus emerging
from the securitised policies as defined in the contracts. The repayments comprise a minimum guaranteed surplus amount and a share of any
excess surplus, net of certain other amounts. Any excess amount serves to accelerate the repayment of the principal. Repayments are contingent
on the receipt of payments due from the Cedants. Repayment of the loan principal is expected to occur by 2021. The contracts are recognised in
the consolidated financial statements at fair value.
Phoenix Group Holdings | Annual Report & Accounts 2017
135
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Notes to the Consolidated Financial Statements
continued
g.
h.
On 23 January 2015, PGHC issued £428 million of subordinated
notes due 2025 at a coupon of 6.625%. Fees associated with
these notes of £3 million were deferred and are being amortised
over the life of the notes in the statement of consolidated financial
position. Upon exchange £32 million of these notes were held
by Group companies. On 27 January 2017, £17 million of the
£428 million subordinated notes held by Group companies were sold
to third parties and a further £15 million were sold to third parties
on 31 January 2017, thereby increasing external borrowings by
£32 million. On 20 March 2017, the Company was substituted in
place of PGHC as issuer of the £428 million subordinated notes.
On 20 January 2017, PGHC issued £300 million Tier 3 subordinated
notes due 2022 at a coupon of 4.125%. On 20 March 2017, the
Company was substituted in place of PGHC as issuer of the
£300 million Tier 3 subordinated notes. On 5 May 2017, PGH
completed the issue of a further £150 million of Tier 3 subordinated
notes, the terms of which are the same as the Tier 3 subordinated
notes issued in January 2017. The Group received a premium of
£2 million in excess of the principal amount. Fees associated with
these notes of £5 million were deferred and are being amortised over
the life of the notes.
i.
On 6 July 2017, PGH issued US $500 million Tier 2 bonds due
2027 with a coupon of 5.375%. Fees associated with these notes
of £2 million were deferred and are being amortised over the life of
the notes.
Changes to the Group’s borrowings since 31 December 2017 have been
detailed in note I8.
E. FINANCIAL ASSETS & LIABILITIES continued
E5. BORROWINGS continued
d.
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,
following a Part VII transfer, these loan notes were transferred
into the shareholder fund of Phoenix Life Limited (’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.
e.
f.
On 7 July 2014, the Group’s financing subsidiary, PGH Capital
plc (’PGHC’), issued a £300 million 7 year senior unsecured bond
at an annual coupon rate of 5.75% (’£300 million senior bond’).
On 20 March 2017, the Company was substituted in place of PGHC
as issuer of the £300 million senior bond. On 5 May 2017, the
Company completed the purchase of £178 million of the £300 million
senior bond at a premium of £25 million in excess of the principal
amount. Accrued interest on the purchased bonds was settled on
this date.
In March 2016, the Group agreed an amendment of its PGHC
£900 million 5 year unsecured bank facility, which comprised a
£450 million revolving credit facility and a £450 million amortising
term loan, into a £650 million unsecured revolving credit facility,
maturing in June 2020. On 9 November 2016, this facility was fully
repaid using proceeds from the rights issue before being drawn
down again on 28 December 2016. On the same date the Group
drew down a further £250 million tranche of this facility to finance
part of the Abbey Life acquisition, increasing borrowings on the
revolving credit facility to £900 million. On 29 December 2016,
£50 million of the facility was repaid. On 20 January 2017, the
proceeds from the issue of £300 million of Tier 3 subordinated notes
were used to repay £300 million of the facility. On 28 February 2017,
the Company became an additional borrower under the £900 million
revolving credit facility. On 6 July 2017, the proceeds from the
issuance of the US $500 million Tier 2 bonds were used to repay
£384 million of the revolving credit facility and on 8 August 2017, the
remaining outstanding balance of £166 million was repaid. There are
no mandatory or target amortisation payments associated with the
revolving credit facility but prepayments are permissible. The facility
accrues interest at LIBOR plus 1.1%, a reduced rate following the
upgrade to the Company’s credit rating on 25 July 2017 (previously
LIBOR plus 1.35%). On 20 January 2017, the utilisation fee was
reduced from 0.4% p.a. to 0.2% p.a. and it was further reduced to
0.1% p.a. on 6 July 2017 following subsequent repayments of the
outstanding balance (2016: 0.4% p.a.).
136
Phoenix Group Holdings | Annual Report & Accounts 2017
E5.2 Reconciliation of liabilities arising from financing
The table below details changes in the Group’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising
from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group’s consolidated statement of cash
flows as cash flows from financing activities.
Limited recourse bonds 2022 7.59%
Property Reversions loan
Retrocession contracts
£200 million 7.25% unsecured subordinated loan
£300 million senior unsecured bond
£900 million unsecured revolving credit facility
£428 million subordinated notes
£450 million Tier 3 subordinated notes
US $500 million Tier 2 bonds
Cash movements
Non-cash movements
At Jan
2017
£m
New
borrowings,
net of costs
£m
Repayments1
£m
Changes in
fair value
£m
Movement
in foreign
exchange
£m
Other
movements2
£m
At 31 Dec
2017
£m
65
183
87
167
298
843
393
–
–
2,036
–
–
–
–
–
–
32
447
383
862
(12)
(24)
(41)
–
(178)
(850)
–
–
–
–
(28)
5
–
–
–
–
–
–
(1,105)
(23)
–
–
–
–
–
–
–
–
(15)
(15)
3
–
–
10
1
7
1
1
–
56
131
51
177
121
–
426
448
368
23
1,778
1 Repayment of shareholder borrowings in the statement of consolidated cash flows includes a premium of £25 million in excess of the principal amount on repayment of the £300 million senior
unsecured bond.
2 Primarily comprises amortisation under the effective interest method applied to borrowings held at amortised cost.
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137
Notes to the Consolidated Financial Statements
continued
E. FINANCIAL ASSETS & LIABILITIES continued
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.
E6.2 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.
E6.1 Financial risk and the asset liability management (’ALM’)
framework
The use of financial instruments naturally exposes the Group to the
risks associated with them, chiefly market risk, credit risk and financial
soundness risk.
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.
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, administrative expenses and new
business pricing. 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 framework
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 include all of the
Group’s participating business), non-linked non-profit funds and unit-
linked funds.
There are two principal sources of credit risk for the Group:
– 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
– 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 the minority interest
in consolidated collective investment schemes and those assets that
back policyholder 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 £5,640 million (2016: £6,253 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
£225 million (2016: £322 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 (2016: £41 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 £53 million (2016: £29 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.
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Phoenix Group Holdings | Annual Report & Accounts 2017
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 external credit rating:
2017
Loans and deposits
Derivatives
Fixed and variable rate
income securities
Reinsurers’ share of insurance
contract liabilities
Reinsurers’ share of investment
contract liabilities
Cash and cash equivalents
2016
Loans and deposits
Derivatives
Fixed and variable rate
income securities
Reinsurers’ share of insurance
contract liabilities
Reinsurers’ share of investment
contract liabilities
Cash and cash equivalents
AAA
£m
–
–
AA
£m
53
41
A
£m
366
1,942
BBB
£m
20
557
BB
£m
–
–
B and
below
£m
Non-rated
£m
Unit-linked
£m
–
–
1,371
210
2
10
Total
£m
1,812
2,760
3,867
12,853
5,571
3,586
276
84
546
215
26,998
–
–
–
1,406
1,849
–
694
–
1,400
11,128
–
–
114
4,277
–
–
–
–
–
–
65
–
–
–
3,320
6,085
37
6,085
2,245
276
84
2,192
6,349
43,220
3,867
15,047
AAA
£m
–
–
AA
£m
80
20
A
£m
106
BBB
£m
420
1,807
1,024
BB
£m
–
–
B and
below
£m
–
–
4,343
13,283
6,358
4,230
326
119
–
–
–
1,820
1,865
–
573
–
918
2
–
89
–
–
4
–
–
–
623
145
439
57
–
–
Non-rated
£m
Unit-linked
£m
Total
£m
1,232
3,003
3
7
192
29,290
–
3,744
6,808
82
6,808
1,666
4,343
15,776
11,054
5,765
330
119
1,264
7,092
45,743
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.
Assets held directly by the life companies 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.
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.
The Group operates an Internal Credit Rating Committee to monitor and control oversight of both externally rated and internally rated assets. A variety of
methods are used to validate the appropriateness of credit assessment from external institutions and fund managers. Internally rated assets are those
that do not have a public rating from an external credit assessment institution. This Committee reviews the policies, processes and practices to ensure
the appropriateness of the internal ratings assigned to asset classes.
The Group has increased exposure to illiquid credit assets (e.g. equity release mortgages and commercial real estate loans) with the aim of achieving
greater diversification and investment returns.
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.
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139
Notes to the Consolidated Financial Statements
continued
E. FINANCIAL ASSETS & LIABILITIES continued
E6. RISK MANAGEMENT – FINANCIAL RISK continued
2017
Loans and deposits
Derivatives
Fixed and variable rate income securities
Reinsurers’ share of insurance contract liabilities
Reinsurers’ share of investment contract liabilities
Reinsurance receivables
Prepayments and accrued income
Other receivables
Cash and cash equivalents
2016
Loans and deposits
Derivatives
Fixed and variable rate income securities
Reinsurers’ share of insurance contract liabilities
Reinsurers’ share of investment contract liabilities
Reinsurance receivables
Prepayments and accrued income
Other receivables
Cash and cash equivalents
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
1,810
2,750
26,783
3,320
–
32
355
580
2,208
Neither past
due nor
impaired
£m
1,229
2,996
29,098
3,744
–
37
358
493
1,584
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
10
215
–
6,085
–
–
–
37
Less than
30 days
£m
30–90 days
£m
Greater than 90
days
£m
Impaired
£m
Unit-linked
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3
7
192
–
6,808
–
3
20
82
Carrying
value
£m
1,812
2,760
26,998
3,320
6,085
32
355
580
2,245
Carrying
value
£m
1,232
3,003
29,290
3,744
6,808
37
361
513
1,666
Please refer to page 191 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.
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 through stress and scenario testing.
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Reinsurance
The Group is exposed to credit risk as a result of insurance risk transfer
contracts with reinsurers. This also gives rise to concentration of risk
with individual reinsurers, due to the nature of the reinsurance market
and the restricted range of reinsurers that have acceptable credit ratings.
The Group manages its exposure to reinsurance credit risk through the
operation of a credit policy, collateralisation where appropriate, and regular
monitoring of exposures at the Reinsurance Management Committee.
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 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:
– the mismatch between liability profiles and the related asset
investment portfolios;
– 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
– the income flow of management charges derived from the value of
invested assets of the business.
The Group manages the levels of market risk that it accepts through
the operation of a market risk policy and an approach to investment
management that determines:
– the constituents of market risk for the Group;
– the basis used to fair value financial assets and liabilities;
– the asset allocation and portfolio limit structure;
– diversification from and within benchmarks by type of instrument and
geographical area;
– the net exposure limits by each counterparty or group of
counterparties, geographical and industry segments;
– control over hedging activities;
– reporting of market risk exposures and activities; and
– 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 and supported participating funds. For unsupported
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.
Changes in the value of the Group’s holdings in swaptions as the result
of time decay or changes to interest rate volatility are not captured in the
sensitivity analysis.
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 unsupported 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 unsupported participating business to the Group result is largely limited
to the shareholders’ share of the declared annual bonus. The contribution
of the supported participating business to the Group result is determined
by the shareholders’ interest in any change in value in the capital
advanced to the with-profit funds.
In the non-participating funds, policy liabilities’ sensitivity to interest rates
are matched primarily with fixed and variable rate income securities and
hedging if necessary to match duration, with the result that sensitivity to
changes in interest rates is very low. The Group’s exposure to interest
rates principally arises from the Group’s hedging strategy to protect the
regulatory capital position, which results in an adverse impact on profit on
an increase in interest rates.
An increase of 1% in interest rates, with all other variables held constant
would result in a decrease in profits after tax in respect of a full financial
year, and in equity, of £110 million (2016: £146 million).
A decrease of 1% in interest rates, with all other variables held constant,
would result in an increase in profits after tax in respect of a full financial
year, and in equity, of £196 million (2016: £319 million).
Phoenix Group Holdings | Annual Report & Accounts 2017
141
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Notes to the Consolidated Financial Statements
continued
E. FINANCIAL ASSETS & LIABILITIES continued
E6. RISK MANAGEMENT – FINANCIAL RISK continued
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 profits after tax in respect of a full financial
year, and in equity, of £73 million (2016: £75 million).
A 10% increase in equity prices, with all other variables held constant,
would result in a decrease in profits after tax in respect of a full financial
year, and in equity, of £71 million (2016: £74 million).
A 10% decrease in property prices, with all other variables held constant,
would result in a decrease in profits after tax in respect of a full financial
year, and in equity, of £11 million (2016: £4 million).
A 10% increase in property prices, with all other variables held constant,
would result in an increase in profits after tax in respect of a full financial
year, and in equity, of £5 million (2016: £2 million).
The sensitivity to changes in equity prices is primarily driven by
the Group’s equity hedging arrangements over the value of future
management charges that are linked to asset values.
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
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Phoenix Group Holdings | Annual Report & Accounts 2017
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 2017, since
unhedged exposure to foreign currency was relatively low (2016: not
considered significant).
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 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 I3.
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. Industry consultation
resulted in changes to mitigate the impact of restrictions on the rules
relating to the loss absorbing capacity of deferred tax introduced
during 2017.
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. This was invoked as a result of the market volatility
experienced following the result of the referendum on membership of
the European Union in 2016 in line with other firms across the industry.
In 2017, all unit trusts processed 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.
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:
– 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’);
– cash flows are appropriately managed and the reputation of the Group
is safeguarded; and
– 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.
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Phoenix Group Holdings | Annual Report & Accounts 2017
143
Notes to the Consolidated Financial Statements
continued
E. FINANCIAL ASSETS & LIABILITIES continued
E6. RISK MANAGEMENT – FINANCIAL RISK continued
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:
2017
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
2016
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
4,739
26,733
144
28
72
840
1,961
23
522
179
144
12,169
27,527
–
1,161
99
153
–
–
–
–
–
–
–
972
302
1,283
–
–
–
–
–
–
–
–
131
–
–
–
–
–
–
–
–
1 year or less or
on demand
£m
1–5 years
£m
Greater than
5 years
£m
No fixed
term
£m
3,406
27,332
121
29
85
1,040
1,623
21
484
204
102
11,143
31,258
–
1,733
103
170
–
–
–
–
–
–
–
552
327
1,384
–
–
–
–
–
–
–
–
183
–
254
–
–
–
–
–
–
Total
£m
44,435
26,733
2,408
429
1,508
840
1,961
23
522
179
144
Total
£m
45,807
27,332
2,589
459
1,893
1,040
1,623
21
484
204
102
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.
E6.3 Unit-linked contracts
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.
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.
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F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS
WITH DPF AND REINSURANCE
F1. LIABILITIES UNDER INSURANCE CONTRACTS
Classification of contracts
Contracts are classified as insurance contracts where the Group
accepts significant insurance risk from the policyholder by agreeing to
compensate the policyholder if a specified uncertain event adversely
affects the policyholder.
Contracts under which the transfer of insurance risk to the Group
from the policyholder is not significant are classified as investment
contracts or derivatives and accounted for as financial liabilities (see
notes E1 and E3 respectively).
Some insurance and investment contracts contain a Discretionary
Participation Feature ('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
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:
– where there are no guaranteed surrender values; or
– in the periods where guaranteed surrender values do not apply
even though guaranteed surrender values are applicable after a
specified period of time.
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 participating business, the liabilities under insurance contracts and
investment contracts with DPF are calculated in accordance with the
following methodology:
– 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;
– acquisition costs are not deferred; and
– 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).
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.
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145
Notes to the Consolidated Financial Statements
continued
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS
WITH DPF AND REINSURANCE continued
F1. LIABILITIES UNDER INSURANCE CONTRACTS continued
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.
Life assurance business:
Insurance contracts
Investment contracts with DPF
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.
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
2017
£m
Reinsurers’
share
2017
£m
Gross
liabilities
2016
£m
Reinsurers’
share
2016
£m
33,481
10,954
44,435
3,319
1
3,320
34,749
11,058
45,807
3,743
1
3,744
Amounts due for settlement after 12 months
39,697
2,996
42,401
3,478
At 1 January
Amounts classified as held for sale at 1 January
Premiums
Claims
Foreign exchange adjustments
Acquisition of AXA Wealth and Abbey Life1
Annuity liabilities transfer
Other changes in liabilities2
At 31 December
Gross
liabilities
2017
£m
45,807
–
45,807
1,130
(3,897)
20
–
–
1,375
44,435
Reinsurers’
share
2017
£m
3,744
–
3,744
205
(443)
(1)
–
–
(185)
3,320
Gross
liabilities
2016
£m
39,983
1,587
41,570
999
(3,726)
44
3,875
(1,652)
4,697
45,807
Reinsurers’
share
2016
£m
3,954
1,521
5,475
75
(456)
32
100
(1,582)
100
3,744
1 Gross liabilities in respect of the acquisition of AXA Wealth businesses and Abbey Life are stated after the recognition of negative reserves of £181 million that arise on
acquisition of AXA Wealth.
2 Other changes in liabilities principally comprise changes in economic and non-economic assumptions and experience.
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F2. UNALLOCATED SURPLUS
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 from/(to) consolidated
income statement
Acquisition of Abbey Life
At 31 December
2017
£m
879
46
–
925
2016
£m
877
(4)
6
879
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 £3,640 million
(2016: £3,780 million).
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 2017 are set out below.
Reinsurance transactions
2017
£m
368
368
2016
£m
392
392
F3. REINSURANCE
This section includes disclosures in relation to reinsurance. Further
disclosures and accounting policies relating to reinsurance are included
in note F1.
Financial assets
Financial liabilities
F3.1 Premiums ceded to reinsurers
Premiums ceded to reinsurers during the period were £205 million
(2016: £75 million).
During 2016, the Group entered into a longevity swap arrangement
with RGA International in respect of a portfolio of the Group’s in-force
immediate annuities of £2.0 billion.
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:
On 30 December 2016, the reinsurance agreement with ReAssure Life
Limited (formerly Guardian Assurance Limited) was replaced by a transfer
of the business using a scheme under Part VII of the Financial Services
and Markets Act 2000. Prior to the business transfer, in order to mitigate
the risk of counterparty default, ReAssure Life Limited held assets in a
collateral account over which the Group had a fixed charge as disclosed
in note F3.2.
Mortality
Longevity
Morbidity
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;
Expenses
policies cost more to administer than expected;
Lapses
Options
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;
unanticipated changes in policyholder option exercise
rates giving rise to increased claims costs; and
Pricing
inadequate or inappropriate pricing of new business.
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Phoenix Group Holdings | Annual Report & Accounts 2017
147
Notes to the Consolidated Financial Statements
continued
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
Following the implementation of the Solvency II regulatory regime
effective from 1 January 2016, the Group made certain changes to the
assumptions and estimates used in the valuation of insurance contracts
during the year ended 31 December 2016, as follows:
– In determining the discount rate to be applied when calculating
participating and non-participating insurance contract liabilities, the
Group amended the risk-free reference curve from a gilt yield curve
plus a liquidity premium of 10bps to the swap curve plus 10bps.
