Phoenix Group Annual Report 2018

FY2018 Annual Report · Phoenix Group

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2018 WAS TRANSFORMATIONAL
FOR PHOENIX AS WE DELIVERED
CASH, RESILIENCE AND GROWTH.

WITH THE RESTRUCTURING
OF THE LIFE AND PENSIONS
INDUSTRY, WE ARE IN A
POSITION TO TAKE ADVANTAGE
OF FURTHER OPPORTUNITIES.

THE SUCCESSFUL ACQUISITION
OF THE STANDARD LIFE
ASSURANCE BUSINESSES
HAS ALLOWED US TO EVOLVE
FROM BEING A HERITAGE
BUSINESS TO ONE THAT
EXTENDS TO OPEN BUSINESS
AND EUROPE.

THIS HAS ENHANCED THE
SUSTAINABILITY OF THE GROUP
AND WILL PROPEL US TOWARDS
OUR NEW VISION TO BECOME
EUROPE’S LEADING LIFE
CONSOLIDATOR.

More information online at
www.thephoenixgroup.com

PHOENIX GROUP
AT A GLANCE

OUR
VISION
Become Europe’s
Leading Life Consolidator.

OUR
PURPOSE
Inspire confidence
in the future.

WHAT WE DO
As the largest life and pensions consolidator in Europe,
Phoenix specialises in the acquisition and management
of closed life insurance and pension funds. We call this
our Heritage business.

Transactions in the bulk purchase annuity market offer
a complementary source of growth for the Group and
the management actions we deliver help increase and
accelerate cash flows.

Alongside this, we have an Open business which
manufactures and underwrites new products and
policies to support people saving for their future in areas
such as workplace pensions and self-invested personal
pensions. This Open business is supported by the
Strategic Partnership with Standard Life Aberdeen plc
following our acquisition of Standard Life Assurance
Limited in 2018. We also have a market leading brand
– SunLife – which sells a range of financial products
specifically for the over 50s market.

Read more on our operating
structure and business model
on P8 and 14

Read more on
P56

CORPORATE
AND SOCIAL
RESPONSIBILITY
REPORT 2018

Go online for the full Corporate
and Social Responsibility Report
www.thephoenixgroup.com/CRreport2018

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONSTAKEHOLDER ENGAGEMENT
CONTINUED

OUR
CUSTOMERS

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, and we aim
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
P18 and 20

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.

LISTENING TO CUSTOMERS
Listening to the needs and wants
of customers is helpful in delivering
good customer outcomes. 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.

Within Phoenix Life improvements
included an online facility for some
customers within the retirement
process, the launch of secure e-mail
as an alternative communication
channel, and improvements to the
presentation of annual statements
and communications.

Within Standard Life Assurance
improvements for workplace members
and clients included extended opening
hours, implementation of a new voice
recognition system, a new online
registration process and amendments
to the investment switching journey
online for trust schemes. Face-to-face
retirement roadshows were held
nationwide, reaching c. 2,000
individuals in 19 locations.
Following the roadshow success,
retirement webinars were launched.

DIGITAL PROPOSITION
During the year the Group has continued
to develop its digital offering for customers.
The Phoenix Life website allows visitors
24/7 access to policy information, whilst
reducing the volume of paperwork
routinely issued. Selected customers
can access a secure website where they
can review and update their personal
information, view policy details and
contact Phoenix.

Operationally, Phoenix has selected
Diligenta, the FCA regulated subsidiary
of Tata Consultancy Services, as its
preferred outsource partner to deliver
a single, digitally enhanced outsourcer
platform that will improve customer
outcomes and deliver cost savings
for legacy-Phoenix Life policies
(c. 5.5 million customers).

Within Standard Life Assurance
over 11,000 customers moved into
drawdown in the year. Digital was the
channel of choice for the majority of
these customers, followed by telephony
service. Over 3 million logins were
recorded across 2018, with the
24/7 mobile app being the easiest
way for customers to interact.
For customers in non-advised Active
Money Pension Plan drawdowns, the
Group developed an online retirement
review to help customers assess
their investment choices based
on objectives.

CUSTOMER COMPLAINTS
The Group acknowledges that mistakes
can happen, but where they do it aims
to put things right as soon as it can.
A robust oversight model is in place to
continually monitor complaint activity
including those complaints that are
referred to the independent services
of the Financial Ombudsman Service
or the Pensions Ombudsman Service.
Best practice is shared with colleagues
across the industry to improve
complaint-handling services. Work is
carried out with internal teams to ensure
that causes of complaints are addressed
in a timely manner. A significant
proportion of complaints are resolved
across the Group, in less than three
days, which is a key performance
indicator for the complaints team
and results in a better experience
for customers.

POLICYHOLDERS HAVE DILIGENTLY SAVED FOR MANY YEARS
IN THEIR POLICIES, AND IT IS UNFORTUNATE THAT THE BENEFITS
MAY HAVE BEEN LEFT UNCLAIMED. WE ARE DELIGHTED TO
HAVE BEEN ABLE TO REPATRIATE SO MANY OF THESE LOST
POLICIES WITH THEIR RIGHTFUL OWNERS.”

DAVID WOOLLETT
CUSTOMER DIRECTOR, PHOENIX LIFE

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

2,380

UNCLAIMED POLICIES REUNITED
WITH RIGHTFUL OWNERS FOLLOWING
EXTENSIVE TRACING EXERCISES

Over 80% of cases referred to the
Financial Ombudsman Service from
Phoenix Life were found to be in
agreement with the decision made,
giving the Group useful insight and
assurance into how well complaints
are being handled.

£12.7m

REUNITED POLICIES VALUE

PROTECTING CUSTOMERS
FROM PENSION SCAMS
The Group is dedicated to protecting
its customers from financial crime,
including 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.
The Group continues to raise awareness
of scams and warns its policyholders
to remain vigilant of the evolving
methods of fraudsters.

REUNITING CUSTOMERS
WITH LOST POLICIES
Phoenix Life reunited 2,380 unclaimed
policies with their rightful owner or next
of kin following an extensive tracing
exercise. The work commenced in
September 2016 and to date has reunited
policies amounting £12.7 million.

The Group introduced a proactive
campaign to ensure the customer or
their estate benefited. They enlisted
the help of external tracing companies
and obtained copies of death
certificates, probate and wills in the
process. Phoenix Life has also recently
implemented an enhanced ‘gone-away’
process across its outsource partners
to allow the Group to re-engage
and communicate with more
Phoenix Life customers.

LONG-TERM SAVINGS
COMMITTEE APPOINTMENT
The Association of British Insurers
(‘ABI’) has appointed Susan McInnes,
CEO of Standard Life Assurance Limited
and Director of Open Business as chair
to its Long-term Savings Committee.
In addition she has taken a seat on
the ABI Board and previously held
the role of chair to the Long-Standing
Customers Committee. The Long-term
Savings Committee oversees the
direction of all the ABI policy work
in relation to pension savings and
retirement. Current priorities include the
delivery of the pension dashboard and
supporting customers to make the most
of their new choices at retirement.

CUSTOMERS IN VULNERABLE CIRCUMSTANCES
Phoenix’s vulnerable customer strategy aims to address vulnerability to
the extent that the right outcomes for customers are achieved regardless
of whether they are living in vulnerable circumstances.

The Group’s key objective is to be able to recognise vulnerability and
then be equipped to take the appropriate action to address it. This is being
achieved by having frameworks and practical guidance in place to support
the strategy, whilst ensuring there is an appropriate awareness and positive
culture instilled throughout the Group in respect of vulnerability.

Within Phoenix Group/Phoenix Life an online training module on customer
vulnerability was designed and delivered by Money Advice Trust. Alongside this,
colleagues have become dementia friends, with awareness sessions delivered
by Phoenix’s inhouse dementia champions, helping the Group work towards
becoming a dementia-friendly business. The digital team is currently working
on a proposal which will look to enhance online accessibility catering for
varying customer needs.

Within Standard Life Assurance the Customer Operations team has
been working in partnership with Age Scotland and Alzheimer Scotland to
deliver training to help colleagues better understand how to handle calls with
vulnerable customers. An extensive training programme took place across
2018 which involved face-to-face and e-learning modules. This training
programme won ‘Excellence in Skills in Learning and Development’ at
the 2018 Contact Centre Association Awards.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONSTAKEHOLDER ENGAGEMENT
CONTINUED

OUR
SUPPLIERS

The Group has c. 1,000 suppliers of
which c. 70 are considered Material
Service Providers1.

Following the acquisition of
Standard Life Assurance Limited
in August 2018, Aberdeen Standard
Investments has become one of the
Group’s key strategic partners.

The Group’s Modern Slavery and Human
Trafficking Statement is available at
www.thephoenixgroup.com/mss

The Group’s Anti-Bribery Statement
is available on the Group’s website at
www.thephoenixgroup.com/abs

SUPPLY CHAIN MANAGEMENT
Phoenix relies heavily on its 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 key
stakeholders is implemented and
managed. The Group works closely
with its partners in order to closely
monitor the operational and financial
performance from Material Service
Providers for any indications of
instability and steps are taken where
necessary and appropriate to mitigate
risks to Phoenix or its stakeholders.

c. 1,000

SUPPLIERS

For Material 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
manages 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 and from January 2018
has been submitting relevant statements
under the Small Business, Enterprise and
Employment Act 2015 for the duty to
report payment practices. The Group is
committed to supply chain sustainability
and supports the culture of prompt
payment in the business community.

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 2018 a statement
was published on the Group website
pursuant to Section 54, Part 6 of the
Modern Slavery and Human Trafficking

Act 2015. 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.

FINANCIAL CRIME PREVENTION
In order to ensure that any financial crime
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.

Colleagues are required to complete
annual computer-based training
around both financial crime prevention
and adherence with the Code of
Business Ethics and Ethical Conduct.
Colleagues 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.

Note:
1 A Material Service Provider has been identified
by the Group as a key supplier due to the nature
of the services they provide.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

OUR
COLLEAGUES

We are an employer of choice
offering rewarding careers and
opportunities, promoting physical,
financial and mental wellbeing
in the workplace and empowering
a wholly inclusive workforce.

Read more about key employee
engagement activities undertaken
during the year on
P26

Read more about diversity and
inclusion on our website at
www.thephoenixgroup.com/diversity

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 colleagues, whilst
ensuring compliance with any legislation
and external regulatory requirements.

Adherence to this policy is managed by
the Group HR department via quarterly
assessment of the minimum control
standards. There were no material
issues raised during the year.

This section details the actions taken
and outcomes achieved across the year.

EMPLOYEE CONSULTATION
The Big Conversation was a significant
listening exercise that was undertaken
within Phoenix Group and Phoenix Life
at the start of the year to raise the level
of dialogue around the Group’s values,
and provided greater clarity around
associated behaviours. Through a series
of facilitated workshops and online
channels, colleagues were given the
opportunity to voice their opinions on
what they perceived as positive or
negative behaviours, with a view to
developing a common understanding
across all levels of the business.

The outcomes were shared with
colleagues and provided a clear
framework for how individuals are
recognised, developed and recruited.
The values were continually reinforced
throughout the year and culminated in
an employee-led recognition awards
process, whereby colleagues were
asked to nominate individuals who
they believed displayed particular
values across the year.

The Group operates a Whistleblowing
policy, prompting colleagues to
disclose information where they believe
wrongdoing, malpractice or risk exists
across any of Phoenix’s operations.
Colleagues are encouraged to speak up
about matters that concern them, with
the understanding that confidentiality
will be maintained.

Colleagues within Standard Life
Assurance have access to Vivo,
an employee consultation group based
onsite. Championing the employee
voice, it provides support and advice
when employees need it most, and
is actively engaged in any decisions
affecting working life.

The plan identifies talent
across the broader organisation.
Growing talent continues to
deliver the Group’s most senior
appointments and talent programmes
in Accounting, Actuarial and Change
help to identify future leaders.

The Group also selects key
partners to provide a wide range of
learning and continual professional
development opportunities including
the Chartered Management Institute,
Corndell, Moving Ahead and the
ACCA. Relationships continue with
business schools and executive
coaches to develop the Group’s
most senior talent pipeline.

The Professional Women’s Network
launched a mentoring scheme with
Moving Ahead which is available
to colleagues across the Group
and at any level. Over 100 mentoring
pairs are currently working together,
breaking down silos and developing
a culture of mentoring, learning and
knowledge sharing.

In addition, the Group participated
for a second year in the Actuarial
Mentoring Programme, providing
support and guidance to newly
qualified female actuaries.

As part of the Early Careers
proposition, Standard Life Assurance
currently has 24 graduates who form
part of the Graduate Development
Programme based in Edinburgh,
in cohorts from 2017 and 2018.
In addition 10 mentors are
actively engaged in providing
monthly mentoring sessions to
young people across the Edinburgh
area, through the Career Ready
development programme.

The Group has fully utilised
the Apprenticeship levy funding
working in partnership with
Corndell and has over 100
programmes underway including
Project Management, Leadership,
Data analytics and Accountancy
enabling skill development across
the Phoenix management population.

LEARNING AND DEVELOPMENT
The Talent and Development
team designs and delivers a
varied programme of learning and
development activities including
leadership development, talent
programmes, skills training, online
learning, coaching and mentoring.

As part of the Group’s HR processes,
there is an established succession
plan which tracks internal succession
across all material roles and enables
appropriate assessment of skills gaps.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONSTAKEHOLDER ENGAGEMENT
CONTINUED

CULTURAL SURVEY
In the absence of an engagement survey
for 2018, the Group issued a cultural
survey to colleagues across the Enlarged
Group. A series of questions were asked
concerning what individuals would like
to see in the future. This insight will
help the Group shape its values and
understand more about what is required
to create a high-performing organisation.

DIVERSITY AND INCLUSION
Phoenix was one of the first companies
to sign HM Treasury’s Women in
Finance Charter. The Charter is a
commitment for signatory firms to work
together to build a more balanced and
fair industry. Targets for gender diversity
are published annually on the Group’s
website. Targets set for completion by
end of 2018 were not met, as they were
largely impacted by changes in senior
management through acquisition,
structural changes, resignation and
retirement. From 2019, the Group will
report progress based on the combined
entities, with a commitment to achieve
targets by end of 2021. The Group
remains committed to creating an
inclusive and positive environment
for all employees.

EMPLOYEE NETWORKS
The Group values the power of its
employee voice. Various networks are
in operation across the Enlarged Group,
with a common goal of collaboration.
Work has commenced to merge and
replicate some of the networks,
creating a common focus and
support network across sites.

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
the management team on a quarterly
basis to share views and shape future
engagement activity. A similar network
called Ignite operates within Standard
Life Assurance, encouraging colleagues
to be involved and positively influences
everyday engagement activity.

Various other employee-driven
networks exist which have a common
aim of creating a more supportive and
inclusive working environment.

Balance – which incorporates the former
‘Professional Women’s Network’ aims
to raise awareness of gender diversity,
promoting an inclusive environment
where everyone can thrive.

The ‘Young Person’s Development
Network’ aims to connect individuals
across the organisation, providing a
platform for individuals to learn, share
and develop as they start out in their
career journey.

The Group has a ‘Lesbian, Gay,
Bi-sexual and Transgender Network’
– Affinity in operation, encouraging
connections and a safe place to
share common experiences, issues
or challenges.

A Black, Asian and Minority Ethnic
(‘BAME’) Network – Mosaic exists
to identify and address any barriers to
development and career progression.
The network enhances cultural
awareness and creates a more
inclusive and diverse workforce.

The ‘Armed Forces Network’ supports
the recruitment of Armed Forces
personnel into the business. In October
2018, the Armed Forces Covenant was
signed by the Group.

‘Carers Network’ and ‘Working Parents’
Network’ are two groups providing
education and support to colleagues
with varying caring responsibilities
outside of the workplace.

A new mental health network, Mind
Matters was launched initially within
Standard Life Assurance. Its purpose is
to generate healthy conversation in the
workplace around mental health issues.
This network will be rolled out to other
colleagues in 2019.

REWARD
The Group continues to attract,
develop and retain talented individuals
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.

95% of colleagues within Phoenix
Group and Phoenix Life participate
in the flexible benefits scheme,
which allows benefits to be selected
that meet personal circumstances.
Examples include cycle to work
schemes, home technology and smart
phones, critical illness cover through
to health assessments and enhanced
life cover. For 2018 buying and selling
annual leave remained the most utilised,
followed by childcare vouchers and
insurance-related products.

Private medical insurance cover
is available to all colleagues across
the Group regardless of their status
within the organisation.

95%

OF PHOENIX GROUP/PHOENIX
LIFE COLLEAGUES PARTICIPATE
IN THE FLEXIBLE BENEFITS SCHEME

OVER HALF OF THE PHOENIX GROUP AND PHOENIX
LIFE POPULATION ARE VOLUNTARILY PARTICIPATING
IN ONE OR MORE OF THE SHARE-SAVE OR SHARE
INCENTIVE PLANS, BENEFITING IN THE GROUP’S
INCREASED SHARE PERFORMANCE.”

STEPHEN JEFFORD
GROUP HR DIRECTOR

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

All Group employees participate in an
Annual Incentive Plan and are able to
become shareholders in the Company.
Over half of the Phoenix Group and
Phoenix Life population are voluntarily
participating in one or more of the
share-save or share incentive plans,
benefiting in the Group’s increased
share performance.

EMPLOYEE WELLBEING
The Group’s wellbeing programme
covers physical, mental and financial
matters, offering colleagues and their
dependants information, tools and
resources covering a range of topics.
A programme of wellbeing activity took
place during the year which included
onsite health-checks, flu vaccinations,
self-care workshops and awareness of
musculoskeletal issues. A programme
of Mental Health First Aid training and
bespoke mentally healthy workplace
workshops were offered across the year.

Four dementia champions have been
trained by Alzheimer’s Society to deliver
awareness sessions to colleagues onsite.
During 2018, 278 dementia friends were
created. In addition colleagues can
benefit from subsidised onsite massage,
discounted gym membership and fitness
classes at the larger sites.

Building on the success of the previous
year’s wellbeing partnership with Living
Streets charity, the Group joined forces
to offer additional cultural led-walks for
colleagues in London and Basingstoke.
The Group’s efforts were featured in
the City of London’s Active Travel – Best
Practice Guide for 2018. Launched in
National Walking Month 2018, Wythall
colleagues were trained to deliver
weekly walks targeted at individuals
aged over 65.

‘Wythall Walking Friends’ was a
six-month pilot which improved the
physical and mental wellbeing of
colleagues and members of the local
community. This wellbeing initiative will
be replicated in 2019 and expanded
to reach additional beneficiaries.

Colleagues across the Group have
access to an Employee Assistance
Programme which provides free,
independent and confidential
advice on all matters affecting
an individual’s wellbeing.

The Group was named as National
and Regional Winner in the Chamber
Business Awards 2018 for ‘Workplace
Wellbeing’ and finalists in Herefordshire
and Worcestershire Chamber of
Commerce annual awards.

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 colleagues 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 HR department via
assessments of the minimum control
standards, which ensure effective
resolution of employee disputes.

In addition all colleagues 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.

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.

The Group had three reportable
accidents during 2018 which were
reported to the Health and Safety
Executive under the Reporting of
Incidents, Disease and Dangerous
Occurrence Regulations (‘RIDDOR’).

All colleagues are required to complete
annual computer-based Health and
Safety training.

Arrangements are in place to manage
onsite facilities across all sites, ensuring
the working environment is kept clean
and secure.

WELLBEING
ACCOLADE

PHOENIX GROUP WINS NATIONAL
WORKPLACE WELLBEING AWARD
(Image source: 2018 Chamber Business Awards)

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONSTAKEHOLDER ENGAGEMENT
CONTINUED

OUR COMMUNITY
PARTNERS

We contribute to our local communities
– providing donations, skills, time and
resources to the cause.

PHOENIX GROUP’S CHARITY
PARTNERS OF THE YEAR

It is recognised that the true value of
a corporate charity partnership allows
the Company and employees to explore
opportunities beyond just monetary
value, often leaving a lasting legacy with
those involved. Now into its fifth year of
the six-year partnership with Midlands
Air Ambulance Charity and London’s Air
Ambulance Charity, the Group is continuing
to use this collaboration to engage
colleagues in fundraising, skills-based
volunteering and events.

The Group has donated in excess
of £770,000 between these two air
ambulance charities since 2014. A festive
fundraising ‘Reindeer Run’ through the
streets of London, raised over £21,000
(including matching) for the
combined charities.

For 2019, the Group will enter into two
further corporate charity partnerships,
helping to unite the Enlarged Group
with fundraising for a common cause.
Colleagues in Scotland will be supporting
Scotland’s Charity Air Ambulance and
colleagues in Basingstoke will support
Hampshire and Isle of Wight Air
Ambulance. A donation of over £31,000
was presented to Scotland’s Charity Air
Ambulance in recognition for colleague
participation in onsite lottery, Give as you

Earn and a raffle for the period September
to December 2018.

SunLife commenced a two-year
partnership at the start of the year
with Alive Activities Limited, enriching
the lives of older people in care and
providing training resources for carers.
Colleagues at the Bristol office exceeded
their fundraising target for the year by
raising over £6,000 for the charity.

Further afield the German charity partner
for 2018 was Hilfe für krebskranke Kinder
Frankfurt e.V who received a donation
of €13,486.30 to aid children with cancer
and the Austrian charity partner was
Oesterreichische Krebshilfe Wien who
received €6,000, to support individuals
living with cancer.

Colleagues in Ireland have reviewed
partnership opportunities and from
February 2019 will be partnering with Irish
charity, ALONE, which helps older
individuals in the community.

OTHER CHARITABLE DONATIONS
Colleagues based in the UK can fundraise
for any UK-registered charity through the
‘Our Community, Your Choice’ programme
and apply for matching. All applications
must meet the Group’s charity criteria,
and not be deemed political or religious.

Over £17,000 was donated across the
year through onsite fundraising, primarily
benefiting causes in the local area.
Beneficiaries included: Macmillan Cancer
Support, Alzheimer’s Society, Street
Support Network Limited, St Michael’s
Hospice in Basingstoke and the City’s
Lord Mayor’s Appeal.

To welcome Standard Life Assurance
colleagues to the Phoenix family, a charity
vote was held onsite in September 2018.
St Columba’s Hospice in Edinburgh
received the most votes and was awarded
a community donation of £10,000, and

runner-up donations of £6,000 and £4,000
was awarded to Scotland’s Charity Air
Ambulance and Streetwork in Edinburgh.
In addition, for Dublin colleagues €4,000
were donated to The Peter McVerry Trust,
to help reduce homelessness and the
harm caused by substance misuse
and social disadvantage.

Through the staff-matched fundraising
scheme, individuals are able to participate
in charitable activity in their own time, and
request matching of the amount raised.
This also includes an element of ‘payment
in lieu of volunteering’ whereby colleagues
may regularly support UK-registered
charities outside of business hours. Over
£52,000 was donated across the year.

COMMUNITY WELLBEING
The Group extended its focus on wellbeing
to members of the Wythall community,
where Phoenix is considered one of the
largest employers in the area. A unique
initiative named ‘Wythall Walking
Friends’ was launched in conjunction
with Living Streets charity to help tackle
social isolation in individuals aged over 65,
through the delivery of regular community
led-walks. Volunteers were trained to lead
the walks, helping to reduce loneliness,
encourage new friendship groups and
increase the exercise potential within the
group, thus helping to reduce the risk of
depression and dementia.

The Group has been assisting Alzheimer’s
Society with raising awareness of
dementia onsite and in the community.
Four colleagues are trained as dementia
champions and have run awareness
sessions to over 160 members of the
community, reaching NHS dieticians at
Moseley Hall Hospital and pupils within Ark
Kings Academy. In addition colleagues
attended the Bromsgrove Pensioners
Advice and Information Fair, showcasing
Phoenix engagement activity that directly
improves community wellbeing, for
example Age UK’s Men in Sheds project.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

COMMUNITY INVESTMENT
The Group has worked closely with
various community partners over the
year, offering support in both financial
and non-financial ways.

Phoenix was 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.

Standard Life Assurance sponsored
a team for the annual Social Bite
sleep in the park, which 22 colleagues
participated, helping to raise awareness
of homelessness in Scotland.

Meeting room facilities at the Wythall
site were freely available to Acorns
Children’s Charity and Coppice School
who provided times-table training to 39
school representatives, benefiting the
education of over 11,000 pupils within
the Midlands area. In addition the
grounds have been loaned to Wythall
Transport Museum and Kings Norton
Marching Band.

The Group signed the Literacy Pledge for
2018, helping to raise literacy levels and
increase social mobility within the UK.
Volunteers currently support Ark Kings
Academy in Birmingham and St Joseph’s
Primary School in London with reading
programmes. In Dublin, a volunteering
in schools programme, arranged in

conjunction with Junior Achievement
Ireland, works to keep children in
education, therefore improving
employment and life outcomes.
Whilst this programme commenced
before the Standard Life Assurance
acquisition, the year’s achievements
included motivating 412 students across 15
schools. Four Career Ready interns were
offered a paid placement, enabling valuable
work experience and the Nigel Monaghan
Apprenticeship for school leavers was
launched, providing a six-month paid
work experience placement.

Within the Edinburgh office, 10 young
people are engaged with the Career Ready
programme, receiving regular mentoring
sessions with colleagues, helping to
expand their educational opportunities.

The Group has supported Citizens Advice
Solihull Borough with the creation of a
new charity shop in Chelmsley Wood,
Birmingham. The premises were
equipped with furniture donations
and wares from the Group.

VOLUNTEERING
Employees regularly volunteer on
either an individual basis or with
their team to make a difference in
their local community.

Employees within Phoenix Group and
Phoenix Life are permitted 14 hours per
year during working hours to support
a variety of causes. 58% of colleagues

participated in this year’s volunteering
programme contributing 3,547 hours.
There has been a shift in more colleagues
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 87% of colleagues
contributing 700 hours across the year
to causes within their local community.

Within Standard Life Assurance
colleagues are permitted up to three
days community volunteering lieu time
for activities they are engaged with
inside and outside of working hours.
In the period since September 2018,
1,533 hours were donated to community
causes. The Armed Forces Network
organised a day for volunteers to help
collect donations for Poppy Scotland
in Edinburgh.

Phoenix Group was a finalist in the
Chartered Institute of Personnel and
Development (‘CIPD’) annual awards, for
Best Skills-based Volunteering Initiative.
This accolade recognised the contribution
that volunteers made in supporting
Midlands Air Ambulance Charity with
its Practical Quality Assurance System
for Small Organisations (‘PQASSO’)
Level 2 accreditation.

SCHOOL PARTNERSHIPS
The Group continues its partnership with Ark Kings Academy in Kings
Norton, working on a variety of mutually-beneficial initiatives across the
year. The Group part-funded the 2018 – 2019 academic year Place2Be
mental health service onsite, assisting pupils, their families and teaching
staff with wellbeing and enrichment support.

Volunteers provide weekly financial literacy and reading skills support
to pupils. The music department was the focus for this year, inspiring
the youth in creative arts. Donations from the Group included staging and
lighting towers, branded t-shirts and end-of-year concert support. The school
was awarded a Gold Standard by the Incorporated Society of Musicians,
recognising the high level of uptake and attainment in GCSE music, and
commitment to the subject. The school’s choir ‘Phoenix Singers’ performed
to colleagues onsite at Wythall during their festive lunch celebrations.

In London our colleagues have supported St Joseph’s Primary School,
where pupils are visited on a weekly basis, helping to develop reading
skills. In addition, the Group’s CEO and management team visited
Draper’s Academy in Harold Hill, to share their experiences of working
life and routes into the profession. They also took time to read with
pupils with Special Educational Needs.

THE SUPPORT OF PHOENIX
GROUP HAS VERY MUCH
HELPED WITH THE DEVELOPMENT
OF MUSIC ONSITE.”

ROGER PUNTON
PRINCIPAL AT ARK KINGS ACADEMY

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONSTAKEHOLDER ENGAGEMENT
CONTINUED

OUR
ENVIRONMENT

Our Corporate Responsibility
programme supports our
commitment to monitoring and
reducing our environmental footprint.
Having awareness of the potential
impacts of climate change is of
global importance, however is not
considered a material risk to the
working practices of the Group.

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 employee-led initiatives continue
to take place each year, focusing largely
on internal resource-use, and the 3 Rs –
reduce, re-use and recycle. From an
energy contract point, the Group now
uses only 100% renewable resources
in its owned properties.

The Corporate Responsibility Steering
Committee reviews environmental
progress and agrees activity for future
implementation such as the installation of
electric vehicle charging facilities, scheduled
for April 2019 at the Wythall site.

INTERNAL PRINT RESOURCE
Reducing print and paper consumption
onsite remained one of the Group’s
primary environmental focuses across
2018. Phoenix Group and Phoenix Life
colleagues now receive quarterly
personalised dashboards detailing print
usage and ratio of colour print, so they can
directly manage what impact their print
habits have on the wider environment.

With technological advances in Information
Technology and greater availability to online
content the Group’s print and paper
consumption is moving in the right direction.

WASTE MANAGEMENT
All core sites continue to divert 100% of
their waste from landfill with a detailed
monthly report outlining the volume of
waste and method of disposal or recycle.
The London office, which is shared tenancy,
achieved an accolade for its achievements
in waste management, waste minimisation
and re-use in the form of the Clean City
Awards Scheme. Donations of old furniture,
carpet tiles and electrical equipment were
distributed to various community partners in
the Wythall area, reducing the requirement
for waste removal, but adding value by
creating a new lease of life for the items
being donated. In addition, LED lighting has
been installed in three core staircases and
other common areas within the Wythall
site. The aim was to make the building
more energy-efficient, whilst reducing
ongoing energy usage.

Colleagues across the Enlarged Group
were given a re-usable cup to mark the
start of a new chapter in Phoenix Group’s
journey with Standard Life Assurance.
At the Wythall site, colleagues have
reduced one-use paper-cup consumption
by an estimated 30% since go live.
Plans are underway to move to a more
sustainable biodegradable cup in 2019,
with a view to eliminating other forms
of one-use plastic onsite.

RESPONSIBLE INVESTMENT
The Group has completed several green
investment deals across the year, signifying
the importance it places on the wider
environment. This signified a new area

of investment for the Group, helping to
diversify the overall investment portfolio.

The first was a £27 million investment in
renewable energy at the Walney Extension
Project, assisting with the construction and
operation of the enlarged offshore wind
farm, situated 45 miles north of Liverpool.
This project now provides clean energy
to a large number of UK homes. Phoenix
participated in providing debt-financing for
the acquisition of a 50% share in the project.

A further investment was £50 million
in Anglian Water’s green projects.
The proceeds are to be used to help
finance projects that will mitigate climate
change impacts and the conservation
of water resources.

CLIMATE CHANGE
Phoenix’s vision is to be Europe’s leading
life consolidator and although it continues
to be a predominantly Heritage business, it
now also has a substantial Open business
element. As the Group is a consolidator
of life insurance funds, rather than general
insurance, it does not currently consider
climate risk as a principal risk.
Climate change is one of the risks
considered in the Group’s horizon scanning
activity and the Group continues to focus
on the potential impacts of this risk,
for example:

• The Group uses external managers

for the vast majority of its assets who
consider a broad range of environmental,
social and governance (‘ESG’) factors in
their selection and management of our
investments. With the view that ESG
and social impact investing can deliver
better risk adjusted returns, Phoenix is
developing its own ESG policy in support

CONSERVATION
Working with Bromsgrove District and Redditch Borough Councils, colleagues have
donated 750 volunteering hours to improving the various parklands within the
Midlands area. Their efforts have assisted with creating a bark path, building dead
hedging and a wildlife hibernaculum, thinning woodland, painting benches, planting
floral displays and removing the invasive Himalayan balsam from the waterways.

The Group continues to partner with the Heart of England Forest, planting in excess
of 6,000 broadleaf trees since 2013. Pupils from partner school Ark Kings Academy
were invited to the education centre at the Forest, to spend a day exploring the
greater outdoors. The SunLife operation in Bristol is also a member of the
Woodland Trust.

There has been a shift in 2018, with colleagues wishing to support more outdoor
environmental-based volunteering projects. The Group has also supported the Canal
and River Trust, Warwickshire Wildlife Trust and National Trust across the year.

This volunteering encouraged healthy exercise whilst taking part in environmentally-
focused activities which will benefit future generations. At one of the Edinburgh
sites the roof space is home to a colony of bees. Colleagues are able to meet the
beekeeper and attend awareness sessions.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

of this. Over 2018, Phoenix has
invested in a number of ESG-related
opportunities, including renewable
energy and green initiatives.

• Expanding the Group’s programme

of qualitative and quantitative scenario
analysis to take account of the potential
impact of climate change scenarios;
and to ensure this is appropriately
reflected in the Group’s risk
management framework.

• Continuing to engage with our regulators
on the impact on the Group of near term
physical and transition risks associated
with climate change.

• Continue to consider the requirements of
consultations associated with the risks of
climate change and engage with industry
bodies on the Group’s response
where appropriate.

ENVIRONMENTAL REPORTING
This section includes an update on the
Group’s annual greenhouse gas emissions.
Emissions disclosed relate to facilities
and activities where the Group has
operational control within the UK.

As of September 2018, the vast majority
of Standard Life business (part of Standard
Life Aberdeen Plc) was sold to Phoenix
Group. As a result, two operational
properties were acquired – Standard Life
House and Standard Life Data Centre.
These two properties have therefore been
included in the Group’s carbon footprint
(absolute GHG emissions) for the 2018
calendar year. However, as these two
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 2018

The Group’s full Corporate and Social
Responsibility Report is available at
www.thephoenixgroup.com/
CRreport2018

The Group’s complete Economic,
Social and Governance measures
are available to download at
www.thephoenixgroup.com/esg

GREENHOUSE GAS EMISSIONS
Absolute GHG emissions data in tonnes of CO2e

Emissions, tonnes of CO2e from:

(location-based)

(market-based)

(location-based)

2018

2017

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)

1,402

2,990

4,392

1,402

3,042

4,444

1,203

2,754

3,957

Phoenix Group’s chosen intensity measurement1

2018

2017

(location-based)

Emissions reported above on a per floor area intensity

63 kg CO2e/m2

64 kg CO2e/m2

Emissions reported above on a per full-time equivalent
employee (FTE) intensity

3.8 tonnes
CO2e/FTE

3.5 tonnes
CO2e/FTE

Note:
1 Our intensity measurement calculations exclude former Standard Life Assurance Limited properties to avoid skewed

intensity results over the two-year period.

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 2018 absolute emissions have
increased by 11% due to the inclusion
of the two ex-Standard Life acquired
properties. This increase has outweighed
the reduction in the emission factor for
consumption of purchased electricity
(Scope 2) and the reduced consumption
of energy at a number of properties
throughout 2018.

£27m

INVESTMENT IN RENEWABLE ENERGY
AT THE WALNEY EXTENSION PROJECT

£50m

INVESTMENT IN ANGLIAN
WATER’S GREEN PROJECTS

Approximately 14% of 2018 emissions
are estimated as full-year data is 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 in previous years and
were determined to be non-material
to the overall footprint, so have not
been included.

The Group’s chosen intensity metrics
detail carbon emissions per floor area
and per full-time equivalent employees
(FTE). The intensity by floor area has
decreased slightly as a larger number
of properties have been included within
the analysis this year and these properties
have largely reduced their energy use in
2018 compared to 2017. The intensity
by FTE shows a slight increase from
2017 to 2018 as the number of people
employed has reduced.

THESE INVESTMENTS MARK AN
IMPORTANT FIRST STEP FOR THE
GROUP IN RENEWABLE ENERGY
AND IS PARTICULARLY SUITED TO
OUR AMBITIONS. WE HOPE TO
SEE FURTHER PROJECTS OF THIS
NATURE IN THE FUTURE.”

SCOTT ROBERTSON
HEAD OF FINANCIAL MANAGEMENT
GROUP, PHOENIX GROUP

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONSTAKEHOLDER ENGAGEMENT
CONTINUED

OUR
INVESTORS

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.

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 20 shareholder
roadshow days and a total of
246 meetings with existing and
prospective equity investors.

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 CAPITAL MARKETS 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 a Capital Markets Day
on 29 November 2018 in London
which was attended by 120 investors
and analysts and provided an update
on the Standard Life Assurance
acquisition. The event also provided
attendees with the opportunity to
meet with management.

Investor presentations are generally
filmed and the videos 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 nine conferences
in the UK, including conferences
organised by ABN AMRO, Bank of
America Merrill Lynch, Deutsche Bank,
J.P. Morgan Cazenove, Investec,
Lloyds, Morgan Stanley and Natixis.

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 Capital
Markets Day. The Executive Directors
also held nine presentations to the
sales teams at major investment
banks to promote the Phoenix
investment case.

DEBT INVESTORS
The Debt Investor Relations programme
is managed by the Group Treasury
department and supported by the
Investor Relations department.

Senior management conducted 13
deal and non-deal related debt investor
roadshow days in the UK, Continental
Europe and Asia, meeting 168 debt
investors overall.

CREDIT RATINGS 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
2018. 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.

414

TOTAL NUMBER OF DEBT AND
EQUITY INVESTORS MET IN 2018

TOTAL NUMBER OF DEBT AND
EQUITY INVESTOR ROADSHOWS

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

CORPORATE
GOVERNANCE

IN THIS SECTION
Chairman’s Introduction ��������������������������������������������������60
Board Structure ���������������������������������������������������������������61
Board of Directors �����������������������������������������������������������62
Executive Management Team ����������������������������������������64
Corporate Governance Report ����������������������������������������65
Directors’ Remuneration Report �������������������������������������76
Directors’ Report �����������������������������������������������������������106
Statement of Directors’ Responsibilities ���������������������� 110

CHAIRMAN’S
INTRODUCTION

SHAREHOLDERS
I would like to start my introduction to
this Governance section by expressing my
pleasure and gratitude for the tremendous
support from our shareholders in 2018,
both through the 96% take-up in July 2018
of our £1bn rights issue to finance the
acquisition of Standard Life Assurance
and through their strong support of all
proposals at the three shareholder
meetings we held in 2018 as follows:

• May 2018 Annual General Meeting –

All 21 resolutions passed with a majority
of at least 93% of votes cast�

• June 2018 General Meeting to approve

the acquisition of Standard Life Assurance
businesses, the associated £1bn rights
issue and the issue of shares to Standard
Life Aberdeen plc (‘SLA’) as part
consideration for the acquisition – All 7
resolutions passed with a majority of at
least 91% of votes cast (including 99% for
the resolution approving the acquisition)�

• November 2018 General Meeting to

approve the Scheme of Arrangement and
associated capital reduction in connection
with the establishment of the Group’s
new UK-registered and listed holding
company, Phoenix Group Holdings plc
– All 8 resolutions passed with a majority
of at least 99% of votes cast�

Our three general meetings in 2018 were
held in London� Following the acquisition
of Standard Life Assurance, our 2019
Annual General Meeting will be held on
2 May 2019 in Edinburgh, which is now
our largest operational centre�

The UK listing of Phoenix Group Holdings
plc as a UK-registered company in place
of our former Cayman Islands registration
was the final stage of regularising our
legacy residency and incorporation status
and followed the movement of central
management and control for Phoenix
Group Holdings from Jersey to the
UK in January 2018�

BOARD OF DIRECTORS
Our Board has been through a period of
renewal over the past three years and our
Board Evaluation Review, undertaken in
November 2018, concluded that we should
now aim for a period of Board stability,
following the appointment of eight new
non-executive directors out of a total of
ten since September 2016�

UK CORPORATE
GOVERNANCE CODE
As detailed in the Corporate Governance
Report on pages 65 to 75, we complied in
2018 with all the principles and provisions
of the UK Corporate Governance Code
(‘the Code’), such that in the last six years
we have had only one matter of non-
compliance with the Code�

We have been considering the new
requirements of the Code effective
from 2019� We have been taking steps to
comply with the new provisions and will,
as required, report on our compliance with
those provisions in our 2019 Annual Report�

However, I am very pleased to report
now that, in respect of the provision to
enhance the Board’s engagement with the
workforce, the Board has appointed Karen
Green as our nominated non-executive
director who will liaise with the workforce
through a Workers’ Advisory Council�

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

• Directors’ Report�

The relatively high amount of recent Board
recruitment has enabled us to focus on the
skills required for a growing business and
the Group’s M&A agenda, which in 2018
delivered the successful acquisition of
Standard Life Assurance� Apart from
my own appointment in 2018, the new
appointees to the Board in 2018 were
nominees from SLA, our strategic partner,
exercising their rights in line with their
c20% shareholding to appoint two
directors to our Board� The November
2018 Board evaluation concluded that the
Board had a strong and appropriate skillset
which had been enhanced by our two new
appointees from SLA, Campbell Fleming,
who brings asset management skills and
expertise, and Barry O’Dwyer, who brings
experience as a CEO of a large open life
assurance business and the associated
customer-focused skills�

I am pleased that several members of
our Board have current or recent FTSE 100
financial services Board experience –
Alastair Barbour (our Senior Independent
Director and Audit Committee Chair),
John Pollock (our Risk Committee Chair),
Barry O’Dwyer, Karen Green and
Belinda Richards as well as myself�

I am also pleased that our Board complies
with the target of the Hampton-Alexander
Review for the Board to be at least
33% female�

SINCE JOINING THE PHOENIX BOARD AS CHAIRMAN, I HAVE
BEEN IMPRESSED BY THE ATTENTION FROM THE BOARD AND
MANAGEMENT ON ROBUST GOVERNANCE, WITH THE AIMS
OF BOTH PROTECTING OUR SHAREHOLDERS AND CUSTOMERS
AND ENHANCING OUR PERFORMANCE.”

NICHOLAS LYONS
CHAIRMAN

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

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�

PHOENIX GROUP HOLDINGS BOARD

AUDIT
COMMITTEE

Alastair Barbour
(Chair)

Karen Green

John Pollock

Belinda Richards

RISK
COMMITTEE

John Pollock
(Chair)

Alastair Barbour

Wendy Mayall

Belinda Richards

Nicholas Lyons
(Chair)

Alastair Barbour – SID

Clive Bannister

James McConville

Campbell Fleming

Karen Green

Wendy Mayall

Barry O’Dwyer

John Pollock

Belinda Richards

Nicholas Shott

Kory Sorenson

NOMINATION
COMMITTEE

REMUNERATION
COMMITTEE

Nicholas Lyons
(Chair)

Alastair Barbour

Nicholas Shott

Kory Sorenson

Kory Sorenson
(Chair)

Karen Green

Nicholas Shott

Financial Reporting

Internal Controls

External Audit

Internal Audit

Risk Appetite and
high-level Risk Matters

The Group’s Risk Management
Framework

Group Strategy

Board Appointments

Major Transactions

Senior Executive Appointments

Group Budget

Group Risk Appetite

Performance Monitoring

External/Shareholder Reporting

External Debt

Diversity and Inclusion

Board and Senior Executive
Succession Planning

Group Remuneration
Framework

Executive Director
Remuneration

Employee Share Schemes

Further details regarding
the Board are contained on
P62-63

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONBOARD OF
DIRECTORS

THE GROUP IS GOVERNED BY OUR BOARD OF DIRECTORS.
BIOGRAPHICAL DETAILS ARE SHOWN BELOW.