– For non-participating insurance contract liabilities, the Group previously
used a valuation rate of interest and adjusted the liability discount
rate by reference to the yield on the assets backing the liabilities to
account for credit, default and reinvestment risk. The Group now
makes an explicit adjustment to the risk-free rate to adjust for illiquidity
in respect of assets backing illiquid liabilities. This approach does not
take any additional credit for investment margins compared to the
previous methodology.
– For non-participating insurance contract liabilities, the Group previously
derived demographic assumptions by adding an implicit prudent
margin to best estimate assumptions. The Group amended its
approach in this regard and now sets assumptions at management’s
best estimates and recognises an explicit margin for demographic
risks. For participating business in realistic basis companies, the
assumptions about future demographic trends continue to represent
‘best estimates’.
The assumption changes were made to align the IFRS basis more
closely with the requirements of Solvency II removing the volatility that
would otherwise arise from the use of reference rates that differ across
reporting bases and aligning the calculation of liquidity premiums with that
performed under Solvency II.
The amendments to the risk-free reference rate and the approach for
adjusting for illiquidity increased insurance contract liabilities by £77 million
in the year ended 31 December 2016. This was more than offset by
the impact of the change in approach for determining the demographic
prudence margin, which reduced insurance contract liabilities by
£115 million. After allowing for other second order impacts of the changes
(including the revaluation of certain current liabilities using the swap rather
than gilt curve), the overall impact of the above changes in the year ended
31 December 2016 was a benefit to profit before tax of £31 million.
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 £34 million (2016: £43 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 £34 million (2016: £41 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 £137 million (2016: £127 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 £138 million (2016: £128 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 £99 million (2016: £38 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 £77 million (2016: £36 million).
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Phoenix Group Holdings | Annual Report & Accounts 2017
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.
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 £1,965 million (2016: £2,239 million) and
£131 million (2016: £183 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 £334 million (2016: £376 million) and £48 million
(2016: £13 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.
Assumption changes
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:
(Decrease)/increase
in insurance
liabilities
2017
£m
(Decrease)/increase
in insurance
liabilities
2016
£m
Change in longevity assumptions
Change in persistency
assumptions
Change in mortality assumptions
Change in expenses assumptions
(148)
120
15
(79)
(83)
142
1
(8)
The £148 million positive impact of changes in longevity assumptions
reflects updates to base and improvement assumptions to reflect
latest experience analyses and the most recent Continuous Mortality
Investigation 2016 projection tables.
The £120 million adverse impact of changes in persistency assumptions
is principally driven by the strengthening of actuarial assumptions to
reflect the impact of the continued low interest rate environment on
the Group’s expectations of persistency for products with valuable
guarantees and associated late retirements.
The £79 million positive impact of changes in expense assumptions
includes the impact of expense synergies arising from integration of the
acquired Abbey Life business, together with the impact of revisions to the
life expense agreements between the life and service companies.
Phoenix Group Holdings | Annual Report & Accounts 2017
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R
O
P
E
R
E
C
N
A
N
R
E
V
O
G
E
T
A
R
O
P
R
O
C
I
S
L
A
C
N
A
N
I
F
N
O
I
T
A
M
R
O
F
N
I
L
A
N
O
I
T
I
D
D
A
Notes to the Consolidated Financial Statements
continued
F. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE continued
F4. RISK MANAGEMENT – INSURANCE RISK continued
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 gross of longevity
swaps) and the ways in which the Group manages those risks.
2017
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 – without guarantees
Immediate annuities
Protection
Unit-linked
Other
2016
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
150
Phoenix Group Holdings | Annual Report & Accounts 2017
Gross
Reinsurance
Insurance
contracts
£m
Investment
contracts
with DPF
£m
Insurance
contracts
£m
Investment
contracts
with DPF
£m
7,458
1,234
1,029
4,244
13,965
8
761
2,509
3,278
1,344
121
11,303
289
3,420
(239)
33,481
78
–
–
8,936
9,014
–
804
–
804
–
–
–
–
1,136
–
10,954
665
–
699
–
1,364
4
2
18
24
77
–
1,854
61
66
(127)
3,319
–
–
–
–
–
–
1
–
1
–
–
–
–
–
–
1
Gross
Reinsurance
Insurance
contracts
£m
Investment
contracts
with DPF
£m
Insurance
contracts
£m
Investment
contracts
with DPF
£m
8,576
1,572
1,208
1,000
12,356
11
633
4,166
4,810
2,211
479
571
11,376
274
2,426
246
34,749
144
–
–
9,005
9,149
–
751
–
751
–
–
–
–
–
1,153
5
11,058
499
–
609
8
1,116
4
6
6
16
82
–
2
2,247
89
73
118
3,743
–
–
–
–
–
–
–
1
1
–
–
–
–
–
–
–
1
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, Financial Conduct Authority (‘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.
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
(see note E6.2.2).
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. In addition,
the Group has in place longevity swaps that provide downside protection
over longevity risk.
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.
Phoenix Group Holdings | Annual Report & Accounts 2017
151
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Notes to the Consolidated Financial Statements
continued
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.
Where it is expected that a part of the expenditure required to settle a provision will be reimbursed by a third party the reimbursement is recognised
when, and only when, it is virtually certain that the reimbursement will be received. This reimbursement shall be recognised as a separate asset
within other receivables and will not exceed the amount of the provision.
2017
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
PA(GI)
provision
£m
FCA
thematic
reviews
provision
£m
Restructuring
provision
£m
5
1
–
(1)
5
13
–
(2)
(1)
10
2
–
(1)
–
1
33
21
(14)
–
40
25
29
–
–
54
30
13
(26)
–
17
Other
£m
1
6
–
–
7
Total
£m
109
70
(43)
(2)
134
Leasehold properties
The leasehold properties provision includes a £3 million (2016: £3 million)
dilapidations provision in respect of obligations under operating leases.
In addition, a provision has been made for £2 million (2016: £2 million) 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.
Staff related
Staff related provisions mainly includes provisions for unfunded pensions
of £6 million (2016: £6 million) and private medical insurance costs for
former employees of £2 million (2016: £3 million).
Known incidents
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.
PA(GI) provision
In 2015, PA(GI), a subsidiary of the Group, was subject to a Companies
Court judgement that directed that PA(GI) is liable to claimants for
redress relating to creditor insurance policies within a book of insurance
underwritten by PA(GI) until 2006. As a consequence, PA(GI) is liable for
complaint handling and redress with regard to the complaints.
The PA(GI) provision of £40 million (2016: £33 million) represents the
Group’s best estimate of the likely future costs. However, this is subject
to a number of risks and uncertainties including volumes of future
complaints, the rates by which those complaints are upheld and the
average redress value. At 31 December 2017, a reimbursement asset
of £32 million (2016: £nil) has been recognised in other receivables
in connection with the Group’s exposure to these complaints.
This represents recoveries due from third parties under contractual
arrangements. Recoveries of £7 million (2016: £nil) have been received
during the year.
FCA thematic reviews provision
On 3 March 2016, the FCA published a thematic review report on the
fair treatment of long-standing customers in the life insurance sector.
Following completion of the review, Abbey Life is subject to additional
investigations. Specifically, the FCA is exploring whether remedial and/or
disciplinary action is necessary or appropriate in respect of exit or paid-up
charges being applied. Additionally, Abbey Life is being investigated for
potential contravention of regulatory requirements across a number of
other areas assessed in the thematic review. The FCA has confirmed
that these investigations have been commenced in order to enable the
FCA to establish the reasons for the practices within firms and determine
whether customers have suffered detriment as a result. No conclusion
has been reached as to whether there have been any breaches of
regulatory requirements. The commencement of investigations itself
therefore cannot be taken to indicate that disciplinary action against
Abbey Life will result nor does it indicate that a penalty will inevitably be
imposed or that redress will be payable.
In addition, on 14 October 2016, the FCA published its thematic review of
non-advised annuity sales. In its findings, the FCA identified concerns in
a small number of firms relating to significant communications that took
place orally, usually on the telephone. The FCA also identified other areas
of possible concern, including in relation to the recording and maintenance
of records of calls. The FCA encouraged all firms to consider its feedback
and take appropriate action to address the points raised.
The Group has recognised a provision of £54 million as at 31 December
2017 (2016: £25 million) in relation to its best estimate of its obligations
arising as a result of Abbey Life’s past practices in the areas covered by
the two thematic reviews. Any resultant outflow of economic benefits is
subject to uncertainty given the absence of final findings from the FCA
review procedures, which would determine the extent to which the FCA
may require Abbey Life to carry out remediation activities or impose
financial penalties.
152
Phoenix Group Holdings | Annual Report & Accounts 2017
Under the terms of the acquisition, Deutsche Bank has provided PLHL
with an indemnity, with a duration of up to eight years, in respect of
exposures that may arise in Abbey Life as a result of the FCA’s final
thematic review findings. The maximum amount that can be claimed
under the indemnity is £175 million and it applies to all regulatory fines
and to 80% to 90% of the costs of customer remediation. The indemnity
would be expected to mitigate any additional costs not covered by the
existing provision, arising in the event of a crystallisation of exposures
deemed not to trigger the recognition of a provision based on current
information, or a deterioration in management’s estimate of the
liabilities associated with present obligations. At 31 December 2017, a
reimbursement asset of £23 million (2016: £nil) has been recognised in
other receivables under this indemnity, which is net of £6 million tax relief
arising on recognition of costs in the year.
Restructuring provision
Following the acquisition of AXA Wealth in 2016, the Group commenced
the restructuring of these businesses to align their operating model with
that of the other Group companies. These activities include separation
and integration activities associated with the exiting of interim services
agreements entered into with the vendor, and costs involved with
implementing the Group’s preferred outsourcer model. A provision of
£30 million was recognised in 2016, of which £17 million was utilised
during 2017. The remaining £13 million is expected to be utilised within
6 months.
Following the acquisition of Abbey Life on 30 December 2016, a similar
restructuring provision of £13 million was recognised in 2017 in respect
of committed Abbey Life integration activities. During 2017, £8 million of
this provision was utilised with the remaining £4 million expected to be
utilised within 6 months.
Other provisions
Other provisions include litigation and onerous contract provisions,
together with obligations arising under a gift voucher scheme operated by
the SunLife business.
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
2017
£m
47
(5)
2016
£m
44
(12)
(366)
(378)
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Phoenix Group Holdings | Annual Report & Accounts 2017
153
Notes to the 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)
2017
Trading losses
Expenses and deferred acquisition costs carried forward
Provisions and other temporary differences
Non-refundable pension scheme surplus
Committed future pension contributions
Pension scheme deficit
Accelerated capital allowances
Unpaid interest
Acquired in-force business
Customer relationships
Unrealised gains
IFRS transitional adjustments
2016
Trading losses
Expenses and deferred acquisition costs carried forward
Provisions and other temporary differences
Non-refundable pension scheme surplus
Committed future pension contributions
Pension scheme deficit
Accelerated capital allowances
Unpaid interest
Acquired in-force business
Customer relationships
Unrealised gains
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
1 January
£m
Other
movements
£m
31 December
£m
23
3
23
(13)
34
15
7
16
(364)
(37)
(37)
(48)
(378)
25
21
(20)
–
(10)
(4)
2
–
23
4
(44)
8
5
–
–
–
–
1
1
–
–
–
–
–
–
2
–
–
5
–
–
–
–
–
–
–
–
–
5
48
24
8
(13)
25
12
9
16
(341)
(33)
(81)
(40)
(366)
Recognised in
consolidated
income statement
£m
1 January
£m
Recognised
in other
comprehensive
income
£m
Acquisition of
AXA Wealth and
Abbey Life
(see note H2)
31 December
£m
14
16
8
(7)
42
–
6
21
(359)
(37)
–
(54)
(4)
(354)
(5)
(13)
13
(3)
(8)
–
1
(5)
29
4
(2)
8
4
23
–
–
1
(3)
–
–
–
–
–
–
–
–
–
(2)
14
–
1
–
–
15
–
–
(34)
(4)
(35)
(2)
–
(45)
23
3
23
(13)
34
15
7
16
(364)
(37)
(37)
(48)
–
(378)
The Finance Act 2016 reduced the rates of corporation tax from 20% to 19% in April 2017 and to 17% from April 2020. Consequently a blended rate of
tax has been used for the purposes of providing for deferred tax in these financial statements.
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
Excess expenses and deferred acquisition costs
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.
154
Phoenix Group Holdings | Annual Report & Accounts 2017
2017
£m
37
–
–
16
2016
£m
25
33
3
18
On 29 March 2017 the UK Government triggered Article 50 initiating
a 2 year process for leaving the EU. There is some uncertainty about
how the existing tax legislation will apply after the UK’s exit. No changes
are required to the measurement of tax in these financial statements
but this will be monitored and reassessed at each reporting period as
negotiations continue.
G3. PAYABLES RELATED TO DIRECT INSURANCE CONTRACTS
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
2017
£m
522
2016
£m
484
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
2017
£m
179
2016
£m
204
Amount due for settlement after 12 months
–
–
G5. OTHER PAYABLES
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
2017
£m
76
68
144
2016
£m
37
65
102
Amount due for settlement after 12 months
–
–
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 three main staff pension schemes for
its employees, the Pearl Group Staff Pension Scheme, the PGL Pension
Scheme, and the Abbey Life Staff Pension Scheme and explains how
the pension asset/liability is calculated.
Phoenix Group Holdings | Annual Report & Accounts 2017
155
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Notes to the Consolidated Financial Statements
continued
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL
POSITION NOTES continued
G6. PENSION SCHEMES continued
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 £420 million
(2016: £387 million) available as a refund on a
winding-up of the Scheme)
Adjustment for insurance policies eliminated
on consolidation
Adjustment for amounts due from subsidiary
eliminated on consolidation
Net economic deficit
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 liability
2017
£m
572
(50)
(200)
322
2016
£m
448
(66)
(157)
225
500
465
(916)
(913)
–
(416)
–
(147)
(563)
(6)
(454)
(4)
(135)
(593)
Abbey Life Staff Pension Scheme
Net defined benefit liability
(70)
(87)
In December 2016, the PGL Pension Scheme entered into a buy-in
transaction with PLL which converted the existing longevity swap
contract into a bulk annuity contract. Further details are included in
section G6.2.
The Group’s defined benefit schemes typically expose the Group to a
number of risks, the most significant of which are:
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 all 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.
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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 benefit scheme
The Pearl Scheme is established under, and governed by, the trust
deeds and rules and is funded by payment of contributions to a
separately administered trust fund. 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 Scheme. The Pearl Scheme is administered by a separate 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 2017, undertaken by independent
qualified actuaries. The present values of the defined benefit obligation
and the related interest costs have been measured using the projected
unit credit method.
Funding
A triennial funding valuation of the Pearl Scheme as at 30 June 2015 was
completed in September 2016. This showed a deficit as at 30 June 2015
of £300 million, on the agreed technical provisions basis. The funding and
IFRS accounting bases of valuation can give rise to different results for
a number of reasons. The funding basis of valuation is based on general
principles of prudence whereas the accounting valuation is based on
best estimates. Discount rates are gilt-based for the funding valuation
whereas the rate used for IFRS valuation purposes is based on a yield
curve for high quality AA-rated corporate bonds. In addition, the values
are prepared at different dates which will result in differences arising from
changes in market conditions and employer contributions made in the
subsequent period.
On 27 November 2012 the principal employer and the Trustee of the
Pearl Scheme entered into a revised pensions funding agreement (the
‘Pensions Agreement’), the principal terms of which have not been
altered following the 30 June 2015 triennial valuation. The principal terms
of the Pensions Agreement are:
– 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 timing of payment of contributions
changed during 2017 so that the contributions are paid on a monthly
basis following the last annual payment of £40 million completed
in September 2016. 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;
– additional 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;
– 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. 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; and
– covenant tests relating to the embedded value of certain companies
with the Group.
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 £50 million (2016: £66 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
£143 million (2016: £189 million) in accordance with the minimum funding
requirement. A deferred tax asset of £24 million (2016: £32 million) has
also been recognised to reflect tax relief at a rate of 17% (2016: 17%)
that is expected to be available on the contributions, once paid into
the scheme.
Contributions totalling £50 million were paid into the scheme in 2017 (2016: £40 million), £10 million in relation to the last quarter of 2016 and £40 million
in relation to 2017 by monthly instalments. Contributions totalling £40 million are expected to be paid into the scheme in 2018.
Summary of amounts recognised in the consolidated financial statements
The amounts recognised in the consolidated financial statements are as follows:
2017
At 1 January
Interest income/(expense)
Included in profit or loss
Remeasurements:
Return on plan assets excluding amounts included in interest income
Gain from changes in demographic assumptions
Loss from changes in financial assumptions
Experience loss
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
Fair value
of scheme
assets
£m
2,685
Defined
benefit
obligation
£m
(2,237)
Provision for
tax on the
economic
surplus
available as
a refund
£m
Minimum
funding
requirement
obligation
£m
(157)
(66)
69
69
76
–
–
–
–
–
76
50
(158)
(56)
(56)
–
51
(51)
(15)
–
–
(15)
–
158
(4)
(4)
–
–
–
–
(39)
–
(39)
–
–
(2)
(2)
–
–
–
–
–
18
18
–
–
Total
£m
225
7
7
76
51
(51)
(15)
(39)
18
40
50
–
At 31 December
2,722
(2,150)
(200)
(50)
322
Phoenix Group Holdings | Annual Report & Accounts 2017
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S
T
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E
R
E
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N
A
N
R
E
V
O
G
E
T
A
R
O
P
R
O
C
I
S
L
A
C
N
A
N
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O
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A
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Notes to the Consolidated Financial Statements
continued
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued
G6. PENSION SCHEMES continued
G6.1 Pearl Group Staff Pension Scheme continued
2016
At 1 January
Interest income/(expense)
Included in profit or loss
Remeasurements:
Fair value
of scheme
assets
£m
2,213
Defined
benefit
obligation
£m
(1,937)
84
84
Provision for
tax on the
economic
surplus
available as
a refund
£m
Minimum
funding
requirement
obligation
£m
(97)
(3)
(3)
–
–
–
–
(57)
–
(57)
–
–
(74)
(3)
(3)
–
–
–
–
–
11
11
–
–
Total
£m
105
5
5
453
(15)
(367)
50
(57)
11
75
40
–
(73)
(73)
–
(15)
(367)
50
–
–
Return on plan assets excluding amounts included in interest income
453
Loss 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
453
(332)
Employer’s contributions
Benefit payments
40
(105)
–
105
At 31 December
2,685
(2,237)
(157)
(66)
225
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 gain of £145 million (2016: £537 million gain).
2017
2016
Of which not
quoted in an
active market
£m
(35)
–
–
–
270
35
18
–
–
288
Total
£m
1,823
165
88
1,090
270
35
18
120
(887)
2,722
Of which not
quoted in an
active market
£m
(38)
–
–
–
206
38
30
–
–
236
Total
£m
2,327
134
129
958
206
38
30
84
(1,221)
2,685
158
Phoenix Group Holdings | Annual Report & Accounts 2017
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.