NICHOLAS LYONS
CHAIRMAN

COMMITTEE MEMBERSHIP
Nomination Committee (Chairman)

APPOINTED TO THE BOARD
31 October 2018

EXPERIENCE
Nicholas Lyons was appointed Chairman of the board
of directors of Phoenix Group Holdings and Chairman of
the Nomination Committee of Phoenix Group Holdings
with effect from 31 October 2018� Nicholas Lyons joined
JP Morgan in 1982, where he worked for 12 years in
debt and equity capital markets and mergers and
acquisitions� He spent eight years at Lehman Brothers,
as a Managing Director in their European financial
institutions group, ending his executive career in 2003
as Global Co-Head of Recruitment� Mr Lyons has held
a number of positions on the boards of other financial
institutions including the Pension Insurance Corporation,
where he was the Senior Independent Director from
2016 until July 2018� He also held positions on the
boards of the Temple Bar Investment Trust, Catlin Group
Limited, Friends Life Group Limited and Friends Life
Holdings plc� Mr Lyons has recently joined the Board of
the British United Provident Association Limited (BUPA)
and is also Chairman of Clipstone Industrial REIT plc�
He is an Alderman in the City of London Corporation�

ALASTAIR BARBOUR
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 Specialist Funds Segment of 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� Mr Barbour was
appointed Senior Non-Executive Independent
Director on 2 May 2018�

CLIVE BANNISTER
GROUP CHIEF EXECUTIVE OFFICER

APPOINTED TO THE BOARD
28 March 2011

EXPERIENCE
Clive Bannister joined the Group in February 2011
as Group Chief Executive Officer� Prior to this,
Mr Bannister was Group Managing Director of
Insurance and Asset Management at HSBC
Holdings plc� He joined HSBC in 1994 and held
various leadership roles in planning and strategy in
the Investment Bank (USA) and was Group General
Manager and CEO of HSBC Group Private Banking�
He started his career at First National Bank of Boston
and prior to working at HSBC was a partner in Booz
Allen Hamilton in the Financial Services Practice
providing strategic support to financial institutions
including leading insurance companies, banks and
investment banks� Mr Bannister is also Chairman
of the Museum of London�

JAMES MCCONVILLE
GROUP FINANCE DIRECTOR AND
GROUP DIRECTOR, SCOTLAND

APPOINTED TO THE BOARD
28 June 2012

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�

WENDY MAYALL

BARRY O’DWYER

JOHN POLLOCK

INDEPENDENT NON-EXECUTIVE DIRECTOR

NON-EXECUTIVE DIRECTOR

INDEPENDENT NON-EXECUTIVE DIRECTOR

COMMITTEE MEMBERSHIP

Risk Committee

APPOINTED TO THE BOARD

1 September 2016

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, Ms 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� Ms Mayall is a

Non-Executive Director of 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�

APPOINTED TO THE BOARD

31 August 2018

EXPERIENCE

Barry O’Dwyer is the Head of UK for Standard Life

Aberdeen� Prior to the sale of Standard Life

Assurance to Phoenix, he was the CEO of Standard

Life Aberdeen’s Pensions & Savings businesses�

Mr O’Dwyer initially worked at Standard Life between

1988 and 2008 and held several senior roles at Standard

Life after re-joining the company in 2013� A Fellow of

the Institute of Actuaries, Mr O’Dwyer has 30 years of

experience in the insurance industry, in a career which

has also included senior roles at Prudential and HBOS�

COMMITTEE MEMBERSHIP

Risk Committee (Chairman),

Audit Committee

APPOINTED TO THE BOARD

1 September 2016

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�

CAMPBELL FLEMING
NON-EXECUTIVE DIRECTOR

APPOINTED TO THE BOARD
31 August 2018

EXPERIENCE
Campbell Fleming is the Global Head of Distribution
at Aberdeen Standard Investments, the asset
management business of Standard Life Aberdeen�
He joined Aberdeen Asset Management in August
2016 from Columbia Threadneedle Investments
where he was the Chief Executive – EMEA and
Global COO for four years� Mr Fleming is the Chair
of the Investment Association Trade Committee
and previously held senior positions at JP Morgan
Asset Management�

KAREN GREEN
INDEPENDENT NON-EXECUTIVE DIRECTOR

BELINDA RICHARDS

NICHOLAS SHOTT

KORY SORENSON

INDEPENDENT NON-EXECUTIVE DIRECTOR

COMMITTEE MEMBERSHIP
Audit Committee,
Remuneration Committee

APPOINTED TO THE BOARD
1 July 2017

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� 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
Non-Executive Director of Admiral Group plc and is a
Council Member of Lloyd’s of London� She is Deputy
Chair and Acting Chair of Aspen Managing Agency
Limited and is also a Vice President of the Insurance
Institute of London�

COMMITTEE MEMBERSHIP

Risk Committee,

Audit Committee

1 October 2017

EXPERIENCE

COMMITTEE MEMBERSHIP

Nomination Committee,

Remuneration Committee

COMMITTEE MEMBERSHIP

Remuneration Committee (Chair),

Nomination Committee

1 September 2016

EXPERIENCE

1 July 2014

EXPERIENCE

APPOINTED TO THE BOARD

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

Nicholas Shott is an investment banker, who has

been European Vice Chairman of Lazard since 2007

Kory Sorenson is currently a Non-Executive Director

and Chairman of the Audit Committee of SCOR SE,

and Head of UK Investment Banking at Lazard since

a Non-Executive Director of Pernod Ricard SA, a

2009� Mr Shott joined Lazard in 1991 and became a

Integration and Separation Advisory Services� She is

partner in 1997� He is also a Non-Executive Director

an experienced Non-Executive Director, currently on

on the Board of the Home Office�

the Boards of WM Morrison Supermarkets plc, Avast

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�

Non-Executive Director of Prometic Life Sciences

Inc and a member of the Supervisory Board of the

privately-owned Bank Gutmann AG� Ms Sorenson

is currently on the Supervisory Board of Uniqa Insurance

Group AG, although will not be seeking renewal of her

mandate in May 2019� She has been nominated to join

the Board of SGS SA in March 2019� 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 a Non-Executive Director of

Aviva Insurance Limited, Managing Director, Head

of Insurance Capital Markets of Barclays Capital and

also 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 PLC
ANNUAL REPORT & ACCOUNTS 2018

CLIVE BANNISTER

GROUP CHIEF EXECUTIVE OFFICER

APPOINTED TO THE BOARD

28 March 2011

EXPERIENCE

Clive Bannister joined the Group in February 2011

as Group Chief Executive Officer� Prior to this,

Mr Bannister was Group Managing Director of

Insurance and Asset Management at HSBC

Holdings plc� He joined HSBC in 1994 and held

various leadership roles in planning and strategy in

the Investment Bank (USA) and was Group General

Manager and CEO of HSBC Group Private Banking�

He started his career at First National Bank of Boston

and prior to working at HSBC was a partner in Booz

Allen Hamilton in the Financial Services Practice

providing strategic support to financial institutions

including leading insurance companies, banks and

investment banks� Mr Bannister is also Chairman

of the Museum of London�

JAMES MCCONVILLE

GROUP FINANCE DIRECTOR AND

GROUP DIRECTOR, SCOTLAND

APPOINTED TO THE BOARD

28 June 2012

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�

NICHOLAS LYONS

CHAIRMAN

COMMITTEE MEMBERSHIP

Nomination Committee (Chairman)

APPOINTED TO THE BOARD

31 October 2018

EXPERIENCE

Nicholas Lyons was appointed Chairman of the board

of directors of Phoenix Group Holdings and Chairman of

the Nomination Committee of Phoenix Group Holdings

with effect from 31 October 2018� Nicholas Lyons joined

JP Morgan in 1982, where he worked for 12 years in

debt and equity capital markets and mergers and

acquisitions� He spent eight years at Lehman Brothers,

as a Managing Director in their European financial

institutions group, ending his executive career in 2003

as Global Co-Head of Recruitment� Mr Lyons has held

a number of positions on the boards of other financial

institutions including the Pension Insurance Corporation,

where he was the Senior Independent Director from

2016 until July 2018� He also held positions on the

boards of the Temple Bar Investment Trust, Catlin Group

Limited, Friends Life Group Limited and Friends Life

Holdings plc� Mr Lyons has recently joined the Board of

the British United Provident Association Limited (BUPA)

and is also Chairman of Clipstone Industrial REIT plc�

He is an Alderman in the City of London Corporation�

WENDY MAYALL
INDEPENDENT NON-EXECUTIVE DIRECTOR

BARRY O’DWYER
NON-EXECUTIVE DIRECTOR

JOHN POLLOCK
INDEPENDENT NON-EXECUTIVE DIRECTOR

COMMITTEE MEMBERSHIP
Risk Committee

APPOINTED TO THE BOARD
1 September 2016

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, Ms 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� Ms Mayall is a
Non-Executive Director of 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�

APPOINTED TO THE BOARD
31 August 2018

EXPERIENCE
Barry O’Dwyer is the Head of UK for Standard Life
Aberdeen� Prior to the sale of Standard Life
Assurance to Phoenix, he was the CEO of Standard
Life Aberdeen’s Pensions & Savings businesses�
Mr O’Dwyer initially worked at Standard Life between
1988 and 2008 and held several senior roles at Standard
Life after re-joining the company in 2013� A Fellow of
the Institute of Actuaries, Mr O’Dwyer has 30 years of
experience in the insurance industry, in a career which
has also included senior roles at Prudential and HBOS�

COMMITTEE MEMBERSHIP
Risk Committee (Chairman),
Audit Committee

APPOINTED TO THE BOARD
1 September 2016

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�

ALASTAIR BARBOUR

SENIOR INDEPENDENT DIRECTOR

COMMITTEE MEMBERSHIP

CAMPBELL FLEMING

NON-EXECUTIVE DIRECTOR

APPOINTED TO THE BOARD

Audit Committee (Chairman), Nomination Committee,

31 August 2018

APPOINTED TO THE BOARD

Campbell Fleming is the Global Head of Distribution

APPOINTED TO THE BOARD

EXPERIENCE

at Aberdeen Standard Investments, the asset

management business of Standard Life Aberdeen�

He joined Aberdeen Asset Management in August

2016 from Columbia Threadneedle Investments

where he was the Chief Executive – EMEA and

Global COO for four years� Mr Fleming is the Chair

of the Investment Association Trade Committee

and previously held senior positions at JP Morgan

Asset Management�

Risk Committee

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 Specialist Funds Segment of 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� Mr Barbour was

appointed Senior Non-Executive Independent

Director on 2 May 2018�

COMMITTEE MEMBERSHIP

Audit Committee,

Remuneration Committee

1 July 2017

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� 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

Non-Executive Director of Admiral Group plc and is a

Council Member of Lloyd’s of London� She is Deputy

Chair and Acting Chair of Aspen Managing Agency

Limited and is also a Vice President of the Insurance

Institute of London�

KAREN GREEN

INDEPENDENT NON-EXECUTIVE DIRECTOR

BELINDA RICHARDS
INDEPENDENT NON-EXECUTIVE DIRECTOR

NICHOLAS SHOTT
INDEPENDENT NON-EXECUTIVE DIRECTOR

KORY SORENSON
INDEPENDENT NON-EXECUTIVE DIRECTOR

COMMITTEE MEMBERSHIP
Risk Committee,
Audit Committee

APPOINTED TO THE BOARD
1 October 2017

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, Avast
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�

COMMITTEE MEMBERSHIP
Nomination Committee,
Remuneration Committee

APPOINTED TO THE BOARD
1 September 2016

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�

COMMITTEE MEMBERSHIP
Remuneration Committee (Chair),
Nomination Committee

APPOINTED TO THE BOARD
1 July 2014

EXPERIENCE
Kory Sorenson is currently a Non-Executive Director
and Chairman of the Audit Committee of SCOR SE,
a Non-Executive Director of Pernod Ricard SA, a
Non-Executive Director of Prometic Life Sciences
Inc and a member of the Supervisory Board of the
privately-owned Bank Gutmann AG� Ms Sorenson
is currently on the Supervisory Board of Uniqa Insurance
Group AG, although will not be seeking renewal of her
mandate in May 2019� She has been nominated to join
the Board of SGS SA in March 2019� 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 a Non-Executive Director of
Aviva Insurance Limited, Managing Director, Head
of Insurance Capital Markets of Barclays Capital and
also 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 PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONEXECUTIVE
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’).

RAKESH THAKRAR
DEPUTY GROUP FINANCE DIRECTOR

ROLES AND RESPONSIBILITIES
• Leads on the Group’s Annual Report and
Accounts, ORSA and Pillar 3 reporting;

• Manages the Group’s financial plans
and management information in line
with strategy;

• Contributes to the effective management
of the Group’s balance sheet and financial
plan (including M&A); and

• Leads on all financial aspects of any M&A�

SIMON TRUE
GROUP CORPORATE DEVELOPMENT
DIRECTOR AND GROUP CHIEF ACTUARY

ROLES AND RESPONSIBILITIES
• Supports the Group Chief Executive

Officer in the formulation of the strategy
for the Group;

• Leads implementation of the Group’s

strategy as regards any potential acquisition
or disposal;

• Ensures capital is managed efficiently

across the Group;

• Manages the Group’s solvency position;

• Leads the development of the Group’s

investment strategy; and

•

Identifies and delivers opportunities to
enhance shareholder value across the Group�

QUENTIN ZENTNER
GENERAL COUNSEL

ROLES AND RESPONSIBILITIES
• 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; and

• Designs and implements a whistleblowing

framework within the Group�

CLIVE BANNISTER
GROUP CHIEF EXECUTIVE OFFICER

ROLES AND RESPONSIBILITIES
• Leads the development of the Group’s
strategy for agreement by the Board;

•

Leads and directs the Group’s 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; and

Manages the Group’s key external
stakeholders�

STEPHEN JEFFORD
GROUP HUMAN RESOURCES DIRECTOR

ROLES AND RESPONSIBILITIES
• 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; and

• Delivers HR services to the Group�

TONY KASSIMIOTIS
GROUP CHIEF OPERATING OFFICER

ROLES AND RESPONSIBILITIES
• Leads development and delivery of the
Group’s operating platforms in line with
regulatory requirements, the Risk Universe
and strategy;

• Ensures the delivery of the Group’s
information technology strategy;

• Leads the management of the Group’s

long-term outsourcing arrangements; and

• Ensures that the Group’s procurement

activities and shared services are efficient
and effective�

JAMES MCCONVILLE
GROUP FINANCE DIRECTOR AND
GROUP DIRECTOR, SCOTLAND

ROLES AND RESPONSIBILITIES
• Develops and delivers the Group’s financial

business plan in line with strategy;

• Ensures the Group’s finances 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; and

• Enhances shareholder value through

clear, rigorous assessment of business
opportunities�

SUSAN MCINNES
CHIEF EXECUTIVE, STANDARD LIFE
ASSURANCE LIMITED, AND GROUP
DIRECTOR, OPEN BUSINESS

ROLES AND RESPONSIBILITIES
• Leads development and delivery of
the Standard Life business strategy
including ensuring customer proposition
is evolved to ensure it continues to meet
the market need;

• Focuses on a business model which ensures
good outcomes for customers, shareholders
and all other stakeholders; and

• Ensures that Standard Life deploys

capital efficiently and effectively, with
due regard to regulatory requirements,
the Risk Universe and strategy�

JOHN MCGUIGAN
GROUP HEAD OF CUSTOMER

ROLES AND RESPONSIBILITIES
• Leads the Group’s Customer Function to
drive operational and experience delivery
for the Group’s customer base;

• Sets standards and policies for customer

management and interaction; and

•

Provides customer oversight, complaint
handling and remediation activity�

ANDY MOSS
CHIEF EXECUTIVE, PHOENIX LIFE AND
GROUP DIRECTOR, HERITAGE BUSINESS

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; and

•

Ensures Phoenix Life deploys capital
efficiently and effectively, with due
regard to regulatory requirements,
the Risk Universe and strategy�

JONATHAN PEARS
CHIEF RISK OFFICER

ROLES AND RESPONSIBILITIES
• 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; and

• Supports the Group Board Risk

Committee in the oversight of the
Group’s risk framework, in line with
risk strategy and appetite�

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

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 2018 WITH THE PRINCIPLES AND PROVISIONS SET DOWN IN THE CODE.

THE BOARD
The Board comprises the Non-Executive
Chairman, the Group Chief Executive
Officer, the Group Finance Director,
two SLA nominated Directors and
seven independent Non-Executive
Directors� Biographical details of
all Directors are provided on pages
62 to 63�

The Board considers that the
following Directors are independent:
Alastair Barbour, 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
Nicholas Lyons is Chairman of the
Board of Directors of the Company,
having joined the Board as Chairman
on 31 October 2018� 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 62� The Chairman was
appointed on the basis of committing
two days per week to Phoenix�

The Senior Independent Director,
appointed by the Board, is Alastair
Barbour� His role is to be available
to shareholders whose concerns
are not resolved through the normal
channels or when such channels are
inappropriate� He is also responsible
for leading the annual appraisal of
the Chairman’s performance by
the Non-Executive Directors�

BOARD SUCCESSION PLANNING
The Board undertakes regular
reviews of executive and non-executive
succession planning, as it did in 2018,
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� The Board concluded
in its November 2018 Board Evaluation
Review that a period of Board stability
would now be desirable, following
the successful succession planning
programme resulting in regular changes
in the Board’s composition over the
last three years, during which eight
non-executive directors were appointed�

BOARD EFFECTIVENESS
In accordance with the Code, an
evaluation of the performance of the
Board and that of its Committees and
individual Directors was undertaken
in the latter part of 2018� The process
was led by the Chairman and internally
facilitated by the Company Secretary�
The process involved completion by
Directors of a questionnaire covering
various aspects of Board, Committee
and Director effectiveness followed
by individual meetings between the
Chairman and each Director, concluding
in a Board report which was discussed
by the Board in November 2018�

A strong theme from the review
was the desire to continue to
focus on strategy and the Group’s
future as a heritage and open
business� Various process-focused
recommendations to support the
Board in successfully driving
forward the Group’s strategy
are being actioned�

BOARD COMPOSITION

GROUP BOARD (%)

BOARD GENDER DIVERSITY (%)

DECEMBER
2018

17%

• Female
• Male

33%
67%

• Chairman
• Executive
• Independent

Directors

Non-Executive
Directors

• SLA

nominated
Directors

58%

17%

KEY STATISTICS

December
2018

December
2017

Market Cap

£4.45bn

£3�18bn

FTSE position

AGM votes
in favour of all
resolutions

May
2018
93%

137

May
2017
95%

UK Corporate
Governance
Code

Fully
compliant
in 2018

Fully
compliant
in 2017

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATION
CORPORATE GOVERNANCE REPORT
CONTINUED

To ensure that the Directors maintain
up-to-date skills and knowledge of
the Group, all Directors receive regular
presentations on different aspects
of the Group’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� In 2018 the
new Chairman, Nicholas Lyons and
SLA nominated Directors, Campbell
Fleming and Barry O’Dwyer, undertook
a comprehensive induction, including
detailed strategic and operational
briefings and information, before
and following their appointments�
Comments on their induction
process are shown below�

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�

The schedule of matters reserved
for the Board is available from the
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
and to devote appropriate preparation
time ahead of each meeting� In February
2019, the Nomination Committee
reviewed the time spent by Directors
and concluded that the time required
of (and given by) the 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 Nomination Committee has
confirmed its absolute satisfaction
with the time and overall commitment
given to Phoenix by all Directors�
During 2018, several unscheduled
meetings called at short notice
impacted directors’ attendance�

INDUCTION INSIGHTS

Two new Directors,
who joined the Board in
2018, share their insights
on their induction.

WHAT DID YOUR
INDUCTION INVOLVE?

WHAT WERE YOUR
OVERALL IMPRESSIONS?

CAMPBELL FLEMING
NON-EXECUTIVE DIRECTOR

BARRY O’DWYER
NON-EXECUTIVE DIRECTOR

I spent several days with senior executives
in London and Edinburgh on a full and very
detailed programme covering all aspects
of the businesses from Solvency models
to client service� The sessions all involved
excellent presentations and full, as well
as open, discussions with the team� I also
spent some time with the client service
teams and learned about the strategy to
better serve clients in future� I am yet to
visit the life company operations in Wythall
but hope to do so as soon as possible�

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�

Prior to the acquisition of Standard
Life Assurance, I was the CEO of
that company and so I am very familiar
with the newest part of the Phoenix
Group� My induction hence focused
on helping me to understand the wider
Group and the Phoenix Life company
in Wythall� My meetings involved
discussing the Group’s strategy
and its risk management framework,
as well as seeing how the business
operates day-to-day�

I was very impressed by the way
in which the Group approached the
induction process – it was extremely well
organised and everyone I met was very
open and helpful in answering questions�
As a Director, it felt very well-designed to
get me up to speed quickly with ongoing
events, allowing me to contribute
immediately to Board discussions�

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

This included Alastair Barbour and
Belinda Richards, who each missed
three of twelve Board meetings
in 2018� All three meetings missed by
Mr Barbour were ad-hoc meetings called
at short notice� His Board attendance
record in the prior year (2017) was 100%�
Two of the three meetings missed by
Belinda Richards in 2018 were ad-hoc
meetings called at short notice�

Since her appointment in 2017, she has
attended all other Board meetings, so has
attended twelve out of fifteen to date�

The remuneration of the Directors is
shown in the Directors’ Remuneration
Report on pages 88 to 105� 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
will submit themselves for election at the
Company’s AGM on 2 May 2019�

The Board met twelve times during
2018 and is scheduled to meet
seven times in 2019 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 2018�

BOARD AND COMMITTEE ATTENDANCE 2018

Board meetings

Audit

Risk

Nomination

Remuneration

Max

Actual

Max

Actual

Max

Actual

Max

Actual

Max

Actual

Chairman

Henry Staunton1

Nicholas Lyons2

Executive Directors

Clive Bannister (Group CEO)

James McConville (Group FD)

Non-Executive Directors

Alastair Barbour6

Ian Cormack3

Campbell Fleming4

Karen Green5

Wendy Mayall5

Barry O’Dwyer4

John Pollock5

Belinda Richards5, 6

Nicholas Shott

Kory Sorenson5

–

Notes:
1 Henry Staunton resigned from the Board on 31 October 2018�
2 Nicholas Lyons was appointed to the Board on 31 October 2018�
3 Ian Cormack resigned from the Board on 2 May 2018�
4 Campbell Fleming and Barry O’Dwyer were appointed to the Board on 31 August 2018�
5 In addition, the following attended meetings of the specially constituted Chair Selection Committee: Kory Sorenson (Chair) – 3 meetings; Karen Green – 3 meetings;

Wendy Mayall – 3 meetings; John Pollock – 2 meetings; Belinda Richards – 2 meetings�

6 All three Board meetings missed by Alastair Barbour were ad-hoc meetings called at short notice� His Board attendance record in the prior year (2017) was 100%�
Two of the three Board meetings missed by Belinda Richards were ad-hoc meetings called at short notice� Since her appointment in 2017, she has attended all
other Board meetings, so has attended twelve out of fifteen to date�

BOARD ALLOCATION OF AGENDA TIME (%)

• CEO report

Strategy, performance,
governance and regulatory
review

• Strategy and planning

Strategic and operational
planning, consideration of
corporate transactions

• CFO/MI report

Monitoring performance

against objectives

30%

15%

10%

External reporting

Audit, Nomination, Remuneration and
Risk Committee activity

• Financial reporting
• Reports from Chairs of Committees 5%
• Board changes and performance
• Other matters

Appointments, succession and performance

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATION

CORPORATE GOVERNANCE CONTINUED
BOARD COMMITTEES

THE BOARD HAS DELEGATED SPECIFIC RESPONSIBILITIES
TO FOUR STANDING COMMITTEES OF THE BOARD.
THE TERMS OF REFERENCE OF THE COMMITTEES CAN
BE FOUND ON THE COMPANY’S WEBSITE.

AUDIT
COMMITTEE

The composition of the Audit
Committee is in accordance with
the requirements of the Code and
also with DTR 7.1.1AR in that all
four members are 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 2018� Its meetings
are attended by the Chair 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 Board Chair
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, without management present�

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�

• 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 Chairs of the Audit
Committee and subsidiary audit
committees, and the Audit Committee
Chair’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 (and from
1 September 2018, the Standard
Life Audit Committee papers)�
This oversight has been enhanced
further through the attendance at
the Audit Committee, on at least
an annual basis, by the Chair of
the Phoenix Life and Standard
Life Audit Committee�

Members:

Chair: Alastair Barbour

Karen Green

John Pollock

Kory Sorenson (until 2 May 2018)

Belinda Richards (from 2 May 2018)

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

• 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 by the Board in November
2018 as part of its overall Board
Evaluation Review�

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 Chair 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�

AUDIT COMMITTEE’S PRINCIPAL
ACTIVITIES DURING 2018
External reporting and controls
• Reviewed the Company’s 2017

Annual Report and Accounts and
2018 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 2017 (annual), 2018 (interim) and
2018 (annual) as summarised in the
table on page 71� 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 112 to 120�

• 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 Line 2
internal control assessment from
Group Risk, and the annual Line 3
internal control environment opinion
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�

• Considered various financial

disclosures included within the
transaction documents pertaining
to the acquisition of Standard
Life Assurance�

• 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�

External audit
• Undertook a review of the

effectiveness, engagement and
remuneration of the current external
auditors� This culminated in the
re-appointment of Ernst & Young LLP
(‘EY’), which was approved by the
Board and subsequently approved by
shareholders at the May 2018 AGM
– see ‘Assessment of the effectiveness
of the external audit process’ and
‘Auditor’s Appointment’ on page 70�

• Reviewed and monitored the

independence of the external auditors
including their provision of non-audit
services and fees and their
appointment as external auditors to
the Standard Life Assurance entities
– see Auditor’s Independence and
External Auditor Policy on page 70�

Internal audit
• Assessed the effectiveness
of Internal Audit, noting the
positive responses received
from Management�

• Approved the annual update of the

Group Internal Audit Charter and the
Group Internal Audit Plan (including
its link to the Risk Management
Framework), receiving regular reports
to monitor progress against the plan�

THE ACQUISITION OF STANDARD LIFE IN 2018 WAS
SIGNIFICANT FOR THE GROUP, AND FOR THE AUDIT
COMMITTEE THERE WILL BE ADDITIONAL FOCUS
ON ENSURING THAT ROBUST CONTROLS ARE IN
PLACE AND ARE APPLIED ACROSS THE WHOLE
ENLARGED GROUP.”

ALASTAIR BARBOUR
CHAIR OF AUDIT COMMITTEE

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONCORPORATE 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 2018
statutory audit�

The Committee also reviewed the
appointment of EY as auditor to
Standard Life Assurance Limited and
its subsidiaries in 2018 following the
acquisition of those entities by the Group�

Following completion of the onshoring
of the Group, a new UK-registered
holding company, PGH plc was put in
place in December 2018� Effective from
December 2018, EY has been appointed
as auditor of the Group by the Directors
of PGH plc�

EY has been appointed as auditor of the
Group by the Directors of PGH plc� EY has
indicated its willingness to continue in
office and shareholders’ approval will be
sought at the AGM on 2 May 2019�

The current audit partner is Ed Jervis,
who has held that role from the 2014
statutory audit and will rotate off after
completion of the 2018 statutory
audit responsibilities�

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 2017 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 2018, total fees of £12�2 million were
paid to EY� Of this amount £7�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 £4�1 million are
classified as non-audit services under the
EU Directive and Regulations, and give
rise to a non-audit to audit fee ratio of
66% in 2018 within the limits prescribed
in the Group’s policy�

The engagement of EY to perform any
non-audit service is subject to a process
of pre-approval by the Audit Committee�
£1�6 million of the non-audit fees related
to actuarial and finance due diligence
procedures conducted in relation to the
acquisition of Standard Life Assurance�
The Audit Committee considers that the
engagement of the external auditors in the
performance of such diligence procedures
provides synergies with audit work
post-completion of the transaction and
enhanced insight as to the quality of
the control environment operated in the
target company by comparison to Group
standards� Of the remaining balance, a
further £2�0 million relates to the provision
of assurance services to the Board and the
sponsoring banks in support of disclosures
made in the public transaction documents
relating to the acquisition and debt
issuances undertaken in the year�
The engagement of the Group’s
independent external auditor for the
provision of such services is consistent
with market practice in transactions
of this nature�

In relation to their appointment as auditors
of the Standard Life Assurance entities, the
Committee reviewed the independence of
EY in accordance with the requirements
of the Financial Reporting Committee’s
Ethical Standards on independence (“the
Ethical Standards”)� This included ensuring
that any material business relationships
between EY and the acquired entities
and any prohibited professional services
provided by EY to those entities, were
terminated within a period of three months
from completion of the acquisition as
permitted under the Ethical Standards�

The Audit Committee is satisfied that
the non-audit services performed during
2018 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 139�

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

SIGNIFICANT MATTERS CONSIDERED BY THE AUDIT
COMMITTEE IN RELATION TO THE FINANCIAL STATEMENTS

Significant matters in relation to the
2018 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

Valuation of complex and
illiquid financial assets

• Management presented papers to the Life Company Audit Committees 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 Life
Company Audit Committees, 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 Life Company
Audit Committees’ conclusions were reported to the Audit Committee through minutes of its meeting and a
discussion between the Chairmen of the committees� The Audit Committee discussed, and questioned
management and EY on, the content of the summary papers and the Life Company 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 Life Company Audit
Committees� 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 Life Company
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�

Acquisition Accounting

• The Audit Committee considered the impact of the acquisition of the Standard Life Assurance entities on the

Group consolidated IFRS financial statements� This has included consideration of the adoption of Group accounting
policies and methodologies by the acquired entities�

• Management presented papers detailing the basis of fair value adjustments made to the acquisition balance sheets
including the valuation of tangible net assets, the valuation of intangibles including the Acquired Value of In-Force
business and the gain on bargain purchase� The key methodologies and assumptions applied in determining such
adjustments were reviewed and approved by the Audit Committee�

• The Audit Committee considered and confirmed the appropriateness of the results of annual impairment testing
carried out in respect of goodwill balances and reviews for indicators of impairment performed in respect of
finite 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� As part of the year-end
procedures, the Audit Committee discussed with management and EY 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 2018 year-end

and 2018 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�

Viability Statement

• 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�

Note:
Please note that references in this table to Life Company
Audit Committees include Audit Committees for the
acquired Standard Life Assurance entities in respect
of post-acquisition activity�

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONCORPORATE GOVERNANCE REPORT
BOARD COMMITTEES CONTINUED

RISK
COMMITTEE

The role of the Risk Committee is
to advise 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.

The performance of the Committee
during 2018 was assessed as part
of both an overall internal annual
Board effectiveness review and a
Committee-specific effectiveness
review� The conclusions demonstrate
that the Committee continues
to operate effectively�

Details of the Risk Management
Framework, for which the Risk
Committee has oversight, are
provided in the Risk Management
section on pages 39 to 46�

RISK COMMITTEE’S ROLE
• The Committee is comprised of four

Independent Non-Executive Directors�

• A set of ‘Operating Principles’ are

in place to define the responsibilities
and accountabilities of the Risk
Committees of Phoenix Group
Holdings and its subsidiary company
boards to avoid any overlap of
focus or assurance activity�

• The Committee’s meetings are

attended by the Chair of the Audit
Committee, Alastair Barbour, which
allows the review of internal control
effectiveness to be managed through
collaborative working and oversight�

• The Chairman of the Phoenix Life

and Standard Life Risk Committees
and Model Governance Committee,
John Lister, is a regular attendee
to the Committee and provides
members with a regular update on
the risk matters pertinent to these
key subsidiaries and the matters
being dealt with at the Model
Governance Committee (which
is a Board Committee of the
Group’s Life Companies)�

• Other regular attendees to the
Committee include the Group
Chief Actuary, Deputy Group Finance
Director, the Chief Executives of
the subsidiary company boards,
the Group General Counsel and
the Group Head of Internal Audit�

• The Committee met a total of seven
times in 2018 to including two out
of cycle meetings by telephone�

• A joint briefing session was held
between the Phoenix Group and
Phoenix Life Risk Committee
members to review Emerging
Risks and Forward Looking Scenarios,
the Counterparty Concentration
Exposures Process and a deep
dive into Credit and Illiquid Assets�

• The Chief Risk Officer, Jonathan
Pears, who joined from Standard
Life Assurance on 31 August 2018,
has full access to the Chair and the
Committee and attends all meetings�

• The Committee receives frequent

reporting from the Chief Risk Officer
and the Group Risk function on
consolidated risk matters affecting
the Group to including risk profile
assessments and emerging risks�

Significant matters discussed in 2018
Standard Life Assurance acquisition
• To ensure the safe delivery of the
Group’s acquisition strategy in line
with risk appetite, the Committee
evaluated the acquisition and provided
a recommendation to the Board based
on the risk profile, execution risks and
overall risk appetite� In doing so, the
Committee considered the financing
and capital structure of the acquisition,
reverse stress testing, acquiring
risk infrastructure and regulatory
engagement�

• Throughout the acquisition, the Risk
Committee continued to be informed
on any risk matters including review
of the Risk Factors included in the
acquisition prospectus, the capital
policy framework in operation at
Standard Life and the execution risks
presented at the time of transfer�

Members:

Chair: John Pollock

Alastair Barbour

Wendy Mayall

Belinda Richards

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

• Monitored progress against the
2018 Group Risk function plan�

• Approved the Group Market

Risk Appetite Targets�

• Considered the refresh of the
Group’s capital 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�

• 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, completed and provided
oversight of, and challenge to,
the design and execution of the
Group’s stress and scenario
testing, including any changes
of assumptions�

• Informed the Remuneration
Committee regarding the
management of the Group’s
material risks to support their
consideration of executive’s
Annual Incentive Plan rewards�

• Considered a Line 2 review of

the 2019 Annual Operating Plan�

REVIEW OF SYSTEM OF
INTERNAL CONTROLS
The Board has overall responsibility
for the Group’s risk management
and internal control systems and
for reviewing their effectiveness
in accordance with the Code�
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 (and its subsidiary company
boards) monitor internal controls on a
continual basis, in particular through
the Audit and Risk Committees, which
draw upon input from all three lines of
defence� 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 2018, in
accordance with the ‘Guidance on
Risk Management, Internal Control
and Related Financial and Business
Reporting’ published by the Financial
Reporting Council� The assessment
for 2018 was presented to the Board,
following review by both Audit and
Risk Committees, on 4 March 2019�
Where any significant weaknesses
were identified, corrective actions
have been taken, or are being taken
and monitored by both the business
and the Committees accordingly�

Consequences/Implications
of a ‘Hard Brexit’
• Due to the ongoing uncertainty

of the UK’s exit from the European
Union, the Committee reviewed and
considered the preparations in place
for a ‘Hard Brexit’ and the potential
financial and operational impacts
on the Group� This continued to be
reflected within the top risk reporting
to the Committee during the course
of 2018 and 2019 to date�

Implementation of a single, digitally
enhanced outsourcer platform
• The Committee considered the

estimated impact that delivery of this
platform would have on the risk profile
of Phoenix Life�

Building the UK Financial Sector’s
Operational Resilience
• Following the issue of a tripartite
discussion paper from the Bank
of England, PRA and FCA, the
Committee discussed the drive to
move the industry toward a more
comprehensive risk-based view of
operational resilience which is more
visible to boards� The Committee
considered and supported the
prepared response by the Risk
function on behalf of the Company�

RISK COMMITTEE’S PRINCIPAL
ACTIVITIES DURING 2018
In addition to the significant matters
discussed in 2018, the Committee also:

• Reviewed adherence to the Group
Risk Management Framework and
approved its harmonisation following
the acquisition of Standard Life
Assurance Limited, to include
consideration of the appropriateness
of the Group’s overall Risk
Appetite Statements�

DURING 2018, IN ADDITION TO ITS EXISTING PRINCIPAL
ACTIVITIES, THE COMMITTEE HAS REVIEWED AND CHALLENGED
MATTERS RELATING TO THE STANDARD LIFE ACQUISITION
AND THE IMPACT OF EXTERNAL POLITICAL AND ECONOMIC
UNCERTAINTIES IN ORDER TO ENSURE THE COMPANY
IS IN A STRONG POSITION TO DRIVE ITS STRATEGIC
OBJECTIVES FORWARD.”

JOHN POLLOCK
CHAIR OF RISK COMMITTEE

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONCORPORATE GOVERNANCE REPORT
BOARD COMMITTEES CONTINUED

NOMINATION
COMMITTEE

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
five times in 2018�

The Nomination Committee also
met three times in 2018 as the Chair
Selection Committee, chaired by Kory
Sorenson, with other members being
Karen Green, Wendy Mayall, John
Pollock and Belinda Richards�

The standard process used by the
Committee for Board appointments
involves the use of an external search
consultancy to source candidates
external to the Group and, in the
case of executive appointments,
also considers internal candidates�

Detailed assessments of short-listed
candidates are undertaken by the search
consultancy, followed by interviews
with Committee members and other
Directors and the sourcing of references
before the Committee recommends the
appointments to the Board�

This process was used for the
appointment of the new Chairman,
Nicholas Lyons, in 2018� The search
consultancy used in 2018 for Director
appointments was Russell Reynolds
which has no other connection with
the Company�

NOMINATION COMMITTEE’S
PRINCIPAL ACTIVITIES
DURING 2018
• As the Chair Selection Committee,
delivered a recommendation to
the Board for the appointment of
Nicholas Lyons as Chairman following
a comprehensive search process led
by the Chair Selection Committee
with Russell Reynolds
search consultancy�

• Delivered a recommendation to
the Board for Alastair Barbour to
succeed Ian Cormack as Senior
Independent Director�

• Taking account of the Board
Evaluation Review, reviewed
the balance of skills, diversity,
experience, independence and
knowledge on the Board�

• 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 plans

for Executive and Non-Executive
Directors and recommended
their 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�

THE NOMINATION COMMITTEE HAS PERFORMED ITS ROLE
SUCCESSFULLY OVER THE LAST THREE YEARS OF BOARD
RENEWAL, WITH EIGHT NEW NON-EXECUTIVE DIRECTORS
APPOINTED OVER 2016, 2017 AND 2018, REFLECTING
THE SKILLS AND EXPERIENCE REQUIRED TO DRIVE THE
GROUP FORWARD.”

NICHOLAS LYONS
CHAIRMAN

Members:

Chair: Nicholas Lyons

Alastair Barbour

Nicholas Shott

Ian Cormack (until 2 May 2018)

Kory Sorenson (from 2 May 2018)

Note:
Henry Staunton (Chair until 31 October 2018, when
he was succeeded by Nicholas Lyons)�

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

REMUNERATION
COMMITTEE

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 seven times
during 2018.

Our Remuneration Committee terms
of reference were updated during
the course of this year to reflect the
expectations of the new Corporate
Governance Code, of which we are
fully supportive�

FIT Remuneration Consultants
provided advice to the Remuneration
Committee until March 2018�
PwC provided advice from May
2018 onwards� Both organisations
are independent of the Group�

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,
Executive Committee members (and
other Solvency II identified staff) and
the Chairman� Other than in relation to
the Chairman, these include pension
rights and executive incentive schemes
to encourage superior performance�
Details of the remuneration structure
and the Remuneration Committee’s
activities in 2018 are provided in the
Directors’ Remuneration Report on
pages 76 to 105�

THE COMMITTEE BELIEVES THAT PHOENIX GROUP HOLDINGS’
APPROACH TO REMUNERATION PLAYS A KEY PART IN SUPPORTING
THE GROUP’S STRATEGIC PRIORITIES AND ALIGNMENT WITH
SHAREHOLDERS’ AND CUSTOMERS’ INTERESTS.”

KORY SORENSON
REMUNERATION COMMITTEE CHAIR

Members:

Chair: Kory Sorenson

Karen Green

Nicholas Shott

Note:
There were no changes to the composition of the
Committee during 2018�

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONDIRECTORS’ REMUNERATION REPORT
REMUNERATION COMMITTEE CHAIR’S LETTER

DEAR SHAREHOLDER
On behalf of the Board and its Remuneration Committee
(‘Committee’), I am pleased to present the Directors’
Remuneration Report for the year ended 31 December 2018.
This report covers remuneration for Executive Directors
and Non-Executive Directors of the Company, operated
in line with the Remuneration Policy approved by
shareholders at the 2017 AGM.

2018 was a transformational year for Phoenix with the
acquisition of the Standard Life Assurance businesses, as
set out in the Group Chief Executive Officer’s report at the
beginning of this Annual Report and Accounts. This and other
achievements, in line with our strategic objectives, reflect the
strong performance, commitment and leadership shown by
the Group’s management team.

Particular operational and financial highlights for the
year included:

Highlights
• Cash generation of £664 million in 2018 taking the

total cash generation in 2017 and 2018 to £1.3 billion
and exceeding the upper end of the target range for
this period of £1.0 billion to £1.2 billion.

• Completion of the acquisition of the Standard Life

Assurance businesses financed in part by a £950 million
rights issue and a £945 million debt issuance.

• Strategic Partnership with Standard Life Aberdeen plc.

• Completion of AXA Wealth and Abbey Life integrations.

• Completion of three Bulk Purchase Annuity

(‘BPA’) transactions.

• Successful on-shoring of the Group.

• Strong Customer Satisfaction scores of 93%.

INCENTIVE OUTCOMES FOR 2018
The Committee believes that Phoenix’s approach to
remuneration plays a key part in supporting the Group’s
strategic priorities and alignment with shareholders’ and
customers’ interests. As indicated in last year’s report,
following the acquisition of the Standard Life Assurance
businesses, the Committee reviewed the business targets
within our variable pay plans and made the necessary
adjustments to ensure that the plans operated as originally
intended and properly reflected our aim to reward long-
term value generation.

Specifically:

• 2018 Annual Incentive Plan (‘AIP’):

– Solvency II Management Action targets have
been increased by £260 million to reflect the
equity hedging action announced to the market.

– Solvency II Own Funds targets have been

increased by £1,837 million to reflect equity
raised as part of the acquisition.

– No changes were made to other AIP metrics.

• 2016 Long Term Incentive Plan (‘LTIP’):

– No changes were made to the targets, recognising
that no net cash is expected from the Standard Life
Assurance businesses over the performance period
ending December 2018.

For completeness, the targets relating to the 2017 and
2018 LTIP awards were also reviewed and the adjustments
are described on page 94.

The Committee evaluated the performance of each Executive
Director against both business objectives and individual
personal objectives and decided the overall outturns of
the AIP and LTIP are appropriate, specifically:

• 2018 AIP: Clive Bannister and James McConville

should receive 85.5% and 88.0% of their maximum
bonus opportunity, respectively.

• 2016 LTIP: Awards will vest at 49.5% of maximum

opportunity for both Clive Bannister and James McConville.

Further details of the performance assessment are
provided in this report.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

REMUNERATION POLICY APPROVAL FOR 2019
The current Directors’ Remuneration Policy was approved
by shareholders at the 2017 AGM, with a 99% vote in favour.
While this policy was put in place for three years, the recent
establishment of Phoenix Group Holdings plc as the ultimate
parent company of the Group means that the Directors’
Remuneration Policy will need to be submitted for a formal
binding shareholder approval at this year’s AGM before
an updated Remuneration Policy is put to shareholders
at the 2020 AGM.

This will largely be a roll forward of the previously approved
Phoenix Group Holdings policy. However, in recognition
of the 2018 update to the UK Corporate Governance Code,
we propose the following two changes to our current Policy:

• Alignment of pension contributions for new Executive
Directors with those provided to the wider workforce,
with a review of the policy for current Executive Directors
as part of the full policy review later this year.

• Introduction of post-cessation shareholding requirements

for both new and current Executive Directors.

AIP AND LTIP FOR 2019
The Committee reviewed the AIP and LTIP metrics in light
of the acquisition of the Standard Life Assurance businesses
and concluded that they continue to reflect the Group’s
evolving business focus and are aligned to the success
of the Enlarged Group. Therefore, we propose no changes
for the 2019 performance measures.

AIP 2019 (metrics unchanged from 2018)

Metric

2019 Weightings

Cash Generation

24% (30% of Corporate component)

Adjusted Shareholder
Solvency II Own Funds

24% (30% of Corporate component)

Management Actions

12% (15% of Corporate component)

Customer Experience

20% (25% of Corporate component)

Personal Objectives

20%

LTIP 2019 (metrics unchanged from 2018)

Metric

2019 Weightings

Cumulative Cash Generation

Return on Adjusted Shareholder
Solvency II Own Funds

TSR

40%

35%

25%

BOARD CHANGES
During the year, Henry Staunton announced his retirement
from the Phoenix Group Holdings Board. Following an
intensive search process, Henry was succeeded by
Nicholas Lyons from 31 October 2018. Nicholas brings a
wealth of experience in life insurance as well as the broader
financial services sector. The Board is delighted to welcome
Nicholas and looks forward to working with him in the future.
The new Chairman’s annual fee is the same as that paid
to his predecessor.

LOOKING FORWARD
During 2019 the Committee will conduct a full review
of the Remuneration Policy to ensure that it continues
to align with the Group’s strategy, motivates and incentivises
management, and promotes alignment with shareholders’
and customers’ interests. This review will incorporate the new
requirements of the UK Corporate Governance Code, which
we have already started to embrace through the early
adoption of certain aspects of the Code and expanded remit
of the Committee as set out in the Terms of Reference.
An updated Remuneration Policy will be put to shareholders
at the 2020 AGM.

As part of the review process, I will be formally reaching
out to engage with and seek the views of the Group’s
major shareholders. As ever, I welcome the views of all
stakeholders, look forward to these meetings, and am
very grateful for your time taken and valuable feedback.

KORY SORENSON
REMUNERATION COMMITTEE CHAIR

4 March 2019

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONDIRECTORS’ REMUNERATION REPORT
AT A GLANCE

HOW WE PERFORMED IN 2018
Group performance measures

Annual Incentive Plan (‘AIP’):
Below we show the target ranges and outturn against the metrics within the 2018 AIP. More details of the 2018 AIP can be
found on page 89. AIP metrics that are stated Group KPIs are flagged below and evidences the direct link between Company
strategy and remuneration outcomes.

OPERATING CASH
GENERATION (£m)

SOLVENCY II MANAGEMENT
ACTIONS (£m)

ADJUSTED SHAREHOLDER
SOLVENCY II OWN FUNDS
(£m)

CUSTOMER SATISFACTION
(%)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

£664m

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

£1,080m

£5,603m

93.1%

550

640

690

360

400

460

4,700

4,750

4,850

ORIGO TIMESCALES
(DAYS)

CAT. B INCIDENT
CLOSURES (%)

SERVICING
COMPLAINTS (%)

FOS OVERTURNS
(%)1

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.73 days

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

73.4%

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17%

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

50%

≤12

≤11

≤9.5

≥70

≥72.5

≥75

≤20

≤19

≤18

• Threshold • Target • Maximum

. . . . .

Outturn

1 See note 5 on page 89 for detail of the FOS Overturn Rate used in the AIP.

Long Term Incentive Plan (‘LTIP’):
Below we show outturn against the measures which applied for the 2016 LTIP awards which are reflected in the Single Figure
Table on page 88. Cumulative cash generation and TSR performance are shown over the three-year performance period
(financial years 2016, 2017 and 2018). TSR is measured against the constituents of the FTSE 250 (excluding Investment Trusts),
with median being the 50th percentile and upper quintile being the 80th percentile. Cash generation continues to be one of our
key corporate strategic objectives, while TSR provides a direct linkage to shareholder interests.

CUMULATIVE CASH
GENERATION (£bn)

TOTAL SHAREHOLDER
RETURN (percentile)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

£1.507bn

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

46th
percentile

1.311

1.511

• Threshold • Target

. . . . .

Outturn

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

SHAREHOLDING GUIDELINES (‘SOGs’)
The charts below show the shares and vested LTIP awards
held by the Executive Directors as a percentage of salary as
at 31 December 2018. The figures are based on a share price
of £5.63 as at 31 December 2018. LTIPs which have vested
but are subject to a holding period have counted towards
the SOGs figure. The LTIP vested figure reflects performance
outturn, dividend accrual, and the expected impact of income
tax and National Insurance that will be payable on exercise.
Further details on shareholding requirements are included in
the Remuneration Policy under the Shareholding Guidelines
section on page 84.

SHAREHOLDING GUIDELINES (% OF SALARY)

Group Chief Executive
Ofﬁcer – Clive Bannister

Group Finance Director and Group Director,
Scotland (’Group FD’) – James McConville

740%

399%

200%

• Shareholding
• Shares held at

guidelines

31 December 2018

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’).

Phoenix Group Holdings previously voluntarily complied with
the DRR regulations as a matter of good practice although it
was not strictly required to do so as a non-UK incorporated
quoted company. Subsequent to the completion of Phoenix
Group Holdings’ re-domicile to the UK and following the
completion of a Scheme of Arrangement on 12 December 2018,
Phoenix Group Holdings plc was inserted as the new ultimate
parent company of the Group in place of Phoenix Group
Holdings. Accordingly, the Company, as a UK-registered
quoted company, must now comply with the DRR
regulations as a matter of UK company law.

The appointment of the Directors of Phoenix Group Holdings plc,
as shown on page 102, became effective from the date of
admission of Phoenix Group Holdings plc to the London
Stock Exchange on 13 December 2018.

DIRECTORS’ REMUNERATION POLICY
The 2019 AGM is the Company’s first AGM as a UK-registered
quoted company, and so the Company is seeking approval
from its shareholders for its Directors’ Remuneration Policy
(‘Remuneration Policy’).

The Remuneration Policy which is being put forward for
approval by shareholders of Phoenix Group Holdings plc at
the 2019 AGM is in all material respects the same as the policy
approved by the shareholders of Phoenix Group Holdings at
that company’s AGM on 11 May 2017. From the date of listing
of Phoenix Group Holdings plc on 13 December 2018 the
Remuneration Committee has voluntarily applied the policy
previously established by Phoenix Group Holdings. This Policy
will be reviewed in 2019 in light of changes to the UK Corporate
Governance Code and other investor body guidelines and a new
revised Policy will be presented to shareholders for approval at
the AGM of Phoenix Group Holdings plc in 2020.

Ahead of this full review however, the Group has taken the
opportunity to make two immediate updates to the Policy:

• The alignment of pension entitlement for newly appointed
Executive Directors to that of the majority of the workforce.

• The introduction of a shareholding requirement post

cessation of employment.

The Remuneration Policy is set out in section A of this
report overleaf.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATION

DIRECTORS’ REMUNERATION REPORT
CONTINUED

SECTION A: THIS SECTION CONTAINS THE DIRECTORS’ REMUNERATION POLICY AS PROPOSED FOR
APPROVAL BY THE COMPANY’S SHAREHOLDERS AT THE COMPANY’S 2019 AGM ON 2 MAY 2019.

GENERAL POLICY
The Remuneration Policy for Executive Directors is summarised in the table below along with the policy on the Chairman’s
and the Non-Executive Directors’ fees.

Summary of changes from previous policy:
As explained in the Remuneration Committee Chairman’s letter at the beginning of this Directors’ Remuneration Report, the
Remuneration Policy proposed for adoption by the Company’s shareholders at the 2019 AGM is largely unchanged from the
Remuneration Policy approved by the shareholders of Phoenix Group Holdings at its 2017 AGM with the exception of the specific
details outlined on page 79 and the addition of the 2019 LTIP metrics. In line with legislative requirements, a revised Remuneration
Policy will be presented to shareholders in 2020 being three years following the 2017 AGM.

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 benchmark will be reviewed
in 2019 in accordance with Phoenix’s position within the FTSE market.

* This section does not form part of the Remuneration Policy and is for information only.

HOW MUCH THE EXECUTIVE DIRECTORS EARNED IN 2018/POTENTIAL REWARDS UNDER VARIOUS SCENARIOS (£000)
The charts below compare the maximum levels of Total Remuneration payable under the Directors’ Remuneration Policy
(see page 81) and the actual payments for 2018 detailed in the Single Figure Table (see page 88).

TOTAL REMUNERATION OPPORTUNITY (£000)

Group Chief Executive Ofﬁcer – Clive Bannister

Group Finance Director – James McConville

3,992

18%

3,292

43%

35%

32%

26%

25%

21%

2,482
5%

25%

36%

34%

1,717

20%
31%

49%

839

100%

2,516

18%

2,076

42%

35%

32%

26%

21%

1,582
5%

24%

37%

34%

1,086

21%
30%

49%

533

100%

Minimum

On-target Maximum Maximum
with growth

Actual

Minimum On-target Maximum Maximum
with growth

Actual

• Total ﬁxed pay
• AIP
• LTIP
• Share price growth and dividends

• Minimum, on-target and maximum represent the scenario charts required under the Directors’ Remuneration Policy – see the

data assumptions below.

• ‘Maximum with growth’ is the maximum scenario, but with the LTIP element increased to reflect a 50% share price growth

assumption over the three-year period 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 2018 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

On-target

Maximum

Base salary
£000

Benefits
£000

Pension
£000

Total fixed
£000

700

440

140

856

544

Consists of base salary, benefits and pension:
– Base salary is the salary to be paid in 2019 (unchanged from 2018).
– Benefits measured as benefits paid in 2018 as set out in the Single Figure Table.
– Pension measured as the full entitlement of approximately 17.6% of base salary receivable (after the reduction

to payments made in cash for employers’ National Insurance Contributions).

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.

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 PLC
ANNUAL REPORT & ACCOUNTS 2018

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 above 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 when the prior policy was adopted in 2017), provided that this figure may be increased in line with UK RPI
inflation from the adoption of the prior policy in May 2017.

Performance measures
– N/A

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 the 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

Element and purpose
Pension
To provide retirement benefits and remain competitive within the marketplace

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

the 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
– Pension contributions for new Executive Directors will be aligned with the wider workforce. The exact contribution rate will be disclosed

next year following a review of overall Company pension provision.

– Pension contributions for current Executive Directors are limited to 20% of base salary per annum (reduced to 17.6% when taken as

cash in lieu of contribution), with the intention to review this against the wider workforce as part of the full policy review later this year.

Performance measures
– N/A

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONDIRECTORS’ REMUNERATION REPORT
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 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. 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.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

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 measures for the 2019 LTIP are as set out below (unchanged
from 2018):

Measure

Cumulative Cash Generation

Return on Adjusted Shareholder Solvency II Own Funds

Total Shareholder Return

Weighting

40%

35%

25%

– The Remuneration Committee retains discretion to adjust the weightings/substitute metrics but 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 will be no more than 25%

of that part of the LTIP award.

– 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.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONDIRECTORS’ REMUNERATION REPORT
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.

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.

– Post cessation of employment, Executive Directors are expected to retain their full level of employment shareholding requirement

in the first year and half the level of their employment shareholding requirement in the second year.

Maximum
– N/A

Performance measures
– N/A

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

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

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.

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:

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 Phoenix employees, including Executive Directors,
although remuneration packages differ to take into account
appropriate factors in different areas of the business:

• AIP – all Phoenix 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, 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 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), and equivalent arrangements in foreign jurisdictions
(including on a tax advantaged basis permitted under local
laws). 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. 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.

• 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) 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). Any exercise of discretion will be disclosed
in the Implementation Report for the year.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONDIRECTORS’ 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 to 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.

Copies of Executive Director service contracts and Non-
Executive Director letters of appointment are available for
inspection at the Company’s registered office.

DIRECTORS’ REMUNERATION REPORT
CONTINUED

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.

• 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 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.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

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 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

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

1 Where the reason for leaving is retirement, the individual will be required to provide confirmation of their continued retirement before any payments are released to them 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 previous practice, the Remuneration Committee did not consult with employees in preparing the 2017
Remuneration Policy although will be establishing further employee engagement in 2019 in accordance with the requirement
under the Corporate Governance Code. Further details are shown on page 101.

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 extensively with shareholders prior to the approval of the prior policy which
was approved with 99.7% support in 2017. As this new policy is largely a rollover of the previous shareholder approved policy
subject to the amendments described on page 79, it was not considered necessary to re-consult.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONDIRECTORS’ REMUNERATION REPORT
CONTINUED

SECTION B: THIS SECTION CONTAINS THE ANNUAL REPORT ON REMUNERATION WHICH
FORMS PART OF THE DIRECTORS’ REMUNERATION REPORT TO BE PROPOSED FOR APPROVAL
BY THE COMPANY’S SHAREHOLDERS AT THE COMPANY’S 2019 AGM ON 2 MAY 2019.

As explained on page 79 Phoenix Group Holdings plc became the ultimate parent company of the Group and was listed on
the London Stock Exchange on 13 December 2018. For ease of comparison to 2017, 2018 full year data is shown below.
Details of remuneration paid by each of the two entities Phoenix Group Holdings and Phoenix Group Holdings plc is shown
in the Appendix to this report on page 104.

IMPLEMENTATION REPORT – AUDITED INFORMATION
SINGLE FIGURE TABLE

£000

Clive Bannister

James McConville

Salary/fees¹

Benefits²

Annual Incentive³

Long-term
incentives

Pension6

Total

2018

2017

2018

2017

2018

2017

20184

20175
(restated)

2018

2017

2018

20175
(restated)

700

440

700

440

898

581

902

567

745

468

1,147

724

123

2,482

1,582

2,888

1,824

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 £16,290. Benefits for James McConville comprise car allowance and private medical

insurance totalling £16,032.

3 Annual incentive amounts are presented inclusive of any amounts which must be deferred into shares for three years (ie 40% of the AIP award for 2018). In 2018 and 2017,
£359,100 and £360,835 respectively of Clive Bannister’s incentive payment is subject to three-year deferral delivered in shares, and £232,320 and £226,810 of James
McConville’s incentive payment is subject to a similar deferral. Deferred amounts are subject to continued employment.

4 In accordance with the requirements of the DRR regulations, the 2018 value for long-term incentives is an estimate of the vesting outcomes for LTIP awards granted in 2016 and
which are due to vest on 2 June 2019 for Clive Bannister and James McConville. These vesting levels are at 49.5% reflecting outcomes against the Cumulative cash generation
and TSR performance measures to 31 December 2018 (see page 91) and assumptions regarding dividends for the period until vesting. This vesting outcome is then applied to
the average share price between 1 October 2018 and 31 December 2018 (600.04p) to produce the estimated long-term incentives figures shown for 2018 in the above table.
These assumptions will be trued up for actual share prices and dividends on vesting in the report for 2019. The disclosed LTIP figure of £745,255 for Clive Bannister reflects the
proportion of the original award which ultimately vested (£619,744) plus the value of dividend roll-up on those shares (£125,511). For James McConville the equivalent values are
£468,433 as the disclosed LTIP figure, comprising £389,547 for the value of the proportion of the original LTIP award which ultimately vested plus the value of dividend roll-up
on those shares (£78,886). All values are calculated using the three month average share price to 31 December 2018 (600.04p).

5 For 2015’s LTIP awards which are reflected in the 2017 long-term incentives column above, the performance conditions were met as to 64.28% of maximum. The 2017 long-term
incentives values in the above table reflect the value of the Company’s shares on the date of vesting which was 28 September 2018 (676p per share) multiplied by the number
of shares vesting whereas the equivalent figure within the published 2017 Single Figure Table was an estimate which reflected the average share price between 1 October 2017
and 31 December 2017 (759.8462p 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 17.6% which is paid 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 and none have any prospective entitlement to a defined benefit pension arrangement.

PAYMENTS FOR LOSS OF OFFICE AND PAYMENTS TO PAST DIRECTORS
There were no payments made to former Directors and no payments for loss of office in the year.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

AIP OUTCOMES FOR 2018 – AUDITED INFORMATION
As explained in the Committee Chairman’s statement, the business of the Group is to engage in corporate activity and the
Remuneration Committee may adjust targets during the year to include such activity and ensure the targets continue to reflect
performance as originally intended. 2018 was a transformational year for the Group in terms of corporate activity with respect
to the acquisition of the Standard Life Assurance businesses. In light of this acquisition, the Committee approved the following
adjustments to the AIP targets:

Solvency II Management Actions: Threshold, target and maximum levels increased by £260 million to reflect the equity
hedging action announced to the market. The range therefore increased from £100 million (threshold), £140 million (target),
£200 million (maximum) to £360 million (threshold), £400 million (target), £460 million as shown in the table below.

Solvency II Management Actions are disclosed on page 32 and 33 of the Business Review and includes capital synergies
associated with the acquisition of the Standard Life Assurance businesses.

Adjusted Shareholder Solvency II Own Funds: Threshold, target and maximum levels increased by £1,837 million to reflect
equity raised as part of the acquisition, net of any dividends paid or payable in the first 12 months arising from the additional
equity. The range therefore increased from £2,863 million (threshold), £2,913 million (target), £3,013 million (maximum) to
£4,700 million (threshold), £4,750 million (target), £4,850 million as shown below.

Adjusted Shareholder Solvency II Own Funds represents the Group’s Own Funds adjusted to remove the impacts of
unsupported with-profit funds, the unsupported pension scheme (PGL Pension Scheme), restricted Tier 1 notes and Tier 2
or Tier 3 subordinated liabilities.

Against the specific Corporate measures, outturns were as follows:

Performance measure

Threshold
performance
level for
2018 AIP

Target
performance
level for
2018 AIP

Maximum
performance
level for
2018 AIP

Performance
level attained
for
2018 AIP

% of incentive
potential based
on Performance
Measure

Operating companies’ cash generation

Solvency II Management Actions

£550m

£360m

£640m

£400m

£690m

£460m

£664m

£1,080m

30.0%

15.0%

% achieved

22.2%

15.0%

Adjusted Shareholder
Solvency II Own Funds

Customer experience

Customer satisfaction1

Origo timescales2

CAT B incident closures3

Servicing complaint closure4

FOS overturn rate5

Total

£4,700m

£4,750m

£4,850m

£5,603m

30.0%

90%

≤12 days

≥70%

60%

≤20%

91%

≤11 days

≥72.5%

65%

≤19%

93%

93.1%

≤9.5 days

10.73 days

≥75%

70%

≤18%

73.4%

50.0%

17.0%

7.5%

5.0%

2.5%

7.5%

4.4%

3.4%

0.0%

2.5%

100.0%

85.0%

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). 93.1% 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. The metrics in the table represent the percentage of cases closed within nine months.

4 This measure looks at servicing (ie 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 figures exclude cases from past Abbey Life businesses that are subject to the FCA’s past business review as such cases must follow an approach prescribed by the FCA
and are therefore not an indicator of Phoenix customer treatment.

Before confirming these outcomes for the 2018 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 2018 AIP outcomes.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONDIRECTORS’ REMUNERATION REPORT
CONTINUED

Personal objectives were agreed by the Group Board and shared with the Remuneration Committee at the start of the year.
The Board regards a number of the personal objectives set 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:

Clive Bannister, Group Chief Executive Officer (‘Group CEO’)

Objectives

Achievements

Identify acquisition opportunities
capable of individually and collectively,
materially enhancing shareholder
value, and execute as appropriate

Deliver the financial results
at or ahead of plan

Maintain or improve solvency

Deliver management actions
and deliver on the strategic
asset allocation strategy

Maintain strong effective
relationships with regulators

Complete on-shoring of
Phoenix Group Holdings

Finalise outstanding integration
issues related to AXA and
Abbey Life

Deliver on Diversity targets

The Group CEO played the critical role in securing and delivering the transformational acquisition of
the Standard Life Assurance businesses leading the negotiation, transaction, and pricing of the deal
and welcoming Standard Life Aberdeen plc as a strategic partner. Subsequent to the closure of the
above acquisition, repositioned the Group to leverage Edinburgh as an operational headquarters
alongside sites in London and Wythall, with a joint leadership team appropriately representative
of the enlarged entity.

The Group CEO has sponsored the achievement of all the financial targets including above target
cash flow, reduced expense, reduced leverage.

In conjunction with the Group FD, has helped deliver raising £1 billion of equity, £0.9 billion of
subordinated debt, retaining a stable outlook from Fitch, delivering the highest Solvency II surplus
and the lowest leverage ratio in the Group’s history.

Actively sponsored the Group’s evolving strategic asset allocation and the sourcing of £1.4 billion
of alternative illiquid assets and the establishment of the Group’s Bulk Purchase Annuity capabilities.
Drove £570 million of SII management actions and a further £510 million of capital synergies to the
Standard Life Assurance businesses.

Championed another solid year of maintaining a wholly effective and transparent relationship with
our regulators.

Re-domiciled Phoenix Group Holdings to the UK and established Phoenix Group Holdings plc as the
new parent company of the Group.

Completed the outstanding matters related to the AXA and Abbey Life integrations with total cost
savings of £27 million per annum, £10 million above target. £1 billion of cash generation delivered
from these businesses to date, 75% of total consideration.

Diversity targets were not met as they were largely impacted by changes in senior
management through acquisition, structural changes, resignation and retirement. However
improved metrics, governance, and accountability have re-enforced the importance
of Phoenix’s broader diversity agenda.

James McConville, Group Finance Director and Group Director, Scotland (‘Group FD’)

Objectives

Achievements

Complete at least 1 acquisition
enhancing of shareholder value

Deliver the financial results
at or ahead of plan

Maintain or improve solvency

The Group FD has played a critical role in supporting the Group’s transformational acquisition
of the Standard Life Assurance businesses both as a transaction, with its associated successful
rights issue, and in its strategic on-boarding in Q4 2018. The Group FD has taken in Q3 2018
further responsibility as Group Director Scotland, and Head of Transformation for the acquisition.

All financial targets have been exceeded with reference to our Corporate targets: generating
£664 million of cash, a reduced expense base (excluding acquisition costs), a reduced Fitch
leverage ratio (22%) and an operating profit of £708 million.

The Group FD has delivered the raising £1 billion of equity, £0.9 billion of subordinated debt,
retaining a stable outlook from Fitch, delivering the highest Solvency II surplus and the lowest
leverage ratio in the Group’s history.

Deliver management actions and deliver
on the strategic asset allocation strategy

Management actions have been delivered materially ahead of target, including securing of over
£1.4 billion of alternative assets.

Complete on-shoring of
Phoenix Group Holdings

Finalise outstanding integration
issues related to AXA and
Abbey Life

Deliver on Diversity targets

Manage investor relations and the
external communications function

Re-domiciled Phoenix Group Holdings plc to the UK and established Phoenix Group Holdings plc
as the new parent company of the group.

Completed the outstanding matters related to the AXA and Abbey Life integrations with total
cost savings of £27 million per annum, £10 million above target. £1 billion of cash generation delivered
from these businesses to date, 75% of total consideration.

The Group FD chairs the Diversity Committee. Improved metrics, governance, and accountability
have re-enforced the importance of Phoenix’s broader diversity agenda. Diversity targets were not
met as they were largely impacted by changes in senior management through acquisition, structural
changes, resignation and retirement.

The Group FD ran a comprehensive Investor engagement programme across debt and equity with 33
investor roadshows and met 414 debt and equity investors, plus a capital markets event attended by
120 investors and analysts. These activities supported the successful rights issue and debt issues
undertaken as part of the financing for the acquisition of the Standard Life Assurance businesses.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

Taking account of the attainment of personal objectives, the Group Chief Executive Officer received an 87.5% payout (£183,750)
for this element and the Group Finance Director received a 100%payout (£132,000) for this element, consistent with their ratings
for 2018. These Personal (individual objectives) measures applied to 20% of incentive opportunity and Corporate (financial and
strategic) measures applied to 80% of incentive opportunity. Overall outturns as a percentage of maximum opportunity are
85.5% for the Group Chief Executive Officer and 88.0% for the Group Finance Director.

The table below shows the actual outturn against the annual incentive maximum.

Name

Clive Bannister

James McConville

Corporate

Personal

Total

Maximum

Total

As a % of
maximum
corporate
element

85.00

As a %
of salary

102.00

As a % of
maximum
personal
element

87.50

100.00

As a %
of salary

26.25

30.00

As a %
of salary

128.25

132.00

As a %
of salary

150.00

As a %
of maximum
opportunity

85.50

88.00

As described in the Remuneration Policy, 40% of 2018 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 2019 have been disclosed (see Implementation of Remuneration
Policy for 2019 on page 97), 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 2019’s AIP
retrospectively in next year’s Remuneration Report on a similar basis to the disclosures made above in respect of 2018’s AIP.

LTIP OUTCOMES FOR 2016 AWARDS – AUDITED INFORMATION

Performance measure
and weighting

Target
range

Cumulative cash
generation (50%)

Target range between Cumulative cash generation of £1.311 billion
and Cumulative cash generation of £1.511 billion.

TSR (50%)

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.

Performance
achieved

Vesting
outcome

%
achieved

£1.507bn

46th

99%

49.5%

0.0%

49.5%

The above targets were all measured over the period of three financial years 1 January 2016 to 31 December 2018.

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, customer
satisfaction and, in exceptional cases, personal performance (as described more fully on page 94, had been achieved in the
performance period.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONDIRECTORS’ REMUNERATION REPORT
CONTINUED

NON-EXECUTIVE FEES – AUDITED INFORMATION
The emoluments of the Non-Executive Directors for 2018 based on the current disclosure requirements were as follows:

Name

Non-Executive Chairman

Henry Staunton2

Nicholas Lyons3

Non-Executive Directors

Alastair Barbour

Ian Cormack4

Campbell Fleming5

Karen Green6

Isabel Hudson7

Wendy Mayall

Barry O’Dwyer5

John Pollock

Belinda Richards8

Nicholas Shott

Kory Sorenson

David Woods9

Total

Directors’
salaries/fees
2018
£000

Directors’
salaries/fees
2017
£000

Benefits1
2018
£000

Benefits1
2017
£000

Total
2018
£000

271

143

–

105

–

107

–

127

105

125

–

325

–

150

116

–

118

–

136

105

116

–

1,182

1,236

–

271

155

–

108

–

109

–

127

106

107

125

–

Total
2017
£000

325

–

153

116

–

118

–

136

105

116

1,204

1,241

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 Group Holdings and Phoenix Group Holdings plc 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 Henry Staunton retired from the Board of Phoenix Group Holdings on 31 October 2018.
3 Nicholas Lyons became Chairman designate of Phoenix Group Holdings from 1 September 2018 and was confirmed in this appointment on 31 October 2018. Figure above

reflects fee paid from 31 October 2018.

4 Ian Cormack retired from the Board of Phoenix Group Holdings on 2 May 2018.
5 Campbell Fleming and Barry O’Dwyer joined the Board of Phoenix Group Holdings on 31 August 2018 and waived all current and future emoluments with regard to their

Directors’ fees.

6 Karen Green joined the Board of Phoenix Group Holdings on 1 July 2017.
7 Isabel Hudson retired from the Board of Phoenix Group Holdings on 11 May 2017.
8 Belinda Richards joined the Board of Phoenix Group Holdings on 1 October 2017.
9 David Woods retired from the Board of Phoenix Group Holdings on 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 £4.055 million (2017: £4.082million).

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

SHARE-BASED AWARDS – AUDITED INFORMATION
As at 31 December 2018, Directors’ interests under long-term share-based arrangements were as follows:

LTIP

Name

Clive
Bannister

LTIP

James
McConville

LTIP

Date of
grant

Share price
on grant

No. of
shares
as at
1 Jan
2018

No. of
shares
granted
in 2018

Increase
in shares
following
right issue

No. of
dividend
shares
accumulating
at vesting1

No. of
shares
exercised2

No. of
shares
not
vested3

No. of
shares
as at
31 Dec
2018

28 Sept
2015

2 Jun
2016

24 Mar
2017

21 Mar
2018

28 Sept
2015

2 Jun
2016

24 Mar
2017

21 Mar
2018

632.8p

198,931

670.9p

187,634

708.7p

177,627

–

703.6p

–

178,913

564,192

178,913

22,286

42,737

21,020

19,899

20,043

83,248

–

42,737

632.8p

125,041

670.9p

117,940

708.7p

111,651

–

14,008

26,860

13,212

12,508

–

703.6p

–

112,460

12,598

354,632

112,460

52,326

26,860

–

(94,285)

169,669

–

208,654

197,526

198,956

(94,285)

774,805

(59,263)

106,646

–

131,152

124,159

125,058

(59,263)

487,015

Vesting
date4

28 Sept
2018

2 Jun
2019

24 Mar
2020

21 Mar
2021

28 Sept
2018

2 Jun
2019

24 Mar
2020

21 Mar
2021

The number of shares for outstanding LTIP awards granted between 2015 and 2016 were increased to take into account the impact of the rights issues which took place on
9 November 2016 and 27 July 2018. The number of shares for outstanding LTIP awards granted between 2017 and 2018 were increased to take into account the impact of the rights
issues which took place on 27 July 2018. All adjustments were 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.

1 In addition to the shares awarded under the LTIP presented above, participants receive an additional number of shares (based on the number of LTIP awards which actually vest)

to reflect the dividends paid during the vesting period (and which for awards made from 2015, will include dividends paid during any applicable holding period).

2 Gains of Directors from share options exercised and vesting shares under the LTIP in 2018 were £nil (2017: £2,533,277).
3 The 2016 LTIP award vested at 49.5% of maximum.
4 All LTIP awards are now subject to a holding period 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.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONDIRECTORS’ REMUNERATION REPORT
CONTINUED

LTIP Targets
Following the acquisition of the Standard Life Assurance businesses, the Committee reviewed the business targets within
the variable pay plans and made the necessary adjustments to ensure that the plans continue to operate as originally intended,
properly reflect the aim to reward long-term value generation and are aligned to the market announcements directly in
connection with the acquisition. This review resulted in an adjustment to the 2018 targets as follows:

Cumulative Cash Generation: target range increased from £1.474 billion (threshold) to £1.674 billion (maximum) to £1.824 billion
(threshold) to £2.024 billion (maximum) as shown below reflecting the additional net cash generation expected by the end
of 2020.

Return on Adjusted Solvency II Shareholders Own Funds: rebasing of the opening position to reflect the equity issued and any
synergy benefits expected by the end of 2020.

The Committee were satisfied these adjustments ensured the LTIP continued to operate as originally intended with the targets
no easier to satisfy as a result of the acquisition.

No changes were made to the targets for the 2016 and 2017 awards.

The performance conditions for the 2016, 2017 and 2018 awards are set out below and include these adjustments to the
2018 targets.

2016 award
(50% Cumulative cash
generation and 50% TSR)

2017 award
(50% Cumulative cash
generation and 50% TSR)

Not applicable.

2018 award
(40% Cumulative cash
generation, 35% Return on
Adjusted Shareholder Solvency II
Own Funds and 25% TSR)

Between 4% CAGR
and 6% CAGR.

Target range of £1.311bn
to £1.511bn.

Target range of £1.372bn
to £1.572bn.

Target range of £1.824bn
to £2.024bn.

Target range as for 2016.

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

Return on Adjusted
Shareholder Solvency II
Own Funds
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 Return on Adjusted Shareholder Solvency II Own Funds, 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. The underpin also includes consideration of customer satisfaction and, to meet Solvency II requirements, in
exceptional cases, personal performance.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

DBSS

Clive
Bannister

DBSS

James
McConville

DBSS

Date of
grant

Share price
on grant

No. of
shares
as at
1 Jan 2018

No. of
shares
granted
in 2018

Increase
in shares
following
rights
issue

No. of
dividend
shares
accumulating
at vesting1

No. of
shares
exercised2

No. of
shares
lapsed/
waived

No. of
shares
as at
31 Dec
2018

28 Sept
2015

2 Jun
2016

24 Mar
2017

21 Mar
2018

28 Sept
2015

2 Jun
2016

24 Mar
2017

21 Mar
2018

632.8p

33,917

670.9p

38,464

708.7p

37,363

–

4,309

4,185

6,479

(40,396)

–

703.6p

–

109,744

46,112

5,165

13,659

6,479

(40,396)

632.8p

22,491

670.9p

25,283

708.7p

23,485

–

703.6p

–

28,985

71,259

28,985

2,832

2,631

3,247

8,710

4,296

(26,787)

–

4,296

(26,787)

–

42,773

41,548

51,277

135,598

–

28,115

26,116

32,232

86,463

Vesting
date

19 Mar
2018

24 Mar
2019

20 Mar
2020

15 Mar
2021

19 Mar
2018

24 Mar
2019

20 Mar
2020

15 Mar
2021

The number of shares for outstanding DBSS awards granted between 2015 and 2016 were increased to take into account the impact of the rights issues which took place on
9 November 2016 and 27 July 2018. The number of shares for outstanding DBSS awards granted between 2017 and 2018 were increased to take into account the impact of the
rights issues which took place on 27 July 2018. All adjustments were 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.

1 In addition to the shares awarded under the DBSS presented above, participants receive an additional number of shares (based on the number of DBSS awards which actually

vest) to reflect the dividends paid during the vesting period.

2 Gains of Directors from share options exercised and vesting shares under the DBSS in 2018 were £525,707 (2017: £595,978). Clive Bannister’s gain was £316,099 arising

from an award exercised on 20 March 2018 at a share price of £7.825. James McConville’s gain was £209,608 arising from an award exercised on 20 March 2018 at a share
price of £7.825.

The DBSS is the share scheme used for the deferral of AIP. No performance conditions apply therefore, other than being subject
to continued employment.

SCHEME INTERESTS AWARDED IN THE YEAR – AUDITED INFORMATION

Recipient

Date of award

Type of award

Basis on which
award made

Face value
of award

Percentage
vesting at
threshold
performance1

Vesting date

Performance
measures

21 March 2018 LTIP

Nil cost option £1,399,854

25%

21 March 2021 See page 94

Clive Bannister

21 March 2018 DBSS1

Nil cost option £360,785

James McConville

21 March 2018 LTIP

Nil cost option £879,908

James McConville

21 March 2018 DBSS1

Nil cost option £226,784

1 The DBSS awards have no threshold performance level.

–

25%

–

15 March 2021 None

21 March 2021 See page 94

15 March 2021 None

The face value 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 the average of the closing middle market prices of Phoenix shares for the three dealing
days preceding the award date.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONDIRECTORS’ REMUNERATION REPORT
CONTINUED

SHARESAVE – AUDITED INFORMATION

Name

Clive Bannister

James McConville

As at
1 Jan
2018

–

2,852

Increase in
shares
following
rights issue

–

319

Shares
exercised

Shares
lapsed

–

As at
31 Dec
2018

–

Exercise
price

Exercisable
from

–

Date of
expiry

–

3,171

£5.674

1 Jun 2020

1 Dec 2020

The number of options were increased to take into account the impact of the rights issues which took place on 27 June 2018. This adjustment was based on the Theoretical
Ex-Rights Price (‘TERP’) and approved by the Remuneration Committee and HMRC. The share price on grant shown has also been adjusted to reflect the impact of the rights issue
on the share price.

Gains of Directors from share options exercised under Sharesave during 2018 were nil (2017: nil). 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 2018 were £525,707
(2017: £3,129,255).

During the year ended 31 December 2018, the highest mid-market price of the Company’s shares was 733p and the lowest
mid-market price was 544p. At 31 December 2018, the Company’s share price was 563.4p.

DIRECTORS’ INTERESTS – AUDITED INFORMATION
The number of shares and share plan interests held by each Director and their connected persons are shown below:

Name

Clive Bannister

James McConville

Alastair Barbour

Ian Cormack

Campbell Fleming

Karen Green

Nicholas Lyons

Wendy Mayall

Barry O’Dwyer

John Pollock

Belinda Richards

Nicholas Shott

Kory Sorenson

Henry Staunton

As at
1 January 2018
or date of
appointment
if later

As at
31 December 2018
or retirement
if earlier

Total share plan
interests as at
31 December 2018
– Subject to
performance
measures

Total share plan
interests as at
31 December 2018
– Not subject to
performance
measures

Total share plan
interests as at
31 December 2018
– Vested but
unexercised
scheme interest

727,329

187,493

6,625

5,779

–

20,000

25,000

–

10,000

–

5,000

2,185

70,000

827,178

253,227

9,716

5,779

–

20,000

30,000

–

14,666

–

7,333

15,704

102,666

605,136

380,369

135,598

89,634

169,669

106,646

–

There have been no changes in the Directors’ share interests between 31 December 2018 and 22 February 2019 (being one
month prior to the date of the notice of the AGM).

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

SHAREHOLDING REQUIREMENTS – AUDITED INFORMATION
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 2018 (using the share price of 563.4p
as at 31 December 2018) can be summarised as follows:

Name

Clive Bannister

James McConville

Shareholding
Guideline
(minimum % of
salary)

Value of
shares held at
31 December 2018
(% of salary)

200%

740%

399%

The Executive Directors are required to sign a declaration that they have not and will not at any time during their employment
with Phoenix, 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.

IMPLEMENTATION OF REMUNERATION POLICY IN 2019 – NON-AUDITABLE

Element of Remuneration Policy

Detail of Implementation of Policy for 2019

Base Salary

Benefits

Pension

Base salaries are set by reference to appropriate market comparables. Salaries in 2019 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 eight and five years respectively.

There are no proposed changes to the benefits offered to Executive Directors in 2019.

There are no proposed changes to the pension benefits offered to current Executive Directors in 2019.
Pension benefits for newly appointed Executive Directors will be aligned to that of the wider workforce.

Annual Incentive Plan (‘AIP’)

The AIP for 2019 will operate on a basis that is consistent with how the AIP operated in 2018.

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 2019 are:

– Corporate (financial and strategic) performance measures – 80% (2018: 80%).

– Personal (individual objectives) – 20% (2018: 20%).

The weightings of the AIP performance measures for 2019 remain unchanged from 2018 and are
summarised below:

Performance measure

Corporate measure

% of incentive potential

Operating Companies’ Cash Generation

(30% of Corporate component) 24%

Adjusted Shareholder Solvency II Own Funds

(30% of Corporate component) 24%

Solvency II Management Actions

Customer Experience

Personal

Individual Objectives

Total

(15% of Corporate component) 12%

(25% of Corporate component) 20%

20%

100%

Outcomes from performance measures for 2019’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
2019 AIP outcomes are confirmed.

The targets for the specific performance measures for AIP in 2019 are regarded as commercially
sensitive by the Company but will be disclosed retrospectively in the Remuneration Report for 2019.

40% of AIP outcomes for 2019 will be delivered as an award of deferred shares under the Deferred
Bonus Share Scheme which will vest after a three-year deferral period.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONDIRECTORS’ REMUNERATION REPORT
CONTINUED

Element of Remuneration Policy

Detail of Implementation of Policy for 2019

Deferred Bonus Share
Scheme (‘DBSS’)

DBSS awards made in 2019 (in respect of 2018’s AIP outcome) will be made automatically on the fourth
dealing day following the announcement of the Company’s 2018 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 2018 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 2019 are unchanged at 200% of base salary.
The weightings of the LTIP performance measures for 2019 remain unchanged from 2018 and 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%

The performance measures are measured over a period of three financial years, commencing with
financial year 2019.

All 2019 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 2019’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 £2,097 million (where 25% of
this part of the award vests) and £2,397 million (full vesting of this part of the award).

The performance targets for the return on Adjusted Shareholder Solvency II Own Funds measure are
4.5% in excess of the risk-free rate (where 25% of this part of the award vests) and 6.5% in excess of the
risk-free rate (full vesting of this part of the award).

The rules of the Company’s LTIP reserves discretion for the Committee to adjust the outturn for any LTIP
performance measures (from zero to any cap) should it consider that to be appropriate. The Committee
may operate this discretion having regard to such factors as it considers relevant, including the
performance of the Company, any individual or business.

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.

Chairman and Non-Executive
Directors’ fees

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 97.

Post cessation of employment, Executive Directors are expected to retain their full shareholding
requirement in Year 1 and 50% of the requirement in Year 2.

The fee levels for 2019 remain the same as for 2018 and are £325,000 for the Chairman, £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.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

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 (£m)

Proﬁts distributed by way of
dividend (% change +67%)

Overall expenditure on
pay (% change +47%)

332

188

198

128

2017

2018

2017

2018

• SLA businesses 66
• Group

122

(excl.SLA
businesses)

Profit distributed by way of dividend has been taken as the
dividend paid and proposed in respect of the relevant financial
year. For 2018 this is the interim dividend paid (£163 million) and
the recommended final dividend of 23.4p 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 47%, and decreased by 5% on a like for like basis
excluding the impact of the acquisition of the Standard Life
Assurance businesses.

The decrease was primarily driven by the reduction in the
number of AXA Wealth employees during the year, a significant
portion of whom transferred to the Group’s outsource provider.
This was partly offset by small increases in share-based payment
costs (see note I2) and AIP costs, increased salaries for new
activities such as Bulk Purchase Annuities 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 2018 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

Value of a 100 unit investment made on 5 July 2010

300

250

200

150

100

Jul
2010

Dec
2010

Dec
2011

Dec
2012

Dec
2013

Dec
2014

Dec
2015

Dec
2016

Dec
2017

Dec
2018

Phoenix Group Holdings/Phoenix Group Holdings plc
FTSE 250 (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).

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATION

DIRECTORS’ REMUNERATION REPORT
CONTINUED

GROUP CHIEF EXECUTIVE OFFICER REMUNERATION

2018

2017

2016

2015

2014

2013

2012

2011

Clive Bannister

Clive Bannister4

Jonathan Moss4,5

Single figure
of total
remuneration
(£000)

Annual variable
element award
rates against
maximum
opportunity
(‘AIP’)

Long-term
incentive vesting
rates against
maximum
opportunity
(‘LTIP’)

2,482

2,8881

2,878

2,867

3,104

2,737

1,583

1,333

704

86%

84%

82%

68%

69%

73%

n/a

49.5%

64%

55%

57%

57%2

67%2

n/a3

n/a

1 The single figure of total remuneration for 2017 has been restated and now reflects the actual price of shares on the day the 2015 LTIP vested (28 September 2018: 676p
per share) rather than the three-month average share price to 31 December 2017 (759.8642p per share) which was required to be used last year for the single figure of
total remuneration.

2 The long-term incentive vesting rate for 2013 is shown at 67% and for 2014 is shown as 57%. In both years the Group Chief Executive Officer decided to waive voluntarily

any entitlement in excess of two-thirds of the shares which would otherwise have vested.

3 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 2017 TO 2018
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
2017 and 2018 and the equivalent percentage changes in the average of all staff (representing all permanent staff during 2017
and 2018 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%

3.97%

0.82%

7.80%

-0.48%

1.20%

Total

-0.26%

3.56%

There has been minimal movement overall in the level of remuneration for the Group Chief Executive Officer; the small increase
in taxable benefits is due to a rise in the cost of funding for Private Medical Insurance. There was a slight reduction in AIP which
was a result of a lower outcome under the Corporate element of the 2018 AIP.

Staff more generally have seen a slight overall increase, the primary reason for this is due to an increase in taxable benefits as
a result of the implementation of Private Medical Insurance to all employees, extending the benefit to c.150 employees within
the Company. The median salary increase for staff was 2.5%; this is lower than the figures above which are based on averages.
There has been a small increase in average AIP for employees, which is linked in part to increases in employee salary levels.

VOTING OUTCOMES ON REMUNERATION MATTERS
The table below shows the votes cast to approve the Directors’ Remuneration Report for the year ended 31 December 2017 at
the 2018 AGM held on 2 May 2018 and to approve the Directors’ Remuneration Policy at the 2017 AGM held on 11 May 2017.

For

Against

Number

% of
votes cast

Number

% of
votes cast

Abstain
Number

To approve the Directors’ Remuneration Report
for the year ended 31 December 2017 (2018 AGM)

To approve the Directors’ Remuneration Policy
(2017 AGM)

294,152,705

99.15

2,528,520

0.85

1,291,938

296,336,785

99.67

976,191

0.33

2,243

100

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

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 all-employee Sharesave scheme only, new shares are issued. Therefore the usage of shares
compared to the 10% dilution limits (in any rolling 10-year period) set by the Investment Association in respect of all share
plans as at 31 December 2018 is 0.23%, and no shares count towards the dilution limit for executive plans only (5% in any
rolling ten-year period).

CONSIDERATION OF EMPLOYEE PAY
As explained in the Notes to the Remuneration Policy table:

• when determining Executive Directors’ remuneration, the Committee takes into account pay throughout the Group to ensure

that the arrangements in place remain appropriate, and

• the Group has one consistent reward policy for all levels of employees, and 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.

The Remuneration Committee intends to publish the ratios comparing CEO to employee pay as prescribed by the DRR
regulations for financial year 2019. Following the acquisition of the Standard Life Assurance businesses on 31 August 2018,
we have been integrating our employee pay systems and are not in the position to adopt this disclosure requirement early.
Accordingly, Phoenix has come to the conclusion that it would not be appropriate to publish on a voluntary basis a CEO to
employee pay ratio disclosure for 2018.

GENDER PAY GAP
The reporting entity for Gender Pay Gap reporting remains as Pearl Group Management Services; details of the 2018 Gender
Pay Gap are shown on page 27 of the Annual Report and Accounts within the People Section. Employees who transferred
from Standard Life Aberdeen are included in the Gender Pay Gap reporting for Standard Life Aberdeen as they were employees
of that entity on the relevant date.

ADDITIONAL UNAUDITED INFORMATION
The information provided below relates to the Directors’ membership of both the Phoenix Group Holdings and Phoenix Group
Holdings plc boards and committees throughout 2018.

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

28 March 2011

28 June 2012

Date of contract

7 February 2011

28 May 2012

Notice period
from either party
(months)

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 2018, Clive Bannister received £45,000 from Punter Southall Group and CHF 50,000 from UniGestion in respect of two
external directorships. He is also Chairman of the Museum of London for which he receives no payment. James McConville
received £112,000 from Tesco Personal Finance plc.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

101

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CONTINUED

Non-Executive Directors’ contracts

Name

Alastair Barbour

Campbell Fleming

Karen Green

Nicholas Lyons

Wendy Mayall

Barry O’Dwyer

John Pollock

Nicholas Shott

Belinda Richards

Kory Sorenson

Date of letter of
appointment

joining the Phoenix
Group Holdings Board1

Date of

1 November 2018

1 October 2013

Appointment
end date

2 May 2019

1 November 2018

31 August 2018

31 August 2021

1 November 2018

1 July 2017

1 July 2020

1 November 2018

31 October 2018

31 October 2021

1 November 2018

1 September 2016

1 September 2019

1 November 2018

31 August 2018

31 August 2021

1 November 2018

1 September 2016

1 September 2019

1 November 2018

1 September 2016

1 September 2019

1 November 2018

1 October 2017

1 October 2020

1 November 2018

1 July 2014

2 May 2019

Unexpired term
(months)

1 All Directors above joined the Phoenix Group Holdings plc Board on 15 October 2018 and services are considered to have commenced with effect from 13 December 2018.

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 originally established a Remuneration Committee in 2010. On 13 December 2018 the Phoenix Group Holdings plc
Remuneration Committee was formally constituted following admission of the new entity to the London Stock Exchange.
The terms of reference of the Committee are available at www.thephoenixgroup.com. The main determinations of the
Committee in 2018 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 2018 and their date
of appointment:

Member

Kory Sorenson (Committee Chair from 11 May 2017)

Karen Green

Nicholas Shott

From

3 July 2014

1 July 2017

20 October 2016

To date

Under the Committee’s Terms of Reference, the Committee meets at least twice a year but more frequently if required.
During 2018, seven Committee meetings were held and details of attendance at meetings are set out in the Corporate
Governance Report on page 67.

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.

102

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

ADVICE
During the year, the Committee received independent remuneration advice from its appointed advisers, FIT Remuneration
Consultants LLP (‘FIT’) and PwC (who were appointed by the Committee as their adviser from May 2018 following a competitive
tender). Both firms are members of the Remuneration Consultants Group (the professional body for remuneration consultants)
and adhere to its code of conduct.

The Committee was satisfied that the advice provided by both firms was objective and independent. FIT’s fees in respect of
2018 were £45,250, all of which were attributed to work relating to the Committee and were charged on the basis of the firm’s
standard terms of business for advice provided. PwC’s fees in respect of 2018 were £160,850 all of which were attributed to
work relating to the Committee and were charged on the basis of the firm’s standard terms of business for advice provided.
PwC have not provided any other services to Phoenix Group Holdings plc in relation to remuneration.

FIT have provided some technical specialist advice to management since stepping down as the Committee’s adviser. PwC also
provided general consultancy services to management during the year. Separate teams within PwC provided unrelated services
in respect of tax, assurance, risk consulting and transaction support during the year. The Committee is satisfied that these
activities do not compromise the independence or objectivity of the advice it has received from PwC.

The Committee assesses the performance of its advisers annually, the associated level of fees and reviews the quality of advice
provided to ensure that it is independent of any support provided to management.