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:
– Deferred scheme members: 37% (2016: 38%); and
– Pensioners: 63% (2016: 62%)
The weighted average duration of the defined benefit obligation at
31 December 2017 is 17 years (2016: 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
2017
%
3.05
2.20
2.50
3.20
2.20
2016
%
3.05
2.20
2.65
3.20
2.20
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 based on the SAPS standard tables for males
and for females based on year of use. Future longevity improvements
are based on CMI 2016 Core Projections (2016: CMI 2014 Core
Projections) and a long-term rate of improvement of 1.75% per annum
for males and 1.50% per annum for females up to and including age
85 then decreasing linearly to 0% per annum at age 110 (2016: Long-
term rate of improvement of 2% per annum up to and including age
75 then decreasing linearly to 0% per annum at age 110). Under these
assumptions, the average life expectancy from retirement for a member
currently aged 40 retiring at age 60 is 30.0 years and 32.0 years for male
and female members respectively (2016: 31.0 and 33.1 respectively).
A quantitative sensitivity analysis for significant actuarial assumptions is shown below:
2017
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)
2,150
(82)
88
57
(54)
85
(84)
2016
Assumptions
Sensitivity level
Base
Discount rate
RPI
Life expectancy1
25bps
increase
25bps
decrease
25bps
increase
25bps
decrease
1 year
increase
1 year
decrease
Impact on the defined benefit obligation (£m)
2,237
(86)
91
60
(56)
85
(84)
1 The 2016 comparative has been restated following the adoption in 2017 of a refined methodology for calculating the life expectancy sensitivity numbers.
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.
Phoenix Group Holdings | Annual Report & Accounts 2017
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Notes to the Consolidated Financial Statements
continued
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL
POSITION NOTES continued
G6. PENSION SCHEMES continued
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 (2016: £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 2017, 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.
Funding
A triennial funding valuation of the PGL Pension Scheme as at 30 June
2015 was completed in June 2016. This showed a surplus as at 30 June
2015 of £164 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 in total over the
period from October 2013 to August 2017 would remain unchanged.
The remaining contributions totalling £10 million were paid into the
scheme in 2017 (2016: £15 million) and there are no further committed
contributions to pay.
In 2016, an additional liability was recognised of £4 million reflecting
a charge on any refund of the resultant economic surplus (prior to
the elimination of insurance policies) that arose after adjustment for
discounted future contributions of £10 million in accordance with the
minimum funding requirement. A deferred tax asset of £2 million was
recognised to reflect tax relief at a rate of 17% that was expected to be
available on the contributions, once paid into the scheme.
Liability management exercises
Two liability management exercises were carried out in 2016 that
impacted on the results in the comparative period. No such exercises
were undertaken in the current period.
In January 2016, the Group carried out a pension increase exchange
(‘PlE’) exercise in respect of the PGL Pension Scheme. Existing in-scope
pensioners were offered the option to exchange future non-statutory
pension increases for a one-off uplift to their current pension, thereby
reducing longevity and inflation risk for the Group. The financial effect
of all acceptances received in the prior period has been recognised in
2016 in the consolidated financial statements as a reduction in scheme
liabilities of £3 million shown as a past service credit in the consolidated
income statement.
In February 2016, the Group commenced a flexible retirement option
(‘FRO’) exercise whereby defined members who are eligible to retire
within the PGL Pension Scheme were offered a transfer value on
standard terms or a pension in the scheme. The financial effect of all
acceptances received has been recognised in 2016 in the consolidated
financial statements and an experience gain of £2 million on liabilities
arose as a result of this exercise.
Insurance policies with Group entities
In June 2014, 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 transferred the risk of longevity improvements to PLL.
The financial effect of this contract was eliminated on consolidation.
In December 2016, the PGL Pension Scheme entered into a ‘buy-in’
agreement with PLL, which converted the longevity swap contract into
a bulk annuity contract. The Scheme transferred certain additional risks
in respect of the benefits payable to the deferred members covered by
the longevity swap arrangement, including the investment risk associated
with the assets covering those benefits. The Scheme transferred
£1,164 million of plan assets to a collateral account and this transfer
constituted the payment of premium to PLL and was net of a £23 million
prepayment by PLL to the scheme in respect of benefits up to 31 May
2017. The assets transferred to PLL are recognised in the relevant line
within financial assets in the statement of consolidated financial position.
An adjustment of £6 million to the value of the premium was paid by
PLL to the PGL Scheme in 2017. The economic effect of the ‘buy-in’
transaction in the Scheme is to replace the plan assets transferred with
a single line insurance policy reimbursement asset which is eliminated
on consolidation. The value of this insurance policy at 31 December 2017
was £895 million (2016: £892 million).
Included within insurance policies with Group entities of £916 million
(2016: 913 million) is a further insurance policy reimbursement
asset of £21 million (2016: £21 million) which was also eliminated
on consolidation.
At the same time as the buy-in transaction, there was a rule change made
with respect to pre-1997 excess benefits for members of the Phoenix
section of the PGL Scheme. Pensions increases will now be increased
in line with CPI inflation subject to a maximum of 5% per annum. Prior to
this, members received discretionary increases in payment on these
benefits with the discretionary increases not allowed for in the defined
benefit obligation. The financial impact of this change was to recognise in
2016 an increase in the defined benefit obligation of £6 million, and a past
service cost in the consolidated income statement.
160
Phoenix Group Holdings | Annual Report & Accounts 2017
Summary of amounts recognised in the consolidated financial statements
The amounts recognised in the consolidated financial statements are as follows:
2017
At 1 January
Interest income/(expense)
Administrative expenses
Included in profit or loss
Remeasurements:
Return on plan assets excluding amounts included in interest income
Experience loss
Loss from changes in financial assumptions
Gain from changes in demographic 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
Income received from insurance policies
At 31 December
2016
At 1 January
Interest income/(expense)
Administrative expenses
Past service costs
Included in profit or loss
Remeasurements:
Return on plan assets excluding amounts included in interest income
Experience gains
Loss from changes in financial assumptions
Loss from changes in demographic assumptions
Change in provision for tax on economic surplus available as a refund
Change in minimum funding requirement obligation
Included in other comprehensive income
Scheme assets transferred as premium for buy-in transactions
Employer’s contributions
Benefit payments
Fair value of
scheme assets
£m
1,195
Defined
benefit
obligation
£m
(1,649)
Provision for
tax on the
economic
surplus
available as
a refund
£m
(135)
Minimum
funding
requirement
obligation
£m
(4)
31
(2)
29
22
–
–
–
–
–
22
10
(77)
27
1,206
Fair value of
scheme assets
£m
2,006
76
(2)
–
74
349
–
–
–
–
349
(1,164)
15
(85)
(43)
–
(43)
–
(6)
(38)
37
–
–
(7)
(4)
–
(4)
–
–
–
–
(8)
–
(8)
–
77
–
(1,622)
Defined
benefit
obligation
£m
(1,397)
–
–
–
(147)
Provision for
tax on the
economic
surplus
available as
a refund
£m
(199)
(52)
–
(3)
(55)
–
15
(289)
(8)
–
–
(282)
–
–
85
(8)
–
–
(8)
–
–
–
72
–
72
–
–
–
–
–
–
–
–
–
–
–
4
4
–
–
–
–
Minimum
funding
requirement
obligation
£m
(9)
–
–
–
–
–
–
–
–
5
5
–
–
–
Total
£m
(593)
(16)
(2)
(18)
22
(6)
(38)
37
(8)
4
11
10
–
27
(563)
Total
£m
401
16
(2)
(3)
11
349
15
(289)
(8)
72
5
144
(1,164)
15
–
At 31 December
1,195
(1,649)
(135)
(4)
(593)
Phoenix Group Holdings | Annual Report & Accounts 2017
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A
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Notes to the Consolidated Financial Statements
continued
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued
G6. PENSION SCHEMES continued
G6.2 PGL Pension Scheme 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
Corporate Bonds
Cash and other
Obligations for repayment of stock lending collateral received
Reported scheme assets
Add back:
Insurance policies eliminated on consolidation
Amounts due from subsidiary eliminated on consolidation
Economic value of assets
The actual return on plan assets was £53 million (2016: £425 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:
– Deferred scheme members: 39% (2016: 39%); and
– Pensioners: 61% (2016: 61%).
The weighted average duration of the defined benefit obligation at
31 December 2017 is 19 years (2016: 19 years).
2017
2016
Of which not
quoted in an
active market
£m
–
–
7
111
90
–
–
–
208
–
–
208
Total
£m
357
866
7
111
90
17
12
(254)
1,206
916
–
2,122
Of which not
quoted in an
active market
£m
–
–
7
104
85
–
–
–
196
–
–
196
Total
£m
320
732
7
104
85
13
29
(95)
1,195
913
6
2,114
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
2017
%
2016
%
3.20
2.20
2.50
3.20
2.20
3.25
2.20
2.65
3.20
2.20
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 S1PL base tables with future longevity improvements in
line with CMI 2016 Core Projections (2016: CMI 2014 Core Projections)
and a long-term rate of improvement of 1.75% per annum up to and
including age 85 then decreasing linearly to 0% at age 110 (2016: Long-
term rate of improvement of 2% per annum 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 28.3 years (2016: 29.4 years) and 29.6 years
(2016: 30.6 years) for male and female members respectively.
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A quantitative sensitivity analysis for significant actuarial assumptions is shown below:
2017
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)
1,622
(69)
74
47
(50)
61
(60)
2016
Assumptions
Sensitivity level
Base
Discount rate
RPI
Life expectancy1
25bps
increase
25bps
decrease
25bps
increase
25bps
decrease
1 year
increase
1 year
decrease
Impact on the defined benefit obligation (£m)
1,649
(70)
75
47
(51)
60
(59)
1 The 2016 comparative has been restated following the adoption in 2017 of a refined methodology for calculating the life expectancy sensitivity numbers.
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.
G6.3 Abbey Life Staff Pension Scheme
Scheme details
The Abbey Life Staff Pension Scheme (‘the Abbey Life Scheme’) was
consolidated into the Group statement of financial position following the
acquisition of Abbey Life Assurance Company Limited (‘Abbey Life’) (see
note H2.2). The scheme is a defined benefit scheme which is currently
open to future accrual.
On 30 June 2017, the Abbey Life Scheme was transferred from
Abbey Life to Pearl Life Holdings Limited (‘PeLHL’), a fellow subsidiary.
PeLHL assumed the scheme covenant together with all obligations of
the scheme following implementation of the transfer. The Abbey Life
Scheme is a registered occupational pension scheme, set up under
Trust, and legally separate from the employer PeLHL. The scheme is
administered by Abbey Life Trust Securities Limited (The Trustee), a
corporate trustee. There are three Trustee Directors, one of whom is
nominated by the scheme members and two of whom are appointed
by PeLHL. The Trustee is responsible for administering the scheme
in accordance with the Trust Deed and rules and pensions laws
and regulations.
The valuation has been based on an assessment of the liabilities of the
Abbey Life Scheme as at 31 December 2017 undertaken by independent
qualified actuaries. The present values of the defined benefit obligation
and the related interest costs have been measured using the projected
unit credit method.
Funding
The last funding valuation of the Scheme was carried out by a qualified
actuary as at 31 March 2015 and showed a deficit of £107 million. A new
schedule of contributions was introduced with effect from 1 July 2016
following completion of the 31 March 2015 funding valuation. In respect
of future accrual of benefits up until 30 June 2017, Abbey Life paid 39.5%
of gross pensionable earnings from 1 July 2016 and in relation to deficit
contributions, Abbey Life paid the following:
– a lump sum of £15 million into the Scheme (paid on 24 June 2016);
– monthly contributions of £246,000 into the Scheme. These amounts
were paid to the Scheme on or before the 19th of the calendar month
following that to which the payment related;
– annual payments of £2.92 million into the 2016 Charged Account by
31 July each year, with the first payment being paid by 31 July 2016.
Following the transfer of the Scheme to PeLHL a revised schedule
of contributions was agreed effective from 1 July 2017, for PeLHL to
pay 39.5% of gross personable earnings and the following amounts in
respect of deficit contributions:
– a lump sum of £25 million into the Scheme settled on 31 July 2017;
– fixed monthly contributions of £400,000 payable up to 30 June 2026
and monthly contributions of £83,552 in respect of administration
expenses which are payable up to 30 June 2028 and will increase
annually in line with the Retail Prices Index assumption; and
– annual payments of £4 million into the 2016 Charged Account by
31 July each year, with the first payment being made on 31 July 2017,
and the last payment due by 31 July 2025.
The Charged Accounts are escrow accounts which were created in 2010
to provide the Trustees with additional security in light of the funding
deficit. The amounts held in the Charged Accounts do not form part of
Scheme assets.
Under the terms of the 2013 Funding Agreement dated 28 June 2013,
the funding position of the Scheme will be assessed as at 31 March
2021. A payment will be made from the 2013 Charged Account to the
Scheme if the results of the assessment reveal a shortfall calculated in
accordance with the terms of the 2013 Funding Agreement. The amount
of the payment will be the lower of the amount of the shortfall and the
amount held in the 2013 Charged Account.
Under the terms of the 2016 Funding Agreement dated 23 June 2016,
the funding position of the Scheme will be assessed as at 31 March
2027. A payment will be made from the 2016 Charged Account to the
Scheme if the results of the assessment reveal a shortfall calculated in
accordance with the terms of the 2016 Funding Agreement. The amount
of the payment will be the lower of the amount of the shortfall and the
amount held in the 2016 Charged Account.
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163
Notes to the Consolidated Financial Statements
continued
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION
NOTES continued
G6. PENSION SCHEMES continued
G6.3 Abbey Life Staff Pension Scheme continued
Summary of amounts recognised in the consolidated
financial statements
The amounts recognised in the consolidated financial statements
are as follows:
2017
At 1 January
Current service cost
Interest income/(expense)
Administrative expenses
Included in profit or loss
Remeasurements:
Return on plan assets
excluding amounts
included in interest income
Experience loss
Loss from changes
in financial assumptions
Loss from changes
in demographic assumptions
Included in other
comprehensive income
Employer's contributions
Benefit payments
Fair value
of scheme
assets
£m
Defined
benefit
obligation
£m
237
(324)
–
6
(2)
4
6
–
–
–
6
30
(26)
(1)
(8)
–
(9)
–
(1)
(12)
(1)
(14)
–
26
Total
£m
(87)
(1)
(2)
(2)
(5)
6
(1)
(12)
(1)
(8)
30
–
At 31 December
251
(321)
(70)
2016
At 1 January
Acquisition of Abbey Life
At 31 December
Fair value of
scheme assets
£m
Defined benefit
obligation
£m
–
237
237
–
(324)
(324)
Total
£m
–
(87)
(87)
As the acquisition of Abbey Life took place on 30 December 2016, no
amounts are recognised in the 2016 consolidated income statement
or in the statement of comprehensive income in relation to the Abbey
Life Scheme.
Scheme assets
The distribution of the scheme assets at the end of the year was
as follows:
2017
Equities – UK
Fixed interest government bonds
Corporate bonds
Derivatives
Cash and cash equivalents
Pension scheme assets
2016
Equities – UK
Fixed interest government bonds
Corporate bonds
Derivatives
Cash and cash equivalents
Pension scheme assets
Of which not
quoted in an
active market
£m
–
–
–
(40)
–
(40)
Of which not
quoted in an
active market
£m
–
–
–
(35)
–
(35)
Total
£m
28
105
149
(40)
9
251
Total
£m
25
115
123
(35)
9
237
The actual return on plan assets was £12 million (2016: £nil).
Derivative values above include interest rate and inflation rate swaps and
foreign exchange forward contracts. The Abbey Life Scheme has hedged
its inflation risk through an inflation swap. It is currently exposed to
interest rate risk to the extent that the holdings in bonds are mismatched
to the scheme liabilities. The long-term intention is to fully hedge this
risk through an interest rate swap. Further key risks that will remain are
longevity and credit spread exposures.
Defined benefit obligation
The calculation of the defined benefit obligation can be allocated to the
scheme’s members as follows:
– Active scheme members: 5% (2016: 5%);
– Deferred scheme members: 55% (2016: 59%); and
– Pensioners: 40% (2016: 36%)
The weighted average duration of the defined benefit obligation at
31 December 2017 is 18 years (2016: 18 years).
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Principal assumptions
The principal financial assumptions of the Abbey Life Scheme are set out in the table below:
Rate of increase for pensions in payment
Rate of increase for deferred pensions ('CPI' subject to caps)
Discount rate
Inflation – RPI
Inflation – CPI
Rate of salary increases
2017
%
3.05
2.20
2.50
3.20
2.20
4.20
2016
%
3.05
2.20
2.70
3.20
2.20
4.20
Commutation of benefits to lump sums on retirement
15.00
15.00
The discount rate and inflation assumptions have been determined by considering the shape of the appropriate yield curves and the duration of the
Abbey Life 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 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 31 March 2015, using the SAPS S2 ‘Light’ tables for males and for females
based on year of use. Future longevity improvements are based on CMI 2016 Core Projections (2016: CMI 2015 Core Projections) and a long-term
rate of improvement of 1.75% per annum for males and 1.50% per annum for females up to and including age 85 then decreasing linearly to 0% per
annum at age 110 (2016: Long-term rate of improvement of 1.25% per annum). Under these assumptions the average life expectancy from retirement
for a member currently aged 45 retiring at age 65 is 25.8 years and 27.2 years for male and female members respectively (2016: 25.0 years and 27.2
years respectively).
A quantitative sensitivity analysis for significant actuarial assumptions is shown below:
2017
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)
321
(15)
15
11
(11)
10
(9)
2016
Assumptions
Sensitivity level
Impact on the defined benefit obligation (£m)
324
Base
Discount rate
RPI
Life expectancy
25bps
increase
(14)
25bps
decrease
15
25bps
increase
25bps
decrease
1 year
increase
1 year
decrease
11
(11)
10
(10)
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.
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165
Notes to the 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 relevant cash generating
units. Goodwill is impaired when the recoverable amount is less than
the carrying value.
Acquired in-force business
Insurance and investment contracts with 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. This acquired in-
force business is amortised over the estimated life of the contracts on
a basis which recognises the emergence of the economic benefits.
The value of acquired in-force business related to investment contracts
without DPF is recognised at its fair value and is amortised on a
diminishing balance basis.
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 relevant cash generating
units for the purposes of impairment testing.
Customer relationships
The customer relationship intangible asset includes vesting pension
premiums and is measured on initial recognition at cost. The cost
of this intangible asset acquired in a business combination is the
fair value as at the date of acquisition. Following initial recognition,
the customer relationship intangible asset is carried at cost less any
accumulated amortisation and any accumulated impairment losses.
The intangible asset is amortised on a straight-line basis over its
useful economic life and assessed for impairment whether there
is an indication that the recoverable amount of the intangible asset
is less than its carrying value. The customer relationship intangible
asset is allocated to relevant cash generating units for the purposes of
impairment testing.
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.