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 2018.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

103

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONDIRECTORS’ REMUNERATION REPORT
CONTINUED

APPENDIX – STATUTORY SINGLE FIGURE TABLES – AUDITED INFORMATION
Following the completion of a Scheme of Arrangement on 12 December 2018, Phoenix Group Holdings plc was inserted into
the Group as the new ultimate parent company of the Group in place of Phoenix Group Holdings (further details are included
in note A1 to the consolidated financial statements). The appointment of the Directors of Phoenix Group Holdings plc, as shown
on page 102, became effective from the date of admission of Phoenix Group Holdings plc to the London Stock Exchange on
13 December 2018.

The tables shown on pages 88 and 92 show the total remuneration received by Directors over the full year to 31 December
2018. The DRR regulations require the disclosure of the remuneration paid to the Directors of the Company in respect of
services provided to Phoenix Group Holdings plc or its subsidiaries. Services are considered to have been provided effective
from 13 December 2018. As there was no change to the remuneration arrangements this simply reflects the annual data
pro-rated from 13 December 2018 to 31 December 2018 and therefore the separate footnotes shown under the Single
Figure Table on page 88 have not been repeated.

For comparison purposes, the remuneration paid for the period up to 13 December in respect of services to Phoenix Group
Holdings has also been included.

Phoenix Group Holdings plc – Single Figure Table from 13 December 2018 to 31 December 2018

£000

Clive Bannister

James McConville

Salary/fees

Benefits

Annual Incentive

Long-term
incentives

Pension

Total

2018

2017

2018

2017

2018

2017

2018

2017

2018

2017

2018

2017

–

129

–

Phoenix Group Holdings – Single Figure Table from 1 January 2018 to 12 December 2018

£000

Clive Bannister

James McConville

Salary/fees

Benefits

Annual Incentive

Long-term
incentives

Pension

Total

2018

20171

2018

20171

2018

20171

2018

20171
(restated)

2018

20171

2018

20171
(restated)

664

417

700

440

851

551

902

567

706

444

1,147

724

117

123

2,353

2,888

1,503

1,824

1 The comparative 2017 data represents a full year.

Phoenix Group Holdings plc – NED fees from 13 December 2018 to 31 December 2018

Name

Non-Executive Chairman

Henry Staunton

Nicholas Lyons

Non-Executive Directors

Alastair Barbour

Ian Cormack

Campbell Fleming

Karen Green

Isabel Hudson

Wendy Mayall

Barry O’Dwyer

John Pollock

Belinda Richards

Nicholas Shott

Kory Sorenson

David Woods

Total

104

Directors’
salaries/fees
2018
£000

Directors’
salaries/fees
2017
£000

Benefits
2018
£000

Benefits
2017
£000

–

Total
2018
£000

–

Total
2017
£000

–

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

Phoenix Group Holdings – NED fees from 1 January 2018 to 12 December 2018

Name

Non-Executive Chairman

Henry Staunton

Nicholas Lyons

Non-Executive Directors

Alastair Barbour

Ian Cormack

Campbell Fleming

Karen Green

Isabel Hudson

Wendy Mayall

Barry O’Dwyer

John Pollock

Belinda Richards

Nicholas Shott

Kory Sorenson

David Woods

Total

Directors’
salaries/fees
2018
£000

Directors’
salaries/fees
20171
£000

Benefits
2018
£000

Benefits
20171
£000

Total
2018
£000

Total
20171
£000

271

136

–

100

–

102

–

121

100

119

–

325

–

150

116

–

118

–

136

105

116

–

1,126

1,236

–

271

148

–

103

–

104

–

121

101

102

119

–

325

–

153

116

118

–

136

105

116

1,148

1,241

1 The comparative 2017 data represents a full year.

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

4 March 2019

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

105

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONDIRECTORS’
REPORT

The Directors present their report for the year ended
31 December 2018.

Phoenix Group Holdings plc is incorporated in the United
Kingdom (registered no. 11606773) and has a Premium
Listing on the London Stock Exchange.

SHAREHOLDERS
Dividends
Dividends for the year are as follows:

Ordinary shares

Paid interim dividend

22.6p per share
(2017: 22.6p1 per share)

Recommended final dividend 23.4p per share

Total ordinary dividend

(2017: 22.6p1 per share)

46p per share
(2017: 45.2p1 per share)

1 2017 dividends per share figures have been rebased to take into account the bonus

element of the rights issue completed in July 2018.

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 327,966,570 during 2018 which related to:

• shares issued in relation to the acquisition of Standard

Life Assurance Limited (SLAL);

• shares issued to Standard Life Aberdeen plc (SLA plc)

in relation to the acquisition of SLAL;

• 144,114,450 shares were issued to SLA plc on 31 August

2018; and

Subject to obtaining shareholder approval for the renewal of
this authority at the forthcoming AGM on 2 May 2019, the
Company is authorised to make purchases of its own shares
and make payment for the redemption or purchase of its own
shares in any manner permitted by the Companies Act 2006
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.

Restrictions on transfer of shares
Under the Company’s Articles, the Directors may in
certain circumstances refuse to register transfers of shares.
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 4 March 2019, the Company had been
notified of the following significant holdings of voting
rights in its shares.

Number of
voting rights in
shares

194,275,410

37,167,390

Percentage
of shares
in issue

26.93%

5.15%

• shares issued under the Company’s Sharesave Scheme.

Standard Life Aberdeen plc

BlackRock Inc.

At 31 December 2018, the issued ordinary share capital
totalled 721,199,214. Subsequently, 3,531 ordinary shares
have been issued in 2019 in connection with the Group’s
Sharesave Scheme to bring the total in issue to 721,202,745
at the date of this report.

Full details of the issued and fully paid share capital as at
31 December 2018 and movements in share capital during
the period are presented in note D1 to the IFRS consolidated
financial statements.

At the General Meeting of Phoenix Group Holdings plc held in
October 2018, shareholders granted the Company authority to
purchase up to 10% of its issued ordinary shares. Any ordinary
shares purchased under this authority would, subject to the
Companies Act 2006 either be cancelled by operation of law
or held in treasury.

* Any references to the Company refer to both Phoenix Group Holdings (the Group’s
former Cayman Islands registered holding company) and Phoenix Group Holdings plc
(the Group’s new UK registered holding company).

Annual General Meeting (‘AGM’)
The AGM of the Company will be held at Standard Life House,
30 Lothian Road, Edinburgh, EH1 2DH on Thursday 2 May
2019 at 9.00am.

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
The Company places considerable importance on
communication with investors and regularly engages
with them on a wide range of topics.

106

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

The Company’s Investor Relations department is dedicated
to facilitating communication with investors and analysts
and maintains an active investor relations programme.
Please see page 58 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, 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 2018 meeting,
the Code provisions were complied with. Shareholders were
invited to ask questions during the meeting. It is intended
that the same processes will be followed at the 2019 AGM.

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.

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 election/re-election annually.
The Board of Directors will be unanimously recommending
that all of the Directors should be put forward for election
at the forthcoming AGM to be held on 2 May 2019.

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 the
Companies Act 2006, the provisions of the Company’s
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 the Company’s Articles.

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.

BOARD
Board of Directors
The membership of the Board of Directors during 2018 is
given within the Corporate Governance Report on pages 65
and 67, 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.

Directors’ indemnities
The Company has entered into deeds of indemnity with
each of 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 when prohibited by any
applicable law.

During 2018 and up to the date of this report, the following
changes to the Board took place:

The deeds of indemnity remains in-force as at the date
of signature of this Directors’ Report.

• Ian Cormack resigned from the Board on 2 May 2018.

• Campbell Fleming and Barry O’Dwyer were appointed

to the Board on 31 August 2018.

• Henry Staunton resigned from the Board on

31 October 2018.

• Nicholas Lyons was appointed to the Board on

31 October 2018.

Details of related party transactions which took place during
the year with Directors of the Company and consolidated
entities where Directors are deemed to have significant
influence, are provided in the Directors’ Remuneration Report
and in note I5 to the IFRS consolidated financial statements.

Directors’ conflicts of interest
The Board has established procedures for handling conflicts
of interest in accordance with the Companies Act 2006 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.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

107

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONDIRECTORS’ REPORT
CONTINUED

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
colleague 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 colleagues 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.

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
Engagement Survey and more regular interim surveys and
employee communication and engagement forums. While no
survey was undertaken in 2018 as a result of the Standard Life
acquisition, all employees of the Enlarged Group took part
in a Culture survey in December 2018. Phoenix undertakes
meaningful consultation with staff representatives on all major
organisational changes and other matters affecting employee
engagement. An Engagement survey of the Enlarged Group
is planned for Q3 2019.

Employee shareholding
The Group also provides the opportunity for employees to
participate in the Company’s all-employee share schemes,
which includes Sharesave and the Share Incentive Plan,
to encourage broader share ownership in the Company.

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 43 to 45. 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 47) 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 2018.

Viability statement
The Viability Statement, as required by section C.2.2 of the
Code, has been undertaken for a period of five years to align
to the Group’s business planning and is contained in the
Risk Management section on page 46.

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
60 to 75 which is incorporated by reference into this
Directors’ Report and comprises the Company’s
Corporate Governance Statement.

108

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

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 51. 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.

Greenhouse gas emissions
All disclosures concerning the Group’s greenhouse
emissions are contained in the Environmental Report
forming part of the Strategic Report on pages 56 and 57.

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. The Risk Management section
also describes how the Enterprise Risk Management (ERM)
framework operated by the acquired Standard Life Assurance
businesses aligns with the Phoenix RMF.

Articles of Association
Changes to the Company’s Articles require prior
shareholder approval.

The 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 shareholders’ approval will
be sought at the AGM on 2 May 2019.

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 2018 for audit and
non-audit work are disclosed in note C4 to the IFRS
consolidated financial statements.

Disclosure of information to Auditors
The Directors who held office at the date of approval of this
Directors’ Report confirm that, so far as they are aware, there is
no relevant audit information of which the Company’s auditor is
unaware and that each Director has taken all the steps that they
ought to have taken as a Director to make themselves aware
of any relevant audit information and to establish that the
Company’s auditor is aware of that information.

Group Company Secretary
The Group Company Secretary throughout the 2018
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 and £600million acquisition facility
have provisions which would enable the lending banks
to require repayment of all amounts borrowed following
a change of control.

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

Statement of interest
capitalised

Publication of unaudited
financial information

Deleted

Details of long-term
incentive schemes

Note E5 to the
Consolidated
Financial Statements

Not applicable

Waiver of emoluments
by a Director

Directors’ Remuneration
Report

Waiver of any future
emoluments by a Director

Directors’ Remuneration
Report

Non pre-emptive issue
of equity for cash

As per 7, but for major
subsidiary undertakings

Not applicable

Parent participation in any
placing of a subsidiary

Not applicable

Contracts of significance

Not applicable

Controlling shareholder
provision of services

Shareholder dividend
waiver

Shareholder dividend
waiver – future periods

Controlling shareholder
agreements

Not applicable

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

109

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONSTATEMENT OF DIRECTORS’
RESPONSIBILITIES

STATEMENT OF DIRECTORS’ RESPONSIBILITIES
IN RESPECT OF THE ANNUAL REPORT AND
ACCOUNTS OF PHOENIX GROUP HOLDINGS PLC
The Directors are responsible for the preparation of the
Annual Report and Accounts, the Strategic Report, the
Directors’ Report, the Directors’ remuneration report, the
consolidated financial statements and the Company financial
statements in accordance with applicable law and regulations.

The Directors are responsible for making, and continuing to
make, the Company’s Annual Report and Accounts available
on the Company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.

The Directors as at the date of this report, whose names and
functions are listed in the Board of Directors section on pages
62 and 63, confirm that, to the best of their knowledge:

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 2018,
covers the future developments in the business of Phoenix
Group Holdings plc 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 consolidated financial
statements and the Company financial statements in
accordance with International Financial Reporting Standards
(‘IFRSs’) as adopted by the European Union (‘EU’).
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.

• The Group’s consolidated financial statements and the

Company financial statements, which have been prepared
in accordance with IFRS as adopted by the EU, give a true
and fair view of the assets, liabilities, financial position and
profit of the Group and the Company.

• The Strategic Report and the Corporate Governance and

Directors’ 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.

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 Strategic Report and the Directors’ Report were approved
by the Board of Directors on 4 March 2019.

In preparing these financial statements the Directors are
required to:

By order of the Board

CLIVE BANNISTER
GROUP CHIEF EXECUTIVE OFFICER

JAMES MCCONVILLE
GROUP FINANCE DIRECTOR
AND GROUP DIRECTOR,
SCOTLAND

4 March 2019

• 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 EU, have been
followed, subject to any material departures disclosed
and explained in the Group and the Company
financial statements.

• 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 Group and
the Company and enable them to ensure that the financial
statements and the Directors’ Remuneration Report comply
with the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulations.
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.

110

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

FINANCIALS

IN THIS SECTION
Independent Auditor’s Report .............................................112
IFRS Consolidated Financial Statements .......................... 121
Notes to the Consolidated Financial Statements ............. 128
Parent Company Accounts ................................................. 214
Notes to the Parent Company Financial Statements ....... 216
Additional Life Company Asset Disclosures .....................222
Additional Capital Disclosures ............................................228
Alternative Performance Measures ...................................230

INDEPENDENT AUDITOR’S REPORT

TO THE MEMBERS OF PHOENIX GROUP HOLDINGS PLC

OPINION
In our opinion:

• Phoenix Group Holdings plc’s 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 2018 and of the Group’s
profit for the year then ended;

• the consolidated financial statements have been

properly prepared in accordance with International
Financial Reporting Standards (‘IFRSs’) as adopted
by the European Union (‘EU’);

• the parent company financial statements have been

properly prepared in accordance with IFRSs as adopted
by the EU as applied in accordance with the provisions
of the Companies Act 2006; and

• the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006, and, as
regards the consolidated financial statements, Article 4 of
the IAS Regulation.

We have audited the consolidated financial statements of
Phoenix Group Holdings plc and it’s subsidiaries (collectively
‘the Group’) and the parent company financial statements
which comprise:

Group

Parent company

The statement of changes in
equity for the period then ended

The statement of financial position
as at 31 December 2018

The statement of cash flows
for the period then ended

Related notes 1 to 17 to the
financial statements

The statement of consolidated
financial position as at
31 December 2018

The consolidated income
statement for the year
then ended

The consolidated statement of
comprehensive income for the
year then ended

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
(except for note I3 which is
marked as unaudited), including
a summary of significant
accounting policies

The financial reporting framework that has been applied in
their preparation is applicable law and IFRSs as adopted by the
European Union and, as regards the parent company financial
statements, as applied in accordance with the provisions of
the Companies Act 2006.

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.

INDEPENDENCE
Further to our confirmation that 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, we have specifically considered the
impact of the acquisition of Standard Life Assurance Limited
(‘SLAL’) and other associated entities during the period on our
independence. Material business relationships and prescribed
non-audit services with the acquired entities at the time of the
acquisition were terminated within the provisions of the Ethical
Standard and appropriate safeguards were put in place.
These safeguards included the migration of our workplace
pension scheme arrangement to a different provider.

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 (UK) 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 pages 43 to
45 that describe the principal risks and explain how they are
being managed or mitigated;

• the Directors’ confirmation set out on page 110 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 108 in the 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 twelve
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 46 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.

112

PHOENIX GROUP HOLDINGS PLC
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Overview of our audit approach

Key audit matters

– Valuation of insurance contract liabilities, comprising the following risk areas:

– actuarial assumptions;
– actuarial modelling; and
– data.

– Valuation of certain complex and illiquid financial investments.
– Accounting for the acquisition of SLAL and other associated entities.

Audit scope

– We performed an audit of the complete financial information of the Group Function, Phoenix Life Division and

SLAL and audit procedures on specific balances for Other Companies. Our scope is explained further on pages
117 to 118.

– The components where we performed full or specific audit procedures accounted for more than 99% of the

equity and profit before tax of the Group.

Materiality

– Overall Group materiality of £100 million (2017: £63 million) which represents 1.9% (2017: 2%) of total equity

attributable to owners of the parent (‘Group equity’).

Key audit matters
Key audit matters are those matters that, in our professional judgment, 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.

Risk

Valuation of insurance contract liabilities (£92.6bn; 2017: £45.4bn)

Refer to the Audit Committee Report (pages 68 to 71); Critical accounting estimates (page 129); Accounting policies and note F1 of the
consolidated financial statements (pages 166 to 168).
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.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

113

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONWe 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:

Risk
area

Actuarial assumptions

There has been no change in our identification of this
risk from the prior year. Whilst we consider the risks
to be similar in nature, due to the increased account
balances following the acquisition of Standard Life
Assurance Limited and other associated entities in
the year, we believe the identified risk to have a
higher magnitude of potential misstatement.
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 the Group’s
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 identification of this
risk from the prior year. Whilst we consider the risks
to be similar in nature, due to the increased account
balances following the acquisition of Standard Life
Assurance Limited and other associated entities in
the year, we believe the identified risk to have a
higher magnitude of potential misstatement.
We consider the integrity and appropriateness
of models to be critical to the overall valuation of
insurance contract liabilities.

Over £88.0bn of the £92.6bn insurance contract
liabilities are modelled using the core actuarial modelling
systems with the residual balance modelled outside
these systems to cater for any additional required
liabilities not reflected in the model. 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 engaged our actuaries as part of our audit
team and performed the following procedures:

– obtained an understanding and tested the design and operating
effectiveness of key controls over management’s process for
setting and updating actuarial assumptions;

– challenged and assessed whether the assumptions applied were

appropriate based on our knowledge of the Group, industry standards
and regulatory and financial reporting requirements;

– reviewed the results of management’s experience analysis to assess
whether these justified the adopted assumptions, and checked that
the assumptions used are consistent with this experience analysis;

– in respect of longevity improvements we have evaluated the use

of the chosen industry standard Continuous Mortality Investigation
(‘CMI’) model and the parameters used to validate that it was
appropriate relative to the industry;

– benchmarked the demographic and economic assumptions
against those of other comparable industry participants; and
– reviewed and assessed whether the disclosures in the financial
statements, relating to insurance contract liabilities, complied
with the applicable financial reporting standards.

We performed full scope audit procedures over this risk area in two
components and specific scope audit procedures in one component,
which covered 100% of the risk amount.

To conclude on core actuarial modelling systems, including balances
calculated outside these systems, we engaged our actuaries and
performed the following procedures:

– obtained an understanding of the process and tested the design,
implementation and operating effectiveness of key controls over
management’s process for testing and approval of model changes
and key adjustments outside of the actuarial model during the year;

– we challenged and evaluated the methodology, inputs and
assumptions applied for model changes and out of model
adjustments, on a sample basis, 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; and
– assessed the results of the analysis of movements in insurance
contract liabilities in order to corroborate the completeness of
model changes.

We performed full scope audit procedures over this risk area in two
components and specific scope audit procedures in one component,
which covered 100% of the risk amount.

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.

In addition, we are
satisfied that the
disclosures made
in the financial
statements are in
compliance with
the applicable
financial reporting
standards.

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.

114

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

INDEPENDENT AUDITOR’S REPORT CONTINUEDKey
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.

Based on our
procedures
performed on
the ERM and
modelled
corporate bonds,
we are satisfied
that the valuation
of these complex
and illiquid assets
is reasonable.

In addition, we are
satisfied that the
disclosures made
in the financial
statements are in
compliance with
the applicable
financial reporting
standards.

Risk
area

Data

There has been no change in our identification of this
risk from the prior year. Whilst we consider the risks
to be similar in nature, due to the increased account
balances following the acquisition of Standard Life
Assurance Limited and other associated entities in
the year, we believe the identified risk to have a
higher magnitude of potential misstatement.
The policyholder 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.

Our response
to the risk

To obtain sufficient audit evidence to assess the integrity of policyholder
data we performed the following procedures:

– obtained an understanding of the process and tested the design
and operating effectiveness of key controls, including information
technology general controls, over management’s data collection,
extraction and validation process;

– for Outsourced Service Providers (‘OSP’) where we have placed
reliance on the Service Organisation Controls (‘SOC1’) report,
we have reviewed the SOC1 report and concluded on the design
effectiveness of the relevant controls;

– for OSPs where we do not receive a SOC1 we have obtained an
understanding of the process and performed direct testing of the
operating effectiveness of the key controls;

– where we have not relied on controls at the OSP, or for policies

administered internally, we have performed additional procedures
including agreeing policyholder documentation to the policyholder
data used in the actuarial model on a sample basis;

– 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;

– confirmed that the actuarial model data extracts provided by
the OSPs were those used as an input to the actuarial model;
– assessed the appropriateness of management’s grouping of

data for input into the actuarial model; and

– tested the reconciliations of premiums and claims information

extracted from the policy administration systems to the general
ledger, where applicable.

We performed full scope audit procedures over this risk area in two
components and specific scope audit procedures in one component,
which covered 100% of the risk amount.

Valuation of certain complex and illiquid financial
investments (£2.5bn; 2017: £1.4bn)

We engaged our valuation specialists and actuaries to test valuation of
ERMs and modelled corporate bonds.

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 addition, following the acquisition of SLAL and
other associated entities, we have identified heightened
risk on the Standard Life modelled corporate bonds due
to a combination of size of these financial investments
and level of judgement involved in valuation.

Refer to the Audit Committee Report (pages 68 to 71);
Critical accounting estimates (page 129); Accounting
policies and notes E1 and E2 of the consolidated
financial statements (pages 143 to 151).
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
financial investments and the Standard Life modelled
corporate bonds, such as private placements, 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.

To obtain sufficient audit evidence to conclude on the valuation of ERMs, we:

– tested the design and operating effectiveness of key controls over

management’s process in respect of the valuation of ERMs;

– tested the completeness and accuracy of the mortgage data used in
the valuation model by agreeing a sample of new loans to supporting
evidence and validating any movements on static data over the period;
– evaluated the methodology, inputs and assumptions used (such as house
price inflation, residential house price volatility, longevity improvement and
base mortality, as well as economic assumptions such as discount rate);
– we have validated the key assumptions by comparing them to
published market benchmarks and 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 instrument type;

– assessed the reasonableness of the fair value of the mortgages
at the reporting date including an assessment of the valuation
approach to the no-negative equity guarantee; and

– reviewed that disclosures have been made in the financial statements
regarding the sensitivity of the valuation of the ERMs to changes in the
key assumptions and audited the figures in the sensitivity disclosures.

To obtain sufficient audit evidence to conclude on the valuation of modelled
corporate bonds, we:
– tested the design and operating effectiveness of key controls over
management’s process in respect of the valuation of modelled
corporate bonds;

– tested inputs in the models including coupons and maturity and
assessed reasonableness of assumptions and judgements in
particular related to spread at the acquisition date;

– performed independent valuation of a sample of modelled corporate
bonds and benchmarked management’s valuation approach against
market best practice; and

– reviewed that disclosures have been made in the financial statements
regarding the sensitivity of the valuation of the modelled corporate
bonds to changes in the key assumptions and audited the figures
in the sensitivity disclosures.

We performed full scope audit procedures over this risk area in two
components, which covered 100% of the risk amount.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

115

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONRisk
area

Our response
to the risk

Accounting for the acquisition of Standard Life
Assurance Limited and other associated entities

To obtain sufficient audit evidence to assess the impact of the acquisition
of the Standard Life Assurance businesses, we:

– being the first year of our appointment as auditors of the Standard Life
Assurance businesses, performed review of the predecessor auditor
working papers and discussed the significant risk and judgemental
areas with them;

– agreed the key product features on a sample of products to underlying

policy terms/documentations and reviewed the output of management’s
own model reviews in order to gain assurance that the actuarial models
appropriately capture the product features and that the calculations
reflect the approved business and reporting requirements;

– assessed the integrity of data used in the valuation process through
a combination of re-performance of key reconciliations and the use
of analytic techniques to compare, on a sample basis, policy level data
between data in the actuarial models and that contained within the
policy administration systems;

– audited the SLAL statement of financial position as at the date

of acquisition;

– Ensured appropriate recognition of all identifiable intangible assets by
understanding the transaction and comparing it to other acquisitions
of similar businesses;

– assessed the methodology and assumptions adopted by management
for calculating the fair values of intangible assets arising on acquisition
and considered how market participants would value identifiable assets
and liabilities in an orderly transaction;

– considered whether any fair value adjustments are required in the
insurance contract liabilities recognised on a best estimate basis
within the acquired business, and assess any impact on the
calculation of goodwill and AVIF;

– ensured that the acquisition accounting and disclosure of the

acquisition are in compliance with IFRS 3 Business Combinations; and

– read relevant agreements and board minutes which supported the

final conclusions in respect of the acquisition accounting.

This is a new significant risk for the current year.

Refer to the Audit Committee Report (pages 68 to 71);
Critical accounting estimates (page 130); Accounting
policies and notes G7 and H2 of the consolidated
financial statements (pages 190 to 192 and pages
195 to 197).
On 31 August 2018, the Group acquired SLAL, Standard
Life International Designated Activity Company, Standard
Life Assets and Employee Services Limited and other
related entities (collectively ‘the Standard Life Assurance
businesses’) from Standard Life Aberdeen plc (‘SLA plc’)
for total consideration of £2,994 million.

We consider the identification and valuation of
identifiable intangible assets, such as acquired in-force
business (‘AVIF’) and other intangibles, arising from the
acquisition of the Standard Life Assurance businesses
to be a significant risk due to the nature of judgements
and estimates involved.

Under the Group’s accounting policy, acquired
value of in-force insurance contracts is measured
as the difference between the Generally Accepted
Accounting Practice (‘GAAP’) value of the insurance
contract liabilities and the determined fair value.

As a result, we focused on significant judgements in
respect of the identification of the intangible assets
acquired, GAAP valuation of the SLAL insurance
contract liabilities as at the date of acquisition, the fair
value adjustments required in the insurance contract
liabilities and their impact on the calculation of goodwill
and AVIF and the valuation of an intangible asset relating
to the Client Service and Proposition Agreement
(‘CSPA’) entered into between the Group and SLA plc.

The primary elements of the valuation exercise
assessed the fair value of the identifiable intangible
assets in the form of AVIF (£2,931 million) and a
separately identifiable intangible asset of £36 million
relating to the CSPA, both gross of tax.

This resulted in a gain on acquisition of £141 million that
was recognised in the consolidated income statement
for the year ended 31 December 2018, reflecting the
excess of the fair value of the net assets acquired over
the consideration paid for the acquisition of the
Standard Life Assurance businesses.

Key
observations
communicated
to the Audit
Committee

Based on our
procedures
performed on
the acquisition
of the Standard
Life assurance
businesses,
we are satisfied
that, on an
overall basis,
the fair value of
the assets and
liabilities acquired
lies within a
reasonable
range of what a
market participant
in an orderly
transaction
would pay for the
identifiable assets
and liabilities
and there is a
justification for
the gain on
acquisition.

In addition, we
are satisfied that
the acquisition
accounting and
disclosures are in
compliance with
the applicable
accounting
framework.

116

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

INDEPENDENT AUDITOR’S REPORT CONTINUEDAN OVERVIEW OF 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 (‘reporting 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 reporting component.

In assessing the risk of material misstatement to the
consolidated financial statements, and to ensure we had
adequate quantitative coverage of significant accounts in the
financial statements, we identified four reporting components
of the Group. The Group reporting components consist of
Phoenix Life Division, SLAL, the 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. SLAL is a newly acquired
subsidiary of the Group. 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 Phoenix Life service companies and Standard Life
International Designated Activity Company (‘SL Intl’).

Details of the four reporting components which were audited
by component teams are set out below:

Component

Phoenix Life Division

Standard Life Assurance Limited
(‘SLAL’)

Group Function

Other Companies

Scope

Auditor

Full

Specific

Of the four components selected, we performed an audit
of the complete financial information of three components
(‘full scope components’) which were selected based on
their size or risk characteristics. For the remaining Other
Companies (‘specific scope components’), we performed
audit procedures on specific accounts of Phoenix Life service
companies (provisions, accruals and deferred income, wages
and salaries and administrative expenses) and of SL Intl
(cash and cash equivalents and insurance contract liabilities).

The reporting components where we performed audit
procedures accounted for more than 99% (2017: 99%) of
the Group’s equity and the Group’s profit before tax. For the
current year, the full scope components contributed 93%
(2017: 98%) of the Group’s equity and 97% (2017: 99%) of
the Group’s profit before tax. The specific scope component
contributed 6% (2017: 2%) of the Group’s equity and 2%
(2017: 1%) of the Group’s profit 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.

EQUITY

PROFIT
BEFORE TAX

(full scope)

• Phoenix Life Division
• SLAL (full scope)
• Group Function
• Other Companies
• Out of scope

(speciﬁc scope)

(full scope)

• Phoenix Life Division
• SLAL (full scope)
• Group Function
• Other Companies
• Out of scope

(speciﬁc scope)

(full scope)

45%
33%

15%

6%
<1%

44%
28%

25%

2%
<1%

Changes from the prior year
In prior year, we identified Abbey Life Assurance Company Limited
(‘ALAC’) as a separate component of the Group. In the 2018
financial year, management completed the Part VII transfer of the
ongoing insurance business of ALAC into Phoenix Life Division and
at 31 December 2018 ALAC is no longer a separate identifiable
component of the Group.

SLAL is a new component of the Group in 2018 following the
acquisition completed on 31 August 2018. Due to the size and
risk inherent in the component, we have designated it as a full
scope component. SL Intl, acquired as part of the Standard
Life Assurance businesses, is within the ‘Other Companies’
component and is designated as a specific scope component.

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 component auditors from other EY global network firms
operating under our instruction.

The primary 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 primary audit team.

Of the three full scope components, audit procedures were
performed on one of these directly by the primary audit team
whilst the remaining two components were audited by the
component audit teams. For Other Companies, where the work
was performed by component auditors, we determined the
appropriate level of involvement to enable us to determine that
sufficient audit evidence had been obtained as a basis for our
opinion on the Group as a whole.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

117

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATION

The primary audit team followed a programme of planned visits
that has been designed to ensure that the Senior Statutory Auditor
visited each of the components 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 scope components, in addition
to the component visits, the primary audit team reviewed key
working papers and participated in the component teams’
planning, including the component teams’ discussion of fraud and
error. The primary audit team attended the closing meetings with
the management of the Phoenix Life Division and SLAL and
attended key Audit Committee meetings at the components.

For the specific scope component, the primary audit 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.

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 £100 million
(2017: £63 million), which is 1.9% (2017: 2%) of Group equity.
In the current year we considered profit-based measures for
materiality given that the Standard Life Assurance business
changed the business mix of the Group to include a greater
proportion of open business. Whilst profit before tax or
operating profit are common bases used across the life
insurance industry and might be an appropriate measure for an
open business, we believe that the use of equity as the basis
for assessing materiality remains more appropriate given that
the Group remains primarily 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.

The parent company was incorporated in 2018 under the UK
Companies Act 2006 and is domiciled in England and Wales.
The financial statements for the period ended 31 December
2018 are the first set of financial statements prepared by
the parent company. Accordingly, there is no comparative
information to disclose in the individual financial statements of
the parent company. We determined materiality for the parent
company to be £82 million, which is 2% of the parent company
equity attributable to owners. 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%
(2017: 50%) of our planning materiality, namely £50 million
(2017: £31 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
£10 million to £28 million (2017: £6 million to £24 million).

Reporting threshold
An amount below which identified misstatements are
considered as being clearly trivial.

We agreed with the Audit Committee that we would report to
them all uncorrected audit differences in excess of £5 million
(2017: £3 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.

OTHER INFORMATION
The other information comprises the information included in
the Annual Report set out on pages 1 to 110, 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.

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.

118

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

INDEPENDENT AUDITOR’S REPORT CONTINUEDIn 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 110 –
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 68 to 71 –
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 109 – 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.

OPINIONS ON OTHER MATTERS PRESCRIBED BY THE
COMPANIES ACT 2006
In our opinion, the part of the Directors’ Remuneration Report
to be audited has been properly prepared in accordance with
the Companies Act 2006.

In our opinion, based on the work undertaken in the course
of the audit:

• 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; and

• the Strategic Report and the Directors’ Report have been
prepared in accordance with applicable legal requirements.

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 110, 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 Group and parent company’s
ability to continue as a going concern, disclosing, as
applicable, matters related to going concern and using the
going concern basis of accounting unless the Directors either
intend to liquidate the Group or the parent company or to
cease operations, or have no realistic alternative but to do so.

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.

Explanation as to what extent the audit was considered
capable of detecting irregularities, including fraud
The objectives of our audit:

• in respect to 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.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

119

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONOther matters we are required to address
• Following the completion of the on-shoring exercise and

the incorporation of Phoenix Group Holdings plc, we were
appointed by the Company Directors on 13 December 2018
and signed an engagement letter on 20 February 2019 to
audit the financial statements for the period ending
31 December 2018 and subsequent financial periods.

• The non-audit services prohibited by the FRC’s Ethical
Standard were not provided to the group or the parent
company and we remain independent of the group and
the parent company in conducting the audit.

• The audit opinion is consistent with the additional report

to the audit committee.

USE OF OUR REPORT
This report is made solely to the Company’s members,
as a body, in accordance 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.

ED JERVIS (SENIOR STATUTORY AUDITOR)
FOR AND ON BEHALF OF ERNST & YOUNG LLP,
STATUTORY AUDITOR
London

4 March 2019

Our approach was as follows:

• We obtained an 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.

• We assessed the susceptibility of the consolidated 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.

Financial Reporting Council’s website at
https://www.frc.org.uk/auditorsresponsibilities.
This description forms part of our auditor’s report.

120

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

INDEPENDENT AUDITOR’S REPORT CONTINUED
CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2018

Gross premiums written

Less: premiums ceded to reinsurers

Net premiums written

Fees and commissions

Total revenue, net of reinsurance payable

Net investment income

Other operating income

Gain on acquisition

Net income

Policyholder claims

Less: reinsurance recoveries

Change in insurance contract liabilities

Change in reinsurers’ share of insurance contract liabilities

Transfer from/(to) unallocated surplus

Net policyholder claims and benefits incurred

Change in investment contract liabilities

Change in present value of future profits

Amortisation of acquired in-force business

Amortisation of other intangibles

Administrative expenses

Net income under arrangements with reinsurers

Net expense/(income) attributable to unitholders

Total operating expenses

Profit before finance costs and tax

Finance costs

Profit/(loss) for the year before tax

Tax credit/(charge) attributable to policyholders’ returns

Profit/(loss) before the tax attributable to owners

Tax credit/(charge)

Add: tax attributable to policyholders’ returns

Tax (charge)/credit attributable to owners

Profit/(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)

* Restated following rights issue

Notes

2018
£m

2,645

(481)

2,164

385

2,549

2017 restated
(Note A1)
£m

1,297

(356)

941

173

1,114

(9,600)

4,986

H2.1

F3.3

141

–

(6,873)

6,105

(5,295)

866

4,768

(20)

407

7,975

(196)

(18)

(1,056)

159

7,274

401

(142)

259

211

470

151

(211)

(60)

410

379

410

(4,064)

594

1,392

(423)

(46)

(2,547)

(2,673)

(109)

(17)

(596)

–

(43)

(5,980)

125

(132)

(7)

(21)

(28)

(20)

(27)

–

(27)

B3.1

B3.2

66.8p

66.7p

(6.3)p*

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

121

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONSTATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2018

Profit/(loss) for the year

Other comprehensive income/(expense):

Items that are or may be reclassified to profit or loss:

Cash flow hedges:

Fair value gains/(losses) arising during the year

Reclassification adjustments for amounts recognised in profit or loss

Exchange differences on translating foreign operations

Items that will not be reclassified to profit or loss:

Remeasurement of owner-occupied property

Remeasurements of net defined benefit asset/liability

Tax (charge)/credit relating to other comprehensive income items

Total other comprehensive (expense)/income for the year

Total comprehensive income for the year

Attributable to:

Owners of the parent

Non-controlling interests

Notes

2018
£m

410

2017
£m

(27)

(28)

–

(54)

(10)

(59)

351

320

351

(13)

–

122

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STATEMENT OF CONSOLIDATED FINANCIAL POSITION

AS AT 31 DECEMBER 2018

EQUITY AND LIABILITIES

Equity attributable to ordinary shareholders 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 attributable to ordinary shareholders of the parent

Tier 1 Notes

Non-controlling interests

Total equity

Liabilities

Pension scheme liability

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

2018
£m

2017 restated
(Note A1)
£m

3,077

(6)

(8)

1,413

(2)

(11)

1,923

1,615

5,161

3,155

494

294

–

5,949

3,155

596

633

91,211

1,358

92,569

44,435

925

45,360

114,463

26,733

2,186

4,438

1,093

2,659

2,645

1,778

368

1,242

840

1,961

127,484

32,922

377

843

902

337

873

134

366

522

179

144

224,031

80,288

229,980

83,443

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

123

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATION
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
CONTINUED

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

Notes

2018
£m

2017
£m

255

322

4,033

221

4,311

6,520

3,612

3,798

52,716

496

67,932

70,606

5,417

204,577

1,298

202

1,557

612

1,812

2,760

17,234

550

26,998

18,901

6,085

74,340

7,564

3,320

7,673

3,359

145

478

1,047

4,926

229,980

355

580

2,245

83,443

G10

G11

124

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STATEMENT OF CONSOLIDATED CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2018

Cash flows from operating activities

Cash (utilised)/generated by operations

Taxation paid

Net cash flows from operating activities

Cash flows from investing activities

Notes

Acquisition of Standard Life Assurance subsidiaries, net of cash acquired

H2.1

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

Dividends paid to non-controlling interests

Repayment of policyholder borrowings

Repayment of shareholder borrowings

Proceeds from new shareholder borrowings, net of associated expenses

Proceeds from issuance of Tier 1 Notes, net of associated expenses

Proceeds from sale of internal holding in £428 million subordinated notes

Coupon paid on Tier 1 Notes

Interest paid on policyholder borrowings

Interest paid on shareholder borrowings

Net cash flows from financing activities

Net increase 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

G11

2018
£m

(324)

(29)

(353)

1,607

936

(262)

(2)

(69)

(295)

733

494

–

(14)

(5)

(89)

1,427

2,681

2,245

4,926

2017
£m

1,156

(35)

1,121

–

(193)

–

(77)

(1,053)

830

–

(8)

(75)

(542)

579

1,666

2,245

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

125

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATION
STATEMENT OF CONSOLIDATED CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2018

Shares
held
by the
employee
benefit
trust
(note D2)
£m

Share
capital
(note D1)
£m

Share
premium
£m

Foreign
currency
translation
reserve
£m

Owner-
occupied
property
revaluation
reserve
£m

Cash
flow
hedging
reserve
£m

Retained
earnings
£m

Total equity
attributable
to ordinary
shareholders
of the parent
£m

Tier 1
Notes
(note
D3)
£m

Non-
controlling
interests
(note D4)
£m

Total
equity
£m

(11)

1,615

3,155

At 1 January
2018

Profit for the year

Other
comprehensive
income/
(expense)
for the year

Total
comprehensive
income for
the year

Issue of ordinary
share capital,
net of associated
commissions
and expenses
(note D1)

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

Non-controlling
interests
recognised on
acquisition

Dividends paid to
non-controlling
interests

Issue of Tier 1
Notes

Coupon paid on
Tier 1 Notes, net
of tax relief

At 31 December
2018

1,413

(2)

–

1,926

–

(262)

–

(8)

–

3,077

(6)

–

379

(64)

(59)

315

320

1,959

(262)

–

(8)

–

(4)

–

494

–

– 3,155

410

–

(59)

351

– 1,959

–

(262)

–

(8)

265

(2)

–

494

(12)

–

(8)

1,923

5,161

494

294 5,949

126

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STATEMENT OF CONSOLIDATED CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2017

Share
capital
(note D1)
£m

Share
premium
£m

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

Retained
earnings
£m

Total
£m

At 1 January 2017 – restated
(note A1)

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 (note D1)

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

1,604

(7)

–

(193)

–

(4)

(2)

–

(11)

–

1,597

3,333

(27)

–

(9)

–

(27)

(193)

–

(4)

(11)

1,615

3,155

At 31 December 2017 – restated
(note A1)

1,413

Phoenix Group Holdings (‘Old PGH’), the former holding company of the Group was 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.

In accordance with Cayman Islands Companies Law, dividends shown in the table above were charged within equity against the
share premium account. Upon creation of the new UK-registered holding company (as detailed in note A1), future dividends will
be charged to retained earnings in accordance with the UK Companies Act 2006.

The comparative equity structure has been restated to reflect the difference between the par value of shares issued by Phoenix
Group Holdings plc (the ‘Company’) and the shares issued by Old PGH prior to the share for share exchange with a
corresponding adjustment to share premium. Further details are provided in note A1.

Retained earnings comprise the owners’ interest in the post-acquisition retained earnings of the subsidiary companies and the
retained earnings of the Company. Distribution of retained earnings held within the long-term business funds and surplus assets
held within the owners’ funds of the life companies is subject to retaining sufficient funds to protect policyholders’ interests.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

127

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATION
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

A. SIGNIFICANT ACCOUNTING POLICIES
A1. Basis of preparation
The consolidated financial statements for the year ended
31 December 2018 set out on pages 121 to 213 comprise
the financial statements of Phoenix Group Holdings plc
(‘the Company’) and its subsidiaries (together referred
to as ‘the Group’), and were authorised by the Board
of Directors for issue on 4 March 2019.

Under a scheme of arrangement in accordance with section
86 of the Cayman Islands Companies Law between Phoenix
Group Holdings (‘Old PGH’), the former ultimate parent
company of the Group, and its shareholders, all of the issued
shares in Old PGH were cancelled and an equivalent number
of new shares in Old PGH were issued to the Company
in consideration for the allotment to Old PGH shareholders
of one ordinary share in the Company for each ordinary
share in Old PGH that they held on the scheme record date,
12 December 2018.

The scheme of arrangement had the effect of the Company
being inserted above Old PGH in the Group legal entity
organisational structure and constitutes a group reconstruction.
It has been accounted for in accordance with the principles
of a reverse acquisition under IFRS 3 Business Combinations.

In applying the principles of reverse acquisition accounting,
the consolidated financial statements have been presented
as a continuation of the Old PGH business and the Group is
presented as if the Company had always been the ultimate
parent company. The comparative equity structure has
been restated to reflect the difference between the par
value of shares issued by the Company (£39 million) and
the shares issued by Old PGH (£nil) prior to the share
for share exchange, with a corresponding adjustment
to share premium. In addition, the presentation within the
consolidated statement of changes in equity of the impact
of shares issued during the year by Old PGH up to the date
of the share for share exchange reflects the par value of
the shares issued by the Company.

No other adjustments have been reflected in equity, and as
a consequence, the carrying values of the components of
equity recognised in the consolidated financial statements
are different to the corresponding balances in the financial
statements of the Company.

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 and financial liabilities (including derivative
instruments) that have been measured at fair value.

The consolidated 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
International Financial Reporting Standard (‘IFRS’) or
interpretation, as specifically disclosed in the accounting
policies of the Group.

Statement of compliance
Following the creation of the new UK-registered holding company,
the consolidated financial statements have been prepared in
accordance with IFRSs as adopted by the European Union (‘EU’).
The consolidated financial statements were previously prepared
in accordance with IFRSs as issued by the International Accounting
Standards Board (‘IASB’). As at 31 December 2018 there were
no differences between IFRSs adopted by the EU and those
issued by the IASB in terms of their application to the Group,
and therefore there is no impact on the consolidated financial
statements in the current or prior period as a result of this change.

Restatement of prior period information
Following the acquisition of the Standard Life Assurance
businesses (see note H2), the Group has chosen to revise
the presentation of its 2018 consolidated income statement to aid
understanding of the Enlarged Group’s results. Where necessary,
2017 comparative amounts and accompanying notes have
been restated to reflect line item reclassifications.

The Group has reassessed its operating segments to reflect
the way in which the business is now being managed following
the acquisition of the Standard Life Assurance businesses.
Comparative segmental performance information has been
restated in line with the revised segments and further details
are provided in note B1.

As noted above the equity structure disclosed for the 2017
comparative period has been restated to reflect the difference
between the par value of shares issued by the Company and the
shares issued by Old PGH prior to the share for share exchange.
This impacts the statement of consolidated financial position
and the statement of consolidated changes in equity.

In addition, the presentation of gross premiums written, premiums
ceded to reinsurers, policyholder claims and reinsurance recoveries
in respect of certain corporate pension de-risking transactions has
been updated in the 2017 comparative amounts to better reflect
the underlying structure of the transactions.

None of the restatements of prior period information have
impacted the profit or loss or total equity attributable to the
owners of the parent.

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 reassesses
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.

128

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

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.

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 consolidated
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, valuation of
pension scheme assets and liabilities and the valuation
of intangibles on initial recognition.

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, identification of intangible assets arising on
acquisitions, the recognition of an investment as an associate
and determination of control with regards to underlying
entities. 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 169 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 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.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

129

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONA. SIGNIFICANT ACCOUNTING POLICIES continued
A3.3 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.

A3.4 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. Management has determined that the scheme
administrator would be subject to a 35% tax charge on a
refund and therefore any surplus is reduced by this amount.
Further details of the Group’s pension schemes are
provided in note G6.

A3.5 Operating profit
Operating profit is the Group’s non-GAAP measure of
performance and gives stakeholders a better understanding
of the underlying performance of the Group. 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.

A3.6 Acquisition of the Standard Life Assurance
businesses
The identification and valuation of identifiable intangible
assets, such as acquired in-force business or brand
intangibles, arising from the Group’s acquisition of the
Standard Life Assurance businesses requires the Group
to make a number of judgements and estimates.
Further details are included in notes G7 ‘Intangible
assets’ and H2 ‘Acquisitions’.

A3.7 Control and consolidation
The Group has invested in a number of collective investment
schemes and other types of investment where judgement
is applied in determining whether the Group controls the
activities of these entities. These entities are typically
structured in such a way that owning the majority of the voting
rights is not the conclusive factor in the determination of
control in line with the requirements of IFRS 10 Consolidated
Financial Statements. The control assessment therefore
involves a number of further considerations such as whether
the Group has a unilateral power of veto in general meetings
and whether the existence of other agreements restrict
the Group from being able to influence the activities.
Further details of these judgements are detailed in note H1.

A4. Adoption of new accounting pronouncements in 2018
In preparing the consolidated financial statements, the
Group has adopted the following amendments, standards,
and interpretations effective from 1 January 2018:

IFRS 15 Revenue from Contracts with Customers
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. The Group adopted IFRS 15
using the full retrospective method of adoption however the
effect of adopting IFRS 15 has been minimal and has not
resulted in any adjustment in either the current or prior period.
There has been no change to the Group’s accounting policies
or to the basis of revenue recognition. As required by the
standard, ‘Disaggregation of Revenue’ disclosures have been
included in note C1 to the consolidated financial statements.
The practical expedient under IFRS 15 has been applied
and remaining performance obligations are not disclosed as
the Group has the right to consideration from customers in
amounts that correspond with the performance completed
to date.

Amendments to IFRS 4 Insurance Contracts: Applying
IFRS 9 Financial Instruments with IFRS 4
The amendments address concerns arising from implementing
the new financial instruments standard, IFRS 9, before
implementing IFRS 17 Insurance Contracts, which replaces
IFRS 4. The amendments introduce two options for entities
issuing insurance contracts: a temporary exemption from
applying IFRS 9 and an overlay approach. The Group has taken
advantage of the temporary exemption granted to insurers in
IFRS 4 from applying IFRS 9 until 1 January 2021 as a result
of meeting the exemption criteria as at 31 December 2015.
As required by IFRS 4, a number of disclosures have been
included in note E1 to the consolidated financial statements to
provide information to allow comparison with entities adopting
the standard in 2018. The IASB has recommended that the
deferral period is extended to 1 January 2022.

130

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDAmendments to IFRS 2 Classification and Measurement
of Share-based Payment Transactions
The IASB issued amendments to IFRS 2 Share-based Payment
that address three main areas: the effects of vesting conditions
on the measurement of a cash-settled share-based payment
transaction; the classification of a share-based payment
transaction with net settlement features for withholding
tax obligations; and accounting where a modification to the
terms and conditions of a share-based payment transaction
changes its classification from cash-settled to equity-settled.
On adoption, entities are required to apply the amendments
without restating prior periods, but retrospective application
is permitted if elected for all three amendments and other
criteria are met. The Group has reviewed its current share-
based payment schemes and has determined that it does
not have any cash-settled share based payment schemes
and that the narrow scope amendment regarding ‘net
settlement features’ does not apply. As a consequence,
these amendments do not currently have any impact on
the Group.

Amendments to IAS 40 Transfers of Investment Property
The amendments clarify when an entity should transfer
property, including property under construction or
development into, or out of investment property.
The amendments state that a change in use occurs when
the property meets, or ceases to meet, the definition of
investment property and there is evidence of the change
in use. A change in management’s intentions for the use
of a property in and of itself does not provide evidence of
a change in use. These amendments do not currently have
any impact on the Group.

IFRIC Interpretation 22 Foreign Currency Transactions
and Advance Consideration
The Interpretation clarifies that, in determining the spot
exchange rate to use on initial recognition of the related
asset, expense or income (or part of it) on the derecognition
of a non-monetary asset or non-monetary liability relating
to advance consideration, the date of the transaction is the
date on which an entity initially recognises the non-monetary
asset or non-monetary liability arising from the advance
consideration. If there are multiple payments or receipts
in advance, then the entity must determine a date of
the transactions for each payment or receipt of advance
consideration. This Interpretation does not have any
impact on the Group.

Annual Improvements Cycle 2014-2016: Amendments
to IFRS 1 First-time adoption of IFRSs and Amendments
to IAS 28 Investments in Associates and Joint Ventures.
The first amendment deletes short-term exemptions for
first time adopters as they have now served their intended
purpose. The second amendment clarifies that an entity that
is a venture capital organisation, or other qualifying entity, may
elect, at initial recognition on an investment-by-investment
basis, to measure its investments in associates and joint
ventures at fair value through profit or loss (‘FVTPL’).
The Group currently applies the election to measure its
investments in associates at FVTPL. There are no further
impacts as a result of the amendments.

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,
amendments or interpretations where this is permitted.

• IFRS 9 Financial Instruments (2018). 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 (recommended
deferral period extended by the IASB to 2022) 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 connected with
insurance relative to the total carrying amount of all its
liabilities was greater than 90%. Following the acquisition of
the Standard Life Assurance businesses on 31 August 2018,
this assessment was reperformed and the Group’s activities
were still considered to be predominately connected with
insurance. IFRS 9 will instead be implemented at the same
time as the new insurance contracts standard (IFRS 17
Insurance Contracts) effective from 1 January 2021 (IASB
recommended extending the implementation date to 2022).
The Group expects to continue to value the majority of
its financial assets as at FVTPL on initial recognition, as
these financial assets are managed on a fair value basis.
As detailed in note A4, a number of disclosures have been
made in note E1 to the consolidated financial statements
to provide information to allow comparison with entities
adopting the standard in 2018.

• 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 has commenced an assessment of the impact
of the new standard and has concluded that it will bring
its property leases currently classified as operating leases
(see note I5) onto the statement of consolidated financial
position. A depreciation charge on the right-of-use assets
and an interest expense on the lease liabilities will be
recognised. The overall impact on financial performance
and net equity will be immaterial due to the limited
number of these contracts and their relative value.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

131

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATION• IFRS 17 Insurance Contracts (2021 – IASB recommended

extension of implementation date to 2022). Once effective
IFRS 17 will replace IFRS 4 the current insurance contracts
standard and it is expected to significantly change the way
the Group measures and reports its insurance contracts.
The overall objective of the new standard is to provide
an accounting model for insurance contracts that is more
useful and consistent for users. 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 Discretionary Participation
Features (‘DPF’). These changes will impact profit
emergence patterns and add complexity to valuation
processes, data requirements and assumption setting.
During 2017, the Group commenced a project to perform
an initial impact assessment of the standard on the
Group and to produce a detailed implementation plan.
Implementation activities during 2018 have included the
development of detailed methodologies and policies and
the identification of specific data and systems requirements.
These activities will continue into 2019.

• Sale or Contribution of Assets between an Investor and its
Associate or Joint Venture (Amendments to IFRS 10 and
IAS 28) (effective date deferred). The amendments address
the conflict between IFRS 10 and IAS 28 in dealing with
the loss of control of a subsidiary that is sold or contributed
to an associate or joint venture.

All of the above have been endorsed by the EU with exception
of the following amendments:

• Annual Improvements Cycle 2015-2017: Amendments to
IAS 12 Income Taxes, IAS 23 Borrowing Costs and IFRS 3
Business combinations/IFRS 11 Joint Arrangements (2019);

• IAS 19 Employee Benefits: Plan Amendment, Curtailment

or Settlement;

• IAS 28 Investments in Associates and Joint Ventures

References to the Conceptual Framework in IFRS Standards;

• IAS 1 Presentation of Financial Statements and IAS 8

Accounting Policies;

• IFRS 3 Business Combinations; and
• IFRS 17 Insurance Contracts.

Where not specifically stated, the impact on the Group
of adopting the above standards, amendments and
interpretations is subject to evaluation.

A. SIGNIFICANT ACCOUNTING POLICIES continued
A5. New accounting pronouncements not yet
effective continued
• Annual Improvements Cycle 2015-2017: Amendments to
IAS 12 Income Taxes, IAS 23 Borrowing Costs and IFRS 3
Business combinations/IFRS 11 Joint Arrangements (2019).
These amendments do not currently have any impact on
the Group.

• Amendments to IAS 19 Employee Benefits: Plan

Amendment, Curtailment or Settlement (2019). The
amendments address the accounting when a defined
benefit plan amendment, curtailment or settlement occurs
during a reporting period. The entity is required to update
the assumptions about its obligation and fair value of its
plan assets to calculate costs related to these changes. The
proposed amendments to IAS 19 Employee Benefits specify
that the entity is required to use the updated information
to determine current service cost and net interest for the
period followed by these changes. The Group will apply
these changes to any plan amendments, curtailments
or settlements occurring on or after 1 January 2019.
• Amendments to IAS 28 Investments in Associates and
Joint Ventures: Long-term interests in Associates and
Joint Ventures (2019). The amendments to IAS 28 clarify
that an entity applies IFRS 9 Financial Instruments to
long-term interests in an associate or joint venture that
form part of the net investment in the associate or joint
venture but to which the equity method is not applied.
The amendments are deferred as a result of the extension
of the implementation date of IFRS 9 to 2021.

• Amendments to IFRS 9 Financial Instruments: Prepayment

Features with Negative Compensation (2018 – recommended
implementation date extended by the IASB to 2022 for
those companies applying the IFRS 4 deferral option).
The proposed amendments would allow for a narrow
exception to IFRS 9 that would permit particular financial
instruments with prepayment features with negative
compensation to be eligible for measurement at amortised
cost or at fair value through other comprehensive income.
• 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.

• Amendments to References to the Conceptual Framework

in IFRS Standards (2020).

• Amendments to IAS 1 Presentation of Financial Statements

and IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors (2020). The amendments clarify
the definition of material and how it should be applied
and ensures that the definition of material is consistent
across all IFRS Standards.

• Amendments to IFRS 3 Business Combinations (2020).

The amendments have revised the definition of a business
and aim to assist companies to determine whether an
acquisition made is of a business or a group of assets.
The amended definition emphasises that the output of a
business is to provide goods and services to customers,
whereas the previous definition focused on returns in the
form of dividends, lower costs or other economic benefits
to investors and others.

132

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDB. EARNINGS PERFORMANCE
B1. Segmental analysis

The Group defines and presents operating segments in
accordance with IFRS 8 ‘Operating Segments’ which requires
such segments to be 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.
Following the acquisition of the Standard Life Assurance
businesses, the Group has reassessed its operating segments to
reflect the way the business is now being managed. The Group
now has four reportable segments comprising UK Heritage, UK
Open, Europe and Management Services, as set out in note B1.1.
In the prior year, the Group had one operating segment being
Phoenix Life which provided a range of whole life, term assurance
and pension products. Comparative segmental information for
prior periods has been presented on a basis consistent with
the current year.
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. No such aggregation has been required in the
current year. Prior to the acquisition of the Standard Life
Assurance businesses, Phoenix Life was considered to be the
Group’s only reportable segment, which included the Group’s
operating insurance entities and the Management Services
entities in the Group.
The UK Heritage segment contains UK businesses which
no longer actively sell products to policyholders and which
therefore run-off gradually over time. These businesses will
accept incremental premiums on in-force policies, and will provide
annuities to existing policyholders with vesting products. Bulk
Purchase Annuity contracts are included in this segment.
The UK Open segment includes new and in-force life insurance
and investment policies in respect of products that the Group
continues to actively market to new and existing policyholders.
This includes products such as workplace pensions and Self-
Invested Personal Pensions (‘SIPPs’) distributed through the
Group’s Strategic Partnership with Standard Life Aberdeen plc
(‘SLA plc’), and also products sold under the SunLife brand.
The Europe segment includes business written in Ireland and
Germany. This will include products that are actively being
marketed to new policyholders, and legacy in-force products
that are no longer being sold to new customers.
The Management Services segment 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.
Unallocated Group includes consolidation adjustments and Group
financing (including finance costs) which 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.

Segmental measure of performance: Operating Profit
The Company uses a non-GAAP measure of performance,
being operating profit, to evaluate segment performance.
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 movement 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 acquisition or disposal of subsidiaries

(net of related costs);

• the financial impacts of mandatory regulatory change;
• the profit or loss attributable to non-controlling interests;
• 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 segments on an ongoing
basis. 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 capital 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.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

133

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONB. EARNINGS PERFORMANCE continued
B1.1 Segmental result

Operating profit

UK Heritage

UK Open

Europe

Management Services

Unallocated Group

Total segmental 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

Finance costs attributable to owners

2018
£m

2017
– restated
£m

640

(20)

708

283

(193)

(189)

(18)

(38)

(114)

372

(5)

–

(20)

368

(6)

(87)

(102)

(17)

(80)

(104)

Profit/(loss) before the tax
attributable to owners of the parent

439

(28)

Profit before tax attributable to
non-controlling interests

Profit/(loss) before the tax
attributable to owners

–

470

(28)

Other non-operating items in respect of 2018 include:

• a provision for £68 million in respect of a commitment
to reduce ongoing and exit charges for non-workplace
pension products;

• costs of £43 million associated with the acquisition of

the Standard Life Assurance businesses, and £7 million
incurred under the on-going transition programme;

• costs of £59 million associated with the equalisation of

accrued Guaranteed Minimum Pension (‘GMP’) benefits
within the Group’s pension schemes (see note G6 for
further details);

• a net benefit of £45 million reflecting anticipated costs

savings associated with process improvements and continued
investment in the digitalisation of the customer journey;

• a gain on acquisition of £141 million reflecting the excess

of the fair value of the net assets acquired over the
consideration paid for the acquisition of the Standard Life
Assurance businesses (see note H2 for further details); and

• net other one-off items totalling a cost of £47 million,
including other corporate project costs of £42 million.

Other non-operating items in respect of 2017 include:

• 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 business;

• costs of £20 million in respect of short-term expense
overruns arising from the AXA Wealth business 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.

134

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDB1.2 Segmental revenue

2018

Revenue from external customers:

Gross premiums written

Less: premiums ceded to reinsurers

Net premiums written

Fees and commissions

Income from other segments

Total segmental revenue

UK Heritage
£m

UK Open
£m

Europe
£m

Management
Services
£m

Unallocated
Group
£m

1,959

(478)

1,481

272

–

1,753

200

(1)

199

–

290

486

(2)

484

–

506

–

505

–

(505)

Total
£m

2,645

(481)

2,164

385

–

2,549

Of the revenue from external customers presented in the table above, £2,199 million is attributable to customers in the United
Kingdom (‘UK’) and £350 million to the rest of the world. The Europe operating segment comprises business written in Ireland
and Germany to customers in both Europe and the UK. No revenue transaction with a single customer external to the
Group amounts to greater than 10% of the Group’s revenue.

The Group has total non-current assets (other than financial assets, deferred tax assets, pension schemes and rights arising
under insurance contracts) of £6,479 million located in the UK and £367 million located in the rest of the world.

2017

Revenue from external customers:

Gross premiums written

Less: premiums ceded to reinsurers

Net premiums written

Fees and commissions

Income from other segments

Total segmental revenue

UK Heritage
£m

UK Open
£m

Europe
£m

Management
Services
£m

Unallocated
Group
£m

1,132

(356)

776

171

–

947

165

–

165

–

167

–

338

–

(338)

Total
£m

1,297

(356)

941

173

–

1,114

Predominantly all external revenue presented for 2017 is attributable to customers in the UK. Additionally, predominantly all
non-current assets (other than financial assets, deferred tax assets, pension schemes and rights arising under insurance
contracts) for 2017 were located in the UK.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

135

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONB. EARNINGS PERFORMANCE continued
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. The
methodology for the determination of the expected investment
return is explained below together with an analysis of investment
return variances and economic assumption changes recognised
outside of operating profit.

B2.1 Calculation of the long-term investment return
The expected return on investments for both owner and
policyholder funds is based on opening economic assumptions
applied to the funds under management at the beginning of
the reporting period. Expected investment return assumptions
are derived actively, based on market yields on risk-free fixed
interest assets at the start of each financial year.

The long-term risk-free rate 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 (2017: 350bps), 250bps for properties
(2017: 250bps), 150bps for other fixed interest assets
(2017: 150bps) and 50bps for gilts (2017: 50bps).

The principal assumptions underlying the calculation of the
long-term investment return are:

Equities

Properties

Gilts

Other fixed interest

2018
%

5.2

4.2

2.2

3.2

2017
%

5.0

4.0

2.0

3.0

B2.2 Life assurance business
Operating profit for life assurance business is based on
expected investment returns on financial investments backing
owners’ and policyholder funds over the reporting period,
with consistent allowance for the corresponding expected
movements in liabilities. Operating profit includes the effect
of variance in experience for non-economic items, for example
mortality, persistency and expenses, and the effect of changes
in non-economic assumptions. Changes due to economic
items, for example market value movements and interest rate
changes, which give rise to variances between actual and
expected investment returns, and the impact of changes
in economic assumptions on liabilities, are disclosed
separately outside operating profit.

The movement in liabilities included in operating profit reflects
both the change in liabilities due to the expected return on
investments and the impact of experience variances and
assumption changes for non-economic items.

The effect of differences between actual and expected
economic experience on liabilities, and changes to economic
assumptions used to value liabilities, are taken outside

operating profit. For many types of long-term business,
including unit-linked and with-profit funds, movements in
asset values are offset by corresponding changes in liabilities,
limiting the net impact on profit. For other long-term business,
the profit impact of economic volatility depends on the degree
of matching of assets and liabilities and exposure to financial
options and guarantees.

The investment return variances and economic assumption
changes excluded from the long-term business operating
profit are as follows:

Investment return variances and
economic assumption changes
on long-term business

2018
£m

2017
£m

283

(6)

The net investment return variances and economic
assumption changes on long term business of £283 million
(2017: £6 million adverse) primarily arise due to the positive
impact of strategic asset allocation activities, including
investment in higher yielding illiquid assets, together with the
impact of gains on hedging positions held by the life funds as
a result of declining equity markets in 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.

B2.3 Owners’ funds
For non-long-term business including owners’ funds,
the total investment income, including fair value gains,
is analysed between a calculated longer-term return and
short-term fluctuations.

The variances excluded from operating profit in relation to
owners’ funds are as follows:

Variances on owners’ funds
of subsidiary undertakings

2018
£m

2017
£m

(193)

(87)

The adverse variance on owners’ funds of £193 million
(2017: £87 million negative) is principally driven by realised
losses on derivative instruments entered into by the holding
companies to hedge the Group’s exposure to equity risk
arising from the Group’s acquisition of Standard Life
Assurance. Losses of £143 million were incurred on these
instruments, together with option premiums of £22 million.

The adverse variance on owners’ funds for the year ended
31 December 2017 of £87 million was principally driven by
interest rate swaption positions held in the life companies’
shareholder funds. Such positions were held to hedge the
impact of interest rate risk on the Group’s regulatory capital
position. With swap yields remaining relatively stable during
2017, option value associated with these contracts fell due
to expected option expiry and reduced volatility.

136

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDB3. 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.

Following the completion of the rights issue in July 2018 the
earnings per share calculations, for all periods up to the date
the rights issue shares were issued, have been adjusted for
the bonus element of the rights issue. The bonus factor used
was 1.11. Further details of the rights issue are included in
note D1.

B3.1 Basic earnings per share
The result attributable to ordinary equity holders of the parent
for the purposes of determining earnings per share has been
calculated as set out below:

Profit/(loss) for the period
attributable to owners

Share of result attributable
to non-controlling interests

Coupon payable in respect
of Tier 1 Notes, net of tax relief

2018
£m

410

(31)

(12)

2017
£m

(27)

–

Profit/(loss) attributable to ordinary
equity holders of the parent

367

(27)

The weighted average number of ordinary shares outstanding
during the period is calculated as detailed below:

B3.2 Diluted earnings per share
The result attributable to ordinary equity holders 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
551 million (2017 restated: 436 million). The Group’s deferred
bonus share scheme and sharesave share-based schemes
increased the weighted average number of shares on
a diluted basis by 375,020 shares for the year ended
31 December 2018. As losses have an anti-dilutive effect,
none of the share-based awards had a dilutive effect for
the year ended 31 December 2017.

Diluted earnings per share is as follows:

Diluted earnings per share (restated
for bonus element of rights issue)

B4. Dividends

2018
pence

2017
pence

66.7

(6.3)

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.
Prior to the creation of the new UK-registered holding company
(see note A1), dividends were charged within equity against
the share premium account, as permitted by Cayman Islands
Companies Law. From the date of the scheme of arrangement,
dividends will be charged to retained earnings in accordance
with the UK Companies Act 2006.
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.

2018
Number
million

2017
Number
million

Dividends declared and paid in 2018

2018
£m

262

2017
£m

193

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

Weighted average number
of ordinary shares

Basic earnings per share is as follows:

Basic earnings per share (restated
for bonus element of rights issue)

437

115

(1)

436

–

551

436

2018
pence

2017
pence

66.8

(6.3)

On 14 March 2018, the Board recommended a final dividend
of 25.1p per share in respect of the year ended 31 December
2017. The dividend was approved at the Group’s Annual
General Meeting, which was held on 2 May 2018.
The dividend amounted to £99 million and was paid on
4 May 2018.

On 22 August 2018, the Board declared an interim dividend
of 22.6p per share for the half year ended 30 June 2018.
The dividend amounted to £163 million and was paid on
1 October 2018.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

137

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONC. OTHER INCOME STATEMENT NOTES
C1. Fees and commissions

Fees related to the provision of investment management services
and administration services are recognised as services are
provided. Front end fees, which are charged at the inception
of service contracts, are deferred as a liability and recognised
over the life of the contract.
The table below details the ‘Disaggregation of Revenue’
disclosures required by IFRS15 Revenue from contracts
with customers.

Significant judgements in determining costs to obtain
or fulfil investment contracts
No significant judgements are required in determining the
costs incurred to obtain or fulfil contracts with customers,
and no amortisation is required, as income directly matches
costs with management charges being applied on an ongoing
(or pro-rata) basis.

In the period no amortisation or impairment losses were
recognised in the statement of comprehensive Income.

2018

Fee income
from investment
contracts without
DPF

Initial fees
deferred during
the year

Revenue from
investment
contracts
without DPF

Other revenue
from contracts
with customers

Fees and
commissions

2017

Fee income
from investment
contracts without
DPF

Revenue from
investment
contracts
without DPF

Other revenue
from contracts
with customers

Fees and
commissions

UK
Heritage
£m

UK
Open
£m

Europe
£m

Total
£m

271

–

271

272

–

380

(3)

–

377

385

C2. Net investment income

Net investment income comprises interest, dividends, rents
receivable, net interest income/(expense) on the net defined
benefit asset/(liability), fair value gains and losses on financial
assets, 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.

UK
Heritage
£m

UK
Open
£m

Europe
£m

Total
£m

Investment income

171

–

171

–

171

173

Interest income on loans and deposits
at amortised cost

Interest income on financial assets
designated at FVTPL on initial
recognition

Dividend income

Rental income

Net interest (expense)/income
on Group defined benefit pension
scheme liability/asset

2018
£m

2017
£m

1,260

1,936

108

972

1,073

(6)

(11)

3,308

2,058

Remaining performance obligations
The practical expedient under IFRS 15 has been applied
and remaining performance obligations are not disclosed as
the Group has the right to consideration from customers in
amounts that correspond with the performance completed
to date. Specifically management charges become due over
time in proportion to the Group’s provision of investment
management services.

Fair value gains

Financial assets and financial liabilities
at FVTPL:

Designated upon initial recognition

(13,016)

2,754

Held for trading – derivatives

Investment property

Net investment income

126

(18)

(12,908)

(9,600)

165

2,928

4,986

138

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDC3. Administrative expenses

Employee costs comprise:

Administrative expenses
Administrative expenses are recognised in the consolidated
income statement as incurred.
Deferred acquisition costs
For insurance and investment contracts with DPF, acquisition
costs which include both incremental acquisition costs and
other direct costs of acquiring and processing new business,
are deferred.
For investment contracts without DPF, incremental costs directly
attributable to securing rights to receive fees for asset management
services sold with unit-linked investment contracts are deferred.
Trail or renewal commission on investment contracts without DPF
where the Group does not have an unconditional legal right to
avoid payment is deferred at inception of the contract and an
offsetting liability for contingent commission is established.
Deferred acquisition costs are amortised over the life of the
contracts as the related revenue is recognised. After initial
recognition, deferred acquisition costs are reviewed by category
of business and are written off to the extent that they are no
longer considered to be recoverable.

Employee costs

Outsourcer expenses

Professional fees

Commission expenses

Office and IT 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)

Movement in restructuring and
integration costs provision (see note G1)

Premium paid on part redemption
of the £300 million senior bond

Stamp duty payable on acquisition
of Standard Life Assurance businesses

Other

Acquisition costs deferred during the year

Amortisation of deferred acquisition costs

2017
– restated
(see note
A1)
£m

128

129

160

(18)

–

602

(6)

–

2018
£m

188

202

263

(2)

–

1,070

(15)

Total administrative expenses

1,056

596

Wages and salaries

Social security contributions

2018
£m

170

188

2017
£m

115

128

2018
Number

2017
Number

Average number of persons employed

2,034

1,304

C4. Auditor’s remuneration

During the year the Group obtained the following services from its
auditor at costs as detailed in the table below.

2018
£m

2017
£m

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

Tax services fees

Other non-audit services

Total fees for other services

2.0

5.2

7.2

0.7

0.2

8.1

3.7

0.1

0.3

4.1

Total auditor’s remuneration

12.2

0.7

3.5

4.2

0.5

0.1

4.8

0.7

–

0.5

1.2

6.0

No services were provided by the Company’s auditors to the
Group’s pension schemes in either 2018 or 2017.

Audit of the consolidated financial statements includes certain
amounts in respect of the audit of the acquisition balance
sheet of the acquired Standard Life Assurance businesses
together with amounts in respect of reporting to the auditor
of SLA plc given their status as a significant investor.

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 services relate to assurance reporting
on historical information included within investment circulars.
In 2018, this includes public reporting associated with the
issuance of equity as part of the acquisition of the Standard
Life Assurance businesses and issuance of the Group’s Tier 1
Notes. In 2017, this included assurance reporting on historical
information included within investment circulars.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

139

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONC. OTHER INCOME STATEMENT NOTES continued
C4. Auditor’s remuneration continued
Corporate finance services fees were £3.7 million
(2017: £0.7 million). These fees principally relate to services
provided in connection with the acquisition of the Standard
Life Assurance businesses and the Premium Listing of the
Company undertaken as part of the Group’s on-shoring
activities. £1.6 million of the fees relates 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 £2.0 million relates to the provision of assurance to the
Board and the sponsoring banks in support of disclosures
made in the public transaction documentation relating to
the acquisition and the Premium Listing. The 2017 balance
reflects fees in respect of 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 year.

Tax services fees of £0.1 million (2017: £nil) principally relates
to services provided to Standard Life Assurance for which the
Group’s external auditor was engaged prior to the completion
of the acquisition and their appointment as auditors of those
entities. All such services were terminated within a period
of three months following completion of the acquisition,
as permitted under the Financial Reporting Committee’s
Ethical Standards.

Other non-audit services of £0.3 million (2017: £0.5 million)
also relate to services provided to Standard Life Assurance
where the engagement occurred prior to completion of the
acquisition and which were terminated within the three month
grace period. The 2017 fees for other non-audit services were
primarily in respect of assurance provided over the review of
Abbey Life past business practices undertaken at the request
of the regulator.

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 pages 68 to 71.

C5. 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.

C6. 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.

C6.1 Current year tax (credit)/charge

2018
£m

2017
£m

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 (credit)/charge

Attributable to:

– policyholders

– owners

Total tax (credit)/charge

103

(54)

(195)

(4)

(1)

(200)

(151)

(211)

(151)

(9)

(1)

(8)

(5)

(1)

The Group, as a proxy for policyholders in the UK, is required
to pay taxes on investment income and gains each year.
Accordingly, the tax credit or expense attributable to UK life
assurance policyholder earnings is included in income tax
expense. The tax credit attributable to policyholder earnings
was £211 million (2017: £21 million charge).

Interest expense

On financial liabilities at amortised cost

On financial liabilities at FVTPL

Attributable to:

– policyholders

– owners

140

2018
£m

2017
£m

C6.2 Tax charged/(credited) to other
comprehensive income

Current tax credit
on share schemes

Deferred tax charge/(credit)
on defined benefit schemes

Deferred tax charge
on share schemes

120

142

114

142

118

132

104

132

2018
£m

2017
£m

–

(1)

(2)

–

(3)

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDC6. Tax charge continued
C6.3 Reconciliation of tax (credit)/charge

Profit/(loss) before tax

Policyholder tax credit/(charge)

Profit/(loss) before the tax attributable
to owners

Tax charge/(credit) at standard UK rate of
19.0% (2017: 19.25%)1

Non-taxable income and gains and losses2

Disallowable expenses3

Prior year tax credit for shareholders4

Movement on acquired in-force
amortisation at less than 19.0%
(2017: 19.25%)

Profits taxed at rates other than 19.0%
(2017: 19.25%)5

Recognition of previously unrecognised
deferred tax assets6

Deferred tax rate change7

Current year losses not valued

Other

Owners’ tax charge/(credit)

Policyholder tax (credit)/charge

Total tax (credit)/charge for the period

2018
£m

259

211

470

(31)

(5)

–

(14)

–

(4)

–

(211)

(151)

2017
£m

(7)

(21)

(28)

(5)

(16)

(7)

(2)

(1)

1 Old PGH became tax resident in the UK on 31 January 2018. As the majority

of the Group’s business operated predominately in the UK prior to this date, the
reconciliation of the tax (credit)/charge in the comparative period was completed
by reference to the standard rate of UK tax rather than by reference to the Jersey
income tax rate of 0% previously applicable to Old PGH.

2 Includes non-taxable dividends and gains, non-taxable pension scheme items, and
non-taxable gain on the acquisition of the Standard Life Assurance businesses.
3 Included within disallowable deductions is a consolidation adjustment on the PGL
Pension scheme ‘buy-in’ agreement of £6 million and costs in relation to projects
of £14 million.

4 The prior year credit relates to the impact of reaching agreement with HMRC

in respect of the Group’s prior year tax returns.

5 This predominately relates to IFRS transitional adjustments which are being

recognised at the full shareholder rate rather than marginal policyholder tax rates.

6 Represents tax losses recognised in 2017 which have now reversed.
7 Represents the utilisation of brought forward tax losses from 2017 in 2018

at the current tax rate of 19% rather than the longer term rate of 17%.

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.

Issued and fully paid:

721.2 million ordinary shares of £0.10
each (2017: 393.2 million ordinary
shares of £0.10 each – restated)

2018
£m

2017
Restated1
£m

1 Comparative figures have been restated for the scheme of arrangement as detailed

in note A1.

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:

2018

Number

Shares in issue at 1 January

393,232,644

39,323,264

Ordinary shares issued
under the rights issue

183,581,978

18,358,198

Ordinary shares issued to SLA plc

144,114,450

14,411,445

Other ordinary shares issued
in the period

270,142

27,014

Shares in issue at 31 December

721,199,214

72,119,921

On 10 July 2018, the Group issued 183,581,978 shares
following a rights issue undertaken in association with the
acquisition of the Standard Life Assurance businesses where
7 rights issue shares were issued at 518 pence per new share
for every 15 existing Old PGH shares held. The rights issue
raised £951 million and proceeds, net of deduction of
commission and expenses, were £934 million.

On 31 August 2018, the Group issued 144,114,450 shares
to SLA plc, giving them a 19.99% equity stake in the Group
valued at £1,023 million, based on the share price at that date.

During the year, 270,142 shares were issued at a premium
of £2 million in order to satisfy obligations to employees
under the Group’s sharesave schemes (see note I1).

2017 – restated1

Number

Shares in issue at 1 January

392,849,817

39,284,982

Other ordinary shares issued
in the period

382,827

38,282

Shares in issue at 31 December

393,232,644

39,323,264

1 Comparative figures have been restated for the scheme of arrangement as detailed

in note A1.

During 2017, 382,827 shares were issued at a premium
of £2 million in order to satisfy obligations to employees
under the Group’s sharesave schemes (see note I1).

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.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

141

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIOND. EQUITY continued
D2. Shares held by the Employee Benefit Trust continued
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

2018
£m

2017
£m

(4)

(9)

During the year 518,322 (2017: 1,217,505) shares were awarded
to employees by the EBT and 1,188,435 (2017: 445,560) shares
were purchased. The number of shares held by the EBT at
31 December 2018 was 990,802 (2017: 320,689).

Old PGH provided the EBT with an interest-free facility
arrangement to enable it to purchase the shares.

D3. Tier 1 Notes

The Fixed Rate Reset Perpetual Restricted Tier 1 Write-Down
Notes (‘Tier 1 Notes’) meet the definition of equity and accordingly
are shown as a separate category within equity at the proceeds
of issue. The coupons on the instruments are recognised as
distributions on the date of payment and are charged directly
to the statement of consolidated changes in equity.

At 1 January 2018

Issue of notes in the period

At 31 December 2018

Tier 1 Notes
£m

–

494

On 26 April 2018, Old PGH issued £500 million of Tier 1 Notes,
the proceeds of which were used to fund a portion of the cash
consideration for the acquisition of the Standard Life Assurance
businesses. The Tier 1 Notes bear interest on their principal
amount at a fixed rate of 5.75% per annum up to the ‘First Call
Date’ of 26 April 2028. Thereafter the fixed rate of interest will be
reset on the First Call Date and on each fifth anniversary of this
date by reference to a 5 year gilt yield plus a margin of 4.169%.
Interest is payable on the Tier 1 Notes semi-annually in arrears
on 26 October and 26 April.

At the issue date, the Tier 1 Notes were unsecured and
subordinated obligations of Old PGH. On 12 December 2018,
the Company was substituted in place of Old PGH as issuer.

The Tier 1 Notes have no fixed maturity date and interest
is payable only at the sole and absolute discretion of the
Company; accordingly the Tier 1 Notes meet the definition
of equity for financial reporting purposes and are disclosed
as such in the consolidated financial statements. If an interest
payment is not made it is cancelled and it shall not accumulate
or be payable at any time thereafter.

The Tier 1 Notes may be redeemed at par on the First Call Date
or on any interest payment date thereafter at the option of the
Company and also in other limited circumstances. If such
redemption occurs prior to the fifth anniversary of the Issue
Date such redemption must be funded out of the proceeds of
a new issuance of, or exchanged into, Tier 1 Own Funds of the
same or a higher quality than the Tier 1 Notes. In respect of any
redemption or purchase of the Tier 1 Notes, such redemption
or purchase is subject to the receipt of permission to do so from
the PRA. Furthermore, on occurrence of a trigger event, linked
to the Solvency II capital position and as documented in the
terms of the Tier 1 Notes, the Tier 1 Notes will be subject to
a permanent write-down in value to zero.

D4. 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.

At 1 January 2018

Non-controlling interests recognised on acquisition of
the Standard Life Assurance business (see note H2)

Profit for the year

Dividends paid

At 31 December 2018

Standard Life
Private Equity
Trust plc
£m

–

265

(2)

294

The non-controlling interests of £265 million recognised on
acquisition of the Standard Life Assurance businesses reflects
third party ownership of Standard Life Private Equity Trust
(‘SLPET’) determined at the fair value of the third party
interest in the underlying assets and liabilities. SLPET is a
UK Investment Trust listed and traded on the London Stock
Exchange. As at 31 December 2018, the Group held 55.2%
of the issued share capital of SLPET.

The Group’s interest in SLPET is held in the with-profit and
unit-linked funds of the Group’s life companies. Therefore the
shareholder exposure to the results of SLPET is limited to the
impact of those results on the shareholder share of distributed
profits of the relevant fund.

Summary financial information showing the interest that
non-controlling interests have in the Group’s activities and
cash flows is shown below:

SLPET

Statement of financial position:

Investments

Other assets

Total liabilities

Income statement:

Revenue

Profit after tax

Comprehensive income

Cash flows:

Net decrease in cash equivalents

2018
£m

271

–

142

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDAssociates
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 is no investment in associates which
are of a strategic nature.

Derecognition of financial assets
A financial asset (or part of a group of similar financial assets)
is derecognised where:
• the rights to receive cash flows from the asset have expired;
• the Company retains the right to receive cash flows from

the assets, but has assumed an obligation to pay them in full
without material delay to a third party under a ‘pass-through’
arrangement; or

• the Company has transferred its rights to receive cash flows
from the asset and has either transferred substantially all the
risks and rewards of the asset, or has neither transferred nor
retained substantially all the risks and rewards of the asset,
but has transferred control of the asset.

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 FVTPL 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 FVTPL) are measured at amortised cost
using the effective interest method.
Financial liabilities are designated upon initial recognition at FVTPL
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.

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 holds a portfolio of loans that are designated at FVTPL.
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 FVTPL and accordingly are stated in the statement
of consolidated financial position at fair value. They are designated
at FVTPL 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 contracts liabilities without
DPF are valued on a basis consistent with investment contracts
liabilities without DPF as detailed under the ‘Financial liabilities’
section 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 are 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.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

143

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONOffsetting financial assets and financial liabilities
Financial 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 asset
and settle the liability simultaneously. When financial assets and
liabilities are offset any related interest income and expense is
offset in the income statement.
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 FVTPL
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.
Derecognition of financial liabilities
A financial liability is derecognised when the obligation under
the liability is discharged or cancelled or expires.

144

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDE1. Fair values continued
The table below sets out a comparison of the carrying amounts and fair values of financial instruments as at 31 December 2018:

2018

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

Carrying value

Amounts due for
settlement after
12 months
£m

Total
£m

Fair value
£m

3,798

3,608

3,798

3,189

52,716

496

67,932

70,606

5,417

423

204,577

3,119

–

62,128

–

3,189

52,716

496

67,932

70,606

5,417

423

204,577

Following application of the temporary exemption granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9
Financial Instruments (see note A4) the table below separately identifies financial assets with contractual cash flows that are
solely payments of principal and interest (‘SPPI’) (excluding those held for trading or managed on a fair value basis) and all other
financial assets, measured at fair value through profit or loss.

Financial assets with contractual cash flows that are SPPI
excluding those held for trading or managed on a fair value basis3

All other financial assets that are measured at fair value through profit or loss4

Total financial assets

2018

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 received5

Total financial liabilities

Carrying value

Amounts due for
settlement after
12 months
£m

Total
£m

1,093

127

2,659

114,463

2,059

4,438

2,645

127,484

936

113

–

2,048

4,077

–

1 These assets and liabilities have no expected settlement date.
2 Total financial assets includes £1,063 million (2017: £1,115 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 Financial assets that are SPPI are all short-term deposits with highly rated external institutions.
4 The change in fair value during 2018 of all other financial assets that are fair value through profit or loss is a £12,962 million loss.
5 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 PLC
ANNUAL REPORT & ACCOUNTS 2018

2018
£m

423

204,154

204,577

Fair value
£m

1,093

127

2,659

114,463

2,011

4,438

–

124,791

145

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONE. FINANCIAL ASSETS & LIABILITIES continued
E1. Fair values continued

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

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

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

–

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 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.

146

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDE2. 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 over the counter derivatives
is estimated using pricing models or discounted cash flow
techniques. Collective investment schemes where the underlying
assets are not priced using active market prices are determined to
be Level 2 instruments. 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.

Level 1
£m

Level 2
£m

Level 3
£m

Total fair
value
£m

2018

Financial assets
measured at fair value

Derivatives

348

3,288

162

3,798

Financial assets designated
at FVTPL upon initial
recognition:

Loans and deposits

Equities

Investment in associate

Fixed and variable rate
income securities

Collective investment
schemes

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

2018

Financial liabilities
measured at fair value

–

51,347

496

–

3,189

1,369

–

3,189

52,716

496

39,540

27,175

1,217

67,932

68,594

1,219

793

70,606

–

5,417

–

5,417

159,977 33,811

6,568 200,356

160,325 37,099

6,730

204,154

–

423

–

423

160,325 37,522

6,730

204,577

Level 1
£m

Level 2
£m

Level 3
£m

Total fair
value
£m

Derivatives

911

109

1,093

Financial liabilities
designated at FVTPL
upon initial recognition:

Borrowings

–

Net asset value
attributable to unit-holders

2,659

–

127

–

2,659

Investment contract
liabilities

Total financial liabilities
measured at fair value

Financial liabilities for
which fair values are
disclosed

Borrowings at amortised cost

Deposits received from
reinsurers

Total financial liabilities
for which fair values
are disclosed

– 114,463

2,659 114,463

127

117,249

2,732 115,374

236 118,342

1,752

259

2,011

4,438

–

4,438

–

6,190

259

495

6,449

124,791

147

2,732 121,564

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONE. FINANCIAL ASSETS & LIABILITIES continued
E2. Fair value hierarchy continued
E2.2 Fair value hierarchy of financial instruments continued

2017

Financial assets measured
at fair value

Level 1
£m

Level 2
£m

Level 3
£m

Total fair
value
£m

Derivatives

2,588

144

2,760

Financial assets designated at
FVTPL upon initial recognition:

Loans and deposits

Equities

Investment in associate

Fixed and variable rate
income securities

Collective investment
schemes

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

2017

Financial liabilities
measured at fair value

–

16,621

550

–

1,444

607 17,234

–

550

19,194

7,393

411 26,998

17,923

929

49 18,901

–

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

1,103

100

1,242

Financial liabilities designated
at FVTPL upon initial
recognition:

Borrowings

Net asset value attributable
to unitholders

–

840

–

Investment contract liabilities

– 26,733

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

840 26,733

182 27,755

879 27,836

282 28,997

–

1,521

291

1,812

368

–

368

1,889

291

2,180

879 29,725

573 31,177

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 predominately valued using broker
quotes with the exception of unquoted corporate bonds.
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. These assets are typically
held to back investment contract liabilities and participating
investments contracts and therefore fair value movements
in such financial assets will typically be offset by
corresponding movements in liabilities.

Fixed and variable rate income securities
The Group holds unquoted corporate bonds comprising
investments in local authority loans, private placements
and infrastructure loans with a total value of £1,167 million
(2017: £301 million). These unquoted corporate bonds are
secured on various assets and 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 this spread. An increase of 35bps
would decrease the value by £50 million (2017: an increase of
25bps would decrease the value by £8 million) and a decrease
of 35bps would increase the value by £52 million (2017: a
decrease of 25bps would increase the value by £9 million).

Loans and deposits
Included within loans and deposits are investments in
equity release mortgages with a value of £2,020 million
(2017: £1,255 million). The loans are valued using a discounted
cash flow model and a Black-Scholes model for valuation
of the No-Negative Equity Guarantee (‘NNEG’). The NNEG
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 future cash flows are estimated based on assumed
levels of mortality derived from published mortality tables;
entry into long-term care rates and voluntary redemption rates.
Cash flows include an allowance for the expected cost of
providing a NNEG assessed under a real world approach
using a closed form model including an assumed level of
property value volatility. For the NNEG assessment, property
values are indexed from the latest property valuation point
and then assumed to grow in line with Office for Budget
Responsibility forecasts in the short term and according
to an RPI based assumption thereafter.

Cash flows are discounted using a risk free curve plus a
spread determined at inception based on the purchase price.
This is monitored against prevailing market conditions to
determine whether updates are required. To date, no
updates to the spread have been necessary.

148

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDE2. Fair value hierarchy continued
E2.3 Level 3 financial instrument sensitivities continued
Considering the fair valuation uses certain inputs that are
not market observable, the fair value measurement of these
loans has been categorised as a Level 3 fair value. The key
non-market observable input is the voluntary redemption rate,
for which the assumption varies by the origin, age and loan
to value ratio of each portfolio. Experience analysis is used
to inform this assumption, however where experience
is limited for more recently originated loans, significant
expert judgement is required.

In order to benefit from the matching adjustment, the
equity release mortgage loans are securitised into tranches
of fixed rate and junior loan notes via special purpose
vehicles in the Group.

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 £183 million
(2017: £108 million) and a decrease of 100bps would increase
the value by £205 million (2017: £118 million). An increase of
1% in the inflation rate would increase the value by £11 million
(2017: £7 million) and a decrease of 1% would decrease the
value by £21 million (2017: £14 million).

An increase of 10% in house prices would increase the value
by £6 million (2017: £3 million) and a decrease of 10% would
decrease the value by £14 million (2017: £9 million).

Also included within loans and deposits are investments in
commercial real estate loans of £449 million (2017: £77 million).
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 basket of comparable securities.
The valuation is sensitive to changes in the discount rate.
An increase of 35bps in the discount rate would decrease
the value by £7 million (2017: an increase of 100bps would
decrease the value by £5 million) and a decrease of 35bps
would increase the value by £8 million (2017: a decrease
of 100bps would increase the value by £5 million).

Also included within loans and deposits are income strips
with a value of £654 million (2017: nil). Income strips are
transactions where an owner-occupier of a property has sold
a freehold or long leasehold interest to the Group, and has
signed a long lease (typically 30-45 years) or a ground lease
(typically 45-175 years) and retains the right to repurchase the
property at the end of the lease for a nominal sum (usually £1).
The income strips are valued using an income capitalisation
approach, where the annual rental income is capitalised using
an appropriate yield. The yield is determined by considering
recent transactions involving similar income strips.
The valuation is sensitive to movements in yield. An increase
of 35bps would decrease the value by £70 million and a
decrease of 35bps would increase the value by £79 million.