Present value of future profits on non-participating business
in the with-profit fund
The present value of future profits is determined on a realistic basis.
Brands
Brands acquired in a business combination are recognised at fair
value at the acquisition date, and measured on initial recognition at
cost. Amortisation is calculated using the straight-line method to
allocate the cost of brands over their estimated useful lives. They are
tested for impairment annually or when there is evidence of possible
impairment. For impairment testing, they are allocated to the relevant
cash generating unit. Brands are impaired when the recoverable
amount is less than the carrying value.
2017
Cost or valuation
At 1 January
Revaluation
At 31 December
Amortisation and impairment
At 1 January
Amortisation charge for the year
At 31 December
Carrying amount at 31 December
Amount recoverable after 12 months
Goodwill
£m
Acquired
in-force
business
£m
Customer
relationships
£m
Present value
of future
profits
£m
Brands
£m
Total other
intangibles
Total
£m
Other intangibles
57
–
57
–
–
–
57
57
2,266
–
2,266
(859)
(109)
(968)
1,298
1,201
297
–
297
(109)
(15)
(124)
173
158
6
5
11
–
–
–
11
11
20
–
20
–
(2)
(2)
18
16
323
5
328
(109)
(17)
(126)
2,646
5
2,651
(968)
(126)
(1,094)
202
1,557
185
1,443
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Phoenix Group Holdings | Annual Report & Accounts 2017
2016
Cost or valuation
At 1 January
On acquisition of AXA Wealth
On acquisition of Abbey Life
Revaluation
At 31 December
Amortisation
At 1 January
Amortisation charge for the year
At 31 December
Carrying amount at 31 December
Amount recoverable after 12 months
Goodwill
£m
Acquired in-
force business
£m
Customer
relationships
£m
Other intangibles
Present value
of future
profits
£m
Brands
£m
Total other
intangibles
£m
Total
£m
39
10
8
–
57
–
–
–
57
57
2,048
297
38
180
–
–
–
–
2,266
297
(783)
(76)
(859)
1,407
1,302
(95)
(14)
(109)
188
174
17
–
–
(11)
6
–
–
–
6
6
–
20
–
–
20
–
–
–
20
18
314
2,401
20
–
(11)
68
188
(11)
323
2,646
(95)
(14)
(109)
(878)
(90)
(968)
214
1,678
198
1,557
G7.1 Goodwill
The carrying value of goodwill has been tested for impairment at the year
end. No impairment has resulted as the value in use of this intangible
continues to exceed its carrying value.
£47 million of the goodwill is attributable to the management services
business of the Phoenix Life segment including the £8 million arising
on acquisition of Abbey Life. Value in use has been determined as the
present value of certain future cash flows associated with this business.
The cash flows used in this calculation have been valued using a risk
adjusted discount rate of 7.1% (2016: 7.7%) and are consistent with
those adopted by management in the Group’s operating plan and, for the
period 2023 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.
During 2016, goodwill of £10 million was recognised on the acquisition
of AXA Wealth and was determined to represent the value of the
workforce assumed and the potential for future value creation. This is
considered to relate to the ability to invest in and grow the SunLife brand.
A separate impairment test was performed to consider the recoverability
of the AXA Wealth goodwill along side the brand intangible. Value in use
has been determined as the present value of certain future cash flows
associated with that business. The cash flows used in the calculation are
consistent with those adopted by management in the Group’s operating
plan, and for the period 2023 and beyond, assume a zero growth rate.
The underlying assumptions of these projections include market share,
customer numbers, commission rates and expense inflation. The cash
flows have been valued at a risk adjusted discount rate of 11% that makes
prudent allowance for the risk that future cashflows may differ from
that assumed.
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.
G7.2 Acquired in-force business
Acquired in-force business on insurance contracts and investment
contracts with DPF represents the difference between the fair value of
the contractual rights under these contracts 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.
Acquired in-force business on investment contracts without DPF is being
amortised on a 15% diminishing balance basis. This basis of amortisation
has been updated following the application of the amendment to
IAS 38 Intangible Assets, effective from 1 January 2016. This change
has had no impact on the amounts recognised in the consolidated
financial statements.
During 2016, acquired in-force business of £38 million and £180 million
was recognised upon the acquisitions of AXA Wealth and Abbey Life
respectively. The £38 million arising upon the acquisition of AXA Wealth
is analysed as £116 million in respect of the value in-force of acquired unit
linked business and negative AVIF of £78 million arising on consolidation
in respect of the acquired protection business.
G7.3 Customer relationships
The customer relationships intangible at 31 December 2017 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.
No indicators of impairment were identified during the period and
consequently no impairment test on this intangible has been carried out.
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.
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167
Notes to the Consolidated Financial Statements
continued
Owner-occupied properties
2017
£m
26
2016
£m
25
On loss of control of UKCPT
Gains on adjustments to fair value
(recognised in consolidated income statement)
G. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION
NOTES continued
G7.5 BRANDS
The brand intangible of £20 million was recognised on acquisition of AXA
Wealth and represents the value attributable to the SunLife brand as at
1 November 2016. The intangible asset was valued on a ‘multi-period
excess earnings’ basis. Impairment testing was performed in a combined
test with the AXA goodwill (see section G7.1). The value in use continues
to exceed its carrying value.
The brand name intangible is being amortised over a 10 year period.
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.
Owner-occupied properties have been valued by accredited independent
valuers at 31 December 2017 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
properties of £26 million has been categorised as Level 3 based on the
non-observable inputs to the valuation technique used.
The following table shows reconciliation from the opening to the closing
fair value for the Level 3 owner-occupied properties at valuation:
At 1 January
On acquisition of AXA Wealth businesses
(see note H2.1)
Remeasurement recognised in other
comprehensive income
At 31 December
Unrealised gains for the year
2017
£m
25
–
1
26
1
2016
£m
19
6
–
25
–
The fair value of the owner-occupied properties was derived using the
investment method supported by comparable evidence. The significant
non-observable inputs used in the valuations are the expected rental
values per square foot and the capitalisation rates.
The fair value of the owner-occupied properties valuation would increase
(decrease) if the expected rental values per square foot were to be higher
(lower) and the capitalisation rates were to be lower (higher).
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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.
At 1 January
On acquisition of Abbey Life
Improvements
Disposals
At 31 December
Unrealised gains on properties
held at end of period
2017
£m
646
–
10
(53)
–
9
612
2016
£m
1,942
7
23
(44)
(1,308)
26
646
5
27
As at 31 December 2017, a property portfolio of £474 million
(2016: £444 million) is held by the life companies in a mix of commercial
sectors, spread geographically throughout the UK.
In February 2016, the Group assessed that it no longer controlled UKCPT
and consequently deconsolidated this group of subsidiaries effective
from this date. As a result, the UKCPT property portfolio was no longer
included within the Group investment property portfolio from this date.
Investment properties also include £138 million (2016: £202 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 customers’ properties
which the Group will realise upon their death, are valued using a DCF
model based on the Group’s proportion of the current open market value,
and discounted for the expected lifetime of the policyholder. The open
market value is measured by independent local property surveyors having
appropriate recognised professional qualifications with reference to the
condition of the property and local market conditions. The individual
properties are valued triennially and indexed using regional house price
indices to the balance sheet date. The discount rate is a risk-free rate
appropriate for the duration of the asset, adjusted for the deferred
possession rate. 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.
The fair value measurement of the investment properties has been categorised as Level 3 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) 2017
Range (weighted average) 2016
Commercial
Investment Property
RICS valuation
Expected income per sq. ft.
£5.39 – £100.40 (£23.85)
£4.91 - £99.97 (£22.62)
Capitalisation rate
4.72% – 10.48% (5.83%)
4.72% - 9.96% (6.12%)
Residential Property
Reversions
DCF Model and
RICS valuation
Mortality
130% IFL92C15 – Female
130% IFL92C15 - Female
130% IML92C15 – Male
130% IML92C15 - Male
Future growth in house prices
Risk free rate (4 year swap)
5 year RPI estimate + 1% margin
Discount rates
The estimated fair value of commercial properties would increase
(decrease) if:
– the expected income were to be higher (lower); or
– the capitalisation rate were to be lower (higher).
The key valuation sensitivities in respect of the residential property
reversions are noted below:
– an increase of 1% in the deferred possession rate would decrease the
market value by £6 million;
– a decrease of 1% in the deferred possession rate would increase the
market value by £6 million;
– an increase of 10% in the mortality rate would increase the market
value by £1 million; and
– a decrease of 10% in the mortality rate would decrease the market
value by £1 million.
Direct operating expenses (offset against rental income in the
consolidated income statement) in respect of investment properties
that generated rental income during the year amounted to £1 million
(2016: £1 million). The direct operating expenses arising from investment
property that did not generate rental income during the year amounted to
£4 million (2016: £2 million).
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
2017
£m
22
61
62
2016
£m
21
57
48
Risk free rate (4 Year swap) +
deferred possession rate (3.6%)
G10. OTHER RECEIVABLES
5 year Gilt spot rate + 1.7% margin
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
Reimbursement assets (note G1)
Other debtors
2017
£m
55
338
55
132
580
2016
£m
71
295
–
147
513
Amount recoverable after 12 months
34
–
G11. CASH AND CASH EQUIVALENTS
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)
2017
£m
1,181
1,064
2,245
2016
£m
1,073
593
1,666
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 consolidated collective investment
schemes of £1,878 million (2016: £1,517 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 & Accounts 2017
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Notes to the Consolidated Financial Statements
continued
H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES
H1. SUBSIDIARIES
Subsidiaries 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 subsidiaries 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 including
non-controlling interests, is recognised in the consolidated income
statement.
The Group uses the acquisition method to account for the acquisition
of subsidiaries. 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:
– 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.
– 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.
170
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H1.1 Significant restrictions
The ability of subsidiaries 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 (I3). 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:
– the Pearl Pension Scheme funding agreement includes certain
covenants which restrict the transfer of funds within the Group.
Details are provided in note G6.1.
– Pearl Life Holdings Limited (‘PeLHL’) is required to make payments of
contributions into charged accounts on behalf of The Abbey Life Staff
Pension Scheme. These amounts do not form part of the pension
scheme assets and at 31 December 2017, PeLHL held £40 million within
fixed and variable rate income securities and £5 million within cash and
cash equivalents in respect of these charged accounts. Further details of
when these amounts may become payable to the pensions scheme are
included in note G6.
H2. ACQUISITIONS AND DISPOSALS
H2.1 Acquisition of AXA Wealth
On 1 November 2016, the Group acquired 100% of the issued share
capital of AXA Wealth Limited (‘AWL’), AXA Wealth Services Limited, AXA
Sun Life Direct Limited, Winterthur Life UK Holdings Limited and AXA
Trustee Services Limited from AXA UK plc for total cash consideration of
£373 million. The fair values of the identifiable assets acquired, liabilities
assumed and the resultant goodwill determined at the date of acquisition
have not been adjusted within the 12 month period since the date
of acquisition.
H2.2 Acquisition of Abbey Life
On 30 December 2016, the Group acquired 100% of the issued share
capital of Abbey Life Assurance Company Limited, Abbey Life Trustee
Services Limited and Abbey Life Trust Securities Limited from Deutsche
Holdings No.4 Ltd (a wholly owned subsidiary of Deutsche Bank AG) for
total cash consideration of £933 million. The fair values of the identifiable
assets acquired, liabilities assumed and the resultant goodwill determined at
the date of acquisition have not been adjusted within the 12 month period
since the date of acquisition.
H2.3 Disposal of Pearl Breakfast Unit Trust
On 25 February 2016, the Group completed the sale of its entire interest in an
investment property joint venture which was held by the Pearl Breakfast Unit
Trust. 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. No gain or loss arose on this disposal.
H3. ASSOCIATES: LOSS OF CONTROL OF INVESTMENT IN UK
COMMERCIAL PROPERTY TRUST LIMITED (‘UKCPT’)
UKCPT is a property investment company which is domiciled in Guernsey
and is admitted to the official list of the UK Listing Authority and to trading
on the London Stock Exchange.
In February 2016, the Group reduced its holding in the issued share
capital of UKCPT to 48.9%. The Group deems that it no longer controls
its investment in UKCPT as it no longer has a unilateral power of veto in
general meetings and also because the Group is restricted by the terms
of the existing relationship agreement it has with UKCPT. Consequently,
UKCPT has been deconsolidated from the date of this loss of control.
No gain or loss arose on this effective disposal. The Group’s investment in
UKCPT is now treated as an associate and held at fair value.
The Group’s remaining interest in UKCPT continues to be held in the
with-profit funds of the Group’s life companies. Therefore, the shareholder
exposure to fair value movements in the Group’s investment in UKCPT
continues to be limited to the impact of those movements on the
shareholder share of distributed profits of the relevant fund.
As at 31 December 2017 the Group held 47.9% (2016: 47.9%) of the issued
share capital of UKCPT and the value of this investment, measured at fair
value, was £550 million (2016: £525 million). Summary financial information
for UKCPT is shown below:
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Revenue
Profit before tax
Taxation
Profit for the year after tax
H4. STRUCTURED ENTITIES
2017
£m
640
69
(120)
(11)
578
77
65
(2)
63
2016
£m
608
61
(120)
(14)
535
30
19
3
22
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).
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:
– Unit trusts;
– OEICs;
– SICAVs;
– Private Equity Funds (‘PEFs’);
– Asset backed securities;
– Collateralised Debt Obligations (‘CDOs’);
– Other debt structures; and
– Phoenix Group Employee Benefit Trust (‘EBT’)
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.
H4.1 Interests in consolidated structured entities
The Group has determined that where it has control over funds, these
investments are consolidated structured entities.
The EBT is a consolidated structured entity that holds shares to
satisfy awards granted to employees under the Group’s share-based
payment schemes.
At 31 December 2017 the Group has granted further loans to the EBT
of £4 million (2016: £7 million). Further loans are expected to be granted
in 2018. Details of this loan are included in note 10.4 to the parent
company accounts.
As at the reporting date the Group has no intention to provide financial or
other support in relation to any other consolidated structured entity.
H4.2 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.
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
2017
Carrying
value of
financial
assets
£m
2016
Carrying
value of
financial
assets
£m
344
288
4,166
3,175
472
1,359
8,465
1,264
–
607
4,690
3,436
502
364
8,052
1,388
3
617
19,852
19,340
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.
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.
2
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.
Details of commitments to subscribe to private equity funds and other
unlisted assets are included in note I6.
Phoenix Group Holdings | Annual Report & Accounts 2017
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Notes to the Consolidated Financial Statements
continued
H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued
H5. GROUP ENTITIES
The table below sets out the Group’s subsidiaries (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, joint venture or associate).