Borrowings
Included within borrowings measured at fair value and
categorised as Level 3 financial liabilities are property
reversion loans with a value of £114 million (2017: £131 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 £2 million (2017: £3 million)
and a decrease of 1% would decrease the value by £2 million
(2017: £3 million). An increase of 1% in the house price
inflation rate would decrease the value by £2 million
(2017: £3 million) and a decrease of 1% would increase
the value by £1 million (2017: £3 million).

Corporate transactions
Included within financial assets and liabilities are related
loans and deposits of £66 million (2017: £112 million),
borrowings of £13 million (2017: £51 million) and derivative
liabilities of £13 million (2017: £21 million) pertaining to a
reinsurance and retrocession arrangement (see note E3.2 for
further information on these arrangements). 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 2018, the net of these balances was an
asset of £40 million (2017: asset of £40 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 £2 million (2017: £3 million) and a decrease of 100bps would
increase the aggregate value by £2 million (2017: £3 million).

Also included within derivative assets and derivative liabilities are
longevity swap contracts with corporate pension schemes with
a fair value of £162 million (2017: £144 million) and £96 million
(2017: £77 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 net value by £16 million (2017: £13 million) and a
decrease of 100bps would increase the net value by
£22 million (2017: £17 million). An increase of 1% in the
RPI and CPI inflation rates would increase the value by
£13 million (2017: £10 million) and a decrease of 1% would
decrease the value by £15 million (2017: £10 million).

Derivatives
Included within derivative liabilities are forward local authority
loans and forward private placements with a value of £nil.
These investments include a commitment to acquire or
provide funding for fixed rate debt instruments at specified
future dates. These investments are valued using a discounted
cash flow model that takes a comparable UK Treasury
stock and applies a credit spread to reflect reduced liquidity.
The credit spreads are derived from a basket of comparable
securities. The valuations are sensitive to movements in this
spread. An increase of 35bps would decrease the value by
£16 million and a decrease of 35bps would increase the
value by £17million.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

149

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONE. FINANCIAL ASSETS & LIABILITIES continued
E2. Fair value hierarchy continued
E2.4 Transfers of financial instruments between Level 1 and Level 2

2018

Financial assets measured at fair value

Financial assets designated at FVTPL upon initial recognition:

Fixed and variable rate income securities

2017

Financial assets measured at fair value

Financial assets designated at FVTPL upon initial recognition:

Derivatives

Fixed and variable rate income securities

Collective investment schemes

Financial Liabilities measured at fair value

Financial Liabilities designated at FVTPL upon initial recognition:

Derivatives

From
Level 1 to
Level 2
£m

From
Level 2 to
Level 1
£m

162

From
Level 1 to
Level 2
£m

From
Level 2 to
Level 1
£m

–

138

–

Consistent with the prior year, all the Group’s Level 1 and Level 2 assets have been valued using standard market
pricing sources.

The application of the Group’s fair value hierarchy classification methodology at an individual security level, in particular
observations with regard to measures of market depth and bid-ask spreads, resulted in an overall net movement of financial
assets from Level 2 to Level 1 in both the current and comparative period.

E2.5 Movement in Level 3 financial instruments measured at fair value

2018

Financial assets

Derivatives

Financial assets designated at FVTPL
upon initial recognition:

Loans and deposits

Equities

Fixed and variable rate income
securities

Collective investment schemes

At
1 January
2018
£m

Net gains/
(losses) in
income
statement
£m

Effect of
acquisitions/
purchases
£m

Transfers to
Level 1
and Level 2
£m

At
31 December
2018
£m

Sales
£m

Unrealised
gains/
(losses) on
assets
held at end
of period
£m

144

–

1,444

607

411

2,511

205

(40)

(51)

170

1,833

839

884

802

4,358

(144)

(282)

(30)

(7)

(463)

2,655

188

4,358

(463)

–

(8)

–

(8)

162

3,189

1,369

1,217

793

6,568

147

(31)

(47)

135

6,730

153

150

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDE2. Fair value hierarchy continued

2018

Financial liabilities

Derivatives

Financial liabilities designated at FVTPL
upon initial recognition:

Borrowings

At
1 January
2018
£m

Net losses
in income
statement
£m

Effect of
acquisitions/
purchases
£m

Transfers to
Level 1
and Level 2
£m

At
31 December
2018
£m

Sales
£m

Unrealised
losses on
liabilities
held at end
of period
£m

100

182

282

–

(57)

(2)

–

(2)

109

127

236

E2.5 Movement in Level 3 financial instruments measured at fair value

2017

Financial assets

Derivatives

Financial assets designated
at FVTPL upon initial
recognition:

Loans and deposits

Equities

Investment in joint venture

Fixed and variable rate
income securities

Collective investment
schemes

2017

Financial liabilities

Derivatives

Financial liabilities
designated at FVTPL
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

–

(7)

812

671

146

1,718

1,771

(223)

937

281

(18)

(178)

(80)

1,276

(82)

(171)

(18)

(46)

(317)

(324)

–

144

–

(1)

(6)

–

(7)

1,444

607

411

2,511

2,655

(223)

(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)

–

100

(172)

182

282

(23)

(195)

During 2017, 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 period.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

151

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONE. 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:

Forward currency

Credit default options

Contract for differences

Interest rate swaps

Total return bond swaps

Swaptions

Inflation swaps

Equity options

Stock index futures

Fixed income futures

Retrocession contracts

Longevity swap contracts

Currency futures

Foreign exchange options

Total return equity swaps

Assets
2018
£m

Liabilities
2018
£m

Assets
2017
£m

Liabilities
2017
£m

–

1,959

695

2,212

1,032

912

553

–

162

–

278

–

144

–

3,798

1,093

2,760

1,242

E3.2 Corporate transactions
The Group 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 £162 million and derivative liabilities of £96 million have been recognised
as at 31 December 2018 (2017: £144 million and £77 million respectively).

In addition, the Group 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 £13 million
at 31 December 2018 (2017: £21 million). A loan liability has been recognised in respect of financing obtained for the initial
reinsurance premium (see note E5).

E3.3 Warrants over shares
On 2 September 2009, Old PGH 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 related to ordinary shares rather than ‘B’ ordinary shares.

On 23 August 2018, the Group redeemed and cancelled all outstanding warrants for £56,000. The carrying value of the warrants
as at 31 December 2017 was £56,000.

152

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDE4. 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 2018 (2017: 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.

2018

Financial assets

OTC derivatives

Exchange traded derivatives

Stock lending

Total

Financial liabilities

OTC derivatives

Exchange traded derivatives

Total

Related amounts not offset

Gross and net
amounts of
recognised
financial
assets
£m

Financial
instruments
and cash
collateral
received
£m

Derivative
liabilities
£m

Net
amount
£m

3,435

363

2,417

6,215

2,804

2,417

5,255

455

–

455

176

329

–

505

Related amounts not offset

Gross and net
amounts of
recognised
financial
liabilities
£m

Financial
instruments
and cash
collateral
received
£m

Derivative
assets
£m

Net
amount
£m

1,009

1,093

554

562

455

–

455

–

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

153

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONE. FINANCIAL ASSETS & LIABILITIES continued
E4. Collateral arrangements continued

2017
Financial assets

OTC derivatives

Exchange traded derivatives

Stock lending

Total

Financial liabilities

OTC derivatives

Exchange traded derivatives

Total

Related amounts not offset

Gross and net
amounts of
recognised
financial
assets
£m

Financial
instruments and
cash collateral
received
£m

Derivative
liabilities
£m

Net
amount
£m

2,731

578

3,338

2,089

–

578

2,667

562

–

579

–

Related amounts not offset

Gross and net
amounts of
recognised
financial
liabilities
£m

Financial
instruments and
cash collateral
received
£m

1,193

1,243

631

649

Derivative
assets
£m

Net
amount
£m

562

579

–

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 £374 million (2017: £466 million).

The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2018 are set out below.

Financial assets

Financial liabilities

OTC derivatives

2018
£m

2,619

(2,619)

2017
£m

1,961

(1,961)

The maximum exposure to credit risk in respect of OTC derivative assets is £3,435 million (2017: £2,731 million) of which credit
risk of £3,259 million (2017: £2,651 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 £363 million (2017: £29 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 2018
in respect of OTC derivative liabilities of £1,009 million (2017: £1,193 million) amounted to £554 million (2017: £631 million).

154

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDE4.3 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 £2,746 million (2017: £623 million).

The maximum exposure to credit risk in respect of stock lending transactions is £2,417 million (2017: £578 million) of which
credit risk of £2,417 million (2017: £578 million) is mitigated through the use of collateral arrangements.

E4.4 Other collateral arrangements
Details of collateral received to mitigate the counterparty risk arising from the Group’s reinsurance transactions is detailed
in note F3.

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.

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.

E5.1 Analysis of borrowings

Carrying value

Fair value

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)

£428 million subordinated notes (note h)

£450 million Tier 3 subordinated notes (note i)

US $500 million Tier 2 bonds (note j)

€500 million Tier 2 bonds (note k)

Total shareholder borrowings

2018
£m

114

172

186

121

426

448

390

443

2017
£m

131

238

177

121

426

448

368

–

2018
£m

114

177

209

132

441

447

342

390

2017
£m

131

248

225

137

513

481

390

–

2,014

1,540

1,961

1,746

Total borrowings

2,186

1,778

2,138

1,994

Amount due for settlement after 12 months

2,174

1,727

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

155

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONE. FINANCIAL ASSETS & LIABILITIES continued
E5. Borrowings continued
E5.1 Analysis of borrowings continued
a.

In 1998, Mutual Securitisation plc raised £260 million of capital through the securitisation of Embedded Value on a block
of existing unit-linked and unitised with-profit life and pension policies. The bonds were split between two classes, which
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 £48 million (2017: £60 million) have an average remaining life of 1 year and mature in 2022.
Phoenix Life Assurance Limited (‘PLAL’) has provided collateral of £21 million (2017: £26 million) to provide security to
the holders of the recourse bonds in issue. During 2018, repayments totalling £12 million were made (2017: £12 million).

156

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 2018, repayments totalling
£25 million were made (2017: £24 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.
On 31 December 2018, the retrocession contracts were transferred from Abbey Life to Phoenix Life Limited (‘PLL’),
another Group company, under the terms of a scheme Part VII of the Financial Services and Markets Act 2000.

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 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.

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, Old PGH was substituted in place
of PGHC as issuer of the £300 million senior bond. On 5 May 2017, Old PGH 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.

The Group has in place an unsecured revolving credit facility (‘the facility’), maturing in June 2022. Old PGH drew down
£295 million under the facility on 31 August 2018. Following the issuance of €500 million Tier 2 bond on 24 September 2018,
the facility was fully repaid. The facility is undrawn as at 31 December 2018 (2017: undrawn). There are no mandatory or
target amortisation payments associated with the facility but prepayments are permissible. The facility currently accrues
interest at LIBOR plus 1.1%, a utilisation fee of between 0.1% and 0.4% is applicable dependent on the amount drawn.
On 12 December 2018, the Company became an additional borrower and guarantor under the facility.

On 23 February 2018, Old PGH entered into an acquisition facility with an aggregate principal amount of £600 million.
The acquisition facility has a termination date of 31 August 2019. The Group is entitled to request two six month extensions
to the term of the facility (which would together extend the termination date to 31 August 2020). 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 12 December
2018, the Company became an additional borrower and guarantor under the acquisition facility.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDE5. Borrowings continued
E5.1 Analysis of borrowings continued
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, Old PGH was substituted in place of PGHC as issuer of the £428 million subordinated notes and then on 12 December
2018 the Company was substituted in place of Old PGH as issuer.

On 20 January 2017, PGHC issued £300 million Tier 3 subordinated notes due 2022 at a coupon of 4.125%. On 20 March
2017, Old PGH was substituted in place of PGHC as issuer of the £300 million Tier 3 subordinated notes. On 5 May 2017,
Old 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.
On 12 December 2018 the Company was substituted in place of Old PGH as issuer.

On 6 July 2017, Old 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. On 12 December 2018 the
Company was substituted in place of Old PGH as issuer.

On 24 September 2018, Old PGH issued €500 million Tier 2 notes due 2029 with a coupon of 4.375%. Fees associated
with these notes of £7 million were deferred and are being amortised over the life of the notes. On 12 December 2018
the Company was substituted in place of Old PGH as issuer.

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.

New
borrowings,
net of costs

Repayments

Changes in
fair value

Movement
in foreign
exchange

Other
movements1

Cash movements

Non-cash movements

£m

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

€500 million Tier 2 notes

At Jan
2018
£m

131

177

121

–

426

448

368

–

1,778

£m

–

£m

(12)

(25)

(32)

–

295

(295)

–

438

733

–

(364)

£m

–

(6)

–

At 31 Dec
2018
£m

114

186

121

–

426

448

390

443

–

2,186

1 Comprises amortisation under the effective interest method applied to borrowings held at amortised cost.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

157

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E5. Borrowings continued
E5.2 Reconciliation of liabilities arising from financing continued

New
borrowings,
net of costs

Repayments1

Changes in
fair value

Movement
in foreign
exchange

Other
movements2

Cash movements

Non-cash movements

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

At Jan
2017
£m

183

167

298

843

393

–

2,036

£m

–

447

383

862

£m

(12)

(24)

(41)

–

(178)

(850)

–

£m

–

(28)

–

(1,105)

(23)

£m

–

(15)

At 31 Dec
2017
£m

131

177

121

–

426

448

368

£m

–

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.

E6. Risk Management – financial risk
This note forms one part of the risk management disclosures in the consolidated financial statements. The Group’s management
of insurance risk is detailed in note F4.

E6.1 Financial risk and the Asset Liability Management (‘ALM’) framework
The use of financial instruments naturally exposes the Group to the risks associated with them, chiefly market risk, credit risk and
financial soundness risk.

Responsibility for agreeing the financial risk profile rests with the board of each life company, as advised by investment
managers, internal committees and the Actuarial function. In setting the risk profile, the board of each life company will receive
advice from the appointed investment managers, the relevant with-profit actuary and the relevant Actuarial function holder as to
the potential implications of that risk profile with regard to the probability of both realistic insolvency and of failing to meet the
regulatory Minimum Capital Requirement. The Chief Actuary 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 Life business. 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.

158

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDE6. Risk Management – financial risk continued
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 the risk,
along with sensitivity analysis where appropriate. The sensitivity analysis does not take into account second order impacts
of market movements, for example, where a market movement may give rise to potential indicators of impairment for the
Group’s intangible balances.

E6.2.1 Credit risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge
an obligation. These obligations can relate to both on and off balance sheet assets and liabilities.

There are two principal sources of credit risk for the Group:

• credit risk which results from direct investment activities, including investments in fixed and variable rate income securities,

derivatives counterparties, 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 consolidated 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 (where risks and rewards fall wholly to shareholders), non-profit funds and shareholders’ funds.

The Group holds £9,917 million (2017: £5,640 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 £496 million (2017: £225 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 £108 million (2017: £55 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 £100 million (2017: £53 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. Credit risk on derivatives
and securities lending is mitigated through the use of collateral. The credit risk borne by the shareholder on with-profit policies
is dependent on the extent to which the underlying insurance fund is relying on shareholder support.

PHOENIX GROUP HOLDINGS PLC
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E6. Risk Management – financial risk continued
E6.2 Financial risk analysis continued
Quality of credit assets
An indication of the Group’s exposure to credit risk is the quality of the investments and counterparties with which it transacts.
The following table provides information regarding the aggregate credit exposure split by credit rating.

For financial assets that do not have credit ratings assigned by external rating agencies but where the Group has assigned an
internal rating for use in managing and monitoring credit risk, the assets are classified as ‘internally rated’. If a financial asset is
neither rated by an external agency nor ‘internally rated’, it is classified as ‘not rated’:

2,783

659

954

–

450

1,371

210

546

–

Total
£m

3,612

3,798

–

199

67,932

–

7,564

5,417

101

5,417

4,926

Total
£m

1,812

2,760

215

26,998

–

3,320

6,085

2,245

2018

Loans and deposits1

Derivatives

AAA
£m

–

AA
£m

341

A
£m

457

2,092

BBB
£m

1,032

BB and
below
£m

–

Fixed and variable rate income securities2

9,709

31,043

13,242

10,793

1,992

Non-rated3
£m

Unit-linked
£m

Reinsurers’ share of insurance
contract liabilities

Reinsurers’ share of investment
contract liabilities

Cash and cash equivalents

–

327

6,227

1,292

–

947

–

1,836

10,036

38,563

18,919

–

1,265

13,121

1 For financial assets that do not have credit ratings assigned by external ratings the Group assigns internal ratings for use in management and monitoring credit risk.

£280 million of AA, £198 million of A, and £65 million of BBB loans and deposits are internally rated.

2 £39 million of AAA, £146 million of AA, £418 million of A, and £123 million of BBB fixed and variable rate income securities are internally rated.
3 Non-rated loans and deposits of £2,783 million (2017: £1,271 million) Includes equity release mortgages with a value of £2,020 million (2017: £1,255 million).

Further details are set out in note E2.3.

1,992

4,891

5,727

93,249

2017

Loans and deposits1

Derivatives

AAA
£m

–

AA
£m

Fixed and variable rate income securities

3,867

12,853

A
£m

366

1,942

5,571

BBB
£m

557

BB and
below
£m

–

3,586

360

Non-rated
£m

Unit-linked
£m

Reinsurers’ share of insurance
contract liabilities

Reinsurers’ share of investment
contract liabilities

Cash and cash equivalents

–

1,406

1,849

–

694

–

1,400

11,128

–

114

4,277

3,867

15,047

360

2,192

6,349

43,220

1 As noted above for financial assets that do not have credit ratings assigned by external ratings the Group assigns internal ratings for use in management and monitoring credit risk.

£33 million of AAA, £218 million of AA, £103 million of A, £5 million of BBB and £1 million of BB and below of fixed and variable rate income securities are internally rated.

Credit ratings have not been disclosed in the above tables for holdings in unconsolidated collective investment schemes
and investments in associates. The credit quality of the underlying debt securities within these vehicles is managed by the
safeguards built into the investment mandates for these vehicles.

The Group maintains accurate and consistent risk ratings across its asset portfolio. This enables management to focus on the
applicable risks and to compare credit exposures across all lines of business, geographical regions and products. The rating system
is supported by a variety of financial analytics combined with market information to provide the main inputs for the measurement
of counterparty risk. All risk ratings are tailored to the various categories of assets and are assessed and updated regularly.

The Group operates an Internal Credit Rating Committee to perform oversight and monitoring of internal credit ratings for
internally rated assets. Internally rated assets are those that do not have a public rating from an external credit assessment
institution. The internal credit ratings used by the Group are provided by fund managers or for certain assets (in particular,
equity release mortgages) determined by the Life Companies. A variety of methods are used to validate the appropriateness
of the internal credit ratings. The Internal Credit Rating 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 (eg equity release mortgages and commercial real estate loans)
with the aim of achieving greater diversification and investment returns.

160

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NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDE6. Risk Management – financial risk continued
E6.2 Financial risk analysis continued
A further indicator of the quality of the Group’s financial assets
is the extent to which they are neither past due nor impaired.
All of the amounts in the table above for the current and prior
year are neither past due nor impaired.

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).

Please refer to page 222 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 Potential
Future Exposure (‘PFE’) value 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.

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 to provide security against the daily mark to
model value of derivative financial instruments and as part of
securities lending activity. Management monitors the market
value of the collateral received, requests additional collateral
when needed, and performs an impairment valuation when
impairment indicators exist and the asset is not fully secured
(and is not carried at fair value). See note E4.1 for further
information on collateral arrangements.

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.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

161

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONE. FINANCIAL ASSETS & LIABILITIES continued
E6. Risk Management – financial risk continued
E6.2 Financial risk analysis continued
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 £141 million
(2017: £110 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 £211 million
(2017: £196 million).

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 funds, unit-linked funds or equity
release mortgages in the non-profit 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. For the
non-profit fund property price risk from equity release
mortgages is borne by the Group with the aim of achieving
greater diversification and investment returns, consistent
with the Strategic Asset Allocation approved by the Board.

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
£202 million (2017: £73 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 £197 million
(2017: £71 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 £15 million
(2017: £11 million).

162

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NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDE6. Risk Management – financial risk continued
E6.2 Financial risk analysis continued
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 £7 million
(2017: £5 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 as inflation swaps, or physical positions in relevant
assets, such as index-linked gilts, where appropriate.

Currency risk
With the exception of Standard Life business sold in Germany
and the Republic of Ireland, and some historic business
written in the latter, the Group’s principal transactions are
carried out in sterling. The assets for these books of business
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.

Some of the Group’s 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.

The Group has hedged the currency risk on its foreign
currency hybrid debt ($500 million Tier 2 bonds and
€500 million Tier 2 bonds as set out in note E5) through
cross currency interest rate swaps.

Sensitivity of profit after tax and equity to fluctuations in
currency exchange rates is not considered significant at
31 December 2018, since unhedged exposure to foreign
currency was relatively low (2017: 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 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.

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 plc 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.

PHOENIX GROUP HOLDINGS PLC
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163

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONE. FINANCIAL ASSETS & LIABILITIES continued
E6. Risk Management – financial risk continued
E6.2 Financial risk analysis continued
The vast majority of the Group’s derivative contracts are traded OTC and have a two day collateral settlement period.
The Group’s derivative contracts are monitored daily, via an end-of-day valuation process, to assess the need for additional
funds to cover margin or collateral calls.

Some of the Group’s commercial property investments are held through collective investment schemes. The collective
investment schemes have the power to restrict and/or suspend withdrawals, which would, in turn, affect liquidity. 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 and 2018, 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.

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:

2018

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

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

1 year or
less or on
demand
£m

15,511

114,463

105

361

156

2,659

2,645

902

329

777

1 year or
less or on
demand
£m

4,739

26,733

144

840

1,961

522

179

144

1–5 years
£m

22,049

–

1,189

1,371

147

–

1–5 years
£m

12,169

–

1,161

153

–

Greater
than
5 years
£m

53,651

–

1,500

2,767

1,092

–

Greater
than
5 years
£m

27,527

–

972

302

1,283

–

No fixed
term
£m

–

114

–

No fixed
term
£m

–

131

–

Total
£m

91,211

114,463

2,908

4,499

1,395

2,659

2,645

902

337

873

Total
£m

44,435

26,733

2,408

429

1,508

840

1,961

522

179

144

1 These financial liabilities are disclosed at their undiscounted value and therefore differ to amounts included in the statement of consolidated financial position which discloses the

discounted value.

164

PHOENIX GROUP HOLDINGS PLC
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NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDE6. Risk Management – financial risk continued
E6.2 Financial risk analysis continued
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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165

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONWhere 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’).
Standard Life Assurance Limited (‘SLAL’), a wholly-owned
subsidiary of the Group, includes the Heritage With Profits
Fund (‘HWPF’). In 2006, the Standard Life Assurance Company
demutualised. The demutualisation was governed by its
Scheme of Demutualisation (‘the Scheme’). Under the Scheme
substantially all of the assets and liabilities of the Standard Life
Assurance Company were transferred to SLAL.
The Scheme of Demutualisation (‘the Scheme’) provides that
certain defined cash flows (recourse cash flows) arising in the
HWPF on specified blocks of UK and Ireland business, both
participating and non-participating, may be transferred out of that
fund when they emerge, being transferred to the Shareholder
Fund (‘SHF’) or the Proprietary Business Fund (‘PBF’) of SLAL,
and thus accrue to the ultimate benefit of equity holders of the
Company. Under the Scheme, such transfers are subject to certain
constraints in order to protect policyholders. The Scheme also
provides for additional expenses to be charged by the PBF to
the HWPF in respect of German branch business in SLAL.
Under the realistic valuation, the discounted value of expected
future cash flows on participating contracts not reflected in the
WPBR is included in the cost of future policy-related liabilities
(as a reduction where future cash flows are expected to be
positive). The discounted value of expected future cash flows
on non-participating contracts not reflected in the measure on
non-participating liabilities is recognised as a separate asset
(where future cash flows are expected to be positive). The
Scheme requirement to transfer future recourse cash flows out
of the HWPF is recognised as an addition to the cost of future
policy-related liabilities. The discounted value of expected future
cash flows on non-participating contracts can be apportioned
between those included in the recourse cash flows and those
retained in the HWPF for the benefit of policyholders.
Applying the policy noted above for the HWPF:
• The value of participating investment contract liabilities on
the consolidated statement of financial position is reduced
by future expected (net positive) cash flows arising on
participating contracts.

• Future expected cash flows on non-participating contracts are
not recognised as an asset of the HWPF on the consolidated
statement of financial position. However, future expected cash
flows on non-participating contracts that are not recourse cash
flows under the Scheme are used to reduce the value of
participating insurance and participating investment contract
liabilities on the consolidated statement of financial position.

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 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 Benefit Reserve (‘WPBR’) 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 WPBR and the cost of future policy-related liabilities.

166

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDGross benefits and claims
Claims on insurance contracts and investment contracts with
DPF reflect the cost of all claims arising during the period,
including policyholder bonuses allocated in anticipation of a bonus
declaration. Claims payable on maturity are recognised when the
claim becomes due for payment and claims payable on death are
recognised on notification. Surrenders are accounted for at the
earlier of the payment date or when the policy ceases to be
included within insurance contract liabilities. Where claims are
payable and the contract remains in-force, the claim instalment
is accounted for when due for payment. Claims payable include
the costs of settlement.
Reinsurance
The Group cedes insurance risk in the normal course of business.
Reinsurance assets represent balances due from reinsurance
providers. Reinsurers’ share of insurance contract liabilities is
dependent on expected claims and benefits arising under the
related reinsured policies.
Reinsurance assets are reviewed for impairment at each reporting
date, or more frequently, when an indication of impairment arises
during the reporting period. Impairment occurs when there is
objective evidence, as a result of an event that occurred after
initial recognition of the reinsurance asset, that the Group may
not receive all outstanding amounts due under the terms of the
contract and the event has a reliably measurable impact on the
amounts that the Group will receive from the reinsurer. The
impairment loss is recognised in the consolidated income
statement. The reinsurers’ share of investment contract liabilities
is measured on a basis that is consistent with the valuation of
the liability to policyholders to which the reinsurance applies.
Reinsurance premiums payable in respect of certain reinsured
individual and group pensions annuity contracts are payable by
quarterly instalments and are accounted for on a payable basis.
Due to the period of time over which reinsurance premiums are
payable under these arrangements, the reinsurance premiums and
related payables are discounted to present values using a pre-tax
risk-free rate of return. The unwinding of the discount is included
as a charge within the consolidated income statement.
Reinsurance claims are recognised when the related gross
insurance claim is recognised according to the terms of the
relevant contract.
Gains or losses on purchasing reinsurance are recognised in the
consolidated income statement at the date of purchase and are
not amortised. They are the difference between the premiums
ceded to reinsurers and the related change in the reinsurers’
share of insurance contract liabilities.

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.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

167

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONF. INSURANCE CONTRACTS, INVESTMENT CONTRACTS WITH DPF AND REINSURANCE continued
F1. Liabilities under insurance contracts continued
The table below shows a summary of the liabilities under insurance contracts and the related reinsurers’ share included within
assets in the statement of consolidated financial position.

Life assurance business:

Insurance contracts

Investment contracts with DPF

Gross
liabilities
2018
£m

Reinsurers’
share
2018
£m

Gross
liabilities
2017
£m

Reinsurers’
share
2017
£m

66,872

24,339

91,211

7,564

–

7,564

33,481

10,954

44,435

3,319

3,320

Amounts due for settlement after 12 months

75,700

6,801

39,697

2,996

At 1 January

Premiums

Claims

Foreign exchange adjustments

Acquisition of Standard Life Assurance businesses (see note H2)

Other changes in liabilities1

At 31 December

Gross
liabilities
2018
£m

Reinsurers’
share
2018
£m

Gross
liabilities
2017 restated
(note A1)
£m

Reinsurers’
share
2017 restated
(note A1)
£m

44,435

2,645

(5,295)

51,487

(2,096)

91,211

3,320

45,807

481

(866)

–

4,264

365

7,564

1,297

(4,064)

–

1,375

44,435

3,744

356

(594)

(1)

–

(185)

3,320

1 Other changes in liabilities principally comprise of changes in economic and non-economic assumptions and experience. Other changes in liabilities also includes the recognition

of an additional £22 million (2017: £nil) of policyholder liabilities on the crystallisation of obligations initially included within the FCA thematic reviews provision – SLAL.

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.
In relation to the HWPF, amounts are considered to be allocated
to shareholders when they emerge as recourse cash flows within
the HWPF.
The unallocated surplus of the HWPF comprises the value of
future recourse cash flows in participating contracts (but not
the value of future cash flows on non-participating contracts),
the value of future additional expenses to be charged on German
branch business and the effect of any measurement differences
between the realistic value and the IFRS accounting policy
value of all assets and liabilities other than participating
contract liabilities recognised in the HWPF.
The recourse cash flows are recognised as they emerge as an
addition to shareholders’ profits if positive or as a deduction if
negative. As the additional expenses are charged in respect of
the German branch business they are recognised as an addition
to equity holders’ profits.

At 1 January

Transfer (to)/from consolidated
income statement

Acquisition of Standard Life Assurance
(see note H2)

Foreign exchange movements

At 31 December

2018
£m

925

(88)

525

(4)

1,358

2017
£m

879

–

925

F3. Reinsurance
This section includes disclosures in relation to reinsurance.
Further disclosures and accounting policies relating to
reinsurance are included in note F1.

F3.1 Premiums ceded to reinsurers
Premiums ceded to reinsurers during the period were
£481 million (2017: £356 million).

168

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDF3. Reinsurance continued
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 £3,253 million
(2017: £3,640 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’.
Where there is interest payable on such collateral, it is
recognised within ‘Net income under arrangements
with reinsurers’ (see F3.3). The amounts recognised as
financial assets and liabilities from cash collateral received
at 31 December 2018 are set out below.

Financial assets

Financial liabilities

Reinsurance transactions

2018
£m

373

2017
£m

368

F3.3 Net income under arrangements with reinsurers
The Group has reinsured the longevity and investment risk
related to a portfolio of annuity contracts held within the
HWPF. At inception of the reinsurance contract the reinsurer
was required to deposit an amount equal to the reinsurance
premium with the Group. Interest is payable to the reinsurer
on the deposit at a floating rate. The Group maintains a
ring fenced pool of assets to back this deposit liability.
Annuity payments under the reinsured contracts are made by
the Group from the ring fenced assets and the deposit liability
is reduced by the amount of these payments. Periodically the
Group is required to pay to the reinsurer or receive from the
reinsurer Premium Adjustments defined as the difference
between the fair value of the ring fenced assets and the
deposit amount, such that the deposit amount equals the
fair value of the ring fenced assets. This has the effect of
ensuring that the investment risk on the ring fenced pool
of assets falls on the reinsurer. The investment return on
the ring fenced assets included in investment return in the
consolidated income statement is equal to an equivalent
amount recognised in expenses under arrangements
with reinsurers.

Interest payable on deposits
from reinsurers

Premium adjustments

Net income under arrangements
with reinsurers

2018
£m

2017
£m

(11)

–

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 contracts for the Life businesses include
the following sources of insurance risk:

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

Pricing

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

inadequate or inappropriate pricing of
new business.

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. In addition to this, mortality, longevity and
morbidity risks may in certain circumstances be mitigated
by the use of reinsurance.

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.

The Group’s longevity risk exposures have increased as a
result of the Bulk Purchase Annuity deals it has successfully
acquired, however the vast majority of these exposures are
reinsured to third parties.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

169

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONF. INSURANCE CONTRACTS, INVESTMENT
CONTRACTS WITH DPF AND REINSURANCE continued
F4. Risk Management – Insurance risk continued
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 £54 million (2017: £34 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 £54 million (2017: £34 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 £265 million (2017: £137 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 £273 million (2017: £138 million).

A decrease of 10% 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 £27 million
(2017: £40 million1).

An increase of 10% 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 £26 million
(2017: £31 million1).

1 The 2017 comparative has been restated as the Group now applies a 10% sensitivity
for calculating lapse rate sensitivities for consistency with the stress and scenario
testing monitored by the Group on an ongoing basis (2017: 25%).

F4.1 Assumptions
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
involved placing a value on liabilities similar to the market
value of assets with similar cash flow patterns.

The non-participating insurance contract liabilities are
determined using either a net premium or gross premium
valuation method.

The assumptions used to determine the liabilities, under
these valuation methods are updated at each reporting date
to reflect recent experience. Material judgement is required
in calculating these liabilities and, in particular, in the choice
of assumptions about which there is uncertainty over future
experience. The principal assumptions are as follows:

Discount rates
The Group discounts participating and non-participating
insurance contract liabilities at a risk-free rate derived from
the swap yield curve, plus an illiquidity premium of 10bps.

For certain non-participating insurance contract liabilities
(eg annuities), the Group makes a further explicit adjustment
to the risk-free rate to reflect illiquidity in respect of the
assets backing those liabilities.

Expense inflation
Expenses for the Phoenix Life companies 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.

For the Standard Life Assurance businesses, the assumptions
for future policy expense levels are determined from the most
recent expense analyses. No allowance is made for potential
future expense improvement. The assumed expense level
incorporates an annual inflation allowance determined
by reference to RPI.

Mortality and longevity rates
Mortality rates are based on company experience and
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.

170

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDF4. Risk Management – Insurance risk continued
F4.1 Assumptions continued
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 £1,865 million (2017: £1,965 million) and £93 million
(2017: £131 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 £298 million (2017: £334 million) and £7 million
(2017: £48 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.

Demographic prudence margin
For non-participating insurance contract liabilities, the
Group 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 represent
‘best estimates’.

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
2018
£m

(Decrease)/
increase
in insurance
liabilities
2017
£m

(168)

(12)

(16)

(28)

(148)

120

(79)

Change in longevity assumptions

Change in persistency assumptions

Change in mortality assumptions

Change in expenses assumptions

2018:
The £168 million positive impact of changes in longevity
assumptions reflects updates to base and improvement
assumptions to reflect latest experience analyses and where
applicable the most recent Continuous Mortality Investigation
2017 projection tables.

The £12 million and £16 million positive impact of changes in
persistency and mortality assumptions respectively reflects
the results of the latest experience investigations.

The £28 million positive impact of changes in expense
assumptions principally reflects updated investment expenses
in light of updates made to the asset mix and to reflect
changes to agreements with the Group’s external
funds managers.

2017:
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 variable guarantees.

The £79m 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 management services companies.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

171

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONF. 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 and the ways
in which the Group manages those risks.

2018
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

1 £4,605 million (2017: £3,770 million) of liabilities are subject to longevity swap arrangements.

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

Gross1

Reinsurance

Insurance
contracts
£m

Investment
contracts
with DPF
£m

Insurance
contracts
£m

Investment
contracts
with DPF
£m

8,329
1,111
7,583
11,717
28,740

171
6,145
2,391
8,707

1,237

844
17,600
488
9,440
(184)
66,872

69
–
–
22,449
22,518

–
791
–
791

–

–
–
–
1,021
9
24,339

807
–
4,808
(3)
5,612

4
(79)
3
(72)

208

–
1,776
80
44
(84)
7,564

–
–
–
–
–

–
–
–
–

–

–
–
–
–
–
–

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

–
1,854
61
66
(127)
3,319

–
–
–
–
–

–
1
–
1

–

–
–
–
–
–
1

172

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDDuring 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.

F4. Risk Management – Insurance risk continued
F4.2 Managing product risk continued
With-profit fund (unitised and traditional)
The Group operates a number of with-profit funds 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. For the HWPF, under the Scheme,
shareholders are entitled to receive certain defined cash
flows arising on specified blocks of UK and Irish business.

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. In addition, certain unit prices in
the HWPF are guaranteed not to decrease.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

173

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONF. INSURANCE CONTRACTS, INVESTMENT
CONTRACTS WITH DPF AND REINSURANCE continued
F4. Risk Management – Insurance risk continued
F4.2 Managing product risk continued
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.

174

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDG. 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.

Leasehold
properties
£m

Staff
related
£m

Known
incidents
£m

PA(GI)
provision
£m

FCA
thematic
reviews
provision
£m

Restructuring
provision
£m

Transfer
of policy
administration
provision
£m

–

(1)

–

(1)

(5)

(2)

–

(15)

(8)

–

225

(54)

(17)

208

–

(13)

–

(3)

–

2018

At 1 January

Additions in the year

Acquisition of Standard
Life Assurance during the
year (see note H2.1)

Utilised during the year

Released during the year

At 31 December

Other
£m

–

(7)

(3)

Total
£m

134

104

269

(98)

(32)

377

Leasehold properties
The leasehold properties provision includes a £3 million
(2017: £3 million) dilapidations provision in respect of
obligations under operating leases. In addition, a provision has
been made for £2 million (2017: £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 include provisions for unfunded pensions of
£5 million (2017: £6 million), private medical and other insurance
costs for former employees of £9 million (2017: £2 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.

On acquisition of the Standard Life Assurance businesses on
31 August 2018, obligations arising as a result of the areas described
above were recognised at £37 million on a fair value basis. £5 million
of this balance has been utilised since the acquisition date, with the
remainder expected to be utilised in 2019.

PA(GI) provision
In 2015, PA(GI) Limited, 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 £17 million (2017: £40 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 2018, a reimbursement asset of £8 million
(2017: £32 million) 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 £18 million
(2017: £7 million) have been received during the year.

FCA thematic reviews provision – Abbey Life
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 was subject to additional investigations. Specifically, the
FCA explored whether remedial and/or disciplinary action was
necessary or appropriate in respect of exit or paid-up charges
being applied. Additionally, Abbey Life was investigated for
potential contravention of regulatory requirements across
a number of other areas assessed in the thematic review.

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 provisions in respect of its
best estimate of the likely costs associated with its obligations
in this regard.

On 14 December 2018, the Group was informed by the FCA
that it had closed its investigation into Abbey Life following
completion of the thematic review into the fair treatment of
long-standing customers in the life insurance sector, having
found that the conduct of Abbey Life did not warrant
enforcement action. Accordingly, £10 million of the provision
remaining at 1 January 2018 has been released during the year.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

175

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONG. OTHER STATEMENT OF CONSOLIDATED
FINANCIAL POSITION NOTES continued
G1. Provisions continued
In respect of the non-advised annuity sales, £10 million of
the provision was utilised and £7 million was released during
the year.

Under the terms of the Abbey Life acquisition, Deutsche
Bank provided Phoenix Life Holding Limited (‘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 2018,
a reimbursement asset of £14 million (2017: £23 million) has
been recognised in other receivables under this indemnity.
Recoveries of £9 million have been received during the year.

FCA thematic reviews provision – SLAL
Standard Life Assurance was also a participant in the
thematic review of non-advised annuity sales issued by
the FCA on 14 October 2016.

On acquisition of the Standard Life Assurance businesses
on 31 August 2018, obligations arising as a result of past
practices in the area described above were assessed. As a
result, it was determined appropriate to recognise a provision
of £225 million in respect of SLAL on a fair value basis in this
regard. 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 SLAL to carry out remediation
activities or impose financial penalties.

Under the terms of the Standard Life Assurance acquisition, SLA
plc provided the Company with a deed of indemnity, with a duration
of up to four years from the date of the acquisition, in respect of
certain liabilities arising out of the FCA-mandated, and SLA plc’s
voluntary, review and redress programme in respect of SLAL’s
historical non-advised sales of pension annuities, and the FCA’s
ongoing investigation of historical non-advised annuity sales
practices. To the extent that total costs post 31 August 2018
exceed £225 million, such amounts will be recoverable under
the deed of indemnity and related caps up to a maximum
of £155 million. To the extent that total costs are less than
£225 million, Old PGH is required to pay the balance to SLA plc,
together with any interest that may have accrued on such sum.

Of the £225 million recognised upon acquisition, £44 million
has been utilised since the acquisition date, and £181 million
remains as at 31 December 2018.

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 involved 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, and a further £8 million
during 2018.

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 £5 million utilised during 2018.

Transfer of policy administration

A large majority of the Group’s policy administration is
outsourced to Diligenta Limited (‘Diligenta’), a UK-based
subsidiary of Tata Consultancy Services (‘TCS’). Diligenta
provide life and pension business process services to a large
number of the Group’s policyholders. During 2018, the Group
announced its intention to move to a single outsourcer
platform and as a result a further 2 million of the Group’s
policies will be transferred to Diligenta by 31 December 2021.

A provision of £76 million has been recognised for the
expected cost of the platform migration. During 2018,
£3 million of this provision was utilised, with the remaining
£73 million expected to be utilised within three years.

Other provisions
Other provisions include litigation and onerous contract
provisions, obligations arising under a gift voucher scheme
operated by the SunLife business and a commission clawback
provision which represents the expected future clawback of
commission income earned by the SunLife business as a
result of assumed lapses of policies or associated benefits.

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

2018
£m

145

(20)

2017
£m

(5)

(843)

(366)

176

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDG2. Tax assets and liabilities continued
Movement in deferred tax assets/(liabilities)

2018

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

Other

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

Recognised in
consolidated
income
statement
£m

Recognised
in other
comprehensive
income
£m

Acquisition of
Standard Life
Assurance
businesses
£m

1 January
£m

31 December
£m

(13)

(341)

(33)

(81)

(40)

–

(366)

(36)

(2)

(16)

188

(3)

200

–

(2)

(3)

(5)

–

(502)

(7)

(167)

–

(10)

(667)

(13)

–

(810)

(37)

(60)

(32)

(1)

(843)

Recognised in
consolidated
income
statement
£m

Recognised
in other
comprehensive
income
£m

1 January
£m

Other
movements
£m

31 December
£m

(13)

(364)

(37)

(48)

(378)

(20)

–

(10)

(4)

–

(44)

–

(13)

(341)

(33)

(81)

(40)

(366)

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 consolidated
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

Deferred tax assets not recognised on capital losses1

1 These can only be recognised against future capital gains and have no expiry date.

2018
£m

2017
£m

On 29 March 2017, the UK Government triggered Article 50 initiating a two-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 consolidated financial statements but this will be monitored and reassessed at each reporting period as
negotiations continue.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

177

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONG. OTHER STATEMENT OF CONSOLIDATED
FINANCIAL POSITION NOTES continued
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

2018
£m

902

2017
£m

522

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

2018
£m

337

2017
£m

179

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

Property related payables

Investment management fees

Other payables

2018
£m

199

117

518

873

2017
£m

–

144

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 (prior to the elimination of the
insurance policies issued by Group entities) 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 Pearl Scheme’), the PGL Pension Scheme, and
the Abbey Life Staff Pension Scheme (‘Abbey Life Scheme’)
and explains how the pension asset/liability is calculated.

178

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDG6. Pension schemes continued
An analysis of the defined benefit asset/(liability) 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
£432 million (2017: £420 million)
available as a refund on a winding-up
of the Scheme)

Adjustment for insurance policies
eliminated on consolidation

Net economic deficit

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

2018
£m

449

(37)

(157)

255

506

(877)

(371)

(151)

(522)

2017
£m

572

(50)

(200)

322

500

(916)

(416)

(147)

(563)

Abbey Life Staff Pension Scheme

Net defined benefit liability

(74)

(70)

Risks
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 liabilities are calculated using
a discount rate set with reference to corporate bond yields;
if assets underperform this yield, this will create a deficit.
The majority of the assets are held within a liability driven
investment strategy which is linked to the funding basis of
the schemes (set with reference to government bond yields).
As such, to the extent that movements in corporate bond
yields are out of line with movements in government bond
yields, volatility will arise.

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). The majority of the assets are held with a liability
driven investment strategy which allows for movements in
inflation, meaning that changes in inflation should not
materially affect the surplus.

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.
For the PGL scheme, this is partially offset by the buy in
policies that move in line with the liabilities. These buy in
policies are eliminated on consolidation (see section G6.2
for further details)

Information on each of these schemes is set out below.

Guaranteed Minimum Pension (‘GMP’) Equalisation
GMP is a portion of pension that was accrued by individuals
who were contracted out of the State Second Pension prior
to 6 April 1997. Historically, there was an inequality of benefits
between male and female members who have GMP. A High
Court case concluded on 26 October 2018 and confirmed
that GMPs need to be equalised. The Group has undertaken
an initial assessment, and has included an allowance for
the potential cost of equalising GMP for the impact between
males and females in its IAS 19 actuarial liabilities as at
31 December 2018, pending further discussions with the
scheme Trustees and the issuance of guidance as to how
equalisation should be achieved. The cost of GMP equalisation
across all schemes of £59 million (Pearl Scheme: £32 million;
PGL Scheme: £23 million; and Abbey Scheme £4 million) has
been recognised as a past service cost in the consolidated
income statement. Any future changes to this estimate will
be recognised in Other Comprehensive Income.

G6.1 Pearl Group Staff Pension Scheme
Scheme details
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 Pearl
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.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

179

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONG. OTHER STATEMENT OF CONSOLIDATED
FINANCIAL POSITION NOTES continued
G6. Pension schemes continued
G6.1 Pearl Group Staff Pension Scheme continued
The valuation has been based on an assessment of the
liabilities of the Pearl Scheme as at 31 December 2018,
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.