Registered address of
incorporated entities
If unincorporated,
address of principal
place of business
Type of investment
(including class of
shares held)
% of shares/
units held
Subsidiaries:
Phoenix Life Assurance Limited (life assurance company)
Phoenix Life Limited (life assurance company)
Phoenix AW Limited (life assurance company)
Abbey Life Assurance Company Limited (life assurance company)
Phoenix Wealth Services Limited (management services company)
Phoenix SL Direct Limited (management services company)
Phoenix Wealth Trustee Services Limited
(management services company)
Phoenix Wealth Holdings Limited (holding company)
Abbey Life Trust Securities Limited (pension trustee company)
Impala Holdings Limited (holding company)
Mutual Securitisation plc (finance company)
NP Life Holdings Limited (holding company)
Opal Reassurance Limited (non-trading company)4
PGH Capital plc (finance company)4
PGH (LCA) Limited (finance company)4
PGH (LCB) Limited (finance company)4
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)4
PGH (TC2) Limited (holding company)4
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)
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Republic of Ireland2
Wythall1
Bermuda5
Republic of Ireland6
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
London7
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
PGMS (Ireland) Limited (management services company)
Republic of Ireland8
PA(GI) Limited (non-trading company)
National Provident Life 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)
Pearl (WP) Investments LLC (investment company)
Phoenix SCP Limited (investment company)
172
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Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
USA9
Wythall1
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
100.00%
Ordinary shares
100.00%
Ordinary shares
100.00%
N/A
N/A3
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
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
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
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%
Registered address of
incorporated entities
If unincorporated,
address of principal
place of business
Type of investment
(including class of
shares held)
% of shares/
units held
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)
Jersey11
Jersey11
Jersey11
Jersey11
Wythall1
PGMS (Ireland) Holdings Unlimited Company (holding company)
Republic of Ireland8
PGMS (Glasgow) Limited (investment company)
Phoenix SCP Pensions Trustees Limited (trustee company)
Phoenix SCP Trustees Limited (trustee company)
PGS 2 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)
Abbey Life Trustee Services Limited (dormant company)
Britannic Group Services Limited (dormant company)
Phoenix Pensions Trustee Services Limited (dormant company)
Pearl (Covent Garden) Limited (dormant company)
NPI 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)
PG Dormant (No 6) Limited (dormant company)
Clearfol Investment Limited (dormant company)
PG Dormant (No 4) 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)
SunLife Limited (financial services distribution company)
PG Dormant (No 3) Limited (dormant company)
Phoenix Pension Scheme (Trustees) Limited
Evergreen Trustee Limited (dormant company)
Glasgow10
Wythall1
Wythall1
Wythall1
Wythall1
Glasgow10
Glasgow10
Wythall1
Glasgow10
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Glasgow10
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Glasgow10
Wythall1
Glasgow10
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
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
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
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
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
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
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
100.00%
Ordinary shares
100.00%
Ordinary shares
100.00%
Ordinary shares
100.00%
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173
Notes to the Consolidated Financial Statements
continued
H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued
H5. GROUP ENTITIES continued
Registered address of
incorporated entities
If unincorporated,
address of principal
place of business
Type of investment
(including class of
shares held)
% of shares/
units held
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)
Cityfourinc (dormant company)
Phoenix Life Insurance Services Limited (dormant company)
Glasgow12
Wythall1
Glasgow12
Wythall1
Wythall1
Wythall1
Wythall1
PG Dormant No 2 Holdings (holding company)
Republic of Ireland8
Wythall1
Wythall1
Wythall1
Wythall1
Glasgow10
Glasgow10
Glasgow10
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
London7
Bushey13
London Life Limited (non-trading company)
Pearl RLG Limited (dormant company)
The London Life Association Limited (dormant company)
PG Dormant (No 5) Limited (dormant company)
The Scottish Mutual Assurance Society (dormant company)
The Phoenix Life SCP Institution (dormant company)
Alba LAS Pensions Management Limited (dormant company)
Pearl (Martineau Phase 2) Limited (dormant company)
Pearl MG Birmingham Limited (dormant company)
The Pearl Martineau Galleries Limited Partnership (dormant company)
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)
Phoenix ER1 Limited (finance company)
Phoenix ER2 Limited (dormant company)
Phoenix ER3 Limited (finance company)
Phoenix ER4 Limited (finance company)
Phoenix Group Holdings Limited (dormant company)
CH Management Limited (investment company)
Phoenix Group Employee Benefit Trust
Janus Henderson Diversified Growth Fund
Janus Henderson Global Funds – Janus Henderson Institutional
Overseas Bond Fund
Janus Henderson Institutional Mainstream UK Equity Trust
Janus Henderson Strategic Investment Funds – Janus Henderson
Institutional European Index Opportunities Fund
Janus Henderson Strategic Investment Funds – Janus Henderson
Institutional Japan Index Opportunities Fund
Janus Henderson Strategic Investment Funds – Janus Henderson
Institutional North American Index Opportunities Fund
Janus Henderson Strategic Investment Funds – Janus Henderson
Institutional Asia Pacific ex Japan Index Opportunities Fund
Janus Henderson Institutional UK Equity Tracker Trust
Janus Henderson Institutional Short Duration Bond Fund
174
Phoenix Group Holdings | Annual Report & Accounts 2017
Ordinary shares
100.00%
Ordinary shares
100.00%
Ordinary shares
100.00%
Unlimited
without shares
N/A
Ordinary shares
100.00%
Ordinary shares
100.00%
Ordinary shares
100.00%
Ordinary shares
100.00%
Ordinary shares
100.00%
Ordinary shares
100.00%
Limited by guarantee
N/A
Ordinary shares
100.00%
Limited by guarantee
Limited by guarantee
N/A
N/A
Ordinary shares
100.00%
Ordinary shares
100.00%
Ordinary shares
100.00%
Limited Partnership
100.00%
Ordinary shares
100.00%
Ordinary shares
100.00%
Limited Partnership
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
100.00%
Ordinary shares
100.00%
Ordinary shares
100.00%
Trust
100.00%
OEIC, sub fund
OEIC, sub fund
84.27%
99.14%
Jersey11
London14
London14
London14 Authorised unit trust
100.00%
London14
OEIC, sub fund
79.52%
London14
OEIC, sub fund
65.39%
London14
OEIC, sub fund
83.91%
London14
OEIC, sub fund
70.44%
London14 Authorised unit trust
100.00%
London14 Authorised unit trust
86.54%
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 Bothwell Sub-Sovereign Bond Fund
PUTM UK All-Share Index Unit Trust
PUTM Cautious Unit Trust
PUTM European Unit Trust
PUTM Far Eastern Unit Trust
PUTM International Growth 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
PUTM Bothwell Institutional Credit accum
Standard Life Investments Sterling Short Duration
Managed Liquidity Fund
Registered address of
incorporated entities
If unincorporated,
address of principal
place of business
Type of investment
(including class of
shares held)
% of shares/
units held
Wythall1 Authorised unit trust
100.00%
Wythall1 Authorised unit trust
99.98%
Wythall1 Authorised unit trust
100.00%
Wythall1 Authorised unit trust
99.32%
Wythall1 Authorised unit trust
100.00%
Wythall1 Authorised unit trust
Wythall1 Authorised unit trust
Wythall1 Authorised unit trust
99.88%
85.04%
98.13%
Wythall1 Authorised unit trust
100.00%
Wythall1 Authorised unit trust
Wythall1 Authorised unit trust
99.73%
97.34%
Wythall1 Authorised unit trust
100.00%
Wythall1 Authorised unit trust
99.49%
Wythall1 Authorised unit trust
100.00%
Wythall1 Authorised unit trust
90.28%
Wythall1 Authorised unit trust
100.00%
Wythall1 Authorised unit trust
Wythall1 Authorised unit trust
Wythall1 Authorised unit trust
Wythall1 Authorised unit trust
98.53%
98.82%
99.56%
97.62%
Wythall1 Authorised unit trust
100.00%
Wythall1 Authorised unit trust
99.27%
Wythall1 Authorised unit trust
100.00%
Wythall1 Authorised unit trust
100.00%
Wythall1 Authorised unit trust
Wythall1 Authorised unit trust
Wythall1 Authorised unit trust
Wythall1 Authorised unit trust
Wythall1 Authorised unit trust
Wythall1 Authorised unit trust
99.96%
99.29%
99.50%
99.73%
99.56%
99.99%
Wythall1 Authorised unit trust
100.00%
Wythall1 Authorised unit trust
100.00%
Wythall1 Authorised unit trust
99.89%
Wythall1 Authorised unit trust
100.00%
Wythall1 Authorised unit trust
100.00%
Republic of Ireland8
OEIC, sub fund
92.06%
Ignis Strategic Solutions Funds plc – Fundamental Strategies Fund
Republic of Ireland8
OEIC, sub fund
100.00%
Ignis Strategic Solutions Funds plc – Systematic Strategies Fund
Republic of Ireland8
OEIC, sub fund
100.00%
Ignis Private Equity Fund LP
Ignis Strategic Credit Fund LP
Standard Life Investments Global SICAV – Emerging Market Debt
Unconstrained Fund
AB SICAV I – ESG Responsible Global Factor Portfolio AB
BlackRock LBG DC 'A' Fund
Aberdeen Capital Trust
Cayman Islands15
Limited Partnership
100.00%
Cayman Islands15
Limited Partnership
100.00%
Luxembourg17
SICAV, sub fund
84.30%
Luxembourg17
SICAV, sub fund
London16 Authorised unit trust
London19 Authorised unit trust
71.39%
93.81%
99.64%
Phoenix Group Holdings | Annual Report & Accounts 2017
175
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Notes to the Consolidated Financial Statements
continued
H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued
H5. GROUP ENTITIES continued
Associates:
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
UK Commercial Property Finance Holdings Limited
Brixton Radlett Property Limited
Significant holdings:
Janus Henderson Global Care Funds – Janus Henderson Institutional
Global Care Managed Fund
Janus Henderson UK & Europe Funds – Janus Henderson Institutional
UK Gilt Fund
Janus Henderson Institutional UK Index Opportunities Fund
AB SICAV I – Global Factor Portfolio (SF1)
AXA Fixed Interest Investment ICVC – Sterling Strategic Bond Fund
AQR UCITS Funds – AQR Global Risk Parity UCITS Fund
AB SICAV I – Diversified Yield Plus Portfolio S GBP Acc
BlackRock Market Advantage X GBP Acc
Scottish Widows International Bond Fund
Standard Life Investments – Sterling Liquidity Fund
Standard Life Investments UK Real Estate Income Feeder Fund
Aberdeen UK Smaller Companies Equity Fund
Aberdeen Global Emerging Markets Quantitative Equity Fund
Scottish Widows Ethical Fund
Registered address of
incorporated entities
If unincorporated,
address of principal
place of business
Type of investment
(including class of
shares held)
% of shares/
units held
Guernsey20
Guernsey20
Guernsey20
Guernsey20
Guernsey20
Guernsey20
Guernsey20
Guernsey20
Manchester21
Ordinary shares
Ordinary shares
47.87%
47.87%
Ordinary shares
47.87%
Ordinary shares
47.87%
Ordinary shares
47.87%
Ordinary shares
Limited Partnership
Limited Partnership
Limited Partnership
47.87%
47.87%
47.87%
47.87%
London14
OEIC, sub fund
60.10%
London14
OEIC, sub fund
71.33%
London14 Authorised unit trust
Luxembourg17
SICAV, sub fund
London18
OEIC, sub fund
Luxembourg23
OEIC, sub fund
Luxembourg17
SICAV, sub fund
London16 Authorised unit trust
Edinburgh24
OEIC, sub fund
Dublin8
OEIC, sub fund
Edinburgh22
OEIC, sub fund
Aberdeen25
OEIC, sub fund
London19
OEIC, sub fund
Edinburgh24
OEIC, sub fund
72.18%
39.22%
59.73%
21.60%
42.65%
66.03%
59.86%
42.11%
29.04%
26.05%
21.52%
22.44%
42.23%
26.83%
21.86%
American Century SICAV – Concentrated Global Growth Equity
Luxembourg23
SICAV, sub fund
Architas Diversified Real Assets Fund
Architas MA Active Dynamic Fund Class R Net Accumulation
1 1 Wythall Green Way, Wythall, Birmingham, B47 6WG
2 Marsh Management Services (Dublin) Limited, DS-28 Adelaide Road, Dublin 2,
Republic of Ireland
3 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
4 These subsidiary undertakings are directly owned by Phoenix Group Holdings
5 The Argus Building, 12 Wesley Street, Hamilton, Bermuda
6 Arthur Cox Building, Earlsfort Terrace, Dublin 2, Dublin, Republic of Ireland
7 Juxon House, 100 St Paul’s Churchyard, London, EC4M 8BU
8 25–28 North Wall Quay, IFSC, Dublin 1, Republic of Ireland
9 c/o Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, USA
10 301 St Vincent Street, Glasgow, Strathclyde, G2 5HN
11 32 Commercial Street, St Helier, Jersey, JE2 3RU
12 50 Bothwell Street, Glasgow, G2 6HR
London26
London26
OEIC, sub fund
OEIC, sub fund
13 19 Middle Furlong, Bushey, England, WD23 3SZ
14 201 Bishopsgate, London, EC2M 3AE
15 Ugland House, Grand Cayman, Cayman Islands, KY1-1104
16 12 Throgmorton Avenue, London, EC2N 2DL
17 2–4, Rue Eugène Ruppert, Luxembourg, L-2453
18 7 Newgate Street, London, EC1A 7NX
19 1 Bread Street, London, EC4M 9HH
20 Trafalgar Court, Les Banques, St Peter Port, Guernsey, GY1 3QL
21 100 Barbirolli Square, Manchester, M2 3AB
22 1 George Street, Edinburgh, EH2 2LL
23 33 Rue de Gasperich, Luxembourg, E-5826
24 15 Dalkeith Road, Edinburgh, EH16 5BU
25 10 Queens Terrace, Aberdeen, AB10 1YG
26 30 St Mary, London, EC3A 8BF
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Phoenix Group Holdings | Annual Report & Accounts 2017
The following associate and subsidiaries were fully disposed of during the
period. The subsidiaries were deconsolidated from the date of disposal:
– Castle Hill Asset Management LLC;
– PUTM North American Unit Trust; and
– Janus Henderson Institutional Credit Fund
The following subsidiaries were reclassified as significant holdings due
to the loss of effective control by the Group during the period:
– AB SICAV I – Global Factor Portfolio (SF1);and
– AXA Fixed Interest Investment ICVC – Sterling Strategic Bond Fund
The Group no longer has significant holdings in the
following undertakings:
– Janus Henderson Global Funds – World Select Fund
I. OTHER NOTES
I1. 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.
I1.1 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
2017
£m
8
2016
£m
7
I1.2 Share-based payment expense
Long-Term Incentive Plan (‘LTIP’)
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, the 2014 and 2015 LTIP awards are subject to performance
conditions tied to the Company’s financial performance over a three year
period in respect of growth in MCEV (up to 31 December 2015), growth
in Own Funds (from 1 January 2016), cumulative cash generation and
total shareholder return (‘TSR’). The 2016 and 2017 LTIP awards are
subject to performance conditions tied to the Company’s performance
in respect of cumulative cash generation and TSR.
For all LTIP awards made from 2015 onwards, a holding period applies so
that any LTIP awards to Executive Committee members 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 on LTIP awards until the end of the holding period.
There are no cash settlement alternatives.
2017 LTIP awards were granted on 24 March 2017. The number of shares
for all outstanding LTIP awards as at 9 November 2016 were increased
to take into account the impact of the Group’s rights issue (see note D1).
This adjustment was based on the Theoretical Ex-Rights Price. The 2014
LTIP awards vested during the year. The 2015 awards will vest on
28 September 2018, the 2016 awards will vest on 30 March 2019 and
2 June 2019 and the 2017 awards will vest on 24 March 2020.
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. The fair value is adjusted in respect of the
TSR performance condition which is deemed to be a ‘market condition’.
The fair value of the 2016 and 2017 TSR elements of the LTIP awards has
been calculated using a Monte Carlo model. The inputs to this model are
shown below:
Share price (p)
Expected term (years)
Expected volatility (%)
Risk-free interest rate (%)
Expected dividend yield (%)
2017
TSR
performance
condition
2016
TSR
performance
condition –
March grant
2016
TSR
performance
condition –
June grant
787.5
943.5
871.0
2.8
24
0.2
3.0
26
0.4
3.0
26
0.4
Dividends are received by
holders of the awards therefore no
adjustment to fair value is required
Deferred bonus share scheme (‘DBSS’)
Each year, part of the annual incentive for certain executives 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 in subsequent years,
the three year deferral period will run to the dealing day following the third
anniversary of the announcement of the annual results. Dividends will
accrue for DBSS awards over the three year deferral period. The 2017
DBSS was granted on 24 March 2017 and is expected to vest on
20 March 2020. The number of shares for all outstanding DBSS awards
has been increased to take into account the impact of the Group’s rights
issue (see note D1). This adjustment has been based on the Theoretical
Ex-Rights Price. The 2014 DBSS awards vested during the year. The 2015
awards are expected to vest on 19 March 2018 and the 2016 awards are
expected to vest on 24 March 2019.
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.
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 sharesave
schemes from 2014 onwards.
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 2012 sharesave awards were increased during 2013, and the
exercise prices updated, as a result of the equity raising on 21 February
2013. All sharesave awards were increased in November 2016 following
the Group’s rights issue (see note D1) and the exercise price of these
awards was also amended as a result of this issue. The 2017 sharesave
awards were granted on 13 April 2017.
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Phoenix Group Holdings | Annual Report & Accounts 2017
177
Notes to the Consolidated Financial Statements
continued
I. OTHER NOTES continued
I1.2 Share-based payment expense continued
The following information was relevant in the determination of the fair value of the 2013 to 2017 sharesave awards:
Share price (p)
Exercise price (£) (Revised)
Expected life (years)
Risk-free rate (%) – based on UK government
gilts commensurate with the expected term
of the award
2017
sharesave
747.0
6.31
2016
sharesave
889.0
6.39
2015
sharesave
843.0
6.29
2014
sharesave
674.0
5.13
2013
sharesave
630.0
4.76
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
0.2 (for 3.25 year
scheme) and 0.4
(for 5.25 year
scheme)
0.6 (for 3.25 year
scheme) and 1.0
(for 5.25 year
scheme)
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)
Expected volatility (%) based on the Company’s
share price volatility to date
Dividend yield (%)
30.0
6.3
30.0
6.0
30.0
6.3
30.0
7.9
30.0
8.5
The weighted average remaining contractual life for the rewards
outstanding as at 31 December 2017 is 1.5 years (2016: 1.3 years).
I2. CASH FLOWS FROM OPERATING ACTIVITIES
The following analysis gives further detail behind the ‘cash utilised by
operations’ figure in the statement of consolidated cash flows.
Other share schemes
During the year, the Group launched a Chairman’s share award which is
granted to a small number of employees in recognition of their outstanding
contribution in the previous year. On 24 March 2017, 22,830 nil-cost options
were granted and these awards are expected to vest on 24 March 2020.
The Group operates a Share Incentive Plan (‘SIP’) which allows
participating employees to purchase ‘Partnership shares’ in the Company
through monthly contributions which are limited to the lower of £150
per month and 10% of gross monthly salary. For every three Partnership
shares purchased, the Company gives the employee one ‘Matching
share’. Matching shares are required to be held for three years.
The fair value of the Matching shares granted is estimated as the
share price at date of grant, taking into account terms and conditions
upon which the instruments were granted. At 31 December 2017,
33,705 matching shares were conditionally awarded to employees.
I1.3 Movements in the year
The following tables illustrate the number of, and movements in, LTIP,
Sharesave and DBSS share options during the year:
Number of share options 2017
Loss for the year before tax
Non-cash movements in profit for the
year before tax:
Fair value gains on:
Investment property
Financial assets
Change in fair value of borrowings
Amortisation of intangible assets
Change in present value of future profits
LTIP
Sharesave
DBSS
Change in unallocated surplus
Outstanding at the beginning
of the year
3,469,421
1,037,156
633,118
Granted during the year
1,034,157
675,549
229,465
Forfeited during the year
(754,443)
(64,886)
(4,409)
Exercised during the year
(779,638)
(382,827)
(227,685)
Outstanding at the end
of the year
2,969,497
1,264,992
630,489
Number of share options 2016
LTIP
Sharesave
DBSS
Outstanding at the beginning
of the year
2,694,173
832,680
529,084
Granted during the year
1,438,958
388,143
279,239
Forfeited during the year
–
(8,533)
Cancelled during the year
(273,167)
(15,456)
–
–
Exercised during the year
(390,543)
(159,678)
(175,205)
Outstanding at the end
of the year
3,469,421
1,037,156
633,118
The weighted average fair value of options granted during the year was
£4.75 (2016: £6.11).
Share-based payment charge
Interest expense on borrowings
Premium paid on partial redemption of
£300 million unsecured bond
Net interest expense/(income) on
Group defined benefit pension scheme
asset/liability
Other costs of pension schemes
Decrease/(increase) in investment assets
Decrease in reinsurance assets
(Decrease)/increase in insurance contract
and investment contract liabilities
(Decrease)/increase in deposits received
from reinsurers
Increase in obligation for repayment
of collateral received
Net increase in working capital
Other Items:
Contributions to defined benefit
pension schemes
The weighted average share price at the date of exercise for the rewards
exercised is £7.72 (2016: £7.69).
Cash generated/(utilised) by operations
178
Phoenix Group Holdings | Annual Report & Accounts 2017
2017
£m
(7)
2016
£m
(70)
(9)
(26)
(2,896)
(4,548)
(23)
126
(5)
46
8
132
25
11
5
4,411
1,154
34
90
11
(4)
7
122
–
(21)
5
(650)
345
(1,933)
2,489
(24)
338
(113)
14
898
(486)
(90)
1,156
(55)
(1,845)
I3. CAPITAL MANAGEMENT
The Group’s capital management is based on the new Solvency II
framework. This involves a valuation in line with Solvency II principles
of the Group’s Own Funds and risk based assessment of the Group’s
Solvency Capital Requirement (‘SCR’).
This note sets out the Group’s approach to managing capital and
provides an analysis of Own Funds and SCR.
Risk and capital management objectives
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 32 to 37 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.
Capital Management Framework
The Group’s Capital Management Framework is designed to achieve the
following objectives:
– to provide appropriate security for policyholders and meet all regulatory
capital requirements under the Solvency II regime while not retaining
unnecessary excess capital;
– to ensure sufficient liquidity to meet obligations to policyholders and
other creditors;
– to optimise the Fitch Rating’s financial leverage to maintain an
investment grade credit rating; and
– to maintain a stable and sustainable 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.
Group capital
Group capital is managed on a Solvency II basis.
Under the Solvency II framework, the primary sources of capital managed
by the Group comprise of the Group’s Own Funds as measured under
the Solvency II principles adjusted to exclude surplus funds attributable
to the Group’s unsupported with-profit funds and unsupported pension
schemes. In addition, the Group has access to the undrawn portion
of the revolving credit facility of £900 million as at 31 December 2017
(2016: £50 million). For further details, see note E5.
A Solvency II capital assessment involves valuation in line with Solvency II
principles of the Group’s Own Funds and a risk-based assessment of the
Group’s Solvency Capital Requirement (‘SCR’). Solvency II surplus is the
excess of Own Funds over the SCR.
The Group aims to maintain a Solvency II surplus at least equal to its
Board-approved capital policy, which reflects board risk appetite for
meeting prevailing solvency 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.
The capital policy of each Group Holding Company is designed to ensure
that there is sufficient liquidity to meet creditor obligations through
the combination of cash buffers and cash flows from the Group’s
operating companies.
Own funds and SCR
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 are classified into three Tiers based on
permanency and loss absorbency (Tier 1 being the highest quality
and Tier 3 the lowest). The Group’s 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. Surplus funds in with-profit
funds of the Life companies and in the pension schemes are restricted
and can only be included in Eligible Own Funds up to the value of the SCR
they are used to support.
Eligible Own Funds to cover the SCR are obtained after applying the
prescribed Tiering limits and transferability restrictions to the Basic
Own Funds.
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’.
In December 2015, the Group was granted the PRA’s approval for use
of its Internal Model to assess capital requirements. Following the 2016
acquisitions of the AXA Wealth and Abbey Life businesses, the Group
obtained the PRA’s approval to incorporate the acquired AXA Wealth
businesses within the scope of the Group’s Internal Model in March
2017. The capital assessment of the Abbey Life business remained on a
Standard Formula basis as at 31 December 2017. Therefore, the Solvency
II position of the Group at that date is based partially on the Group’s
Internal Model and partially on Standard Formula. However, following
completion of the reinsurance of the majority of the Abbey Life business
into Phoenix Life Limited in December 2017, the SCR for the related risks
is now being calculated in accordance with the Group’s Internal Model.
Approval to include the Abbey Life business within the scope of the
Group’s Internal Model was received in March 2018.
Phoenix Group Holdings | Annual Report & Accounts 2017
179
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Notes to the Consolidated Financial Statements
continued
I. OTHER NOTES continued
Group capital resources – unaudited
The Group capital resources is based on the Group’s pro forma Own
Funds adjusted for shareholder borrowings as analysed below:
Unaudited
PGH Own Funds
Remove Own Funds pertaining to
unsupported with-profit funds and the
PGL pension scheme
Group capital resources
2017
£bn
6.6
(2.0)
4.6
2016
Pro forma1
£bn
6.0
(2.0)
4.0
1 The 2016 Own Funds include pro forma adjustments to illustrate the impacts of the
issuance in January 2017 of the £300 million Solvency II qualifying Tier 3 bond and the
receipt of the PRA’s approval in March 2017 to include the acquired AXA Wealth business
within the Group’s internal model.
Solvency II surplus
Until 1 July 2017, the Group’s Solvency II assessment and Group
supervision was performed at the PLHL level as this was the highest
EEA insurance holding company. A waiver which permited Group
supervision to take place at the level of the ultimate parent, PGH, via other
methods as opposed to full Group supervision expired on 30 June 2017.
The Group’s capital position is now being managed at the PGH level only.
An analysis of the PGH Solvency II surplus as at 31 December 2017 is
provided in the business review section on page 28 of the Annual Report
and Accounts.
Additional information on the PGH Own Funds, SCR and MCR is included
in the additional capital disclosures on pages 198 to 199 of the Annual
Report and Accounts.
180
Phoenix Group Holdings | Annual Report & Accounts 2017
14. 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.
I4.1 Transactions with pension scheme and associate
During the year, the Group entered into the following transactions with its
pension schemes and associate:
Transactions
2017
£m
Balances
outstanding
2017
£m
Transactions
2016
£m
Balances
outstanding
2016
£m
Pearl Group Staff
Pension Scheme
Payment of
administrative
expenses
UK Commercial
Property Trust
Limited
Dividend income
Reduction in
investment
(3)
23
–
–
–
–
(2)
17
12
–
–
–
I4.2 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
2017
£m
4
2
2016
£m
4
2
Details of the shareholdings and emoluments of individual Directors are
provided in the Remuneration report on pages 62 to 87.
I5. 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 £6 million (2016: £6 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
2017
£m
5
11
2016
£m
7
16
The principal operating lease commitments for 2017 concern office space
located at St Vincent Street, Glasgow, Juxon House, London and Redcliff
Street, Bristol (2016: 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.
I6. 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
I7. CONTINGENT LIABILITIES
2017
£m
543
–
1
2016
£m
646
7
3
Where the Group has a possible future obligation as a result of a past
event, or 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.
During 2016, the FCA published two thematic reviews into the fair
treatment of long-standing customers and into the practices of non-
advised annuity sales. Following the acquisition of Abbey Life, a provision
has been recognised in respect of obligations identified as a result of past
practices adopted by the entity in the areas covered by the two reviews.
As part of this exercise, other potential exposures were identified where it
is not yet possible to conclude that the Group has a present obligation that
will require an outflow of economic benefits. The determination of any
liability arising remains dependent on the occurrence of uncertain future
events, including finalisation of the FCA’s enforcement investigation into
Abbey Life that commenced in response to the findings of the review
into the fair treatment of long-standing customers. Further detailed
information on these exposures is included in note G1.
I8. 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.
With effect from 31 January 2018 the central management, control
and head office of the Company moved from Jersey to the UK.
Phoenix Group Holdings is considered to be resident in the UK for tax
purposes from this date.
On 23 February 2018, the Group announced the proposed acquisition of
the majority of Standard Life Assurance Limited and Vebnet Limited for
a total consideration of £2,930 million. The consideration will be financed
through a cash consideration of £1,971 million and the issuance of shares
in Phoenix Group Holdings representing approximately 19.99% of the
enlarged share capital of the Group. The Group proposes to finance the
cash consideration via a £950 million rights issue with the remaining
cash consideration of £1,021 million financed from up to £1,500 million of
underwritten debt facilities and up to £250 million of own cash resources.
The £1,500 million of underwritten debt facilities comprises a
£900 million backstop revolving credit facility (“the backstop facility”)
and a sterling term loan facility with an aggregate principal amount of
£600 million (“the acquisition facility”). Both agreements were entered
into on 23 February 2018.
The terms of the backstop facility closely mirror the terms of the Group’s
existing £900 million unsecured revolving credit facility (see note E5),
with an additional condition that the drawdown of loans under the
backstop facility results in the cancellation in full of the current revolving
credit facility.
The acquisition facility has a final maturity date of twelve months after
completion. The Group is entitled to request two six month extensions to
the term of the facility (which would together extend the maturity date to
24 months after completion). The interest period may be selected by the
Group and the interest rate for the initial six month period is LIBOR plus a
margin of 0.5%.
On 27 February 2018, the Company updated the terms of its £900 million
unsecured revolving credit facility which extends the term of the facility to
30 June 2022.
On 14 March 2018, the Board recommended a final dividend of 25.1p
per share (2016: 23.9p per share) for the year ended 31 December 2017.
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 2017 and will be charged to the statement of
changes in equity in 2018.
H Staunton
C Bannister
J McConville
A Barbour
I Cormack
K Green
W Mayall
J Pollock
B Richards
N Shott
K Sorenson
14 March 2018
Phoenix Group Holdings | Annual Report & Accounts 2017
181
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Parent Company Accounts
Statement of Comprehensive Income
For the year ended 31 December 2017
Net investment income
Net income
Administrative expenses
Total operating expenses
Profit before finance costs and tax
Finance costs
Notes
4
5
6
Total comprehensive income for the year attributable to owners
The Company was exempt from tax in the Cayman Islands on any profits, income, gains or appreciations from 11 May 2010.
There are no other comprehensive income items for 2017 and 2016.
Statement of Financial Position
As at 31 December 2017
2017
£m
174
174
(27)
(27)
147
(60)
87
2016
£m
92
92
(54)
(54)
38
–
38
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
Accruals and deferred income
Total equity and liabilities
ASSETS
Investments in Group entities
Financial assets
Equities
Fixed and variable rate income securities
Collective investment schemes
Loans and receivables
Other amounts due from Group entities
Total assets
Notes
D1
7
15
8
2017
£m
2016
£m
–
1,449
89
697
2,235
1,412
160
22
3,829
–
1,640
89
602
2,331
–
98
1
2,430
9
1,664
1,664
10.1
10.2
10.3
10.4
15
1
41
28
2,070
25
3,829
–
–
25
737
4
2,430
The notes identified numerically on pages 185 to 190 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 110 to 181.
182
Phoenix Group Holdings | Annual Report & Accounts 2017
Statement of Cash Flows
For the year ended 31 December 2017
Cash flows from operating activities
Cash generated/(utilised) by operations
Net cash flows from operating activities
Cash flows from investing activities
Dividends received from Group entities
Loan advance to Group entities
Capital contributions to Group entities
Repayment of loans from Group entities including price premium received
Interest received from Group entities
Return of share capital from Opal ReAssurance Limited (’Opal Re’)
Net cash flows from investing activities
Cash flows from financing activities
Proceeds from issuing ordinary shares
Ordinary share dividends paid
Interest paid
Proceeds from new borrowings, net of associated expenses
Repayment of borrowings including price premium 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
11
2017
£m
52
52
2
(585)
–
929
72
–
418
2
(193)
(60)
534
(753)
(470)
–
–
–
2016
£m
(78)
(78)
8
(657)
(929)
775
25
77
(701)
908
(126)
–
–
(3)
779
–
–
–
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Phoenix Group Holdings | Annual Report & Accounts 2017
183
Statement of Changes in Equity
For the year ended 31 December 2017
At 1 January 2017
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 I1)
At 31 December 2017
Share capital
(note D1)
£m
–
–
–
–
–
–
Share
premium
£m
1,640
–
2
(193)
–
1,449
Foreign
currency
translation
reserve
£m
89
–
–
–
–
89
Retained
earnings
£m
602
87
–
–
8
697
Statement of Changes in Equity
For the year ended 31 December 2016
At 1 January 2016
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 I1)
At 31 December 2016
Share capital
(note D1)
£m
–
–
–
–
–
–
Share
premium
£m
858
–
908
(126)
–
1,640
Foreign
currency
translation
reserve
£m
89
–
–
–
–
89
Retained
earnings
£m
557
38
–
–
7
602
Total
£m
2,331
87
2
(193)
8
2,235
Total
£m
1,504
38
908
(126)
7
2,331
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, to a solvency test. The solvency test is broadly consistent with the Group’s going concern assessment criteria.
The notes identified numerically on pages 185 to 190 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 110 to 181.
184
Phoenix Group Holdings | Annual Report & Accounts 2017
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 financial statements are presented in sterling (£) rounded to the
nearest million unless otherwise stated.
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.
(B) ACCOUNTING POLICIES
The accounting policies in the separate financial statements are the same
as those presented in the consolidated financial statements on pages
110 to 113, except for the policy noted below. In addition, the Company
does not adopt the Group’s policy of hedge accounting. 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 to the consolidated
financial statements.
Investments in Group entities
Investments in Group entities are carried in the statement of financial
position at cost less impairment.
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 statement of comprehensive income.
The recoverable amount is determined based on the cash flow
projections of the underlying entities.
2. FINANCIAL INFORMATION
In preparing the financial statements the Company has adopted the
standards, interpretations and amendments effective 1 January 2017
which have been issued by the IASB as detailed in note A4 to 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 to the consolidated financial statements and details
about adoption of the standard IFRS 9 Financial Instruments effective
from 1 January 2018 are outlined below.
Phoenix Group Holdings | Annual Report & Accounts 2017
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. In relation to the impairment of financial assets, IFRS
9 requires the use of an expected credit loss model, as opposed to the
incurred credit loss model required under IAS 39. The expected credit
loss model will require the Company to account for expected credit
losses and changes in those expected credit losses at each reporting date
to reflect changes in credit risk since initial recognition.
The Company has performed a high-level impact assessment to consider
the impact of IFRS 9. Overall, the Company expects no significant impact
on its statement of financial position and equity from applying both the
classification and expected credit loss requirements of the standard.
A process has been established to calculate the expected credit loss
allowance for debt instruments held at amortised cost including loans
and other receivables. This considers both qualitative and quantitative
information and based upon information currently available no material
expected credit loss allowances are expected.
3. SEGMENTAL ANALYSIS
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 182 to 184. The accounting
policy for segmental analysis is included in note B1 to the consolidated
financial statements.
Predominantly, all revenues from external customers are sourced in
the UK.
Predominantly, all assets are located in the UK.
4. NET INVESTMENT INCOME
The accounting policy for net investment income is included in note C1 to
the consolidated financial statements.
2017
£m
2016
£m
Investment income
Interest income on financial assets
designated at fair value through profit
and loss on initial recognition
Dividend income from other Group entities
Interest income from other Group entities
Premium on partial redemption of loans
due from PGH (LCA) Limited and PGH
(LCB) Limited
Recharge of bank facility fees to other
Group companies
Fair value gains/(losses) on financial assets at
fair value through profit and loss:
Held for trading – derivatives
Designated upon initial recognition
Gain on return of capital from subsidiary
(note 9)
Net investment income
4
25
114
3
4
150
2
(3)
(1)
25
174
–
8
72
–
–
80
–
–
–
12
92
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Notes to the Parent Company Financial Statements
continued
5. ADMINISTRATIVE EXPENSES
The accounting policy for administrative expenses is included in note C2
to the consolidated financial statements.
Employee costs1
Professional fees
Write down of loans due from other
Group entities
Staff costs recharged from other
Group entities
Other
Administrative expenses
2017
£m
2016
£m
1
5
7
12
2
27
1
25
11
10
7
54
1
In addition to the Non-Executive Directors, one employee was employed by Phoenix Group
Holdings during the period (2016: one). Other Group employees are employed by other
Group entities.
6. FINANCE COSTS
The accounting policy for finance costs is included in note C4 to the
consolidated financial statements.
This note analyses the interest costs on the Company’s borrowings
which are described in note 7.
Interest expense:
On financial liabilities at amortised cost
2017
£m
60
2016
£m
–
7. BORROWINGS
The accounting policy for borrowings is included in note E5 to the
consolidated financial statements.
Carrying value
2017
£m
2016
£m
Fair value
2017
£m
2016
£m
d.
£300 million
senior
unsecured
bond (note a)
£428 million
subordinated
loans (note b)
£450 million
Tier 3
subordinated
notes (note c)
US $500
million Tier 2
bonds (note d)
Total
borrowings
Amount due
for settlement
after 12
months
133
459
452
368
1,412
1,412
–
–
–
–
–
–
137
513
481
390
1,521
e.
–
–
–
–
–
All borrowings are measured at amortised cost using the effective
interest method.
a.
b.
c.
On 7 July 2014, the Group’s financing subsidiary, PGH Capital
plc (’PGHC’), issued a £300 million 7 year senior unsecured bond
at an annual coupon rate of 5.75% (’£300 million senior bond’).
On 20 March 2017, the Company was substituted in place of
PGHC as issuer of the £300 million senior bond, which was
initially recognised at fair value of £336 million net of transaction
costs. On 5 May 2017, the Company completed the purchase
of £178 million of the £300 million senior bond at a premium of
£25 million in excess of the principal amount. Transaction costs
charged to the Company on substitution were deferred and are being
amortised over the life of the bond.
On 23 January 2015, PGHC issued £428 million of subordinated
notes due 2025 at a coupon of 6.625%. On 20 March 2017, the
Company was substituted in place of PGHC as issuer of the
£428 million subordinated notes which was initially recognised at fair
value of £462 million net of transaction costs. The transaction costs
charged to the Company on substitution were deferred and are being
amortised over the life of the notes.
On 20 January 2017, PGHC issued £300 million Tier 3 subordinated
notes due 2022 at a coupon of 4.125%. On 20 March 2017, the
Company was substituted in place of PGHC as issuer of the
£300 million Tier 3 subordinated notes which were initially recognised
at fair value of £301 million net of transaction costs. On 5 May 2017,
the Company also completed the issue of a further £150 million of
Tier 3 subordinated notes, the terms of which are the same as the
Tier 3 subordinated notes issued in January 2017. The Company
received a premium of £2 million in excess of the principal amount.
Fees of £1 million associated with the additional £150 million notes
issued were deferred. All deferred issue costs associated with these
notes are being amortised over the life of the notes.
On 6 July 2017, the Company issued US $500 million Tier 2 bonds
due 2027 with a coupon of 5.375%. Fees associated with these
notes of £2 million were deferred and are being amortised over the
life of the bond.
On 28 February 2017, the Company became an additional borrower
under a £900 million 5 year unsecured revolving credit facility with
an outstanding balance on that date of £544 million, net of issue
costs. On 6 July 2017, the proceeds from the issuance of the
US $500 million Tier 2 bonds were used to repay £384 million of
the revolving credit facility and on 8 August 2017, the remaining
outstanding balance of £166 million was repaid. There are no
mandatory or target amortisation payments associated with the
revolving credit facility but prepayments are permissible. The facility
accrues interest at LIBOR plus 1.1%, a reduced rate following the
upgrade to the Company’s credit rating on 25 July 2017 (previously
LIBOR plus 1.35%). On 20 January 2017, the utilisation fee was
reduced from 0.4% per annum to 0.2% per annum and it was further
reduced to 0.1% per annum on 6 July 2017 following subsequent
repayments of the outstanding balance (2016: 0.4% per annum).
For the purposes of the additional fair value disclosures for financial
liabilities for which fair value is disclosed, £1,521 million is categorised as
Level 2 financial instruments. There were no gains or losses recognised in
other comprehensive income in the current period.
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RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES
The table below details changes in the Company’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising
from financing activities are those for which cash flows were, or future cash flows will be, classified in the Company’s statement of cash flows as cash
flows from financing activities.
£300 million senior unsecured bond
£428 million subordinated notes
£450 million Tier 3 subordinated notes
US $500 million Tier 2 bonds
£900 million unsecured revolving credit facility
Non-cashflows
Cashflows
At
Jan 2017
£m
Loans issued
via
substitution1
£m
Movement
in foreign
exchange
£m
Other
movements2
£m
New
borrowings
net of costs
£m
–
–
–
–
–
336
462
301
–
544
–
1,643
–
–
–
(15)
–
(15)
(3)
(3)
–
–
6
–
–
–
151
383
–
534
Repayments3
£m
(200)
–
–
–
(550)
(750)
At
31 Dec 2017
£m
133
459
452
368
–
1,412
1 Loans issued via substitution is a non-cashflow item as consideration was the transfer of loans and receivables (refer to note 10.4).
2 Primarily comprises amortisation under the effective interest method applied to borrowings held at amortised cost.
3 Repayment of borrowings in the statement of cashflows includes a premium of £3 million in excess of the fair value amount on repayment of the £300 million senior unsecured bond.
8. ACCRUALS AND DEFERRED INCOME
The accounting policy for accruals and deferred income is included in note G4 to the consolidated financial statements.
Accruals and deferred income
Amount due for settlement after 12 months
9. INVESTMENTS IN GROUP ENTITIES
Cost
At 1 January
Additions
Return of share capital from Opal Re
At 31 December
Impairment
At 1 January
Charge for the year
At 31 December
Carrying amount
At 31 December
2017
£m
22
–
2016
£m
1
–
2017
£m
2016
£m
2,101
1,237
–
–
929
(65)
2,101
2,101
(437)
–
(437)
(437)
–
(437)
1,664
1,664
On 24 March 2016, the Company received £77 million as a result of a return of share capital from Opal Re. As the cost of the Company’s investment in
Opal Re was £65 million, a gain in 2016 of £12 million was recognised on return of the capital. On 1 September 2017, a further gain of £25 million was
recognised in respect of the return of the remaining share capital from Opal Re.