• 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 £37 million (2017: £50 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 £106 million
(2017: £143 million) in accordance with the minimum
funding requirement. A deferred tax asset of £18 million
(2017: £24 million) has also been recognised to reflect tax
relief at a rate of 17% (2017: 17%) that is expected to be
available on the contributions, once paid into the Scheme.

Contributions totalling £40 million were paid into the Pearl
Scheme in 2018 (2017: £50 million) reflecting the monthly
instalments. The contributions paid into the Scheme for
2017 reflect £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 2019.

Liability management exercise
In June 2018, the Group commenced a pension increase
exchange (‘PlE’) exercise in respect of the Pearl 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 period has been recognised
in the consolidated financial statements as a reduction
in scheme liabilities of £2 million shown as past service
credit in the consolidated income statement.

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 triennial
funding valuation of the Scheme as at 30 June 2018
commenced during the year and is expected to be
completed by September 2019. The cash flows utilised
in the IFRS valuation as at 31 December 2018 have been
updated to reflect the latest data available from the
30 June 2018 funding valuation and together with the
impact of modelling enhancements implemented during
the year, this has resulted in the recognition of an experience
loss of £145 million in the year (2017: £15 million loss).

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 were not altered following finalisation of 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;

180

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDG6. Pension schemes continued
G6.1 Pearl Group Staff Pension Scheme continued
Summary of amounts recognised in the consolidated financial statements
The amounts recognised in the consolidated financial statements are as follows:

2018

At 1 January

Interest income/(expense)

Past service cost

Included in profit or loss

Remeasurements:

Return on plan assets excluding amounts included
in interest income

Gain from changes in demographic assumptions

Gain 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

Defined
benefit
obligation
£m

Provision for
tax on the
economic
surplus
available as
a refund
£m

Minimum
funding
requirement
obligation
£m

2,722

(2,150)

(200)

(50)

–

(81)

–

(81)

(117)

(52)

(30)

(82)

–

(145)

–

(67)

–

117

(5)

–

(5)

–

(1)

–

(1)

–

Total
£m

322

(30)

(21)

(81)

(145)

(86)

–

At 31 December

2,631

(2,182)

(157)

(37)

255

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

181

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)

–

(158)

(56)

–

(51)

(15)

–

(15)

–

158

(4)

–

(39)

–

(39)

–

(2)

–

Total
£m

225

(51)

(15)

(39)

–

At 31 December

2,722

(2,150)

(200)

(50)

322

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

2018

2017

Of which not
quoted in an
active market
£m

(4)

–

294

–

333

Total
£m

2,012

–

1,251

294

(1,115)

2,631

Of which not
quoted in an
active market
£m

(35)

–

270

–

288

Total
£m

1,823

165

1,090

270

120

(887)

2,722

182

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDG6. Pension schemes continued
G6.1 Pearl Group Staff Pension Scheme continued
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: 40% (2017: 37%); and

• Pensioners: 60% (2017: 63%)

The weighted average duration of the defined benefit
obligation at 31 December 2018 is 16 years (2017: 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

2018
%

2017
%

3.10

2.40

2.80

3.20

2.40

3.05

2.20

2.50

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 from 1 January 2017 are
based on CMI 2017 Core Projections (2017: CMI 2016 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 (unchanged from 2017). Under these
assumptions, the average life expectancy from retirement for
a member currently aged 40 retiring at age 60 is 29.9 years
and 32.2 years for male and female members respectively
(2017: 30.0 and 32.0 respectively).

A quantitative sensitivity analysis for significant actuarial assumptions is shown below:

2018

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)

2,182

(82)

(76)

(79)

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)

(54)

(84)

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.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

183

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 (see note E1). 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 2018 was £856 million (2017: £895 million).

Included within insurance policies with Group entities of
£877 million (2017: £916 million) is a further insurance policy
reimbursement asset of £21 million (2017: £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 Pension
Scheme. Pension increases are now 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.

Scheme details
Defined contribution scheme
Contributions in the year amounted to £7 million (2017: £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
2018, undertaken by independent qualified actuaries.

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. The triennial
funding valuation of the Scheme as at 30 June 2018
commenced during the year and is expected to be completed
by September 2019. The IFRS valuation cash flows have been
updated to reflect the latest valuation data.

No contributions were paid in 2018 (2017: £10 million).
Contributions amounting to £59 million in total were paid into
the Scheme over the period from October 2013 to August
2017. There are no further committed contributions to pay
in respect of the defined benefit section of the Scheme.

184

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDG6. Pension schemes continued
G6.2 PGL Pension Scheme continued
Summary of amounts recognised in the consolidated financial statements
The amounts recognised in the consolidated financial statements are as follows:

Fair value of
scheme
assets
£m

Defined
benefit
obligation
£m

Provision for
tax on the
economic
surplus
available as
a refund
£m

Minimum
funding
requirement
obligation
£m

1,206

(1,622)

(147)

(4)

–

(41)

–

(41)

(81)

(40)

–

(23)

(63)

–

(3)

–

(3)

–

(3)

–

(1)

–

1,157

(1,528)

(151)

–

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

Minimum
funding
requirement
obligation
£m

(135)

(4)

(2)

–

(77)

(43)

–

(43)

–

(6)

(38)

–

(7)

–

(4)

–

(4)

–

(8)

–

(8)

–

1,206

(1,622)

(147)

–

2018

At 1 January

Interest income/(expense)

Administrative expenses

Past service cost

Included in profit or loss

Remeasurements:

Return on plan assets excluding amounts included
in interest income

Experience gain

Gain from changes in financial assumptions

Loss from changes in demographic assumptions

Change in provision for tax on economic surplus available
as a refund

Included in other comprehensive income

Benefit payments

Income received from insurance policies

At 31 December

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

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

Total
£m

(563)

(13)

(4)

(23)

(40)

(41)

(3)

(1)

–

(522)

Total
£m

(593)

(16)

(2)

(18)

(6)

(38)

(8)

–

(563)

185

Fixed interest gilts

Index-linked bonds

Swaps

Properties

Hedge funds

Corporate Bonds

Cash and other

Obligations for repayment of stock lending collateral received

European Investment Bank Bonds

Reported scheme assets

Add back:

Insurance policies eliminated on consolidation

Economic value of assets

2018

2017

Of which not
quoted in an
active market
£m

–

877

882

Total
£m

291

848

–

(24)

1,157

877

2,034

Of which not
quoted in an
active market
£m

–

111

–

208

916

1,124

Total
£m

357

866

111

(254)

–

1,206

916

2,122

The Group ensures that the investment positions are
managed within an 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 Pension 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 PGL Pension
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: 36% (2017: 39%); and

• Pensioners: 64% (2017: 61%)

The weighted average duration of the defined benefit
obligation at 31 December 2018 is 16 years (2017: 18 years).
The prior year value has been restated following refinements
made to the modelling used in the calculation.

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

2018
%

2017
%

3.20

2.40

2.80

3.20

2.40

2.20

2.50

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 Pension 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 from 1 January 2017 in line with CMI 2017
Core Projections (2017: CMI 2016 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% at age 110 (unchanged from
2017). Under these assumptions, the average life expectancy
from retirement for a member currently aged 40 retiring
at age 62 is 28.3 years (2017: 28.3 years) and 29.6 years
(2017: 29.6 years) for male and female members respectively.

186

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDG6. Pension schemes continued
G6.2 PGL Pension Scheme continued
A quantitative sensitivity analysis for significant actuarial assumptions is shown below:

2018

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)

1,528

(59)

(51)

(57)

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)

(50)

(60)

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 consolidated financial position.

G6.3 Abbey Life Staff Pension Scheme
Scheme details
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 Abbey Life
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 Abbey Life Scheme is closed to new
entrants. The last active member ceased employment with
the Group during the year and consequently the Abbey Life
Scheme no longer recognises a current service cost.

The valuation has been based on an assessment of the
liabilities of the Abbey Life Scheme as at 31 December 2018
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 Abbey Life Scheme was
carried out by a qualified actuary as at 31 March 2018 and
showed a deficit of £74 million.

Prior to 19 November 2018, the following schedule of
contribution was applicable from 1 July 2017 and PeLHL
was required to pay 39.5% of gross pensionable 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.

Following the completion of the triennial funding valuation a
revised schedule of contributions was agreed effective from
19 November 2018, for PeLHL to pay the following amounts
in respect of deficit contributions:

• fixed monthly contributions of £400,000 payable up to

30 June 2026;

• monthly contributions in respect of administration expenses
of £85,640 payable up to 31 March 2019, then £100,000
payable up to 30 June 2028 increasing 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 next payment
being made by 31 July 2019, 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 Abbey Life
Scheme assets.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

187

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONG. OTHER STATEMENT OF CONSOLIDATED
FINANCIAL POSITION NOTES continued
G6. Pension schemes continued
G6.3 Abbey Life Staff Pension Scheme continued
Under the terms of the 2013 Funding Agreement dated
28 June 2013, the funding position of the Abbey Life Scheme
will be assessed as at 31 March 2021. A payment will be
made from the 2013 Charged Account to the Abbey Life
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 Abbey Life
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.

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

Fair value
of scheme
assets
£m

Defined
benefit
obligation
£m

237

(324)

–

(2)

–

(1)

(8)

–

(9)

–

(1)

(12)

(1)

(14)

–

Total
£m

(87)

(1)

(2)

(5)

(1)

(12)

(1)

(8)

–

2018

At 1 January

Past 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

Gain from changes
in financial
assumptions

Gain 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

251

(321)

–

(2)

(13)

–

(13)

(15)

(4)

(8)

–

(12)

–

(5)

–

Total
£m

(70)

(4)

(2)

(8)

(13)

(5)

(2)

–

Employer’s contributions

Benefit payments

(26)

At 31 December

251

(321)

(70)

Scheme assets
The distribution of the scheme assets at the end of the year
was as follows:

2018

Equities – UK

Fixed interest government bonds

Corporate bonds

Derivatives

Cash and cash equivalents

Pension scheme assets

2017

Equities – UK

Fixed interest government bonds

Corporate bonds

Derivatives

Cash and cash equivalents

Of which not
quoted in an
active market
£m

–

(40)

–

(40)

Of which not
quoted in an
active market
£m

–

(40)

–

(40)

Total
£m

148

(40)

233

Total
£m

105

149

(40)

251

At 31 December

233

(307)

(74)

Pension scheme assets

188

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDG6. Pension schemes continued
G6.3 Abbey Life Staff Pension Scheme continued
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 Abbey Life Scheme’s members as follows:

• Active scheme members: nil% (2017: 5%)

• Deferred scheme members: 49% (2017: 55%); and

• Pensioners: 51% (2017: 40%)

The weighted average duration of the defined benefit obligation at 31 December 2018 is 17 years (2017: 18 years).

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

2018
%

3.10

2.40

2.80

3.20

2.40

N/A

2017
%

3.05

2.20

2.50

3.20

2.20

4.20

Commutation of benefits to lump sums on retirement

20.00

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 2017 Core
Projections (2017: CMI 2016 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 (unchanged from 2017).
Under these assumptions the average life expectancy from retirement for a member currently aged 45 retiring at age 65 is 25.7
years and 27.2 years for male and female members respectively (2017: 25.8 years and 27.2 years respectively).

A quantitative sensitivity analysis for significant actuarial assumptions is shown below:

2018

Assumptions

Sensitivity level

Impact on the defined benefit
obligation (£m)

2017

Assumptions

Sensitivity level

Impact on the defined benefit
obligation (£m)

Base

Discount rate

RPI

Life expectancy

25bps
increase

25bps
decrease

25bps
increase

25bps
decrease

1 year
increase

1 year
decrease

307

(12)

(9)

(11)

Base

Discount rate

RPI

Life expectancy

25bps
increase

25bps
decrease

25bps
increase

25bps
decrease

1 year
increase

1 year
decrease

321

(15)

(11)

(9)

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.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

189

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONG. OTHER STATEMENT OF CONSOLIDATED FINANCIAL POSITION NOTES continued
G7. Intangible assets

Goodwill
Business combinations are accounted for by applying the
acquisition 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.
In certain acquisitions, an excess of the acquirer’s interest in
the net fair value of the acquiree’s identifiable assets, liabilities,
contingent liabilities and non-controlling interests over cost may
arise. Where this occurs, the surplus of the fair value of net assets
acquired over the fair value of the consideration is recognised in
the consolidated income statement.

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 assets acquired in a business combination
is their 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 whenever 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 and other contractual arrangements
Brands and other contractual arrangements 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 and other contractual arrangements over their estimated
useful lives. They are tested for impairment whenever there is
evidence of possible impairment. For impairment testing, they are
allocated to the relevant cash-generating unit. Brands and other
contractual arrangements are impaired when the recoverable
amount is less than the carrying value.

2018

Cost or valuation

At 1 January

On acquisition of Standard Life
Assurance businesses (see note H2.1)

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

Other intangibles

Goodwill
£m

Acquired
in‑force
business
£m

Customer
relationships
£m

Present
value of
future
profits
£m

Brands and
other
£m

Total other
intangibles

Total
£m

–

2,266

2,931

–

5,197

(968)

(196)

(1,164)

4,033

3,651

297

–

297

(124)

(15)

(139)

158

143

–

(2)

(3)

(5)

328

365

(126)

(18)

(144)

2,651

2,967

5,619

(1,094)

(214)

(1,308)

221

4,311

202

3,910

190

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDG7. Intangible assets continued

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 and
other
£m

Total other
intangibles

Total
£m

Other intangibles

–

2,266

–

2,266

(859)

(109)

(968)

1,298

1,201

297

–

297

(109)

(15)

(124)

173

158

–

(2)

323

328

(109)

(17)

(126)

2,646

2,651

(968)

(126)

(1,094)

202

1,557

185

1,443

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 goodwill is attributable to
the Management Services segment including £8 million that
arose 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 8.9% (2017: 7.1%) 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.

The remaining £10 million relates to the goodwill recognised
on the acquisition of AXA Wealth during 2016 and has been
allocated to the UK Open segment. This represents the value
of the workforce assumed and the potential for future value
creation, which relates to the ability to invest in and grow
the SunLife brand. Value in use has been determined as the
present value of certain future cashflows 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 cashflows
have been valued at a risk-adjusted discount rate of 11%
that makes prudent allowance for the risk that future cash
flows 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 amortised in line with emergence of
economic benefits.

Acquired in-force business of £2,931 million was recognised
during 2018 upon acquisition of the Standard Life Assurance
businesses (see note H2).

G7.3 Customer relationships
The customer relationships intangible at 31 December 2018
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 UK Heritage segment. This
intangible is being amortised over a 20-year period.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

191

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONG. OTHER STATEMENT OF CONSOLIDATED
FINANCIAL POSITION NOTES continued
G7. Intangible assets continued
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.

G7.5 Other intangibles
Other intangibles include £20 million which was recognised
at cost on acquisition of the AXA Wealth businesses and
£36 million recognised at cost on acquisition of the Standard
Life Assurance businesses.

The amount recognised in respect of AXA Wealth 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.

This brand intangible is being amortised over a 10 year period.

The amount recognised in respect of the Standard Life
Assurance businesses represents the value attributable
to the Client Services and Proposition Agreement (‘CSPA’)
with SLA plc and the Group’s contractual rights to use the
Standard Life brand. The CSPA formalises the Strategic
Partnership between the two companies and establishes
the contractual terms by which SLA plc will continue to
market and distribute certain products that will be
manufactured by Group companies.

This intangible was valued on a ‘multi-period excess earnings’
basis and is being amortised over a period of 15 years.
Further details are set out in note H2.

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 20 – 50 years. Land is not depreciated. Gains and
losses on owner-occupied property are recognised in the
statement of consolidated comprehensive income.
Equipment consists primarily of computer equipment and
equipment and fittings. Equipment is stated at historical cost less
deprecation. Where acquired in a business combination, historical
cost equates to the fair value at the acquisition date. Depreciation
on equipment is charged to the consolidated income statement
over its estimated useful life of between 2 and 15 years.

Equipment

Owner-occupied properties

2018
£m

2017
£m

–

Equipment includes £14 million which was recognised
on acquisition of the Standard Life Assurance businesses.
Additions in the year were £5 million and depreciation
charged was £2 million.

Owner-occupied properties have been valued by accredited
independent valuers at 31 December 2018 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 £31 million (2017: £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 Standard Life
Assurance businesses (see note H2.1)

Remeasurement recognised in other
comprehensive income

At 31 December

Unrealised gains for the year

2018
£m

–

2017
£m

–

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).

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 the Standard Life
Assurance businesses (see note H2.1)

Additions

Improvements

Disposals

(Losses)/gains on adjustments to
fair value (recognised in consolidated
income statement)

At 31 December

Unrealised (losses)/gains on properties
held at end of period

2018
£m

612

5,878

119

(74)

(18)

6,520

(28)

2017
£m

646

–

(53)

612

192

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDG9. Investment property continued
As at 31 December 2018, a property portfolio of £6,401 million (2017: £474 million) is held by the life companies in a mix
of commercial sectors, spread geographically throughout the UK and Europe.

Investment properties also include £119 million (2017: £138 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 derived from published mortality tables. The open market value is measured by independent local property
surveyors having appropriate recognised professional qualifications with reference to the assumed condition of the property and
local market conditions. The individual properties are valued triennially and indexed using regional house price indices to the year
end date.

The discount rate is a risk-free rate appropriate for the duration of the asset, adjusted for the deferred possession rate of 3.6%.
Assumptions are also made in the valuation for future movements in property prices, based on a risk free rate. 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

Commercial
Investment
Property

Valuation techniques

Significant non-
observable inputs

Range (weighted average) 2018

Range (weighted average) 2017

RICS valuation

Expected income per sq. ft. £3.71 – £132.72 (£36.66)

£5.39 – £100.40 (£23.85)

Estimated rental value
per hotel room

£4,789 – £13,800 (£8,948)

–

Capitalisation rate

3.30% – 9.50% (5.10%)

4.72% – 10.48% (5.83%)

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

193

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATION• a decrease of 1% in the deferred possession rate would

Other debtors

G. OTHER STATEMENT OF CONSOLIDATED
FINANCIAL POSITION NOTES continued
G9. Investment property continued
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 £5 million;

increase the market value by £5 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 £11 million (2017: £1 million). The direct
operating expenses arising from investment property that
did not generate rental income during the year amounted
to £2 million (2017: £4 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

2018
£m

262

884

2,815

2017
£m

G10. Other receivables

Other receivables are recognised when due and measured
on initial recognition at the fair value of the amount receivable.
Subsequent to initial recognition, these receivables are measured
at amortised cost using the effective interest rate method.

Investment broker balances

Cash collateral pledged

Reimbursement assets (note G1)

Property related receivables

Deferred acquisition costs

2018
£m

176

339

110

379

1,047

2017
£m

338

–

126

580

Amount recoverable after 12 months

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)

2018
£m

2,124

2,802

4,926

2017
£m

1,181

1,064

2,245

Deposits are subject to a combination of fixed and variable
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 £4,572 million (2017: £1,878 million) are primarily
held for the benefit of policyholders and so are not generally
available for use by the owners.

194

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDH1.1 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.

• Pearl Life Holdings Limited (‘PeLHL’) is required to

make payments of contributions into charged accounts
on behalf of the Abbey Life Scheme. These amounts
do not form part of the pension scheme assets and
at 31 December 2018, PeLHL held £46 million
(2017: £40 million) within fixed and variable rate income
securities and £1 million (2017: £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
H2.1 Acquisition of Standard Life Assurance businesses
On 31 August 2018, the Group acquired 100% of the issued
share capital of Standard Life Assurance Limited, Standard
Life Pensions Fund Limited, Standard Life International
Designated Activity Company, Vebnet (Holdings) Limited,
Vebnet Limited, Standard Life Lifetime Mortgages Limited,
Standard Life Assets and Employee Services Limited and
Standard Life Investment Funds Limited (together known as
‘the Standard Life Assurance businesses’) from SLA plc for
total consideration of £2,994 million. The consideration
consisted of £1,971 million of cash funded by a fully
underwritten rights issue of £950 million, with the remaining
balance of £1,021 million funded by a mix of new debt and
Phoenix’s own resources. In addition, SLA plc took a 19.99%
equity stake in the Enlarged Group on completion valued at
£1,023 million, based on the share price at 31 August 2018.

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. In certain acquisitions an excess of the
acquirer’s interest in the net fair value of the acquiree’s identifiable
assets, liabilities, contingent liabilities and non-controlling interests,
over cost may arise. Where this occurs, the surplus of the fair
value of net assets acquired over the fair value of the consideration
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’),
investment trusts 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.
When assessing control over collective investment schemes,
the Group considers those factors described under the ‘Basis of
consolidation’ in note A1. In particular, the Group considers the
scope of its decision-making authority, including the existence
of substantive rights (such as power of veto, liquidation rights
and the right to remove the fund manager) that give it the ability
to direct the relevant activities of the investee. The assessment
of whether rights are substantive rights, and the circumstances
under which the Group has the practical ability to exercise them,
requires the exercise of judgement. This assessment includes a
qualitative consideration of the rights held by the Group that are
attached to its holdings in the collective investment schemes,
rights that arise from contractual arrangements between the
Group and the entity or fund manager and the rights held by third
parties. In addition, consideration is made of whether the Group
has de facto power, for example, where third party investments in
the collective investment schemes are widely dispersed.
Where Group companies are deemed to control such collective
investment schemes they are consolidated in the Group financial
statements, with the interests of external third parties recognised
as a liability, see the accounting policy for ‘Net asset value
attributable to unitholders’ in note E1.
Certain of the collective investment schemes have non-
coterminous period ends and are consolidated on the basis
of additional financial statements prepared to the period end.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

195

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONH. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued
H2. Acquisitions continued
The table below summarises the fair value of identifiable assets acquired and liabilities assumed as at the date of acquisition.

Notes

Fair value
£m

Assets

Intangible assets:

Acquired in-force business

Other intangibles

Property, plant and equipment

Investment property

Financial assets

Reinsurers’ share of insurance contract liabilities

Other insurance assets

Current tax

Prepayments and accrued income

Other receivables

Cash and cash equivalents

Total assets

Liabilities

Liabilities under insurance contracts

Investment contract liabilities

Unallocated surplus

Other financial liabilities

Provisions

Deferred tax

Reinsurance payables

Payables related to direct insurance contracts

Current tax

Accruals and deferred income

Other payables

Bank overdraft

Total liabilities

Non-controlling interest

Fair value of net assets acquired

Gain arising on acquisition

Purchase consideration transferred

Analysis of cashflows on acquisition:

Net cash acquired with the subsidiaries (included in cash flow from investing activities)

Cash paid including transaction costs

Net cash flow on acquisition

2,931

5,878

150,709

4,264

195

353

613

3,643

168,705

51,487

102,206

525

8,859

269

667

342

820

165,305

(265)

3,135

(141)

2,994

3,617

(2,010)

1,607

Acquired Value in-Force (‘AVIF’) and other intangibles
An asset of £2,931 million arises reflecting the present value of future profits associated with the acquired in-force business.

Under the Group’s accounting policy (see note G7), AVIF arising on acquired insurance contracts and investment contracts with
DPF is measured as the difference between the fair value of contractual rights acquired and obligations assumed and the liability
measured in accordance with the Group’s accounting policies for such contracts. AVIF relating to investment contracts without
DPF, is recognised at its fair value.

196

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDH2. Acquisitions continued
Acquired Value in-Force (‘AVIF’) and other intangibles
continued
The valuation of the AVIF has been determined by reference to
the assumptions expected to be applied by a market participant
in an orderly transaction. The valuation approach uses present
value techniques applied to the best estimate cash flows
expected to arise from policies that were in-force at the
acquisition date, adjusted to reflect the price of bearing the
uncertainty inherent in those cash flows. This approach
incorporates a number of judgments and assumptions which
have impacted on the resultant valuation, the most significant
of which include mortality rates, expected policy lapses and
surrender costs, and the expenses associated with servicing
the policies, together with economic assumptions such as
future investment returns and the discount rate allowing for
an appropriate illiquidity premium based on the assets existing
at the balance sheet date. The determination of the majority
of these assumptions is carried out on a consistent basis with
that described in note F4.1 with appropriate adjustments to
reflect a market participant view. The risk adjustment for the
uncertainty in the cashflows has been determined using a
cost of capital approach.

Deferred acquisition costs of £584 million and deferred
front end fees of £(139) million, recognised by the Standard
Life Assurance businesses have been derecognised on
acquisition and replaced with the AVIF.

A separately identifiable intangible asset of £36 million relating to
the Client Service and Proposition Agreement (‘CSPA’) entered
into between Phoenix and SLA plc has been recognised in the
acquisition balance sheet. This reflects the value associated with
the receipt of marketing, distribution and customer relationship
services from SLA plc at a nil or below market rate cost and the
rights acquired for the usage of the Standard Life brand for the
marketing of certain specified products. Further details are set
out in note G7. The asset has been valued using a multi-period
excess earnings method. The useful economic life of the
intangible has been assessed as 15 years.

Other receivables
The financial assets acquired include other receivables with
a fair value of £613 million. The gross amount due under the
contracts is £613 million, of which no balances are expected
to be uncollectible.

equity market gains in the period from February to August 2018.
Accordingly, a gain on acquisition has arisen on the transaction.

At the time of the announcement, the Group entered into
arrangements to hedge the shareholder exposure to equity
and currency risk in the Standard Life Assurance businesses
in the period prior to completion of the transaction.
Losses of £143 million were recognised on these hedges
within net investment income during this period.
These losses offset the gain arising on acquisition.

Transaction costs
Transaction costs of £43 million have been expensed and are
included in administrative expenses in the consolidated income
statement. £39 million of these costs were paid during the period.

Impact of the acquisition on results
From the date of acquisition, the Standard Life Assurance
businesses contributed £775 million of total revenue, net of
reinsurance payable, and £208 million of the profit after the tax
attributable to owners of the parent. If the acquisition of the
Standard Life Assurance businesses had taken place at the
beginning of the year, total revenue net of reinsurance payable,
would have been £4,186 million and the profit after the tax
attributable to owners of the parent would have been
£439 million.

H3. Associates: 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.

The Group’s interest in UKCPT is 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 is
limited to the impact of those movements on the shareholder
share of distributed profits of the relevant fund.

As at 31 December 2018, the Group held 44.7% (2017: 47.9%)
of the issued share capital of UKCPT and the value of this
investment, measured at fair value, was £496 million
(2017: £550 million). Management has concluded that the
Group did not control UKCPT in either the current or
comparative periods. 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.

Tax
The tax impact of the fair value adjustments recognised on
acquisition has been reflected in the acquisition balance sheet.

Summary financial information (at 100%) for UKCPT is
shown below:

Goodwill
A gain on acquisition of £141 million has been recognised in the
consolidated income statement for the year ended 31 December
2018, reflecting the excess of the fair value of the net assets
acquired over the consideration paid for the acquisition of the
Standard Life Assurance businesses.

The cash consideration for the acquisition was fixed and determined
using a ‘locked box’ pricing mechanism based on the position as
at 31 December 2017, and recalibrated to reflect market conditions
upon announcement of the transaction in February 2018.
The net assets acquired were recognised in the consolidated
financial statements at their fair values on 31 August 2018.
Market movements and the impact of business written during 2018
increased the value of the in-force business as at the acquisition
date compared to that assumed in the pricing basis, most notably

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

Non-current assets

Current assets

Non-current liabilities

Current liabilities

2018
£m

1,431

(249)

(36)

2017
£m

1,336

143

(250)

(24)

1,213

1,205

Revenue

Profit before tax

Taxation

Profit for the year after tax

(6)

161

135

(4)

131

197

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONH4.2 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. Directly held
collective investment schemes are further analysed by the
predominant asset class 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:

Asset backed securities

2018
Carrying
value of
financial
assets
£m

2017
Carrying
value of
financial
assets
£m

463

344

17,693

7,519

1,963

19,185

12,464

4,166

3,175

472

1,359

8,465

11,782

1,264

2,843

73,912

607

19,852

1 Directly held collective investment schemes refer to those structured entities directly
invested in by Group companies. Such investments have been analysed by reference
to the predominant asset class the structure is investing in.

2 Indirectly held collective investment schemes are those interests in structured
entities that are held by collective investment schemes over which it has been
assessed that the Group exercises overall control and have been consolidated
into the financial statements.

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.

H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES
continued
H4. Structured entities

A structured entity is an entity that has been designed so that
voting or similar rights are not the dominant factor in deciding
who controls the entity, such as when any voting rights relate to
administrative tasks only, and the relevant activities are directed by
means of contractual arrangements. A structured entity often has
some or all of the following features or attributes: (a) restricted
activities; (b) a narrow and well-defined objective, such as to
provide investment opportunities for investors by passing on risks
and rewards associated with the assets of the structured entity
to investors; (c) insufficient equity to permit the structured entity
to finance its activities without subordinated financial support;
and (d) financing in the form of multiple contractually linked
instruments to investors that create concentrations of credit
or other risks (tranches).

The Group has determined that all of its investments in
collective investment schemes are structured entities.
In addition, a number of debt security structures and private
equity funds 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 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.

During the year, the Group granted further loans to the EBT
of £8 million (2017: £4 million). Further loans are expected
to be granted in 2019.

As at the reporting date, the Group has no intention to provide
financial or other support in relation to any other consolidated
structured entity.

198

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDH5. 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), 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 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 Limited (life assurance company)
Phoenix Life Assurance Limited (life assurance company)
Abbey Life Assurance Company Limited
(life assurance company)
Standard Life Assurance Limited (life assurance company)
Standard Life International Designated Activity Company (life
assurance company)
Standard Life Pension Funds Limited (life assurance company)
Britannic Finance Limited (finance and insurance
services company)
Pearl Customer Care Limited (financial services company)
Pearl Group Holdings (No. 1) Limited (finance company)
Pearl Group Management Services Limited (management
services company)
Phoenix Customer Care Limited
(financial services company)
Phoenix ER1 Limited (finance company)
Pearl Group Services Limited
(management services company)
PGH (LC1) Limited (finance company)
PGH (LC2) Limited (finance company)
PGH (LCA) Limited (finance company)
PGH (LCB) Limited (finance company)
PGH (MC1) Limited (finance company)
PGH (MC2) Limited (finance company)
PGH Capital plc (finance company)
PGMS (Ireland) Limited (management services company)
Phoenix ER3 Limited (finance company)
Phoenix ER4 Limited (finance company)
Phoenix SL Direct Limited (management services company)
Phoenix Unit Trust Managers Limited (unit trust manager)
Phoenix Wealth Services Limited
(management services company)
Phoenix Wealth Trustee Services Limited
(management services company)
SLACOM (No. 8) Limited (loan provider company)
Standard Life Assets and Employee Services Limited (service
company)
Standard Life Lifetime Mortgages Limited (mortgage provider
company)
The Standard Life Assurance Company of Europe B.V.
(financial holding company)
Vebnet Limited (management service company)
Mutual Securitisation plc (finance company)
Britannic Money Investment Services Limited
(investment advice company)
Century Group Limited (investment company)
Inesia SA (investment company)
Alcobendas Entrust Limited (investment company)
Axial Fundamental Strategies (US Investments) LLC
IH (Jersey) Limited (investment company)
Pearl (WP) Investments LLC (investment company)

Wythall1
Wythall1
Wythall1

Edinburgh27
Dublin5

Edinburgh27
Wythall1

Wythall1
London2
Wythall1

Wythall1

Wythall1
Wythall1

Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Dublin7
Dublin6
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1

Wythall1

Edinburgh27
Edinburgh27

Edinburgh27

Amsterdam9

Wythall1
Dublin28
Wythall1

Wythall1
Luxembourg21
Wythall1
Wilmington19
Jersey16
Wilmington19

Ordinary Shares
Ordinary Shares
Ordinary Shares

100.00%
100.00%
100.00%

Ordinary Shares
Ordinary Shares

100.00%
100.00%

Limited by Guarantee
Ordinary Shares

100.00%
100.00%

Ordinary Shares
Ordinary Shares
Ordinary Shares

100.00%
100.00%
100.00%

Ordinary Shares

100.00%

Ordinary Shares
Ordinary Shares

100.00%
100.00%

Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares

100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%

Ordinary Shares

100.00%

Ordinary Shares
Ordinary Shares

100.00%
100.00%

Ordinary Shares

100.00%

Ordinary Shares

100.00%

Ordinary Shares
N/A
Ordinary Shares

Ordinary Shares
Ordinary Shares
Ordinary Shares
N/A
Ordinary Shares
Limited Liability
Company

100.00%
100.00%
100.00%

100.00%
100.00%
100.00%
100.00%
100.00%
100.00%

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

199

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONH. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued
H5. Group entities continued

Registered address of
incorporated entities

If unincorporated,
address of principal
place of business

Pearl Assurance Group Holdings Limited
(investment company)
PGMS (Glasgow) Limited (investment company)
PGS 2 Limited (investment company)
Phoenix SCP Limited (investment company)
Phoenix SPV1 Limited (investment company)
Phoenix SPV2 Limited (investment company)
Phoenix SPV3 Limited (investment company)
Phoenix SPV4 Limited (investment company)
SPL (Holdings) Limited (investment holding company)
Standard Life Private Equity Trust plc (investment company)
CH Management Limited (investment company)
3 St Andrew Square Apartments Limited (property
management company)
Abbey Life Trust Securities Limited (pension trustee company)
G Park Management Company Limited
(property management company)
Hundred S.à r.l. (property management company)
Lake Meadows Management Company Limited
(property management company)
Pearl Life Services Limited (property management company)
Phoenix SCP Pensions Trustees Limited (trustee company)
Phoenix SCP Trustees Limited (trustee company)
SLA Belgium No.1 SA (property company)
330 Avenida de Aragon SL (property management company)
SLIF Property Investment GP Limited (General Partner to SLIF
Property Investment)
SLIF Property Investment LP Limited (General Partner to SLIF
Property Investment)
SPL (Holdings 1) Limited (non-trading company)
Impala Holdings Limited (holding company)
Pearl Group Holdings (No. 2) Limited (holding company)
NP Life Holdings Limited (holding company)
London Life Limited (non-trading company)
Alba Life Trustees Limited (non-trading company)
National Provident Life Limited (non-trading company)
Phoenix AW Limited (non-trading company)
PA (GI) Limited (non-trading company)
Phoenix Group Holdings (holding company – directly owned
by the Company)
Phoenix Life Holdings Limited (holding company)
Pearl RLH Limited (investment holding company)
PGMS (Ireland) Holdings Unlimited Company
(holding company)
Scottish Mutual Pension Funds Investment Limited
(trustee company)
SLA Netherlands No.1 B.V. (financial holding company)
Standard Life Trustee Company Limited (trustee company)
SunLife Limited (financial services distribution company)
Phoenix Wealth Holdings Limited (holding company)
Pearl Life Holdings Limited (holding company)
PGH (TC1) Limited (holding company)
PGH (TC2) Limited (holding company)
Vebnet (Holdings) Limited (holding company)
Abbey Life Trustee Services Limited (dormant company)
Alba LAS Pensions Management Limited (dormant company)

Wythall1

Edinburgh27
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Glasgow12
Edinburgh26
Delaware20
Edinburgh26

Wythall1
London18

Luxembourg25
London18

Wythall1
Wythall1
Edinburgh27
Belgium3
Madrid40
Edinburgh26

Edinburgh26

Glasgow12
Wythall1
Wythall1
Wythall1
Wythall1
Edinburgh27
Wythall1
Wythall1
Wythall1
Cayman Islands4

Wythall1
Glasgow12
Dublin6

Edinburgh27

Amsterdam9
Edinburgh27
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Glasgow10

Type of investment
(including class of
shares held)

% of shares/
units held

Ordinary Shares

100.00%

Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares

100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
55.20%
100.00%
100.00%

Ordinary Shares
Ordinary Shares

100.00%
100.00%

Ordinary Shares
Ordinary Shares

100.00%
100.00%

Ordinary Shares
Ordinary Shares
Ordinary Shares
Société Anonyme
Ordinary Shares
Ordinary Shares

100.00%
100.00%
100.00%
100.00%
100.00%
100.00%

Limited partnership

100.00%

Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Private Company

Ordinary Shares
Ordinary Shares
Unlimited with Shares

100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%

100.00%
100.00%
100.00%

Ordinary Shares

100.00%

Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares

100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%

200

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
H5. Group entities continued

BA (FURBS) Limited (dormant company)
Britannic Group Services Limited (dormant company)
Century Trustee Services Limited (dormant company)
Cityfourinc (dormant company)
Clearfol Investment Limited (dormant company)
Corunna Limited (dormant company)
Evergreen Trustee Limited (dormant company)
Gallions Reach Shopping Park (Nominee) Limited
(dormant company)
Iceni Nominees (No. 2) Limited (dormant company)
Impala Loan Company 1 Limited (dormant company)
Inhoco 3107 Limited (dormant company)
London Life Trustees Limited (dormant company)
National Provident Institution (dormant company)

NPI (Printworks) Limited (dormant company)
NPI (Westgate) Limited (dormant company)
NPI Limited (dormant company)
Pearl (Barwell 2) Limited (dormant company)
Pearl (Chiswick House) Limited (dormant company)
Pearl (Covent Garden) Limited (dormant company)
Pearl (Martineau Phase 1) Limited (dormant company)
Pearl (Martineau Phase 2) Limited (dormant company)
Pearl (Moor House 1) Limited (dormant company)
Pearl (Moor House 2) Limited (dormant company)
Pearl (Moor House) Limited (dormant company)
Pearl (Printworks) Limited (dormant company)
Pearl (Stockley Park) Limited (dormant company)
Pearl AL Limited (dormant company)
Pearl Group Secretariat Services Limited (dormant company)
Pearl MG Birmingham Limited (dormant company)
Pearl MP Birmingham Limited (dormant company)
Pearl RLG Limited (dormant company)
Pearl Trustees Limited (dormant company)
Pearl ULA Limited (dormant company)
PG Dormant (No 3) Limited (dormant company)
PG Dormant (No 4) Limited (dormant company)
PG Dormant (No 5) Limited (dormant company)
PG Dormant (No 6) Limited (dormant company)
PG Dormant (No. 7) Limited (dormant company)
Phoenix & London Assurance Limited (dormant company)
Phoenix ER2 Limited (dormant company)
Phoenix ER5 Limited (dormant company)
Phoenix Life Insurance Services Limited (dormant company)
Phoenix Life Pension Trust Limited (dormant company)
Phoenix Pension Scheme (Trustees) Limited
Phoenix Pensions Limited (dormant company)
Phoenix Pensions Trustee Services Limited
(dormant company)
Scottish Mutual Assurance Limited (dormant company)
Scottish Mutual Customer Care Limited (dormant company)
Scottish Mutual Nominees Limited (dormant company)
SL (NEWCO) Limited (dormant company)
SL Liverpool plc (dormant company)
SLACOM (No. 10) Limited (dormant company)
SLACOM (No. 9) Limited (dormant company)
Standard Life Agency Services Limited (dormant)

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

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
Wythall1
Wythall1
Wythall1
Wythall1
Glasgow11
Wythall1
London18

London18
Edinburgh27
London18
Wythall1
Wythall1

Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Glasgow10
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
London2
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1

Edinburgh27
Wythall1
Edinburgh27
Edinburgh27
Wythall1
Edinburgh27
Edinburgh27
Edinburgh27

Ordinary Shares
Ordinary Shares
Ordinary Shares
Unlimited with Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares

Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Unlimited without
Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares

Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Public Limited Company
Ordinary Shares
Ordinary Shares
Ordinary Shares

100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%

100.00%
100.00%
100.00%
100.00%
100.00%

100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%

100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%

201

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONH. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued
H5. Group entities continued

Registered address of
incorporated entities

If unincorporated,
address of principal
place of business

Edinburgh27
Wythall1
Edinburgh27
Edinburgh27

Wythall1
Wythall1

Lynch Wood22
Edinburgh27
Glasgow10
London18

Wythall1
Madrid40
Jersey17
Luxembourg25
Luxembourg25
Luxembourg25
Luxembourg25
Luxembourg25
Stockholm23
Stockholm23
Edinburgh26
Edinburgh26

Standard Life Investment Funds Limited (dormant company)
Standard Life Master Trust Co. Ltd (dormant company)
Standard Life Property Company Limited (dormant)
The Heritable Securities and Mortgage Investment
Association Ltd (dormant company)
The London Life Association Limited (dormant company)
The Pearl Martineau Galleries Limited Partnership
(dormant company)
The Pearl Martineau Limited Partnership (dormant company)
The Phoenix Life SCP Institution (dormant company)
The Scottish Mutual Assurance Society (dormant company)
Welbrent Property Investment Company Limited
(dormant company)
Zilmer Limited (dormant company)
28 Ribera del Loira SA (dormant company)
Phoenix Group Employee Benefit Trust
Standard Life Assurance (HWPF) Luxembourg SARL
SLA Germany No.1 S.A.R.L
SLA Germany No.2 S.A.R.L
SLA Germany No.3 S.A.R.L
SLA Ireland No.1 S.A.R.L
Pilangen Logistik AB
Pilangen Logistik I AB
Pearl Private Equity LP
Pearl Strategic Credit LP
PUTM Bothwell Asia Pacific (Excluding Japan) Fund
PUTM Bothwell Emerging Market Debt Unconstrained Fund
PUTM Bothwell Emerging Markets Equity Fund
PUTM Bothwell Euro Sovereign Fund
PUTM Bothwell Europe Fund
PUTM Bothwell European Credit Fund
PUTM Bothwell Floating Rate ABS Fund
PUTM Bothwell Global Bond Fund
PUTM Bothwell Global Credit 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 Sterling Credit Fund
PUTM Bothwell Sterling Government Bond Fund
PUTM Bothwell Tactical Asset Allocation Fund
PUTM Cautious Unit Trust
PUTM European Unit Trust
PUTM Far Eastern Unit Trust
PUTM Growth Unit Trust
PUTM International Growth Unit Trust
PUTM Opportunity Unit Trust
PUTM UK All-Share Index Unit Trust
PUTM UK Equity Unit Trust
PUTM UK Stock Market Fund
PUTM UK Stock Market Fund (Series 3)
Seabury Assets Fund – Standard Life Investments
The Euro VNAV Liquidity Fund

Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1

Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Wythall1
Dublin29

Type of investment
(including class of
shares held)

Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares

% of shares/
units held

100.00%
100.00%
100.00%
100.00%

Limited by Guarantee
Limited Partnership

100.00%
100.00%

Limited Partnership
Limited by Guarantee
Limited by Guarantee
Ordinary Shares

Ordinary Shares
Ordinary Shares
Trust
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Limited Partnership
Limited Partnership
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust

Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
UCITS, sub fund

100.00%
100.00%
100.00%
100.00%

100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
99.49%
100.00%
99.91%
87.78%
98.63%
82.78%
100.00%
99.90%
99.99%

100.00%
99.58%
99.91%
99.40%
99.82%
99.02%
100.00%
99.33%
99.42%
99.69%
100.00%
99.62%
99.99%
99.96%
99.84%
100.00%
100.00%
100.00%

202

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDH5. Group entities continued

Seabury Assets Fund – Standard Life Investments
The Sterling VNAV Liquidity Fund
Janus Henderson Diversified Growth Fund
Janus Henderson Institutional Mainstream UK Equity Trust
Janus Henderson Institutional UK Gilt Fund
Janus Henderson Institutional Short Duration Bond Fund
PUTM Bothwell UK All Share Listed Equity Fund
PUTM Bothwell UK Equity Income Fund
PUTM Bothwell Sub-Sovereign Bond Fund
PUTM Bothwell Institutional Credit Fund
Janus Henderson Institutional UK Equity Tracker Trust
Janus Henderson Global Funds – Janus Henderson
Institutional Overseas Bond Fund
Janus Henderson Institutional UK Index Opportunities Fund
Janus Henderson Strategic Investment Funds – Janus
Henderson Institutional North American Index
Opportunities Fund
Janus Henderson Strategic Investment Funds – Janus
Henderson Institutional European Index Opportunities Fund
Janus Henderson Strategic Investment Funds – Janus
Henderson Institutional Asia Pacific ex Japan Index
Opportunities Fund
Janus Henderson Strategic Investment Funds – Janus
Henderson Institutional Japan Index Opportunities Fund
Standard Life Investment Company – Japanese Equity Growth
Trust
Standard Life Investment Company II – Euro Ethical
Equity Fund
Standard Life Investment Company II – Corporate Debt Fund
Standard Life Trust Management – European Trust
Standard Life Trust Management – Japanese Trust
Standard Life Trust Management – North American Trust
Standard Life Trust Management – Pacific Trust
Standard Life Trust Management – Standard Life Global Equity
Trust II
Standard Life Trust Management – UK Corporate Bond trust
Standard Life Trust Management – Standard Life Active Plus
Bond Trust
Standard Life Trust Management – Standard Life International
Trust
Standard Life Trust Management – Pan European Trust
Standard Life Trust Management – UK Equity General Trust
Standard Life Investment Company III – MyFolio
Managed III Fund
Standard Life Investment Company III – Enhanced-
Diversification Growth Fund
Standard Life Multi Asset Trust
Standard Life European Trust II
Standard Life Investment Company – Global Emerging
Markets Equity
Standard Life Investment Company – Emerging Market
Debt Fund
Standard Life Trust Management – Standard Life Short Dated
UK Government Bond Trust
Standard Life Trust Management – UK Government
Bond Trust
Standard Life Investments Global SICAV II – Global Short
Duration Corporate Bond Fund
Standard Life Investments Global SICAV – Global Equities