During 2016, the Company made capital contributions totalling £929 million in an equal share to PGH (LCA) Limited and PGH (LCB) Limited.
For a list of principal Group entities, refer to note H5 of the consolidated financial statements. The entities directly held by Phoenix Group Holdings are
separately identified.
Phoenix Group Holdings | Annual Report & Accounts 2017
187
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Notes to the Parent Company Financial Statements
continued
10. FINANCIAL ASSETS
The accounting policy for financial assets is included in note E1 to the consolidated financial statements.
10.1 EQUITIES
Equities
Amount due for settlement after 12 months
Carrying value
Fair value
2017
£m
1
–
2016
£m
–
–
2017
£m
1
2016
£m
–
All investments are categorised as Level 3 financial instruments. The investment is an equity holding in a property investment structure and was
acquired by the Company during 2017 and all fair value movements are included in net investment income in the statement of comprehensive income.
Unrealised losses of £3 million were recognised in other comprehensive income in the current period. Sensitivities are included in note E2.3
10.2 FIXED AND VARIABLE RATE INCOME SECURITIES
Investment in fixed and variable rate income securities
Amount due for settlement after 12 months
Carrying value
Fair value
2017
£m
41
41
2016
£m
–
–
2017
£m
41
2016
£m
–
All investments are categorised as Level 3 financial instruments. The investment is a debt holding in a property investment structure and was acquired
by the Company during 2017 and all fair value movements are included in the net investment income in the statement of comprehensive income.
There were no gains or losses recognised in other comprehensive income in the current period. Sensitivities are included in note E2.3.
10.3 COLLECTIVE INVESTMENT SCHEMES
Investment in collective investment schemes
Carrying value
Fair value
2017
£m
28
2016
£m
25
2017
£m
28
2016
£m
25
Amount due for settlement after 12 months
–
–
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.
10.4. LOANS AND RECEIVABLES
Loans due from PGH (LCA) Limited and PGH (LCB) Limited (note a)
Loans due from PGH (MC1) Limited and PGH (MC2) Limited (note b)
Loans due from Phoenix Life Holdings Limited (note c)
Loans due from Phoenix Group Employee Benefit Trust (note d)
Amounts due after 12 months
Carrying value
Fair value
2017
£m
634
142
1,291
3
2,070
1,956
2016
£m
603
128
–
6
737
731
2017
£m
781
250
1,388
3
2,422
2016
£m
718
235
–
6
959
The accounting policy for loans and receivables is included in note E1 to the consolidated financial statements.
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.
a.
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 International Stock Exchange. Interest accrues on these Eurobonds at a rate of
LIBOR plus a margin of 2.5% and the final maturity date is 30 June 2025. The Eurobonds were initially recognised at fair value and are accreted to
par over the period to 2025. At 31 December 2017, £207 million was due (2016: £191 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. During the year, interest of £12 million was capitalised
(2016: £16 million) and £177 million of repayments were received (2016: £50 million). At 31 December 2017 £247 million was due
(2016: £412 million).
188
Phoenix Group Holdings | Annual Report & Accounts 2017
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.
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:
Investment income from other Group
entities
Gain on return of capital from subsidiary
Write down of loans to Group entities
Share-based payment charge
Finance costs
Fair value losses
Net increase in investment assets
Net decrease/(increase) in working capital
Cash generated/(utilised) by operations
2017
£m
87
(150)
(25)
7
8
60
1
2
62
52
2016
£m
38
(80)
(12)
11
7
–
–
(14)
(28)
(78)
12. CAPITAL AND RISK MANAGEMENT
The Company’s capital comprises share capital and all reserves.
At 31 December 2017, total capital was £2,235 million
(2016: £2,331 million). The movement in capital in the year comprises
the total comprehensive income for the year attributable to owners of
£87 million (2016: £38 million), proceeds from the issue of ordinary share
capital of £2 million (2016: £908 million) and a credit to equity for equity-
settled share-based payments of £8 million (2016: £7 million), partly offset
by payment of dividends of £193 million (2016: £126 million). Details of
the Groups capital management policies are outlined in note I3 to the
consolidated statements.
The principal risks and uncertainties facing the Company are interest rate
risk, liquidity risk and credit risk. Details of the Group risk management
policies are outlined in note E6 to the consolidated financial statements.
b.
c.
On 20 March 2017, the Company was assigned a £295 million loan
equally by PGH (LCA) Limited and PGH (LCB) Limited. These loans
were initially recognised at fair value of £337 million and are accreted
to par over the period to 2021. These loans accrue interest at a rate
of 6.15% and mature on 7 July 2021. Interest of £27 million has been
deferred and has been added to the loan value and becomes due
and payable on 31 July 2018. Interest will accrue on the deferred
interest at LIBOR plus a margin of 1%. During the year, £176 million
of repayments were received in addition to a premium of £27 million.
At 31 December 2017, £170 million was due (2016: £nil).
On 20 March 2017, the Company was assigned a £900 million
revolving credit facility with a balance outstanding of £544 million
net of issue costs by PGH (LCA) Limited and PGH (LCB) Limited.
Interest of £10 million has been deferred and has been added to
the loan value and becomes due and payable on 31 July 2018.
Interest will accrue on the deferred interest at LIBOR plus a margin
of 1%. On 6 July 2017, £384 million repayments were received and
on 8 August 2017, a further £166 million was repaid. At 31 December
2017, £10 million was due (2016: £nil).
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 is 30 June 2025. The Eurobonds were
initially recognised at fair value and are accreted to par over the
period to 2025. At 31 December 2017, £142 million was due
(2016: £128 million).
On 20 March 2017, the Company was assigned a £428 million
subordinated loan by Phoenix Life Holdings Limited. This loan was
initially recognised at fair value of £466 million and is accreted to par
over the period to 2025. The loan accrues interest at a rate of 6.675%
and matures on 18 December 2025. Fees associated with this loan of
£3 million were deferred and are being amortised over the life of the
loan. At 31 December 2017, £461 million was due (2016: £nil).
On 20 March 2017, the Company was assigned a £300 million
subordinated loan by Phoenix Life Holdings Limited. This loan was
initially recognised at fair value of £306 million and is accreted to
par over the period to 2022. The loan accrues interest at a rate of
4.175% and matures on 20 July 2022. Interest of £9 million has been
deferred and has been added to the loan balance and becomes due
and payable on 20 July 2018. Interest will accrue on the deferred
interest at 6 month LIBOR plus a margin of 3%. On 5 May 2017,
the Company issued another £150 million subordinated loan.
Fees associated with these loans of £5 million were deferred and
are being amortised over the life of the loan. At 31 December 2017,
£462 million was due (2016: £nil).
On 6 July 2017, the Company issued a US $500 million loan to
Phoenix Life Holdings Limited due 2027 with a coupon of 5.375%.
Fees associated with this loan of £2 million were deferred and being
amortised over the life of the loans. The foreign exchange movement
in the period was £15 million. At 31 December 2017, £368 million
was due (2016: £nil).
d.
On 16 July 2010, the Company entered into an interest free facility
arrangement with Phoenix Group Employee Benefit Trust (‘EBT’).
In 2017, an additional £4 million was drawn down against this facility
(2016: £7 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 2017 £7 million of the
loan (2016: £6 million) has been written off. At 31 December 2017,
£3 million was due (2016: £6 million).
Phoenix Group Holdings | Annual Report & Accounts 2017
189
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Notes to the Parent Company Financial Statements
continued
13. SHARE-BASED PAYMENTS
For detailed information on the long-term incentive plans, sharesave
schemes and deferred bonus share schemes refer to note I1 to 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 63 to 87 of the
Annual Report and Accounts.
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 I4 to the
consolidated financial statements.
During the year ended 31 December 2017, the Company entered into the
following transactions with Group entities:
Dividend income from other Group entities
Interest income from other Group entities
Premium received on partial redemption of
loans due from PGH (LCA) Limited and PGH
(LCB) Limited
Gain on return of capital from subsidiary
Recharge of bank facility fees to other Group
companies
2017
£m
25
114
3
25
4
171
2016
£m
8
72
–
12
–
92
Amounts due from related parties at the end of the year:
Loans due from Group entities
Other amounts due from Group entities
2017
£m
2,070
25
2,095
2016
£m
737
4
741
Amount due for settlement after 12 months
1,956
731
Amounts due to related parties at the end of the year:
Other amounts due to Group entities
2017
£m
160
2016
£m
98
Amount due for settlement after 12 months
–
–
16. AUDITOR’S REMUNERATION
Details of auditor’s remuneration, for Phoenix Group Holdings
subsidiaries, 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 I8 to the
consolidated financial statements
As part of the Group’s on-shoring plan the Board moved its tax residency
from Jersey to the UK, effective from 31 January 2018. This change
in residency was preceded by the Company waiving the outstanding
balance on the Eurobonds with PGH (LCA) Limited, PGH (LCB) Limited,
PGH (MC1) Limited and PGH (MC2) Limited on 29 January 2018.
H Staunton
C Bannister
J McConville
A Barbour
I Cormack
K Green
W Mayall
J Pollock
B Richards
N Shott
K Sorenson
14 March 2018
190
Phoenix Group Holdings | Annual Report & Accounts 2017
Additional Life Company Asset Disclosures
The analysis of the asset portfolio provided below comprises the assets held by the Group’s life companies, and it is stated net of derivative liabilities.
It excludes other Group assets such as cash held in the holding and service companies and the assets held by the non-controlling interests in
consolidated collective investment schemes.
The following table provides an overview of the exposure by asset category of the Group’s life companies’ shareholder and policyholder funds:
31 December 2017
Carrying value
Cash and cash equivalents
Debt securities – gilts
Debt securities – bonds
Equity securities
Property investments
Other investments4
At 31 December 2017
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
consolidated collective investment schemes
Total Group consolidated assets
Comprised of:
Investment property
Financial assets
Cash and cash equivalents
Derivative liabilities
Shareholder and
non-profit funds1
£m
Participating
supported1
£m
Participating non-
supported2
£m
Unit-linked2
£m
Total3
£m
1,906
3,059
7,362
158
112
1,745
14,342
2,554
470
1,627
52
52
206
4,961
4,312
6,461
6,166
5,350
847
1,547
24,683
2,355
963
3,049
16,845
651
6,103
29,966
11,127
10,953
18,204
22,405
1,662
9,601
73,952
535
456
1,012
75,955
612
74,340
2,245
(1,242)
75,955
1
2
3
4
Includes assets where shareholders of the life companies bear the investment risk.
Includes assets where policyholders bear most of the investment risk.
This information is presented on a look through basis to underlying funds where available.
Includes equity release mortgages of £1,255 million, policy loans of £12 million, other loans of £199 million, net derivative assets of £1,563 million, reinsurers’ share of investment contracts of
£6,085 million, and other investments of £487 million.
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Phoenix Group Holdings | Annual Report & Accounts 2017
191
Additional Life Company Asset Disclosures
continued
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
1,239
3,121
8,645
182
144
833
14,164
2,457
425
1,878
53
74
188
5,075
4,342
6,724
6,427
5,699
802
1849
25,843
Unit-linked
£m
1,858
2,163
2,926
15,747
619
7,449
30,762
31 December 2016
Carrying value
Cash and cash equivalents
Debt securities – gilts
Debt securities – bonds
Equity securities
Property investments
Other investments1
At 31 December 2016
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 consolidated
collective investment schemes
Total Group consolidated assets
Comprised of:
Investment property
Financial assets
Cash and cash equivalents
Derivative liabilities
Total
£m
9,896
12,433
19,876
21,681
1,639
10,319
75,844
570
449
931
77,794
646
77,049
1,666
(1,567)
77,794
1
Includes equity release mortgages of £433 million, policy loans of £10 million, other loans of £308 million, net derivative assets of £1,468 million, reinsurers’ share of investment contracts of
£6,808 million, and other investments of £1,292 million.
The following table analyses by type the debt securities of the life companies:
31 December 2017
Analysis by type of debt securities
Gilts
Other government and supranational2
Corporate – financial institutions
Corporate – other
Asset backed securities (’ABS’)
At 31 December 2017
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
Unit-linked
£m
3,059
1,163
2,812
2,810
577
470
333
443
161
690
6,461
2,109
1,902
1,550
605
10,421
2,097
12,627
963
871
187
1,962
29
4,012
2
Includes debt issued by governments; public and statutory bodies; government backed institutions and supranationals.
31 December 2016
Analysis by type of debt securities
Gilts
Other government and supranational2
Corporate – financial institutions
Corporate – other
Asset backed securities (’ABS’)
At 31 December 2016
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
Unit-linked
£m
3,121
1,195
3,375
3,219
856
425
474
531
184
689
11,766
2,303
6,724
2,103
1,983
1,700
641
13,151
2,163
328
2,081
401
116
5,089
Total
£m
10,953
4,476
5,344
6,483
1,901
29,157
Total
£m
12,433
4,100
7,970
5,504
2,302
32,309
The life companies’ debt portfolio was £29.2 billion at 31 December 2017. Shareholders had direct exposure to £12.5 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 £5.0 billion, at 31 December 2017.
The vast majority of the life companies’ exposure to sovereign and supranational debt holdings is to UK gilts.
192
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The following table sets out a breakdown of the life companies’ sovereign and supranational debt security holdings by country:
31 December 2017
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 2017
3,413
606
–
78
26
29
55
–
7
8
519
6,722
89
3
72
25
20
–
–
66
9
359
122
507
113
117
–
–
592
38
8,570
4,222
803
31 December 2016
Analysis of sovereign and supranational debt security holdings
by country
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
UK
Supranationals
USA
Germany
France
Netherlands
Italy
Spain
Other – non-Eurozone
Other – Eurozone
At 31 December 2016
3,369
673
16
143
40
16
–
–
45
14
4,316
494
144
5
103
25
12
–
–
114
2
899
7,051
446
25
526
90
112
–
–
542
35
8,827
971
25
346
74
62
11
34
37
258
16
1,834
Unit-linked
£m
2,173
20
107
45
11
6
26
10
87
6
Total
£m
11,625
1,079
471
731
226
177
89
37
923
71
15,429
Total
£m
13,087
1,283
153
817
166
146
26
10
788
57
2,491
16,533
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193
Additional Life Company Asset Disclosures
continued
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 2017
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
Spain
Other – non-Eurozone
Other – Eurozone
At 31 December 2017
1,428
598
72
100
190
7
3
389
25
2,812
83
47
9
34
66
–
–
182
22
443
827
425
47
80
186
7
16
283
31
106
25
3
4
28
–
–
14
7
Total
£m
2,444
1,095
131
218
470
14
19
868
85
1,902
187
5,344
31 December 2016
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 2016
1,607
602
75
165
249
15
30
1
550
81
3,375
65
56
1
6
58
–
–
–
328
17
531
736
403
27
73
190
7
–
15
499
33
924
271
34
121
112
11
29
10
516
53
1,983
2,081
Total
£m
3,332
1,332
137
365
609
33
59
26
1,893
184
7,970
The life companies had £10 million (2016: £46 million) shareholder exposure to financial institution corporate debt of the Peripheral Eurozone, defined
as Portugal, Italy, Ireland, Greece and Spain, at 31 December 2017. The £3,255 million (2016: £3,906 million) total shareholder exposure to financial
institution corporate debt comprised £2,648 million (2016: £2,125 million) senior debt, £2 million (2016: £2 million) Tier 1 debt and £605 million
(2016: £1,779 million) Tier 2 debt.
The £3,255 million shareholder exposure to financial institution corporate debt comprised £2,037 million (2016: £2,170 million) bank debt and
£1,218 million (2016: £1,736 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.
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Phoenix Group Holdings | Annual Report & Accounts 2017
The following table sets out a breakdown of the life companies’ corporate – other debt security holdings by country:
31 December 2017
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 2017
31 December 2016
Analysis of corporate – other debt security holdings by country
UK
USA
Germany
France
Netherlands
Italy
Ireland
Spain
Other – non-Eurozone
Other – Eurozone
At 31 December 2016
1,248
561
241
219
5
47
5
46
345
93
2,810
66
31
43
16
–
1
–
1
3
–
161
783
200
142
139
15
32
–
20
185
34
1,550
747
72
25
19
3
5
8
2
1,041
40
1,962
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
Unit-linked
£m
1,517
567
256
276
69
62
4
48
381
39
3,219
74
33
38
17
–
1
–
–
7
14
184
830
303
128
127
17
35
1
23
217
19
1,700
211
83
25
28
4
5
6
5
31
3
401
Total
£m
2,844
864
451
393
23
85
13
69
1,574
167
6,483
Total
£m
2,632
986
447
448
90
103
11
76
636
75
5,504
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A
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S
T
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195
Additional Life Company Asset Disclosures
continued
The following table sets out a breakdown of the life companies’ ABS holdings by country:
31 December 2017
Analysis of ABS holdings by country
UK
USA
Germany
France
Netherlands
Ireland
Other – non-Eurozone
Other – Eurozone
At 31 December 2017
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
507
523
527
Unit-linked
£m
28
–
–
15
9
36
10
–
577
–
9
45
76
–
5
32
690
2
4
–
23
26
5
18
–
–
–
1
–
–
–
605
29
1,901
Total
£m
1,585
2
13
60
109
62
20
50
31 December 2016
Analysis of ABS holdings by country
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
729
10
–
–
9
30
78
–
488
551
8
74
29
84
1
2
3
4
29
–
32
18
7
–
Unit-linked
£m
108
1
–
–
1
–
3
3
Total
£m
1,876
23
103
29
126
49
90
6
856
689
641
116
2,302
UK
USA
Germany
France
Netherlands
Ireland
Other – non-Eurozone
Other – Eurozone
At 31 December 2016
196
Phoenix Group Holdings | Annual Report & Accounts 2017
The following table sets out the credit rating analysis of the debt portfolio:
31 December 2017
Credit rating analysis of debt portfolio
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
Unit-linked
£m
AAA
AA
A
BBB
BB
B and below
Non-rated
At 31 December 2017
1,162
4,169
3,154
1,652
49
–
235
10,421
867
747
325
33
2
1
122
2,097
1,568
7,055
1,264
1,716
187
101
736
12,627
549
995
280
282
23
1
1,882
4,012
Total
£m
4,146
12,966
5,023
3,683
261
103
2,975
29,157
99% of rated securities were investment grade at 31 December 2017 (2016: 98%). The percentage of rated securities that were investment grade in
relation to the shareholder and policyholders’ funds were 99% and 98% respectively (2016: 99% and 98% respectively).
31 December 2016
Credit rating analysis of debt portfolio
Shareholder and
non-profit funds
£m
Participating
supported
£m
Participating
non-supported
£m
Unit-linked
£m
AAA
AA
A
BBB
BB
B and below
Non-rated
At 31 December 2016
1,333
4,578
3,358
2,274
132
16
75
935
943
287
54
4
2
78
1,626
7,962
1,312
1,624
167
117
343
11,766
2,303
13,151
519
1,415
550
360
47
11
2,187
5,089
Total
£m
4,413
14,898
5,507
4,312
350
146
2,683
32,309
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197
Additional Capital Disclosures
CAPITAL MANAGEMENT FRAMEWORK
The Group’s capital management framework is designed to achieve the
following objectives:
– to provide appropriate security for policyholders and meet all regulatory
capital requirements under the Solvency II regime while not retaining
unnecessary excess capital;
– to ensure sufficient liquidity to meet obligations to policyholders and
other creditors;
– to optimise the Fitch Rating’s financial leverage ratio to maintain an
investment grade credit rating;
– to support the Group’s progress in putting in place a new UK-registered
holding company for the Group; and
– to maintain a stable and sustainable 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.
Further information is provided in note I3 of the IFRS financial statements.
This section provides additional analysis of PGH’s Solvency II Own Funds,
SCR and MCR.
PGH SOLVENCY II SURPLUS
The PGH surplus at 31 December 2017 is £1.8 billion (2016: £1.1 billion,
pro forma). The rationale for the use of the pro forma metric in 2016 is set
out on page 23.
Own Funds
SCR
Surplus
31 December
2017
Estimated
£bn
31 December
2016
Pro forma
£bn
6.6
(4.8)
1.8
6.0
(4.9)
1.1
COMPOSITION OF OWN FUNDS
Own Funds items are classified into different Tiers based on the features
of the specific items and the extent to which they possess the following
characteristics, with Tier 1 being the highest quality.
– availability to be called up on demand to fully absorb losses on
a going-concern basis, as well as in the case of winding-up
(‘permanent availability’);
– in the case of winding-up, the total amount that is available to
absorb loses before repayment to the holder until all obligations to
policyholders and other beneficiaries have been met (‘subordination’).
PGH’s Own Funds are analysed by Tier as follows:
Tier 1
Tier 2
Tier 3
Total Own Funds
31 December
2017
Estimated
£bn
31 December
2016
Pro forma
£bn
5.0
1.0
0.6
6.6
5.0
0.6
0.4
6.0
PGH’s Tier 1 capital accounts for 76% (2016: 83%) of total Own Funds
and comprises ordinary share capital, surplus funds of the unsupported
with-profit funds which are recognised only to a maximum of the SCR,
and the accumulated profits of the remaining business.
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Tier 2 capital comprise of subordinated notes whose terms enable them
to qualify as Tier 2 capital for regulatory reporting purposes.
Tier 3 items include the Tier 3 subordinated notes of £0.5 billion
(31 December 2016: £0.3 billion, pro forma for the January 2017 Tier 3
subordinated notes issuance) and the deferred tax asset of £0.1 billion
(2016: £0.1 billion).
BREAKDOWN OF SCR
An analysis of the undiversified SCR of PGH is presented below:
Longevity
Credit
Persistency
Interest rates
Operational
Swap spreads
Other market risks
Other non-market risks
31 December
2017
%
31 December
2016
Pro forma
%
30
15
14
7
9
3
15
7
33
16
13
9
7
4
10
8
100%
100%
The principal risks of the Group are described in detail in note E6 and F4 in
the IFRS financial statements.
BREAKDOWN OF SHAREHOLDER CAPITAL POSITION
The shareholder capital position is an adjusted PGH position which
excludes Own Funds and the associated SCR relating to the unsupported
with-profit funds and the PGL Pension Scheme of £2.0 billion as at
31 December 2017 (2016: £2.0 billion).
The shareholder capital position is further analysed between the
contributions of the life companies and holding companies as follows:
Own funds
Phoenix Life
Holding company
SCR
Phoenix Life
Holding company
Surplus
Phoenix Life
Holding Company
31 December
2017
Estimated £bn
31 December
2016
Pro forma
£bn
4.6
4.0
0.6
(2.8)
(2.4)
(0.4)
1.8
1.6
0.2
4.0
4.0
–
(2.9)
(2.6)
(0.3)
1.1
1.4
(0.3)
Own Funds within Phoenix Life of £4.0 billion (2016: £4.0 billion) comprise
£0.8 billion (2016: £1.0 billion) in the shareholders’ funds, £2.1 billion
(2016: £1.8 billion) in the non-profit funds, £0.5 billion (2016: £0.6 billion)
in the supported with-profit funds and future shareholder transfers of
£0.6 billion (2016: £0.5 billion).
Own Funds within the holding companies of £0.6 billion (2016: £nil)
principally comprises cash and other financial assets held in the holding
companies, net of shareholder borrowings which do not qualify as capital
under the Solvency II regulations.
MINIMUM CAPITAL REQUIREMENTS
Minimum Capital Requirement (‘MCR’) is the minimum amount of capital
an insurer is required to hold below which policyholders and beneficiaries
would become exposed to an unacceptable level of risk if an insurer was
allowed to continue its operations.
The MCR is calculated according to a formula prescribed by the Solvency
II regulations and is subject to a floor of 25% of the SCR or EUR
3.7 million, whichever is higher, and a cap of 45% of the SCR. The MCR
formula is based on factors applied to technical provisions and capital
at risk.
PGH’s MCR at 31 December 2017 is £1.2 billion (2016: £1.3 billion) which
is a sum of the underlying insurance companies’ MCRs.
PGH’s eligible Own Funds to cover MCR is £5.3 billion (2016: £5.2 billion)
leaving an excess of eligible Own Funds over MCR of £4.1 billion
(2016: £4.0 billion), which translates to an MCR coverage ratio of 448%
(2016: 409%).
The eligible Own Funds to cover the MCR is subject to quantitative limits
as shown below:
– the eligible amounts of Tier 1 items should be at least 80% of the
MCR; and
– the eligible amounts of Tier 2 items shall not exceed 20% of the MCR.
31 December
2017
Estimated
£bn
31 December
2016
Pro forma
£bn
Eligible Own Funds to cover MCR
Tier 1
Tier 2
Total eligible Own Funds to cover MCR
5.1
0.2
5.3
5.0
0.2
5.2
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199
Alternative Performance Measures
The Group assesses its financial performance based on a number of measures.
Some measures are management derived measures of historic or future financial
performance, position or cash flows of the Group; which are not defined or specified
in accordance with relevant financial reporting frameworks such as International
Financial Reporting Standards (’IFRS’) or Solvency II. These measures are known as
Alternative Performance Measures (’APMs’).
APMs are disclosed to provide stakeholders with further helpful
information on the performance of the Group and should be viewed as
complementary to, rather than a substitute for, the measures determined
according to IFRS and Solvency II requirements. Accordingly, these
APMs may not be comparable with similarly titled measures and
disclosures by other companies.
A list of the APMs used in our results as well as their definitions, why
they are used and, if applicable, how they can be reconciled to the nearest
equivalent GAAP measure is provided below.
Further discussion of these measures can be found in the business
review on page 26 and the definitions of all APMs are included in the
glossary on page 204.
APM
Definition
Why is this measure used
Reconciliation to financial statements
Operating
companies’
cash
generation
Cash remitted by the Group’s operating
companies to the Group’s holding
companies.
Operating
profit
Shareholder
Capital
Coverage Ratio
Operating profit is a financial performance
measure based on expected long-term
investment returns. It is stated before
tax and non-operating items including
amortisation and impairments of
intangibles, finance costs attributable to
owners and other non-operating items
which in the Director’s view should be
excluded by their nature or incidence to
enable a full understanding of financial
performance.
Further details of the components of
this measure and the assumptions
inherent in the calculation of the long-term
investment return are included in note
B1.2 to the IFRS financial statements.
Represents total eligible own funds
divided by the Solvency Capital
Requirements (’SCR’), adjusted to a
shareholder view through the exclusion
of amounts relating to those ring-fenced
with-profit funds and Group pension
schemes whose own funds exceed
their SCR.
Phoenix Life
Free Surplus
The Solvency II surplus of the life
companies that is in excess of their Board
approved capital management policies.
200
Phoenix Group Holdings | Annual Report & Accounts 2017
Operating companies’ cash generation is
not directly reconcilable to an equivalent
GAAP measure (IFRS consolidated
statement of cash flows) as it includes
amounts that eliminate on consolidation.
Further details of holding companies’ cash
flows are included within the business
review on page 27 and a breakdown of
the Groups cash position by type of entity
is provided in the additional life company
asset disclosures note on page 191.
A reconciliation of operating profit to
the IFRS result before tax attributable to
owners is included in the business review
on page 30 and in the primary financial
statements on page 103.
The statement of cash flows prepared in
accordance with IFRS combines cash flows
relating to shareholders with cash flows relating
to policyholders, but the practical management
of cash within the Group maintains a distinction
between the two. The Group therefore focuses
on the cash flows of the holding companies
which relate only to shareholders. Such cash
flows are considered more representative
of the cash generation that could potentially
be distributed as dividends or used for debt
repayment and servicing, group expenses and
pension contributions.
Operating companies’ cash generation is a key
performance indicator used by management for
planning, reporting and executive remuneration.
This measure provides a more representative
view of the Group’s performance than the
IFRS result after tax as it provides long-term
performance information unaffected by
short-term economic volatility and one-off
items, and is stated net of policyholder finance
charges and tax.
It helps give stakeholders a better
understanding of the underlying performance
of the Group by identifying and analysing
non-operating items.
The unsupported with-profit funds and Group
pension funds do not contribute to the Group
Solvency II surplus. However, the inclusion of
related Own Funds and SCR amounts dampens
the implied Solvency II capital ratio.
Further details of the Shareholder Capital
Coverage Ratio and its calculation are
included in the business review on page 29
and the additional capital disclosures note
on page 198.
The Group therefore focuses on a shareholder
view of the capital coverage ratio which is
considered to give a more accurate reflection of
the capital strength of the Group.
This figure provides a view of the level of
surplus capital in the Life companies that
is available for distribution to the holding
companies, and the generation of Free Surplus
underpins future operating cash generation.
Please see business review section
page 29 for further analysis of the solvency
positions of the life companies.
In this section
Shareholder Information
Forward-looking statements
Glossary
202
203
204
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201
Shareholder Information
ANNUAL GENERAL MEETING
Our Annual General Meeting (’AGM’) will be held on 2 May 2018 at 10:00am.
The voting results for our 2018 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
900
850
800
750
700
650
600
Jan
2017
Feb
2017
Mar
2017
Apr
2017
May
2017
Jun
2017
Jul
2017
Aug
2017
Sep
2017
Oct
2017
Nov
2017
Dec
2017
Phoenix Group
FTSE 250 (excluding investment trusts)
FTSE 350 Life Assurance
SHAREHOLDER PROFILE AS AT 31 DECEMBER 2017
Range of shareholdings
No. of shareholders
%
No. of shares
1–1,000
1,001–5,000
5,001–10,000
10,001–250,000
250,001–500,000
500,001 and above
Total
570
652
141
345
52
117
30.37
34.74
7.51
285,032
1,536,552
1,022,502
18.38
24,029,812
2.77
6.23
18,009,250
348,349,496
1,877
100.00
393,232,644
%
0.07
0.39
0.26
6.11
4.58
88.59
100.00
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.
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’.
REGISTRAR DETAILS
Computershare Investor Services (Cayman) Limited
Queensway House
Hilgrove Street
St Helier
Jersey, JE1 1ES
Shareholder helpline number +44 (0) 370 702 0000
Fax number +44 (0) 370 703 6101
Shareholder helpline e-mail address 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.
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:
– make sure you get the correct name of the person and organisation;
– 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;
– report the matter to the FCA by calling the FCA Consumer Helpline on
0800 111 6768; and
– 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.
202
Phoenix Group Holdings | Annual Report & Accounts 2017
Details of any share dealing facilities that the Company endorses will be
included in Company mailings.
– the impact of inflation and deflation;
– market competition;
– changes in assumptions in pricing and reserving for insurance business
(particularly with regard to mortality and morbidity trends, gender
pricing and lapse rates);
– the timing, impact and other uncertainties of future acquisitions or
combinations within relevant industries;
– risks associated with arrangements with third parties;
– inability of reinsurers to meet obligations or unavailability of reinsurance
coverage; and
– 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 and other financial and/or statistical
data within the 2017 Annual Report and Accounts.
The Group undertakes no obligation to update any of the forward-looking
statements contained within the 2017 Annual Report and Accounts or any
other forward-looking statements it may make or publish.
The 2017 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 2017 Annual Report and Accounts is or should be
construed as a profit forecast or estimate.
More detailed information on this or similar activity can be found on the
FCA website available at www.fca.org.uk/consumers.
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 – 2017 FINAL DIVIDEND
Ex-dividend date
Record date
22 March 2018
23 March 2018
Payment date for the recommended final dividend
4 May 2018
GROUP FINANCIAL CALENDAR FOR 2018
Annual General Meeting
2 May 2018
Announcement of unaudited six months’
Interim Results
23 August 2018
FORWARD-LOOKING STATEMENTS
The 2017 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:
– domestic and global economic and business conditions;
– asset prices;
– 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;
– 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;
– the political, legal and economic effects of the UK’s vote to leave the
European Union;
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Glossary
ABBEY LIFE
ABS
ACQUIRED VALUE
IN FORCE (‘AVIF’)
ALM
ALTERNATIVE
PERFORMANCE
MEASURE
ANNUITY POLICY
ASSET
MANAGEMENT
ASSETS UNDER
MANAGEMENT
BREXIT
The companies comprising of Abbey Life
Assurance Company Limited, Abbey Life
Trustee Services Limited and Abbey Life Trust
Securities Limited
EEA
Asset Backed Securities – A collateralised
security whose value and income payments
are derived from a specified pool of underlying
assets
EXPERIENCE
VARIANCES
The present value of future profits on
a portfolio of long-term insurance and
investment contracts, acquired either directly
or through the purchase of, or investment in,
a business
Asset Liability Management – Management
of mismatches between assets and liabilities
within risk appetite
An Alternative Performance Measure (’APM’)
is a financial measure of historic or future
financial performance, financial position,or
cash flows, other than a financial measure
defined under IFRS or under Solvency II
regulations. The Group uses a range of these
metrics to provide a better understanding of
the underlying performance of the Group. All
APMs are defined within this glossary and an
APM note is provided on page 200
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
Represents all assets managed or
administered by or on behalf of the Group,
including those assets managed by third
parties.
The vote by the people of the United Kingdom
to leave the EU in the referendum held on 23
June 2016
FINANCIAL
REPORTING
COUNCIL
FREE SURPLUS
FCA
FOS
GAR
HOLDING
COMPANIES
CLOSED LIFE FUND
A fund that no longer accepts new business.
The fund continues to be managed for the
existing policyholders
IFRS
EBT
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
IN-FORCE
ECONOMIC
ASSUMPTIONS
Assumptions related to future interest rates,
inflation, market value movements and tax
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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
Current period differences between the actual
experience incurred and the assumptions
used in the calculation of IFRS insurance
liabilities
The UK’s independent regulator responsible
for promoting high-quality corporate
governance and reporting to foster investment
The amount of capital held in life companies
in excess of that needed to support their
regulatory solvency capital requirement, plus
the capital required under the Board approved
capital management policy
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
Refers to Phoenix Group Holdings, PGH
Capital plc, 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
International Financial Reporting Standards
– Accounting standards, interpretations and
the framework adopted by the International
Accounting Standards Board
Long-term business written before the period
end and which has not terminated before the
period end
HMRC
HM Revenue and Customs
INHERITED ESTATE
INTERNAL MODEL
LIBOR
LTIP
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
The agreed methodology and model,
approved by the PRA, to calculate the Group
Solvency Capital Requirement pursuant to
Solvency II
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
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
OWN FUNDS
PART VII TRANSFER
Basic Own Funds comprise the excess of
assets over liabilities valued in accordance with
the Solvency II principles and subordinated
liabilities which qualify to be included in Own
Funds under the Solvency II rules.
Eligible Own Funds are the amount of
Own Funds that are available to cover the
Solvency Capital Requirements after applying
prescribed tiering limits and transferability
restrictions to Basic Own Funds
The transfer of insurance policies under Part
VII of Financial Services and Markets Act
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
PRA
MINIMUM CAPITAL
REQUIREMENTS
(‘MCR’)
MCR is the minimum amount of capital that
the Group needs to hold to cover its risks
under the Solvency II regulatory framework
MSA
Management Services Agreement –
Contracts that exist between Phoenix Life and
management services companies or between
management services companies and their
outsource partners
PROTECTION
POLICY
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
SHAREHOLDER
CAPITAL COVERAGE
RATIO
OPERATING
COMPANIES
Refers to the trading companies within
Phoenix Life
OPERATING
COMPANIES’ CASH
GENERATION
Operating companies’ cash generation
represents cash remitted by the Group’s
operating companies to the holding
companies
OPERATING PROFIT
Operating profit is a non-GAAP measure that
is considered a more representative measure
of performance than IFRS profit or loss after
tax as it is based on expected long-term
investment returns
ORIGO
An electronic pensions transfer system
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
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
Represents total eligible Own Funds divided
by the Solvency Capital Requirements (‘SCR’),
adjusted to a shareholder view through
the exclusion of amounts relating to those
ring-fenced with-profit funds and Group
pension schemes whose Own Funds exceed
their SCR
A new regime for the prudential regulation of
European insurance companies that came into
force on 1 January 2016
SOLVENCY II
SOLVENCY II
SURPLUS
The excess of Eligible Own Funds over the
Solvency Capital Requirement
SOLVENCY CAPITAL
REQUIREMENTS
(’SCR’)
SCR relates to the risks and obligations to
which the Group is exposed, and 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’
STANDARD
FORMULA
A set of calculations prescribed by the
Solvency II regulations for generating the SCR
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Glossary
continued
STANDARD LIFE
ASSURANCE
TRANSITIONAL
MEASURES
ON TECHNICAL
PROVISIONS
TSR
UK CORPORATE
GOVERNANCE
CODE
UKCPT
Standard Life Assurance means the majority
of the business of Standard Life Assurance
Limited and Vebnet Limited that is proposed
to be acquired by the Group as announced on
23 February 2018. It includes Standard Life
Assurance Limited’s UK and European life
insurance, pensions and savings business,
but excludes Standard Life Assurance
Limited’s retail platform and growth business
infrastructure, as well as its advice business
Transitional Measures to Technical Provisions
(’TMTP’) is an allowance, subject to the PRA’s
approval, to apply a transitional deduction to
technical provisions. The transitional deduction
corresponds to the difference between net
technical provisions calculated in accordance
with Solvency II principals and net technical
provisions calculated in accordance with the
previous regime and is expected to decrease
linearly over a period of 16 years starting from
1 January 2016 to 1 January 2032. TMTP is
subject to a mandatory recalculation every two
years or on the occurrence of certain defined
events
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)
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
A property investment company which is
domiciled in Guernsey and listed on the
London Stock Exchange
UNIT-LINKED
POLICY
A policy where the benefits are determined by
the investment performance of the underlying
assets in the unit-linked fund
WITH-PROFIT FUND 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
206
Phoenix Group Holdings | Annual Report & Accounts 2017
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
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AGM and EGM information, UK Regulatory Returns and contact information.
Go online
www.thephoenixgroup.com/investor-relations
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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
Juxon House
100 St Paul’s Churchyard
London EC4M 8BU