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

Dublin29

UCITS, sub fund

99.57%

London30
London30
London30
London30
Wythall1
Wythall1
Wythall1
Wythall1
London30
London30

London30
London30

OEIC, sub fund
Authorised Unit Trust
OEIC, sub fund
Authorised unit trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
Authorised Unit Trust
OEIC, sub fund

83.18%
100.00%
75.29%
99.00%
99.43%
100.00%
100.00%
100.00%
100.00%
99.07%

OEIC, sub fund
OEIC, sub fund

75.53%
87.82%

London30

OEIC, sub fund

80.03%

London30

OEIC, sub fund

76.25%

London30

OEIC, sub fund

69.32%

Edinburgh26

OEIC, sub fund

73.02%

Edinburgh26

OEIC, sub fund

87.01%

Edinburgh26
Edinburgh26
Edinburgh26
Edinburgh26
Edinburgh26
Edinburgh26

Edinburgh26
Edinburgh26

OEIC, sub fund
Unit Trust
Unit Trust
Unit Trust
Unit Trust
Unit Trust

100.00%
92.69%
81.74%
81.00%
92.68%
100.00%

Unit Trust
Unit Trust

100.00%
99.99%

Edinburgh26

Unit Trust

100.00%

Edinburgh26
Edinburgh26
Edinburgh26

Unit Trust
Unit Trust
OEIC, sub fund

99.97%
99.76%
74.20%

Edinburgh26

OEIC, sub fund

98.04%

Edinburgh26
Edinburgh26
Edinburgh26

Unit Trust
Unit Trust
OEIC, sub fund

99.99%
100.00%
77.82%

Edinburgh26

OEIC, sub fund

89.09%

Edinburgh26

Unit Trust

99.96%

Edinburgh26

Unit Trust

100.00%

Luxembourg31

SICAV, sub fund

76.05%

Luxembourg31

SICAV, sub fund

88.84%

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

203

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONH. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued
H5. Group entities continued

Standard Life Investments Global SICAV – European
Government All Stocks
Standard Life Investments Global SICAV – Japanese Equities
Standard Life Investments Global SICAV – Global Bond
Standard Life Investments Global SICAV – Global High
Yield Bond
Standard Life Investments Global SICAV – Global REIT Focus
Standard Life Investments Global SICAV – China Equities
Standard Life Investments Global SICAV – Global Emerging
Markets Unconstrained
Standard Life Investments Global SICAV – Global Emerging
Markets Local CCY Debt
Standard Life Investments Global SICAV – Emerging Market
Debt Unconstrained
Aberdeen Capital Trust Inc
ASI Phoenix Fund Financing SCSp (PLFF)

AB SICAV I – Global Factor Portfolio
Ignis Private Equity Fund LP
Ignis Strategic Credit Fund LP
Crawley Unit Trust
North American Strategic Partners 2008 L.P.
North American Strategic Partners (Feeder) 2008 L.P.
Ignis Strategic Solutions Funds plc – Systematic
Strategies Fund
Ignis Strategic Solutions Funds plc – Fundamental
Strategies Fund
Associates:
The Moor House Limited Partnership
Moor House General Partner Limited
UK Commercial Property Estates Limited
(property investment company)
UK Commercial Property GP Limited
UK Commercial Property Holdings Limited
(property investment company)
UK Commercial Property Nominee Limited
(property investment company)
UK Commercial Property REIT Limited
UK Commercial Property Estates Holdings Limited
(property investment company)
UKCPT Limited Partnership
UK Commercial Property Finance Holdings Limited
UK Commercial Property Estates (Reading) Limited
Brixton Radlett Property Limited
Significant holdings:
Brent Cross Partnership
Castlepoint LP
Gallions Reach Shopping Park Unit Trust
Janus Henderson Institutional Global Responsible
Managed Fund
Standard Life Capital Infrastructure I L.P.
Standard Life Investments Global Absolute Return Strategies
Retail Acc
Standard Life Investments UK Retail Park Trust
Standard Life Investments UK Shopping Centre Trust
Standard Life Investment Company – UK Equity
Recovery 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

Luxembourg31

SICAV, sub fund

100.00%

Luxembourg31
Luxembourg31
Luxembourg31

SICAV, sub fund
SICAV, sub fund
SICAV, sub fund

75.74%
76.59%
68.18%

91.43%
75.33%
86.83%

Luxembourg31

SICAV, sub fund

71.98%

Luxembourg31

SICAV, sub fund

84.25%

London18
Luxembourg36

Luxembourg31
Cayman Islands4
Cayman Islands4
Jersey13
Wilmington19
Wilmington19
Dublin8

Authorised Unit Trust
Special Limited
Partnership
SICAV, sub fund
Limited Partnership
Limited Partnership
Unit Trust
Limited Partnership
Limited Partnership
OEIC, sub fund

99.26%
100.00%

53.14%
100.00%
100.00%
100.00%
80.00%
100.00%
100.00%

Dublin8

OEIC, sub fund

100.00%

Limited Partnership
Limited Partnership
Ordinary Shares

Ordinary Shares
Ordinary Shares

33.27%
33.30%
44.73%

44.73%
44.73%

Ordinary Shares

44.73%

Ordinary Shares
Ordinary Shares

Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares

London15
Birmingham42
Jersey13
London30

Limited Partnership
Ordinary Shares
Unit Trust
OEIC, sub fund

Edinburgh26
Edinburgh26

Limited Partnership
Unit Trust

Jersey41
Jersey41
Edinburgh26

Unit Trust
Unit Trust
OEIC, sub fund

44.73%
44.73%

44.73%
44.73%
44.73%
44.73%

24.00%
35.00%
50.00%
57.49%

26.30%
75.52%

56.60%
40.66%
34.46%

London15
London15
Guernsey14

Guernsey14
Guernsey14

Guernsey14

Guernsey14
Guernsey14

Guernsey14
Guernsey14
London18
London18

204

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDH5. Group entities continued

Standard Life Investment Company – UK Equity Growth Fund
Standard Life Investment Company – UK Equity High
Income Fund
Standard Life Investment Company – American Equity
Unconstrained Fund
Standard Life Investment Company – UK Equity High
Alpha Fund
Standard Life Investment Company – Global
Equity Unconstrained
Standard Life Investment Company – UK Opportunities Fund
Standard Life Investment Company – Short Duration Credit
Fund
Standard Life Investment Company – Smaller Companies
Fund
Standard Life Investment Company – European Equity Growth
Fund
Standard Life Investment Company II – UK Equity
Unconstrained Fund
Standard Life Investment Company II – Ethical Corporate Bond
Fund
Standard Life Investment Company III – MyFolio
Market I Fund
Standard Life Investment Company III – MyFolio
Market II Fund
Standard Life Investment Company III – MyFolio
Market III Fund
Standard Life Investment Company III – MyFolio
Market IV Fund
Standard Life Investment Company III – MyFolio
Market V Fund
Standard Life Investment Company III – MyFolio Multi-
Manager I Fund
Standard Life Investment Company III – MyFolio Multi-
Manager II Fund
Standard Life Investment Company III – MyFolio Multi-
Manager III Fund
Standard Life Investment Company III – MyFolio Multi-
Manager IV Fund
Standard Life Investment Company III – MyFolio Multi-
Manager V Fund
Standard Life Investment Company III – MyFolio
Managed I Fund
Standard Life Investment Company III – MyFolio
Managed II Fund
Standard Life Investment Company III – MyFolio
Managed IV Fund
Standard Life Investment Company III – MyFolio
Managed V Fund
Standard Life Investment Company III – MyFolio
Managed Income II Fund
Standard Life Investment Company III – MyFolio
Managed Income III Fund
Standard Life Investments Strategic Bond Fund
Standard Life Investments Dynamic Distribution Fund
Standard Life Investments UK Real Estate Accumulation
Feeder Fund
Standard Life Investment Company – Global Emerging Market
Equity Income Fund
Standard Life Managed Trust – American
Equity Unconstrained

Registered address of
incorporated entities

If unincorporated,
address of principal
place of business

Edinburgh26
Edinburgh26

Type of investment
(including class of
shares held)

OEIC, sub fund
OEIC, sub fund

% of shares/
units held

24.29%
29.90%

Edinburgh26

OEIC, sub fund

21.93%

Edinburgh26

OEIC, sub fund

22.09%

Edinburgh26

OEIC, sub fund

46.26%

Edinburgh26
Edinburgh26

OEIC, sub fund
OEIC, sub fund

63.93%
20.70%

Edinburgh26

OEIC, sub fund

28.63%

Edinburgh26

OEIC, sub fund

24.11%

Edinburgh26

OEIC, sub fund

36.62%

Edinburgh26

OEIC, sub fund

37.13%

Edinburgh26

OEIC, sub fund

46.84%

Edinburgh26

OEIC, sub fund

41.52%

Edinburgh26

OEIC, sub fund

59.21%

Edinburgh26

OEIC, sub fund

57.92%

Edinburgh26

OEIC, sub fund

65.25%

Edinburgh26

OEIC, sub fund

56.21%

Edinburgh26

OEIC, sub fund

54.62%

Edinburgh26

OEIC, sub fund

60.23%

Edinburgh26

OEIC, sub fund

53.24%

Edinburgh26

OEIC, sub fund

52.18%

Edinburgh26

OEIC, sub fund

65.10%

Edinburgh26

OEIC, sub fund

65.48%

Edinburgh26

OEIC, sub fund

61.11%

Edinburgh26

OEIC, sub fund

66.78%

Edinburgh26

OEIC, sub fund

43.84%

Edinburgh26

OEIC, sub fund

50.75%

Edinburgh26
Edinburgh26
Edinburgh26

Unit Trust
Unit Trust
Unit Trust

53.29%
49.15%
46.09%

Edinburgh26

OEIC, sub fund

69.75%

Edinburgh26

Unit Trust

48.27%

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

205

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONH. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued
H5. Group entities continued

Standard Life Managed Trust – Standard Life Japan Fund
Standard Life Investments Global Real Estate Fund
Standard Life Investments Global SICAV – Euro
Smaller Companies
Standard Life Investments Global SICAV – European
Corporate Bond
Standard Life Investments Global SICAV – Global Absolute
Return Strategies
Standard Life Investments Global SICAV – Absolute Return
Global Bond Strategies
Standard Life Investments Global SICAV – Global
Corporate Bond
Standard Life Investments Global SICAV – Global
Focused Strategies
Standard Life Investments Real Estate Income Feeder Fund
Scottish Widows Tracker and Specialist Investment Funds –
International Bond Fund
AXA Fixed Interest Investment ICVC – Sterling Strategic Bond
Fund
AB SICAV I – Diversified Yield Plus Portfolio
MI Somerset Global Emerging Markets
Aberdeen Liquidity Fund (Lux) – Euro Fund
Aberdeen Liquidity Fund (Lux) – Sterling Fund
Aberdeen Liquid (Lux) Ultra Short Duration Sterling Fund
AXA Sterling Index Linked Bond Fund
BMO Barclays 1-3 Year Global Corporate Bond (GBP Hedged)
UCITS ETF
iShares MSCI Taiwan UCITS ETF
Scottish Widow UK and Income – Scottish Widows
Ethical Fund
AXA Global High Income Fund
AQR UCITS Funds – AQR Global Risk Parity C4 UCITS Fund
Aberdeen Global Emerging Markets Quantitative Equity Fund

Registered address of
incorporated entities

If unincorporated,
address of principal
place of business

Edinburgh26
Edinburgh26
Luxembourg31

Type of investment
(including class of
shares held)

Unit Trust
Unit Trust
SICAV, sub fund

% of shares/
units held

45.28%
51.85%
33.00%

Luxembourg31

SICAV, sub fund

31.95%

Luxembourg31

SICAV, sub fund

37.43%

Luxembourg31

SICAV, sub fund

45.99%

Luxembourg31

SICAV, sub fund

56.47%

Luxembourg31

SICAV, sub fund

46.02%

London18
Edinburgh32

Unit Trust
OEIC, sub fund

30.19%
60.73%

London33

UCITS, sub fund

61.92%

Luxembourg31
Essex34
Luxembourg39
Luxembourg39
Luxembourg39
London33
London37

SICAV, sub fund
OEIC, sub fund
SICAV, sub fund
SICAV, sub fund
SICAV, sub fund
OEIC, sub fund
UCITS, sub fund

Dublin38
Edinburgh35

UCITS, sub fund
OEIC, sub fund

London33
USA24
London18

OEIC, sub fund
UCITS, sub fund
OEIC, sub fund

42.34%
34.49%
36.62%
22.21%
34.60%
22.71%
49.17%

24.46%
20.39%

25.68%
48.37%
27.08%

1 1 Wythall Green Way, Wythall, Birmingham, West Midlands, B47 6WG,

United Kingdom
Juxon House, 100 St. Paul’s Churchyard, London, EC4M 8BU, United Kingdom

2
3 Avenue Louise 326, bte 33 1050 Brussels, Belgium
4 Ugland House, Grand Cayman, KY1-1104, Cayman Islands
5 90 St. Stephen’s Green, Dublin, D2, Ireland
6 Goodbody Secretarial Limited, International Financial Services Centre, 25/28 North

Wall Quay, Dublin 1, Ireland

7 Arthur Cox Building, 10 Earlsfort Terrace, Dublin 2, Dublin, Ireland
8 25/28 North Wall Quay, Dublin 1, Dublin, Ireland
9 Telestone 8, Teleport, Naritaweg 165, 1043 BW, Amsterdam, Netherlands
10 301 St Vincent Street, Glasgow, G2 5HN, United Kingdom
11 50 Bothwell Street, Glasgow, G2 6HR, United Kingdom
12 110 Queen Street, Glasgow, G1 3BX, United Kingdom
13 Ogier House, The Esplanade, St Helier, JE4 9WG, Jersey
14 Trafalgar Court, Les Banques, St Peter Port, GY1 3QL, Guernsey
15 Kings Place, 90 York Way, London, N1 9GE, United Kingdom
16 22-24 New Street, St Pauls Gate, 4th Floor, JE1 4TR, Jersey
17 32 Commercial Street, St Helier, Jersey, Channel Islands, JE2 3RU, Jersey
18 Bow Bells House, 1 Bread Street, London, EC4M 9HH, United Kingdom
19 Corporation Service Company, 2711 Centerville Rd Suite 400, Wilmington, DE

19808, United States

20 Suite 202, 103 Foulk Road, Wilmington, Delaware, 19803, USA
21 8 Boulevard Royal, L-2449, Luxembourg, Luxembourg

22 The Pearl Centre, Lynch Wood, Peterborough, PE2 6FY, England
23 Citco (Sweden) Ab Stureplan 4c 4 Tr 114 35 Stockholm
24 Aqr Capital Management LLC, Greenwich, 06830, United States
25 6B, rue Gabriel Lippmann, Parc d’Activité Syrdall 2, L-5365 Münsbach, Luxembourg
26 1 George Street, Edinburgh, EH2 2LL, United Kingdom
27 Standard Life House, 30 Lothian Road, Edinburgh, EH1 2DH, United Kingdom
28 4th Floor, 25-28 Adelaide Road, Dublin 2, D02RY98, Ireland
29 70 Sir Rogerson’s Quay, Dublin 2, Republic of Ireland
30 201 Bishopsgate, London, EC2M 3AE, United Kingdom
31 88 2-4, Rue Eugène Ruppert, L-2453 Luxembourg, Luxembourg
32 15 Dalkeith Road, Edinburgh, EH16 5BU, United Kingdom
33 7 Newgate Street, London EC1A 7NX, United Kingdom
34 Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW, United Kingdom
35 PO Box 28015, Edinburgh, EH16 5WL, United Kingdom
36 49, Avenue J.F. Kennedy, L-1855 Luxembourg
37 BMO Global Asset Management, Exchange House, Primrose Street, London EC2A

2NY, United Kingdom

38 J.P. Morgan House, International Financial Services Centre, Dublin 1, Ireland
39 35a Avenue J.F. Kennedy, L-1855, Luxembourg
40 Avenida de Aragon 330 – Building 5, 3rd Floor, Parque Empresarial Las Mercedes,

28022 – Madrid, Spain

41 Elizabeth House, 9 Castle Street, St Helier, JE4 2QP, Jersey
42 2 Snowhill, Birmingham, B4 6WR, United Kingdom

206

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDThe Group no longer has significant holdings in the following
undertakings:

• BlackRock Market Advantage X GBP Acc;

• Aberdeen UK Smaller Companies Equity Fund;

• Architas MA Active Dynamic Fund Class R Net

Accumulation.

• American Century SICAV – Concentrated Global

Growth Equity;

• Standard Life Investments – Sterling Liquidity Fund; and

• Achitas Diversified Real Assets Fund.

H5. Group entities continued
The following subsidiaries were dissolved during the
period. The subsidiaries were deconsolidated from the
date of dissolution:

• SMA (Jersey) Limited;

• ILC1 (Jersey) Limited;

• PGH1 (Jersey) Limited; and

• PG Dormant No 2 Holdings.

The following subsidiaries were fully disposed of during the
period. The subsidiaries were deconsolidated from the date
of disposal:

• PUTM Bothwell Fixed ABS Sterling Hedged Fund;

• PUTM Bothwell Credit Financial Sterling Hedged Fund;

• PUTM Bothwell Global Equity Fund;

• PUTM Bothwell Credit Non Financial Sterling Hedged Fund;

• PUTM Bothwell UK Equity Smaller Companies Fund;

• BlackRock LBG DC ‘A’ Fund; and

• AB SICAV I – ESG Responsible Global Factor Portfolio AB.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

207

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONI. 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 out 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

2018
£m

2017
£m

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. Following the
scheme of arrangement on 12 December 2018 (see note A1),
participants in the Old PGH LTIP plan had their outstanding
awards automatically exchanged for equivalent awards over
PGH plc ordinary shares.

Assuming no good leavers or other events which would
trigger early vesting rights, the 2016 and 2017 LTIP awards
are subject to performance conditions tied to the Company’s
performance in respect of cumulative cash generation
and Total Shareholder Return (‘TSR’). The 2018 LTIP award
is subject to performance conditions tied to the Company’s
performance in respect of cumulative cash generation, return
on Adjusted Shareholder Solvency II Own Funds and TSR.

For all LTIP awards, 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.

2018 LTIP awards were granted on 21 March 2018. The number
of shares for all outstanding LTIP awards as at 10 July 2018
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 2015 LTIP awards vested
during the year. The 2016 awards will vest on 30 March 2019
and 2 June 2019, the 2017 awards will vest on 24 March 2020
and the 2018 awards will vest on 21 March 2021.

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 of
the 2016, 2017 and 2018 LTIP awards is adjusted in respect
of the TSR performance condition which is deemed to be a
‘market condition’. The fair value of the 2016, 2017 and 2018
TSR elements of the LTIP awards has been calculated
using a Monte Carlo model. The inputs to this model are
shown below:

2018 TSR
performance
condition

2017 TSR
performance
condition

2016 TSR
performance
condition
– March
grant

2016 TSR
performance
condition
– June
grant

Share price (p)

709.5

787.5

943.5

871.0

Expected
term (years)

Expected
volatility (%)

Risk-free
interest
rate (%)

Expected
dividend
yield (%)

3.0

0.96

2.8

0.2

3.0

0.4

3.0

0.4

Dividends are received by
holders of the awards therefore no
adjustment to fair value is required

On 21 December 2018, LTIP awards were granted to certain
employees under the terms of the new PGH plc scheme
rules. There are three discreet vesting periods for these
awards ending on 24 March 2019, 27 March 2020 and
28 March 2021. These grants of shares are conditional on
the employees remaining in employment with the Group
for the vesting period.

Each year, the Group issues a Chairman’s share award under
the terms of the LTIP which is granted to a small number of
employees in recognition of their outstanding contribution in
the previous year. On 21 March 2018, awards were granted
and are expected to vest on 21 March 2021. The 2017 awards
are expected to vest on 24 March 2020. These grants of shares
are conditional on the employees remaining in employment
with the Group for the vesting period and achieving a ‘CC’
performance grading or above.

Deferred Bonus Share Scheme (‘DBSS’)
Each year, part of the annual incentive for certain executives
is deferred into shares of the parent company. As noted for
the LTIP, following the Scheme of Arrangement, participants
in the Old PGH DBSS plan had their outstanding awards
automatically exchanged for equivalent awards over PGH plc
ordinary shares. The grant of these shares is conditional on
the employee remaining in employment with the Group for
a period of three years with the three-year deferral period
running 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 2018 DBSS was granted on 21 March 2018 and is expected
to vest on 15 March 2021. The number of shares for all
outstanding DBSS awards as at 10 July 2018 were 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 2015 DBSS awards vested during the
year. The 2016 awards are expected to vest on 24 March 2019
and the 2017 awards are expected to vest on 20 March 2020.

208

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDI1. Share-based payment continued
I1.2 Share-based payment expense continued
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 £500 each month over a period of either
three or five years.

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.

Following the scheme of arrangement, participants in the Old
PGH sharesave plan exchanged their options over Old PGH
shares for equivalent options over PGH plc ordinary shares.
All sharesave options were increased in November 2016 and
again in July 2018 following the Group’s rights issues (see
note D1) and the exercise price of these awards was also
amended as a result of these issues. The 2018 sharesave
options were granted on 10 April 2018.

The fair value of the options 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 following information was relevant in the determination of the fair value of the 2014 to 2018 sharesave options:

Share price (p)

Exercise price (£) (Revised)

Expected life (years)

2018
sharesave

768.5

5.629

2017
sharesave

747.0

5.674

2016
sharesave

889.0

5.746

2015
sharesave

843.0

5.654

2014
sharesave

674.0

4.618

3.25 and 5.25

Risk-free rate (%) – based on UK
government gilts commensurate with
the expected term of the award

1.0 (for 3.25 year
scheme) and 1.1
(for 5.25 year
scheme)

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)

Expected volatility (%) based on the
Company’s share price volatility to date

Dividend yield (%)

30.0

6.5

30.0

6.3

30.0

6.0

30.0

6.3

30.0

7.9

Share Incentive Plan
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 2018, 49,854 matching shares were
conditionally awarded to employees (2017: 33,705).

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 2018

LTIP Sharesave

DBSS

Outstanding at the
beginning of the year

2,992,327

1,264,992

630,489

Granted during the year

1,215,824

453,167

289,625

Corporate action

416,937

164,896

77,642

Forfeited during the year

(576,218)

(237,293)

(26,141)

Exercised during the year

(254,809)

(270,142)

(200,575)

Outstanding at the end
of the year

3,794,061

1,375,620

771,040

Number of share options 2017

LTIP1

Sharesave

DBSS

Outstanding at the
beginning of the year

3,469,421

1,037,156

633,118

Granted during the year

1,056,987

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

2,992,327

1,264,992

630,489

1 Updated to incorporate number of Chairman’s awards within the table.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

209

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONI. OTHER NOTES continued
I1. Share-based payment continued
I1.3 Movements in the year continued
The weighted average fair value of options granted during
the year was £5.75 (2017: £4.75).

The weighted average share price at the date of exercise
for the rewards exercised is £6.82 (2017: £7.72).

The weighted average remaining contractual life for the
rewards outstanding as at 31 December 2018 is six years
(2017: six 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.

2018
£m

260

(141)

2017
£m

(7)

–

(9)

12,861

(2,896)

214

(1)

(88)

142

–

5,230

681

(23)

126

(5)

132

–

4,411

1,154

(19,186)

(1,933)

(178)

(568)

328

(24)

338

(113)

Profit/(loss) for the period before tax

Non-cash movements in profit for the
year before tax:

Gain on acquisition

Fair value losses/(gains) on:

Investment property

Financial assets and
derivative liabilities

Borrowings

Amortisation of intangible assets

Change in present value
of future profits

Change in unallocated surplus

Share-based payment charge

Interest expense on borrowings

Premium paid on partial redemption
of £300 million unsecured bond

Net interest expense on Group
defined benefit pension scheme
asset/liability

Pension past service costs

Other costs of pension schemes

Decrease in investment assets

Decrease in reinsurance assets

Decrease in insurance contract
and investment contract liabilities

Decrease in deposits received
from reinsurers

(Decrease)/increase in obligation
for repayment of collateral received

Net decrease/(increase)
in working capital

Other Items

Contributions to defined benefit
pension schemes

Acquisition related expenses to be
included within cash flows from
investing activities

Cash (utilised)/generated
by operations

I3. Capital management

The Group’s capital management is based on the 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 39 to 46 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;

(46)

(90)

• to ensure sufficient liquidity to meet obligations to

policyholders and other creditors;

• to optimise the Fitch Ratings financial leverage to maintain

an investment grade credit rating; and

• to maintain a stable and sustainable dividend policy.

–

(324)

1,156

210

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDI3. Capital management continued
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 comprises 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.

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.

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 and Abbey Life
businesses within the scope of the Group’s Internal Model
in March 2017 and March 2018 respectively. 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 was based
partially on the Group’s Internal Model and partially on
Standard Formula.

The acquired Standard Life Assurance businesses also
determine their capital requirements in accordance with
an approved partial Internal Model. In accordance with the
approvals received from the PRA, the Enlarged Group
operates a partial Internal Model to calculate Group SCR,
aggregating outputs from both the existing Phoenix Internal
Model and the Standard Life Internal Model with no
diversification between the two. A harmonisation programme
to combine the two models into a single Internal Model has
commenced. The Irish life entity, Standard Life International
Designated Activity Company, determines its capital
requirements in accordance with the Standard Formula.

Group capital resources – unaudited
The Group capital resources are based on the Group’s
Eligible Own Funds adjusted to remove amounts pertaining to
unsupported with-profit funds and Group pension schemes:

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.

PGH plc Eligible Own Funds

Remove Own Funds pertaining to
unsupported with-profit funds and
the PGL pension scheme

Group capital resources

Unaudited

2018
£bn

10.3

(2.3)

8.0

2017
£bn

6.6

(2.0)

4.6

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’.

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 permitted Group supervision to take place at the level
of the ultimate parent, Old 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 plc level only.

An analysis of the PGH plc Solvency II surplus as at
31 December 2018 is provided in the business review
section on page 28. The Group has complied with all
externally imposed capital requirements during the year.

Additional information on the PGH plc Own Funds, SCR
and MCR is included in the additional capital disclosures
on pages 228 to 229.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

211

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONI. OTHER NOTES continued
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 Related party transactions
During the year, the Group entered into the following
transactions with related parties. As set out in note H2,
SLA plc took a 19.99% equity stake in the Enlarged Group,
and as a result became a related party of the Group. SLA plc
is considered to have a significant influence over the Group
due to their equity stake and representation on the Board
of Directors.

Transactions
2018
£m

Balances
outstanding
2018
£m

Transactions
2017
£m

Balances
outstanding
2017
£m

Pearl Group
Staff Pension
Scheme

Payment of
administrative
expenses

UK
Commercial
Property
Trust Limited

Dividend
income

Reduction in
investment

SLA plc

Investment
management
fees

Fees under
Transitional
Services
Arrangement

Receipts
under
Transitional
Services
Arrangement

Receipts
under Client
Service
Proposition
Agreement

Dividend paid

(3)

(35)

–

(87)

(55)

(2)

(33)

–

(3)

–

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

2018
£m

2017
£m

Details of the shareholdings and emoluments of individual
Directors are provided in the Remuneration report on pages
76 to 105.

During the year to 31 December 2018 key management
personnel and their close family members contributed
£28,000 (2017: nil) to Pensions and Savings products sold by
the Group. At 31 December 2018, the total value of key
management personnel’s investments in Group Pensions
and Savings products was £1,639,000 (2017: nil).

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 £10 million (2017: £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

Later than five years

2018
£m

2017
£m

–

The principal operating lease commitments for 2018
concern office space located at St Vincent Street,
Glasgow, Juxon House, London, Redcliff Street, Bristol,
Lyoner Straße, Frankfurt, and Arche Noah, Graz (2017:
St Vincent Street, Glasgow and Juxon House, London
and Redcliff Street, Bristol).

Disclosures of future minimum lease rental receivables in
respect of non-cancellable operating leases on investment
properties are included in note G9.

212

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

NOTES TO THE IFRS CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDI6. Commitments

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.

On 4 March 2019, the Board recommended a final
dividend of 23.4p per share (2017: 25.1p per share) for
the year ended 31 December 2018. 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 2018 and will be
charged to the statement of changes in equity in 2019.

N LYONS
C BANNISTER
J MCCONVILLE
A BARBOUR
C FLEMING
K GREEN
W MAYALL
B O’DWYER
J POLLOCK
B RICHARDS
N SHOTT
K SORENSON

4 March 2019

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 and income strips

For repairs, maintenance or
enhancements of investment property

I7. Contingent liabilities

2018
£m

655

125

2017
£m

543

–

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.

I7.1 Annuity sales
As set out in note G1, at the request of the Financial Conduct
Authority (‘FCA’), SLAL are conducting a past business review
of non-advised annuity sales. The purpose of the review is
to identify whether relevant customers received sufficient
information about enhanced annuities to make the right
decisions about their purchase, and where appropriate provide
redress to customers who have suffered loss as a result of
not having received sufficient information. The Group has
recognised provisions with regard to its obligations identified
as a result of this activity to date. In relation to this review,
the FCA is carrying out an investigation and it is possible
that the FCA may impose a financial penalty on the Group.
At this stage it is not possible to determine a reliable estimate
of the financial impact of this contingent liability and the
determination of any liability arising remains dependent
on the occurrence of uncertain future events, including
finalisation of the FCA’s review. Any financial impact on the
Group would be expected to be mitigated by the indemnity
agreement that exists with SLA plc, subject to the liability
caps that exist within the agreement. Further details are
provided in note G1.

I7.2 Legal proceedings
In the normal course of business the Group is exposed to
certain legal issues, which involve litigation and arbitration.
At the period end, the Group has a number of contingent
liabilities in this regard, none of which are considered by
the Directors to be material.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

213

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONPARENT COMPANY ACCOUNTS
STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2018

EQUITY AND LIABILITIES

Equity attributable to ordinary shareholders

Share capital

Share premium

Other reserve

Retained earnings

Total equity attributable to ordinary shareholders

Tier 1 Notes

Total equity

Liabilities

Financial liabilities

Borrowings

Derivatives

Other amounts due to Group entities

Accruals and deferred income

Total liabilities

Total equity and liabilities

ASSETS

Investments in Group entities

Financial assets

Loans and receivables

Other amounts due from Group entities

Cash and cash equivalents

Total assets

Notes

2018
£m

Notes

–

(4)

4,075

4,143

411

4,554

1,634

1,669

6,223

2018
£m

4,146

2,056

6,223

The notes identified numerically on pages 216 to 221 are an integral part of these separate financial statements. Where items
also appear in the consolidated financial statements, reference is made to the notes (identified alphanumerically) on pages 128
to 213.

214

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

STATEMENT OF CASH FLOWS

FOR THE PERIOD FROM 5 OCTOBER 2018 TO 31 DECEMBER 2018

Cash flows from operating activities

Cash generated by operations

Net cash flows from operating activities

Cash flows from investing activities

Interest received from Group entities

Net cash flows from investing activities

Cash flows from financing activities

Interest paid

Net cash flows from financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents at the beginning of the period

Cash and cash equivalents at the end of the period

Notes

2018
£m

–

(28)

–

STATEMENT OF CHANGES IN EQUITY

FOR THE PERIOD FROM 5 OCTOBER 2018 TO 31 DECEMBER 2018

On incorporation at 5 October 2018

Total comprehensive expense for
the period attributable to owners

Issue of shares under scheme
of arrangement

Capital reduction

Issue of Tier 1 Notes via substitution

At 31 December 2018

Share
capital
(note 3)
£m

Share
premium
(note 3)
£m

Other
reserve
(note 8)
£m

Retained
earnings
£m

Total equity
attributable
to ordinary
shareholders
£m

Tier 1
Notes
(note 4)
£m

–

4,078

(4,078)

–

(4)

–

(4)

–

(3)

–

4,078

–

4,075

–

(3)

4,146

–

4,143

–

411

Total
equity
£m

–

(3)

4,146

–

411

4,554

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

215

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATION
NOTES TO THE PARENT COMPANY
FINANCIAL STATEMENTS

1. ACCOUNTING POLICIES
(a) Basis of preparation
Phoenix Group Holdings plc (the ‘Company’) was incorporated
on 5 October 2018 under the UK Companies Act 2006 and
is domiciled in England and Wales. The financial statements
for the period ended 31 December 2018 are the first set of
financial statements prepared by the Company. Accordingly,
there is no comparative information to disclose in the
individual financial statements.

The financial statements have been prepared on a going
concern and on an historical cost basis except for those
financial assets and financial liabilities that have been
measured at fair value.

The Company has taken advantage of the exemption in
section 408 of the Companies Act 2006 not to present its
own income statement in these financial statements.

Statement of Compliance
The Company’s financial statements have been prepared in
accordance with International Financial Reporting Standards
(‘IFRSs’) as adopted by the European Union (‘EU’) and in
accordance with the provisions of the UK Companies Act 2006.

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 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.

(b) Accounting policies
Where applicable, the accounting policies in the separate
financial statements are the same as those presented in the
consolidated financial statements on pages 121 to 213, with
the exception of the two policies detailed below.

The Company’s accounting policy for financial assets is
in accordance with the requirements of IFRS 9 Financial
Instruments. As the Group has applied the temporary
exemption from IFRS 9 available for entities whose activities
are predominantly connected with insurance contracts,
a different accounting policy has been adopted in the
preparation of the consolidated financial statements.
In addition, the Company has not adopted 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 income statement.

The recoverable amount is determined based on the cash
flow projections of the underlying entities.

Financial assets
Classification of Financial assets
Financial assets are measured at amortised cost where
they have:

• contractual terms that give rise to cash flows on specified

dates, that represent solely payments of principal and
interest on the principal amount outstanding; and

• are held within a business model whose objective is
achieved by holding to collect contractual cash flows.

These financial assets are initially recognised at cost, being
the fair value of the consideration paid for the acquisition of
the financial asset. All transaction costs directly attributable
to the acquisition are also included in the cost of the financial
asset. Subsequent to initial recognition, these financials asset
are carried at amortised cost, using the effective interest method.

Financial assets measured at amortised cost are included in
note 9.

Impairment of financial assets
The Company assesses the expected credit losses associated
with its loans and receivables, other amounts due from Group
entities and cash carried at amortised cost. The measurement
of credit impairment is based on an Expected Credit Loss
(‘ECL’) model and depends upon whether there has been
a significant increase in credit risk.

For those credit exposures for which credit risk has not
increased significantly since initial recognition, the Company
measures loss allowances at an amount equal to the total
expected credit losses resulting from default events that are
possible within 12 months after the reporting date (‘12-month
ECL’). For those credit exposures for which there has been
a significant increase in credit risk since initial recognition,
the Company measures and recognises an allowance at an
amount equal to the expected credit losses over the remaining
life of the exposure, irrespective of the timing of the default
(‘Lifetime ECL’). If the financial asset becomes ‘credit-
impaired’ (following significant financial difficulty of issuer/
borrower, or a default/breach of a covenant), the Company
will recognise a Lifetime ECL. ECLs are derived from unbiased
and probability-weighted estimates of expected loss.

See note 12 for detail of how the Company assesses whether
the credit risk of a financial asset has increased since initial
recognition and the approach to estimating ECLs.

The loss allowance reduces the carrying value of the financial
asset and is reassessed at each reporting date. ECLs and
subsequent remeasurements of the ECL, are recognised
in the income statement. For other receivables, the ECL rate
is recalculated each reporting period with reference to the
counterparties of each balance.

216

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

2. FINANCIAL INFORMATION
New accounting pronouncements not yet effective
Details of the standards, interpretations and amendments
to be adopted in future periods are detailed in note A5 to
the consolidated financial statements, none of which are
expected to have a significant impact on the Company’s
financial statements.

Note A5 outlines that 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 detailed above, such an exemption is not applicable to the
Company given it is not an insurer. Therefore, IFRS 9 has been
adopted by the Company and the relevant disclosures are
included in these financial statements.

3. SHARE CAPITAL AND SHARE PREMIUM
The Company was incorporated on 5 October 2018 with
an issued share capital comprising 2 ordinary shares of
£0.10 each and 50,000 redeemable preference shares
of £1.00 each.

On 31 October 2018, all issued redeemable preference
shares were cancelled.

Under a scheme of arrangement in accordance with section
86 of the Cayman Islands Companies Law between Phoenix
Group Holdings (‘Old PGH’), the former ultimate parent
company of the Group, and its shareholders, all of the issued
shares in Old PGH were cancelled and an equivalent number
of new shares in Old PGH were issued to the Company in
consideration for the allotment to the Old PGH shareholders
of one ordinary share in the Company for each ordinary
share in Old PGH that they held on the scheme record date,
12 December 2018.

The shares of the Company are listed on the London Stock
Exchange and trading in these shares commenced on
13 December 2018.

Following court approval on 18 December 2018, the entire
issued share premium of the Company as at 18 December
2018 was cancelled. The sum of £4,078 million arising on
the share premium cancellation has been credited to the
Company’s retained earnings.

Issued and fully paid:

721 million ordinary shares of £0.10 each

72,119,921

2018
£m

4. TIER 1 NOTES
The accounting policy for the Tier 1 Notes is included in note
D3 to the consolidated financial statements.

At 5 October 2018

Issued via substitution

At 31 December 2018

Tier 1
Notes
£m

–

411

On 12 December 2018 the Company was substituted in
place of Old PGH as issuer of the Tier 1 Notes and these
were recognised at the £411 million fair value of an intragroup
loan that was received as consideration. Details of the terms
of the Tier 1 Notes can be found in note D3 to the
consolidated financial statements.

5. BORROWINGS
The accounting policy for borrowings is included in note E5
to the consolidated financial statements.

Carrying value

Fair value

£428 million subordinated loans
(note a)

£450 million Tier 3 subordinated
notes (note b)

US $500 million Tier 2 bonds
(note c)

€500 million Tier 2 notes (note d)

2018
£m

439

447

343

405

2018
£m

441

447

342

390

Total borrowings

1,634

1,620

Amount due for settlement
after 12 months

1,634

a. On 12 December 2018, the Company was substituted in

place of Old PGH as issuer of the £428 million subordinated
notes due 2025 at a coupon of 6.625%, which were initially
recognised at fair value of £439 million.

b. On 12 December 2018, the Company was substituted
in place of Old PGH as issuer of the £450 million Tier 3
subordinated notes due 2022 at a coupon of 4.125%,
which were initially recognised at fair value of £447 million.

c. On 12 December 2018, the Company was substituted in
place of Old PGH as issuer of the US$500 million Tier 2
bonds due 2027 with a coupon of 5.375%, which were
initially recognised at fair value of £349 million.

At incorporation on
5 October 2018

Issue of shares under
scheme of arrangement

Ordinary shares in issue
at 31 December

Number

–

d. On 12 December 2018, the Company was substituted in

place of Old PGH as issuer of the €500 million Tier 2 notes
due 2029 with a coupon of 4.375%, which were initially
recognised at fair value of £407 million.

721,199,212

72,119,921

721,199,214

72,119,921

e. On 12 December 2018, the Company became an additional
borrower on an unsecured revolving credit facility, maturing
in June 2022. The facility is undrawn as at 31 December
2018 and accrues interest at LIBOR plus 1.1%. A utilisation
fee of between 0.1% and 0.4% is applicable dependent on
the amount drawn.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

217

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATIONNOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS
CONTINUED

5. BORROWINGS continued
f. On 12 December 2018, the Company became an additional borrower and guarantor to an acquisition facility with an aggregate
principal amount of £600 million. The acquisition facility is undrawn as at 31 December 2018 and has a final maturity date of
31 August 2019. The Group is entitled to request two six-month extensions to the term of the facility (which would together
extend the maturity date to 31 August 2020). 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%.

Borrowings initially recognised at fair value are being amortised to par value over the life of the borrowings. As part of the
substitutions, accrued interest was also transferred to the Company and was settled prior to 31 December 2018.

For the purposes of the additional fair value disclosure for liabilities recognised at amortised cost, all borrowings have been
categorised as Level 2 financial instruments.

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.

£428 million subordinated notes

£450 million Tier 3 subordinated notes

US $500 million Tier 2 bonds

€500 million Tier 2 notes

Non-cash flow

At 5 Oct
2018
£m

Loans
issued via
subsitution1
£m

Movement
in foreign
exchange
£m

–

439

447

349

407

1,642

–

(6)

(2)

(8)

At 31 Dec
2018
£m

439

447

343

405

1,634

1 Loans issued via substitution are a non-cashflow item as consideration was the transfer of loans and receivables (refer to note 9).

6. DERIVATIVES
The accounting policy for derivatives is included in note E3 to the consolidated financial statements.

The Company has entered into a cross currency swap to hedge against adverse currency movements in respect of the
€500 million Tier 2 notes.

The fair value of the derivative liability is as follows:

Cross currency interest rate swap

7. 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

8. INVESTMENTS IN GROUP ENTITIES

Cost

At 5 October

Additions

At 31 December

218

2018
£m

–

2018
£m

–

4,146

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

9. LOANS AND RECEIVABLES

Bank and cash balances

8. INVESTMENTS IN GROUP ENTITIES continued
On 12 December 2018, the Company became the ultimate
parent undertaking of the Group by acquiring the entire share
capital of Old PGH via a share for share exchange. The cost
of investment in old PGH, reflected in the table above, was
determined as the carrying amount of the Company’s share
of the equity of Old PGH on the date of the transaction.
The difference between the cost of investment and the
market capitalisation of Old PGH immediately before the
share for share exchange of £4 million has been recognised
as an Other reserve, and is shown as a separate component
of equity.

For a list of principal Group entities, refer to note H5 of the
consolidated financial statements. The entity directly held
by the Company is separately identified.

Loans due from PLHL (note a)

Loans due from Old PGH (note b)

Total loans and receivables

Carrying value

Fair value

2018
£m

1,231

825

2,056

2018
£m

1,231

808

2,039

Amounts due after 12 months

2,056

All loans and receivables balances are due from Group entities
and are measured at amortised cost using the effective interest
method. The fair value of these loans and receivables are
also disclosed.

On 12 December 2018, the Company was assigned a
£428 million subordinated loan by Phoenix Life Holdings
Limited (‘PLHL’). The loan accrues interest at a rate of
6.675% and matures on 18 December 2025. This loan
was initially recognised at fair value of £440 million and is
accreted to par over the period to 2025. At 31 December
2018, the carrying value of the loan was £440 million.

On 12 December 2018, the Company was assigned
a £450 million subordinated loan by PLHL. The loan
accrues interest at a rate of 4.175% and matures on
20 July 2022. This loan was initially recognised at fair
value of £448 million and is accreted to par over the
period to 2022. At 31 December 2018, the carrying
value of the loan was £448 million.

On 12 December 2018, the Company was assigned a
US $500 million loan by PLHL due 2027 with a coupon
of 5.375%. This loan was initially recognised at fair value
of £349 million and is accreted to par over the period to
2027. Movement in foreign exchange during the period
reduced the carrying value by £6 million. At 31 December
2018, the carrying value of the loan was £343 million.

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.

10. CASH AND CASH EQUIVALENTS
The accounting policy for cash and cash equivalents is
included in note G11 to the consolidated financial statements.

2018
£m

(2)

(5)

(2)

–

11. CASH FLOWS FROM OPERATING ACTIVITIES

Loss for the year before tax

Adjustments to reconcile profit for the year
to cash flows from operating activities:

Investment income from other Group entities

Finance costs

Fair value losses

Foreign exchange movement on borrowings
at amortised cost

Net decrease in working capital

Cash generated by operations

12. CAPITAL AND RISK MANAGEMENT
The Company’s capital comprises share capital, the Tier 1
Notes and all reserves as calculated in accordance with IFRSs,
as set out in the statement of changes in equity. Under English
company law, dividends must be paid from distributable
profits. As the ultimate parent undertaking of the Group, the
Company manages its capital to ensure that it has sufficient
distributable profits to pay dividends in accordance with its
dividend policy.

At 31 December 2018, total capital was £4,554 million.
The movement in capital in the period comprises the total
comprehensive expense for the period attributable to owners
of £3 million, proceeds from the issue of shares under the
scheme of arrangement of £4,146 million and the substituted
Tier 1 Notes of £411 million.

In addition, the Group also manages its capital on a
regulatory basis as described in note I3 to the consolidated
financial statements.

On 12 December 2018, the Company entered into a new
£825 million loan agreement with Old PGH as consideration
for the substitution of the Company as issuer of the Tier 1
Notes and €500 million Tier 2 notes. The loan accrues
interest at a rate of 6 month LIBOR plus 1.22% and
matures on 31 December 2023.

The principal risks and uncertainties facing the Company are
interest rate risk, liquidity risk, foreign currency risk and credit
risk. The Company has hedged the currency risk on its foreign
currency hybrid debt (US $500 million and €500 million)
through a US $500 million internal loan and a €500 million
internal cross currency interest rate swap.

None of the loans are considered to be past due or impaired.

Details of the Group’s financial risk management policies are
outlined in note E6 to the consolidated financial statements.

PHOENIX GROUP HOLDINGS PLC
ANNUAL REPORT & ACCOUNTS 2018

219

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIALSADDITIONAL INFORMATION

NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS
CONTINUED

12. CAPITAL AND RISK MANAGEMENT continued
Credit risk management practices
The Company’s current credit risk grading framework comprises the following categories: