X P S P e n s i o n s G r o u p p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 9 We are ambitious, agile, expert and helpful. We are XPS. XPS Pensions Group plc Annual Report and Accounts 2019 Who We Are We are actuaries, consultants and administrators working to protect and enhance the benefits of hundreds of thousands of pension scheme members. We bring cutting edge solutions for the benefit of pension scheme trustees, members and sponsoring employers. We believe there is a better way XPS is the largest focused pensions firm in the UK. We provide pensions actuarial, investment consulting and administration services to over 1,200 pension scheme clients in the UK, combining expertise, insight and technology to address the needs of both pension trustees and sponsoring employers. Our purpose We exist to shape and support safe, robust and well-understood pension schemes for the benefit of people and society. Visit us online www.xpsgroup.com Strategic Report Governance Financial Statements Key Performance Indicators1 Contents Number of pension scheme clients Strategic Report Revenue £110m +5% 2018: £104m2 Adjusted EBITDA3 £27.4m +51% 2018: £18.1m Profit before tax5 £11.4m +245% 2018: £3.3m 1,200+ Adjusted diluted earnings per share4 9.8p +18% 2018: 8.3p Proposed full year dividend 6.6p +4.8% 2018: 6.3p • We launched XPS in May 2018, following our acquisition of Punter Southall Group’s pension businesses. XPS is the largest purely pensions firm in the UK, bringing a unique combination of scale and agility that enables us to invest and respond quickly in an evolving market. A year of successful integration culminated in us winning both the Actuarial/Pensions Consultancy of the Year and Third-Party Administrator of the Year at the UK Pensions Awards in May 2019, leaving us optimistic for the future. 1 The Board plans to review the Key Performance Indicators during the next financial year. 2 Proforma basis – as if the Punter Southall entities had been in the Group for the whole year. 3 Adjusted EBITDA excludes the impact of share-based payment costs, fair value adjustments of contingent consideration, and exceptional costs (see note 6 in the financial statements). 4 Adjusted diluted earnings per share from continuing operations. It is based on adjusted profit after tax, which excludes the impact of amortisation of intangible assets, share-based payment costs, fair value adjustment of contingent consideration, exceptional costs, and the tax impact of these items. 5 Profit before tax from continuing operations. Key Performance Indicators At a Glance Why Invest in XPS? Chairman’s Statement Business Model Market Overview Ambition and Strategy Strategy in Action Co-Chief Executives’ Review Operating Responsibly for our Stakeholders Financial Review Principal Risks and Uncertainties Governance Chairman’s Governance Overview Board of Directors Executive Committee Corporate Governance Report Nomination Committee Report Audit and Risk Committee Report Directors’ Remuneration Report Directors’ Responsibility Statement Directors’ Report Financial Statements Independent Auditor’s Report to the Members of XPS Pensions Group plc Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity 01 02 04 06 08 10 12 14 20 24 28 32 36 38 40 42 47 49 52 70 71 75 81 82 83 Consolidated Statement of Cash Flows 84 Notes to the Consolidated Financial Statements Statement of Financial Position – Company Statement of Changes in Equity – Company 85 123 124 Statement of Cash Flows – Company 125 Notes to the Financial Statements – Company 126 XPS Pensions Group Annual Report 2019 01 At a Glance We are UK pensions experts We bring expertise and technology to bear, to drive better decisions, better service expectations and ultimately better financial outcomes for pension scheme trustees, businesses, and our shareholders. Our services Advice and support to pension scheme trustees and sponsoring employers across all areas of UK pension scheme management, including actuarial advice and long-term financial planning for schemes, through to member communications, advice on member option exercises and scheme benefit design. Clear, independent advice to pension scheme trustees to enable them to make the optimum investment decisions for their scheme’s assets. Using financial modelling of different mixes of asset classes, we help clients to choose the right portfolio for their needs, to maximise returns and/or minimise their level of risk. Services including pensions administration, payroll services, pension scheme accounting, scam identification, de-risking projects and technical consultancy for a wide range of trust-based company pension schemes, including defined benefit (DB), defined contribution (DC), career average revalued earnings (CARE) and hybrid schemes. Specialist pensions advice and analysis during corporate events including helping clients who are buying, selling, restructuring or refinancing a business. We work for vendors, purchasers and other corporate entities, including private equity firms and hedge funds as well as pension scheme trustees. We also provide: The National Pension Trust (NPT), a defined contribution master trust for employers offering full ‘Freedom and Choice’ capability, and SIPP and SSAS solutions to financial advisers under the Xafinity brand. 02 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements Where to find us Our 15 offices give us access to staff, expertise and clients across the UK. We are 100% focused on the UK pensions market which means that we have no distractions and no competing priorities. Our values make us one team We are a fast-moving, exciting business, with an incredible team of people exclusively focused on the UK market, believing things can be done in a better way. We are ambitious We are experts We are agile UK locations 15 We are helpful We do the right thing ¼ see www.xpsgroup.com/careers/our-values for more information Employees 1,100+ Clients Years of providing pensions services 1,200+ 40+ XPS Pensions Group Annual Report 2019 03 Why Invest in XPS? We are focused solely on UK pensions As the only UK specialist pension advisors listed on the FTSE Main Market, we have the scale to invest in the solutions our clients need and the agility to respond in a changing market. 01 Well-positioned in a stable, long-term market £2 trillion liabilities of private UK defined benefit pension schemes. 40+ years longevity of private UK defined benefit pension schemes £60bn funds invested in UK defined contribution schemes Read more on page 10 1 Revenue is defined as recurring if it was received from a client that had been billed every month (or every quarter) consecutively for the previous 12 months over the period to 31 March 2019. For won and lost clients the revenue is defined as recurring if it meets the above criteria for the period they were a client. 02 Non-cyclical and recurring revenues Our services are typically provided on the basis of an open-ended engagement with clients and are compliance-driven to a statutory timetable. They are therefore required in all parts of the economic cycle. 92% recurring revenue in our Pensions and Investment business1 Read more on page 28 03 Strong new brand in the market Winners of Actuarial/Pensions Consultancy of the Year and Third- Party Administrator of the Year at the UK Pension Awards in May 2019 – at the end of the first year of creating XPS. net number of new client wins during the year 34 870,000 number of members under administered (increase of 315,000 since 1 April 2018) 04 XPS Pensions Group Annual Report 2019 Read more on page 20 Strategic Report Governance Financial Statements 04 Diversified and longstanding client base A large and diverse client base, built up over 1,200 clients. 06 Track record of positive financial performance XPS has delivered year-on-year organic revenue growth, through a range of macroeconomic conditions, for the past 10 years. 05 13 of top 20 clients have worked with XPS for 10+ years 18% top ten clients represent 18% of revenue Read more on page 28 Scalable, well- invested platform A strengthened management team, and increased capability in finance, M&A, legal and HR creating a platform for capacity for organic and inorganic growth. A business supported by technology in a scalable way. 2 ‘bolt on’ acquisitions – Kier Pensions Unit during the year and Royal London Corporate Pensions Services after year end Read more on page 7 5% revenue growth in FY19, 7% growth in H2 (comparison is to proforma 2018 revenue) 18% average annual growth in fully diluted adjusted EPS in the two years since IPO in February 2017 Read more on page 28-31 07 Experienced management team Drawn from recognised and blue-chip industry participants, our Executive Committee has extensive experience across the UK pensions market. 43 years’ combined experience of Co-CEOs Read more on pages 38-44 XPS Pensions Group Annual Report 2019 05 Chairman’s Statement We have a strong platform for growth XPS is ideally positioned to take advantage of the significant growth opportunities available in the pensions industry as we continue to focus on our strategy of becoming the pre-eminent pensions consulting and administration firm in the UK. Overview This year marks the first annual results that incorporate a full 12 months of operations as XPS Pensions Group (XPS), and I am pleased to report that we have delivered a creditable operational performance whilst having successfully completed the integration of the Punter Southall business and one strategic acquisition, with a second shortly after year end. We are confident that XPS is well positioned to take advantage of the significant growth opportunities available in the pensions industry as we continue to focus on our strategy of becoming the pre-eminent pensions consulting and administration firm in the UK. In what is an increasingly complex regulatory market, our innovative products and high standard of client service continue to cement XPS’ reputation as a leader in the pensions industry. I would like to thank all of our colleagues for their continued hard work, expertise and commitment in providing this excellent service over the last year. Governance highlights • Board composition and diversity strengthened • Company values rolled out to embed a culture of integrity, openness and diversity • Established Diversity, Equality and Inclusion Working Group • Developed an induction programme for new Directors • Developing a plan for increased shareholder engagement See pages 42 to 48 for more information Tom Cross Brown Chairman 06 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements I am pleased to report that we have delivered a creditable operational performance. Tom Cross Brown Chairman Results The Company has performed broadly in line with profit expectations for the year ended 31 March 2019, delivering revenue growth and an increasing list of new clients wins. Revenue from continuing operations was £109.9m (2018: £63.97m). Profit before tax from continuing operations was £11.37m (2018: £3.3m). Basic earnings per share was 5.7p (2018: 7.7p). Dividend The Board is proposing a final dividend of 4.3p (2018: 4.2p), which combined with the interim dividend produces a total dividend of 6.6p (2018: 6.3p). This payment to shareholders is in line with our stated strategy of pursuing a progressive dividend policy that is subject to financial discipline and future Group results. The dividend policy is to pay out two thirds of adjusted profit after tax, with one third of that as an interim dividend. The Board expects to retain sufficient capital to fund ongoing operating requirements, an appropriate level of dividend cover and funds to invest in the Group’s long-term growth. The final dividend will be payable on 26 September 2019 to shareholders on the register at 30 August 2019, subject to shareholder approval. Strategy The Company continues to focus on its strategy of becoming the pre-eminent pensions consulting and administration firm in the UK at the same time as achieving sustainable growth through prioritising the core areas of business and investing in our staff, technology and client services. This ongoing commitment ensures that XPS continues to provide an agile, high-quality and market-leading service that puts client satisfaction at the heart of the business. As part of this strategy, XPS acquired the business and assets of the Kier pensions unit during the period and Royal London Corporate Pension Services Limited on 31 May 2019, representing significant new growth opportunities for XPS in the public sector and in the Scottish market respectively. Furthermore, we disposed of our Healthcare business in H1 2019 as the Company sought to focus solely on the UK pensions market. XPS continues to focus on building its market share in the pensions advisory sphere both organically and through acquisition. Governance I am pleased to report that Sarah Ing has joined the Board as a new Independent Non-executive Director, with John Batting and Jonathan Bernstein stepping down from their positions on the Board to focus on their respective senior leadership roles in the Company. Furthermore, following the announcement in November 2018, Mike Ainslie has stepped down from the Board and from the role of CFO. The Board has appointed Snehal Shah as the new Company CFO and as an Executive Director of the Board subject to FCA approval. I would like to thank Mike, John and Jonathan for their contribution during their time on the Board, and I look forward to working with Sarah and Snehal in what is an exciting time for the Company. Governance has been central to Board discussions over the last year and we have worked hard to ensure that an appropriate corporate governance framework has been embedded into the enlarged business post acquisition from both an operational and strategic perspective. Changes have also been made to ensure compliance with the 2018 UK Corporate Governance Code which applies to the Company from 1 April 2019. Outlook The Board is pleased with the progress made in 2019, with the integration of Punter Southall businesses now largely complete, and an enhanced platform for organic and inorganic growth created. The Board expects total revenue growth for the Group of mid-single digit percentage in 2020 with Pensions broadly flat and other divisions showing good year-on-year growth. Exiting the discounted TSA early and bolstering central functions will benefit the Group operationally but will cause a c£2m per annum step up in the cost base. In combination the change in the mix of business and the one-off increase in central costs is expected to temporarily impact the growth in profits for the next 12 months. The Group has traded in line with these expectations in the first two months of this financial year. Tom Cross Brown Chairman 26 June 2019 XPS Pensions Group Annual Report 2019 07 Business Model We create value through our unique business model We are experts Who we work with We work with pension scheme trustees, sponsoring employers and pension scheme members, with schemes ranging in size from less than £20m in assets to multi-billion pound pension funds. How we earn revenue We charge fixed fees for ongoing administration and advisory services combined with time-based fees for consulting advice and one-off projects. We work with clients on the basis of open-ended engagement letters. Many of the services we provide are essential, non-discretionary requirements for UK pension schemes, required on a repeating basis to a statutory timetable. As such, much of our revenue is independent of the economic cycle. 92% of our revenues are recurring and we have a loyal base of clients who have worked with us over many years. What sets us apart • Pure focus on the UK pensions market • Expert people and empowering • Scalable, proprietary technology • Longstanding client relationships platform culture Our focused model, combined with our blend of scale and long-term capital backing is a source of competitive advantage that benefits all of our stakeholders. What we do We are a UK-focused specialist in pensions actuarial and investment consulting and administration, providing a range of services and solutions to over 1,200 pension scheme clients. We also operate a defined contribution master trust, the National Pension Trust, and provide administration to SSASs and SIPPs. Our 1,100+ people work from 15 offices around the UK. Revenue Split Administration 34.12% Pensions 51.63% Investments 7.39% Other 6.86% Product Lines Revenue Pensions Administration Investment National Pension Trust SSAS and SIPP Total – Continuing operations 1 To include continuing operations only 08 XPS Pensions Group Annual Report 2019 Year ended 31 March 2019 £’000 Year ended 31 March 2018 Restated(1) £’000 56,735 37,492 8,121 1,444 6,098 109,890 37,689 13,673 4,921 957 5,427 62,667 Strategic Report Governance Financial Statements How we share value with stakeholders Clients • Greater insight and expertise, leading to better decisions and improved outcomes for clients and pension scheme members • Excellent, proactive service • Superb technology, allowing them to gain insight and benefit from our efficiency • Value for money environment Employees • Stimulating and collegiate working • First-class training and support • Attractive career prospects • Competitive remuneration towards professional qualifications and benefits Shareholders • Strong cash generation and dividends • Track record of growth • Non-cyclical demand for services Read more on page 24 How we maximise value Clear strategy Read about our vision, strategic priorities and performance on page 12 Robust risk management Read about our principal risks and uncertainties on page 32 Sound governance Read about our Board of Directors and corporate governance from page 38 Shared values Read about the values that guide how we operate on page 3 XPS Pensions Group Annual Report 2019 09 Market Overview We seize opportunities from change We are helpful There is increasing need for expert advice to guide clients through an evolving regulatory landscape. Large DB scheme market Increasing pressure on those running DB schemes Burgeoning DC scheme market There are >5,400 defined benefit schemes in the UK, with aggregate liabilities of £2 trillion. 59% of DB schemes remain open to future benefit accrual. All of these schemes require core compliance services from administrators and actuaries every year. There are 10.4m DB scheme members in the UK private sector, of which 59% are yet to retire. Benefit payments from DB schemes expected to increase to a peak more than five years from now. The present value of DB scheme liabilities is expected to rise for each of the next 10-20 years. Source – The Purple Book, PPF, December 2018 10 XPS Pensions Group Annual Report 2019 10 XPS Pensions Group Annual Report 2019 Significant pressure on pension scheme trustees to improve funding and security in DB schemes, and to provide protection to members (following problems at BHS, Carillion, Tata Steel and more). Pressure also on employers to prioritise pension obligations. Assets under management in UK DC schemes are currently estimated to be over £60bn* in occupational arrangements, with another £179bn** in contract based arrangements. The future growth in DC pensions is expected to take total holdings in DC arrangements to over £1trn by 2025.*** As such, there is an increasing demand for advice on de-risking schemes. A material amount of this growth is anticipated to be future contributions, now that automatic enrolment has been fully introduced and defined benefit membership continues to recede and be replaced by defined contribution arrangements. Further, DC decumulation continues to grow, with £95bn of assets held in drawdown in 2017, up 9% from the previous year.** There is a strong trend towards master trusts. The master trust market is expected to grow from £12bn in AUM (2016) to over £300bn in 2026**** and the National Pension Trust is well placed to grow in this market. Source: * The Pensions Regulator: DC trust – presentation of scheme return data 2018 – 2019 (data represents schemes with 12 or more members). ** FCA: Sector View 2019. *** Philip Hammond, Autumn 2018 Budget Announcement. **** SJ Institutional Insights: UK Defined Contribution: Profiling a typical scheme. Strategic Report Governance Financial Statements £464m Assets in NPT 26 Number of schemes we administer with over 5,000 members 5 Net new actuarial and investment consulting clients with over £500m in assets Favourable regulatory and market environment Continued administration outsourcing Many large pension schemes continue to receive administration services from in-house teams within their sponsoring employer. There is an ongoing trend for companies to outsource scheme administration to third-party specialists such as XPS, and our administration business stands to grow strongly from this activity. Some clients that have outsourced in the past are seeking to switch provider in the search for improved service standards, and this is giving rise to further opportunities for XPS. The Pensions Regulator’s March 2019 Annual Funding Statement calls for improved management of funding and investment risks and consideration of contingent protection. A wider code of practice is coming which may introduce a significant overhaul of regulations. Large numbers of XPS clients will need advice and support. A requirement to improve benefits to make allowance for the inequality between males and females in Guaranteed Minimum Pensions (GMPs) following the High Court ruling on the Lloyds Banking Group defined benefit pension scheme. This will create a large amount of work across the pensions industry. The 2018 Competition and Markets Authority (CMA) review into investment consulting recommended mandatory tendering of certain fiduciary appointments and in general has caused reputational challenges for some of our large competitors. XPS Pensions Group Annual Report 2019 11 Ambition and Strategy We are a forward looking, ambitious business We aim to become the pre-eminent independent mid-tier pensions consulting firm – the best place for people to work, and the best partner for our clients. Our objective is to become the clearly differentiated alternative to the ‘Big 3’ providers of Mercer, Willis Towers Watson and Aon. We will remain focused purely on the UK pensions market, operating at scale and yet agile enough to provide clients with superior service at better value than our larger rivals. Our strategy remains focused on achieving growth. We have reviewed and evolved our priorities since the merger of Xafinity with Punter Southall’s pension businesses to strategically pursue growth across the six key areas of the market where we see the greatest opportunities: Growth through: Expanding services to existing defined benefit clients Winning new clients Administration outsourcing Investment consulting The National Pension Trust Mergers & acquisitions Our strategic priorities Progress Priorities for the year ahead Expanding services to defined benefit clients Clients need support in de-risking their defined benefit schemes, which can involve member options delivered through our unique Centre of Excellence (our dedicated team specialising in member relations. They are experts in high-volume member-based interaction) or evolving asset strategies as schemes mature and funding levels change. Clients also need support on ‘GMP equalisation’. Growth through winning new clients We intend to grow by targeting new clients, by providing innovative and differentiated solutions at better value for money than our competitors. ‘Radar’ is now used widely across our client base. (Radar is our comprehensive user- friendly web-based tool, which enables real-time monitoring of funding levels and modelling of scenarios including long-term funding targets.) We have continued to develop its functionality, to deepen the insight it can bring for clients. It clearly demonstrates the benefits of different de-risking options, leading to an increase in project work. We have developed sophisticated ‘journey planning’ capabilities, which will be very valuable as clients respond to regulatory developments requiring them to have more developed long-term strategies. We have developed ‘Equal GMP’, a bespoke offering for clients and prospects. We won 54 new clients during the year, with a split across all of our core service lines of actuarial and investment consulting and administration. We won appointments on very large schemes (see page 14 for an example), where winning as either legacy firm would have been difficult. Radar has continued to be a very powerful tool to differentiate ourselves in new business pitches. We aim to grow in this area by: Bringing solutions to clients in a systematic way, using Radar to demonstrate the value that we can add; Delivering large transformation projects that flow from this demonstration of value; and Refining our Equal GMP offering and taking this to our clients and more widely. We aim to win new clients by: Exploiting the strong brand position that XPS now has in the market. Our merger is complete and the market can see that we are thriving. We will build on the momentum that winning two major industry awards – Third Party Administrator of the Year and Actuarial / Pensions Consultancy of the Year can bring us. We expect these to boost both the number of opportunities we get and our success rate. 12 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements Our strategic priorities Progress Priorities for the year ahead Growth through administration outsourcing There has been an increasing trend in the pensions market for large schemes to outsource administration where it was previously done in-house. Our administration business has won a number of large clients in recent years and we aim to continue to grow in this market. Growth through investment consulting The CMA review into the investment consulting market continues to present a large opportunity for us. The business models of our largest competitors are under close scrutiny, and as the largest purely pensions consulting firm we are extremely well placed to benefit from changes in the market. XPS Administration has a reputation as a leader in this market. In a recent survey of >230 pension managers and trustees, XPS was rated the best third party administrator. During the year we successfully completed the outsourcing of the pension schemes of a FTSE 100 company, with 90,000 lives. We have reference clients to confirm our credentials. We aim to grow this area by continuing to publicise the achievements and capability of XPS Administration, in a market where service standards elsewhere are not always as high as they should be. We will pursue opportunities in the public sector, a new opportunity for us following the acquisition of the Kier Pensions Unit. We aim to win new clients by providing a service that is the antidote to the problems identified by the CMA. We will deliver clear, independent pragmatic advice. We will bring razor-sharp execution. We will be the investment advisors that make things happen. We restructured our investment consulting practice, creating a dedicated team of experts. This team of initially 40 people grew strongly, and we now have over 50 staff in the investment team. We hired a new Chief Investment Officer, Simeon Willis, to drive our ideas and intellectual capital in this area. Radar functionality improvements have also supported growth. We won a number of new clients in the face of competition from the biggest firms in our market; two were large clients, won directly from the Big 3. We expect NPT to grow strongly this year through premium income and large transfers in, two of which are at a fairly advanced stage and are approaching execution. More widely we expect to offer NPT as: An employer’s main defined contribution arrangement into which contributions are paid, or a ‘de-cumulation’ vehicle to sit alongside an employer’s existing arrangement where the employer’s own arrangement does not offer the full range of flexibilities; and A vehicle to receive transfers in respect of individuals who wish to transfer from a DB pension scheme. There is an increasingly pressing need for a ‘safe solution’ in this area. We will continue to appraise M&A opportunities during the year. Growth through the National Pension Trust (NPT) NPT had a strong year, growing assets under management by 38% to £464m. The pipeline for NPT also continued to grow strongly. We have continued to invest in NPT, and over the year hired staff to boost the ongoing development of the proposition and in business development to grow our pipeline. NPT is a defined contribution vehicle that offers members full access to pensions flexibilities under freedom and choice. Many pension schemes still do not offer access to these flexibilities, and open market options are frequently expensive and inappropriate for members. We believe NPT can address an urgent market need. Growth through mergers & acquisitions The mid-tier section of the pensions consulting market remains highly fragmented and ripe for consolidation. We will continue to review opportunities should they arise. ‘Bolt on’ acquisitions of small businesses that enhance our strategic capability are also a core part of our strategy. The acquisition of the Kier Pensions Unit has boosted our Administration business. It is a sound business in its own right, and the addition of strong public sector expertise to our market-leading private sector business will create wider opportunities. Following our year end, we also announced the acquisition of the Royal London Corporate Pensions Business, which brings us expertise in serving small schemes – we anticipate these schemes will benefit from wider XPS solutions in the future. XPS Pensions Group Annual Report 2019 13 Strategy in Action Looking after a FTSE 100 Company’s pension administration The challenge In 2016, pension scheme trustees of a FTSE 100 company decided to outsource the pension administration, pension payroll, client banking and accounts functions of their staff schemes after 30 years of managing an in-house team, and appointed XPS Administration as their partner. 14 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements The approach adopted by XPS was innovative and refreshing. XPS committed to retain services in the current location, investing in the local area and retaining jobs. We look forward to a long-term relationship with XPS Administration. The approach The transition involved multiple pension schemes and 90,000 members, administered by 40 staff – existing staff staying in the same location and transferring over to XPS. XPS staff worked alongside their future colleagues from the client teams to support the day-to-day delivery of services and to access the local knowledge and working practices. XPS Administration committed to opening an office where the FTSE 100 Company had previously administered the scheme and worked hard to create partnerships with local businesses to support recruitment, training and development needs – keeping jobs in the local area and making a commitment to generate new employment opportunities for the area into the future. XPS Pensions Group Annual Report 2019 15 Strategy in Action Providing valued advice to Johnson Controls The challenge Johnson Controls and Tyco merged in 2016. Its two pension schemes, totalling over £1bn of assets, are now run by one trustee board, who decided to rationalise their service providers. An important objective was to partner with one firm to provide investment and actuarial advice. Following a competitive tender process, XPS Pensions Group was delighted to be appointed for both services, after convincing the Trustees that they offered the best value proposition. 16 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements We selected XPS Pensions Group to provide advice across the two schemes to achieve consistency and synergies. XPS were not an existing adviser to either of the schemes but their approach stood out and we are delighted to be working with them. Chair of Trustees The approach XPS have helped the trustees review and monitor the funding and investment objectives of the schemes. Our bespoke integrated risk management and reporting tool Radar enables the trustees to see daily-updated progress against targets, as well as project into the future, facilitating efficient decision-making through real-time advice at meetings. XPS Pensions Group Annual Report 2019 17 Strategy in Action Adding capabilities through bolt-on acquisitions The challenge In October 2018, we announced the acquisition of the Pensions Unit of Kier Group plc. Our new team of 70+ people, based in Middlesbrough, provide high-quality administration services to public sector clients, including over half of the police forces in the UK. Our challenge was to transition our new colleagues and their clients into the XPS business without impact on service delivery and with minimal change to the delivery model. We are pleased to say that the transition has now been successfully completed. 18 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements Joining XPS has been a very positive experience, the staff engagement has been first class and the response from clients has been very encouraging. Graeme Hall, Operations Manager, XPS Administration Ltd, Middlesbrough The approach We have been delighted with the response of clients to the announcement, with all of them choosing to novate their contracts to us as part of the transition process and taking a very positive view of our involvement in their administration and the public sector. Adding this team to the XPS family broadens our horizons – we are really well placed to continue the good work of our new colleagues and bring the excellence of our private sector administration capability to the large public sector market, building on the reputation and experience of our new colleagues. XPS Pensions Group Annual Report 2019 19 Co-Chief Executives’ Review Moving our business forward together We are experts 2019 was a transformative year. It was our first full year following the acquisition of the Punter Southall pensions businesses, and our focus was on creating a strong platform for the future. We rebranded, we invested heavily in our culture, we invested in infrastructure to become a bigger firm, and we continued to innovate and develop new technology. We stayed very close to our clients throughout, and we also won a number of sizeable new mandates. Our year culminated with validation of the new position of XPS in the market with us winning both ‘Third Party Administration firm of the Year’ and ‘Actuarial/Pension Consulting firm of the Year at the UK Pension Awards in May 2019. We are hugely proud of achieving the ‘double’ of the two main awards in our market at the end of our first full year, and it leaves us extremely well set up for the future. Paul Cuff Co-Chief Executive Ben Bramhall Co-Chief Executive 20 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements Our 2019 financial year was busy and hugely rewarding. Strong performance The integration of the former Xafinity and Punter Southall pension businesses has gone seamlessly in terms of impact on clients and staff, and the effort we put into bringing together the businesses has set us up extremely well for the future. As the largest pure UK pensions firm, we occupy a very interesting place in our market, with a well understood brand and positioning. Against that backdrop the performance of the business has been credible, and strengthened as the year progressed. This validated the rationale for the merger, and clients have a great deal of confidence in our ability to deliver for them into the future. The acquisition in October of the Kier Pensions Unit added a public sector capability to our market-leading private sector administration business, opening up new opportunities for XPS. From its office in Middlesbrough, the Kier team provides pensions administration support to around half of the UK’s police forces, as well as to other private and public sector clients. The acquisition went well, with 100% of the clients novating to XPS and the team have had new business success in the six months since. We have secured a strong run of new business wins in recent months. These will add more than 40,000 members to the total that we administer, which will comfortably exceed 900,000 members during the course of this calendar year. A theme over the year was an increasing new business momentum, as market curiosity about our merger evolved into confidence. In the second half of 2019, we won new mandates across all of our lines of business. Investment Our Investment Consulting business unit also had a strong year. There was significant work in relation to integrating two different business models into one coherent XPS Investment team. Administration Our Administration team had a very strong year. A key part of our strategy is to win new business where large pension schemes outsource their pension scheme administration for the first time. In line with this strategy, in August we opened a new office, having taken on the administration of a FTSE 100 company’s in-house pension schemes and associated staff. This follows the model we adopted in Chelmsford, Bristol and Newcastle, whereby we provide services back to an initial outsourcing client, and then also look to grow our business by taking on new clients. The team in the new office has already won three new clients, which is testament to the strength of the team we have taken on there. In investment, we hired a number of senior members of the team, including a new Chief Investment Officer responsible for growing the depth of our offering and driving our intellectual capital forward. We have used this to increase profile in the market. This has proved successful and we won some very large pieces of work that neither the legacy Punter Southall or Xafinity businesses were likely to have won on their own. Growth also came as a result of the CMA review, and we see further potential as the implications of that reverberate around the industry. XPS Pensions Group Annual Report 2019 21 Co-Chief Executives’ Review continued Pensions Our Pensions business produced a creditable performance, despite being the area of our Group most affected by integration activity. Merging the two largest parts of the legacy firms required us to implement a new management structure, and align processes in a wide range of areas across client delivery, our use of technology (including introducing Radar to legacy Punter Southall consultants), and our approach to risk management. We also introduced a new employee grading structure across the business. We have also invested in new training programs for staff, helping us to exploit our new position in the market. The integration is now complete, and we are well placed to increase revenue next year. We announced the acquisition of the Royal London Corporate Pensions business on 1 May, and this transaction completed on 31 May 2019. The Royal London team are experts at serving small defined benefit schemes, and this acquisition means we can offer market leading solutions for schemes anywhere from £1 million to £multi-billions in size. We were pleased to achieve some landmark wins during the year, and we strengthened our team with some excellent new recruits. We are increasingly finding that talented people working at some of our larger competitors are finding the XPS journey a more exciting one to come and join. Positive external market trends The regulatory and market backdrop continues to be favourable for our business. Pensions continue to be near the top of the agenda for many sponsoring employers faced with challenging deficits in defined benefit schemes. The echoes of BHS, Carillion and Tata Steel continue to reverberate, and there is a need to address poor outcomes for pension scheme members in the event of corporate failure. In its Annual Funding Statement for defined benefit pension schemes published in March 2019, the Pensions Regulator set out its expectations of good governance, and was clear in terms of actions pension scheme trustees need to take in a number of areas. Although many of our larger clients already complied to some degree with the new guidance, many others need support to meet the standards expected by the regulator. Later in the year the regulator plans to publish a consultation document on new funding regulations, and we expect these to follow the clear, stronger expectations seen in the Funding Statement. The two changes outlined above are arguably two of the biggest regulatory developments in the industry for many years, and the industry as a whole is likely to benefit from supporting pension schemes in implementing the changes in response to these developments. Neither has had a material impact on our trading to date, but we expect them to in the future, and we have invested in technology and solutions (particularly Radar, which we have continued to evolve) to be at the forefront in these areas. The fallout from the CMA review of investment consulting and fiduciary management continues to affect our industry. Our fiduciary management oversight service has gained good traction in the market, and we expect more reviews of fiduciary management appointments as the implications of the 2018 CMA review into investment consulting come into practice. The reputational impact on some of our larger competitors continues to work through the industry, and we have undoubtedly benefited from being completely free of conflicts or historic issues in this area. In administration, we see continued growth from the ongoing trend for companies to outsource scheme administration to third party specialists. Within the private sector there remains a significant number of pension schemes that continue to be administered in-house and with pensions administration becoming ever more complex, the material costs associated with maintaining systems and an increase in member demands for excellence in online access, we expect a large number of schemes to make the decision to outsource in the coming years. More widely in the market, we are seeing evidence of some disruption as a consequence of corporate activity, and have hired a number of very experienced senior staff to add capability in strategically important areas of the Group. Winning the awards for Third-Party Administrator of the Year and Actuarial/Pensions Consultancy of the Year is a huge boost against this backdrop. We expect that the profile and reputation this gives will help with everything we are trying to achieve. Clear strategy for organic and inorganic growth The market drivers outlined above present significant opportunities to capitalise on the growing demand for our services. In addition to continuing to work closely with our clients to support them through the regulatory changes and evolving pensions landscape, a core part of our strategy is to pursue further bolt-on acquisitions. Another change that will generate activity is GMP (guaranteed minimum pension) equalisation, concerning the equal treatment of men and women following a High Court ruling involving the Lloyds Banking Group defined benefit pension scheme. A significant amount of work will be required across the pensions industry to comply with this judgement. Kier and Royal London are great examples of us acquiring small businesses to enhance what we do through broadening our horizons into new areas or capabilities, and/or adding scale. In time, the strong platform we have created with XPS gives us scope to consider larger M&A opportunities. 22 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements Strengthened team As we have exited the Transitional Services Agreement (TSA) with the Punter Southall Group, which provided core services e.g. HR, IT and Finance, we have made several important hires to bolster the Group’s central functions, creating a scalable platform for growth as an independent company. We have recruited a number of very capable people into our finance and HR functions, as well as a General Counsel, Zoe Adlam, and a new Head of Risk. The TSA remains in place for IT, but we have already added staff in that function and expect to exit during the summer. As announced previously, Mike Ainslie will leave XPS at the end of June, following the audit of this year’s figures. We wish to thank Mike for his significant contribution to the Group, including his invaluable work in the listing of Xafinity and the large transaction to establish XPS. We are delighted to have recruited Snehal Shah, who joined XPS in May. Snehal will take over from Mike as CFO. He brings a wealth of experience of public company financing, reporting and investor relations, and will play a key role in the next phase of XPS’ growth. There have also been changes to the roles of several members of our senior team. Having overseen a very successful year in our Investment practice, Patrick McCoy has assumed the leadership of our new Advisory function, spanning our Investment and Pensions practices, to drive growth in these complementary areas. In his new role of Chief Operating Officer, Jonathan Bernstein will oversee HR, IT and resourcing across the Group. Richard Thomas, previously the joint head of our administration business, has taken on the role of Corporate Strategy Director, providing leadership on M&A opportunities and corporate strategy more generally. Empowering culture We worked hard to ensure a smooth integration between the Punter Southall pension business and Xafinity, and to establish solid cultural, as well as operational, foundations. We were acutely aware that the combined organisation would thrive only if we aligned the cultures of the two businesses. While there were differences, the legacy businesses had a great deal in common, which we knew from both having previously worked at Punter Southall. Developing and embedding the new Group’s purpose, mission and values was a priority, and something we spent a great deal of time on. We took a lot of soundings from around the Group about what people think about working at XPS, held working groups and interviews with staff, and undertook a desk-top review of how we present ourselves internally and externally. This culminated in a Group-wide roll out of our Purpose, Mission and Values in January 2019. As part of this, we visited all 15 of our offices, and spoke personally about what the values mean to us, and we gave people the opportunity to ask questions and reflect on what the values mean to them. There was a unanimously positive reaction. Our values are genuinely embedded throughout everything we do, and we talk about them a lot in recruitment, and in our new business activities with clients and prospects. It was gratifying that in our annual staff survey undertaken in September, 85% of people said they consider XPS to be a good company to work for, with only 2% disagreeing. This is a very high score, particularly given how hard we had asked our staff to work on integration and changing the way they do things. Working responsibly Doing the right thing is extremely important to us. We have established a very strong framework with our values, and are proud to behave with the utmost integrity. We have a new Corporate Responsibility (CR) policy and processes, and are heartened by how many staff have volunteered to help. During the year we also established a Diversity, Equality and Inclusion Working Group, drawn from right across the firm. Both of us sit on this Group, and it is an effective channel for ideas from the firm about how we can improve our diversity (on gender, but much more widely too). We have implemented a number of new policies and initiatives based on feedback and ideas from this Group. We have empowered this Group to introduce change. Outlook We wish to express our gratitude to all of our colleagues, who have achieved a huge amount during the last year to give XPS a strong platform from which to grow organically and inorganically. The Board expects total revenue growth for the Group of mid-single digit percentage in 2020 with Pensions broadly flat and other divisions showing good year-on-year growth. Exiting the discounted TSA early and bolstering central functions will benefit the Group operationally, but will cause a c£2m per annum step up in the cost base. In combination the change in the mix of business and the one-off increase in central costs is expected to temporarily impact the growth in profits for the next 12 months. The Group has traded in line with these expectations in the first two months of this financial year. Paul Cuff Co-Chief Executive 26 June 2019 Ben Bramhall Co-Chief Executive 26 June 2019 XPS Pensions Group Annual Report 2019 23 Operating Responsibly for our Stakeholders We do the right thing We do the right thing business in an ethical and responsible way • We are committed to managing our • We seek to deliver positive outcomes for • Supporting our stakeholders through customers, employees, investors and society our culture and values With the establishment of XPS, a top priority has been to ensure cultural alignment, and we worked closely with colleagues across the organisation to articulate a set of shared values to guide our behaviours (see page 3). Doing the right thing is embedded in our interactions with all of our stakeholders, whose interests shape our decision-making and business model, and are vital to our ongoing ability to achieve our goals (see pages 11 and 41). Helping our people to thrive As a leading pensions specialist, our people ultimately make the difference in delivering high-quality services to clients and driving innovation. That is why attracting the best people and investing to further develop their skills are among our highest priorities. Policies XPS is a meritocracy, where people can succeed through their talent, skills, knowledge and application of our corporate values. We support our staff in meeting their career goals, and our policies underpin our commitment to fairness and equality. In 2018 we undertook a comprehensive review of our people policies as part of the acquisition of the Punter Southall businesses, to ensure continued compliance and that they are fit for purpose for our enlarged business. Our policies are available on our intranet for all staff. Ethics Maintaining the highest standards of business ethics and a consistency of approach is so fundamental to what we do that it is one of our values. It is clear that a responsible business is also an efficient, agile and respected business. These qualities are at the heart of the service that we deliver to clients and the culture we have at XPS. We conduct business fairly and maintain a zero-tolerance stance on bribery and corruption. Our formal anti-bribery and corruption policy is supported by an external whistleblowing process which allows callers to anonymously raise concerns to an experienced, independent operator. This service is available 24/7 by phone and/or through an online tool. During 2018, no material instances of non-compliance were reported. The Audit and Risk Committee, in conjunction with the Risk Management function, is responsible for approving our systems and controls and works closely with Human Resources to ensure that business ethics is built into every part of the journey for our employees from recruitment to development and retention. Our Diversity, Equality and Inclusion Working Group provides an extra layer of challenge and independence and gives our employees a voice in shaping policies and procedures. Human rights XPS does not have a separate Human Rights Policy. However, respect for human rights is implicit in our contracts of employment and supply contracts. Our values together with the measures set out above provide suitable guidance and controls over our activities to ensure that respect for human rights is maintained. Equal opportunities No person receives less favourable treatment on the grounds of gender, sexual orientation, race, religion, nationality, ethnic or national origins, marital status, disability or age or any other form of discrimination. This applies to recruitment, development, the provision of benefits, advancement and promotion and our wider procedures. 24 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements Gender split data 569 1 14 554 Group total 1,111 Board total 9 Principals (Senior Management) total 69 Other Employees total 1,033 Female Male 542 8 55 479 Diversity We are committed to attracting, developing and retaining a diverse team of talented people. top talent to participate in the 30% Club mentoring programme and provided mentors to be matched with mentees from external organisations. We have set up a Diversity, Equality and Inclusion Working Group to support our key strategic aims of increasing our diversity in all areas, but particularly at senior levels. The Group seeks to achieve its objective of identifying and implementing actions to improve diversity, equality and inclusion through engaging with staff across the business (through local representatives) to gather views, discuss and research actions, determine a priority order for implementing actions and review the impact of actions taken. The Group is made up of colleagues representing each office, three members of the Board and members of Executive Committee. Last year we reported our participation in a new Actuarial Mentoring Programme for female employees that was launched by the Institute and Faculty of Actuaries (and is sponsored by Pension Insurance Corporation) to improve diversity within the actuarial profession. In addition, this year, we have become members of the UK 30% Club, a campaign group to increase the number of female Board members to 30%. We identified female We also introduced an Agile working policy to allow staff a degree of flexibility around their working pattern, as a further demonstration of our commitment to attracting and retaining a diverse and motivated workforce. During the year we reported on our gender pay gap. We analyse salary data annually at pay review and are confident that across XPS, men and women are paid the same for equivalent roles. Our gender pay gap occurs primarily because there is a lower proportion of women in senior leadership and revenue-generating roles, which attract higher market levels of pay. We are dedicated to improving our position in line with our commitment to promote diversity. We recognise that, while we have worked to address greater representation of women, we have more to do. We have measures in place to improve this and we are committed to advancement and holding ourselves publicly accountable. Having a diverse Board and workplace remains important to the Group, bringing as it does the clear benefits of alternative viewpoints and challenging mindsets. We remain committed to having more women in senior management roles in XPS. In October 2018, we participated in the 30% Club cross-company mentoring programme, delivered by Women Ahead. The 30% club programme wants business to ‘do the right thing’ to have an inclusive and diverse workforce, which is able to capitalise on different views and encourages us to be forward thinking ‘experts’ in our industry. The programme offers helpful insight to women in work, both through the personal one to one mentoring and workshop sessions. We are committed to this scheme again for 2019/20. “The scheme enables women in senior roles to champion the potential of women in more junior roles. The meetings and interactions with many powerful women, through the events, has been very motivational along with the realisation that the challenges I personally face are faced by others.” Rebecca Mazur Senior Consultant XPS Pensions Group Annual Report 2019 25 Operating Responsibly for our Stakeholders continued Employee training and development During the year we delivered over 1500 hours of training across a wide range of professional and technical courses. Professional training included consultant masterclasses and consultant and management development, as well as courses on minute taking, time management, and professional writing and presentation skills. Technical training courses included actuarial and Pensions Management Institute courses and in-house actuarial training. We also provided training to our finance, systems and marketing staff. We recently introduced a Leadership Development programme for our key talent, comprising a challenging two-day course to facilitate the development of current and future leaders. Wellbeing The Board acknowledges the duty of care it owes to all staff and those who come into contact with the Group. We are developing a wellbeing programme that focuses on mental health as well as physical health. We are working to reduce stigma and discrimination about mental health in our workplace by updating and implementing policies in relation to this. We have focused on creating an environment within which our people can thrive. Our business is predominantly office based, and we have designed our working environments to be comfortable and safe. Where work is undertaken at locations outside of our immediate control, we undertake risk assessments in order to further ensure the wellbeing of our staff. There is a fast pace of change at XPS and we have focused on staff engagement and building trust through our values and shared purpose. Annual greenhouse gas emissions Fiscal year 2018/2019 Total scope 1 emissions Total scope 2 emissions Total scope 1 + scope 2 emissions Revenue (£m) Emissions intensity (tCO2e/£m) Employee engagement Our annual engagement survey took place in September, attracting an 83% response rate. The results provided an insight into how colleagues feel about working at XPS. There was a great deal of positive feedback as well as some suggestions for improvement, which we have incorporated into local and company-wide action plans. For example, more communication on the strategic direction of the business, more channels for staff engagement, improved Maternity policy, the introduction of an Agile working policy, a new sabbatical policy and a new promotions process has been communicated and implemented. Retention and career progression XPS has a Performance Share Plan for key employees – defined as those that have been identified as likely to significantly impact the growth of the firm or manage a large client relationship or function. Investing responsibly for clients We advise pension schemes on suitable investment strategies to meet their short, medium and long-term objectives. As part of this, we work with our clients to incorporate their specific requirements on Responsible Investing in their strategy. We believe that integrating environmental, social and governance factors into the investment process is an essential part of risk management, leading to better-informed investment decisions. We also consider the stewardship of underlying investments including proxy voting and engagement to be of fundamental importance. To reflect this view, we have incorporated ESG criteria within our research process and require that the funds we recommend to our clients incorporate an appropriate minimum level of ESG integration and stewardship within their investment process. We are reviewing wider reporting around ESG recognising sustainable development goals. tCO2e 115.8 428.8 544.6 109.9 4.96 Reporting follows the requirements of the Companies Act 2006 (Strategic Report and Directors Report) Regulations 2013, is in line with ISAE 3410, and uses conversion factors published by DEFRA. 26 XPS Pensions Group Annual Report 2019 Supporting communities and charities Giving back to society and our local communities is important to us, and we encourage employee involvement in raising awareness and being involved with fundraising and volunteering. We have partnered with the Mental Health Foundation as our corporate charity partner as we want to raise awareness of good mental health with all our stakeholders, and also fundraise to assist the charity in its mission. We also support Children in Need, Macmillan and Crisis. In addition to company-wide initiatives, our local offices also support charities in their areas to enable colleagues to help with community causes close to their hearts such as Newcastle West End Food Bank, Julian Trust, Next Link and Strathcarron Hospice. Aside from the valuable contribution to charitable causes, our fundraising work is a way of developing and strengthening relationships across the XPS network and fostering skills among our people. Minimising our environmental impact The Group is committed to the protection of the environment, not just from its direct activities on site but through our use of sustainable resources, carbon management related to business travel and preventing pollution through reducing and eliminating sources of pollution. The Group seeks to influence all parties in the life cycle of its services, and create an environmentally friendly ethos amongst its staff, contractors and suppliers. The Group has over the last year been reviewing its activities and operations in order to identify/evaluate environmental aspects and impacts, initially concentrating on the area where it believes it can have the largest impact- energy usage. This work has supported the development of an Environmental Management System (EMS) that is being designed to ultimately deliver certification to ISO14001, with the consultancy Blackmores supporting this work. These initiatives are supported by the Group’s Audit and Risk Committee, with the Head of Risk responsible for their delivery. Strategic Report Governance Financial Statements Non-financial Information Statement Reporting requirement Policies and standards which govern our approach Environmental matters Environmental statement1 Employees Recruitment & Selection Policy Equality and Diversity Flexible Working Policy1 Harassment and Bullying Prevention Policy1 Grievance Policy1 Health and Safety Policy1 Agile Working Guidelines Policy1 Family Friendly Policy1 Sabbatical Policy1 Information necessary to understand our business and its impact, policy due diligence and outcomes Helping the transition to a sustainable low-carbon economy, see page 26 Reflecting the needs of our stakeholders: Colleagues, see pages 24-26 Diversity, see pages 25 and 48 Respect for Human rights Data Privacy Policy Reflecting the needs of our stakeholders: Suppliers, see pages 24 and 34 Modern Slavery Information and Cyber Security Policy1 Social matters CSR Policy1 Anti-corruption and anti-bribery Vulnerable Customer Policy1 Bribery and Gifts Policy1 Whistleblowing Policy1 Financial Crime Policy1 Description of principal risks and impact of business activity Description of our business model Non-financial key performance indicators Reflecting the needs of our stakeholders: Clients, see pages 24-26 Reflecting the needs of our stakeholders: Clients, see pages 24-26 Reflecting the needs of our stakeholders: Colleagues, see pages 37 and 51 Helping the transition to a sustainable low-carbon economy: Risk management, see page 32 Risk overview 2019 themes, see page 32 Our principal risks, see page 33 Our business model, see pages 8-9 Operating responsibly for our stakeholders, see pages 24-26 Our strategic priorities, see pages 12-13 1 Certain Group Policies and internal standards and guidelines are not published externally. 2 The policies mentioned above form part of the Group’s Policy Framework which is founded on key risk management principles. The policies which underpin the principles define mandatory requirements for risk management. Robust processes and controls to identify and report policy outcomes are in place and were followed in 2018. XPS Pensions Group Annual Report 2019 27 Financial Review A year of consolidation Mike Ainslie Chief Financial Officer Revenue £110m (2018: £63m) Profit before tax £11m (2018: 3.3m) The financial results for 2019 include, for the first time, a full year of the acquired Punter Southall (PS) businesses as well as five months of the administration business bought from Kier. We sold our Healthcare business in the year and the results of that business are therefore excluded from the results of our operating activities. During the year we were busy integrating the PS businesses. This required us to scale up our central functions to appropriately support a business of twice the size. We accelerated the integration timetable so that, by year end, for the majority of the activities, we have been able to come off the Transitional Services Agreement, an arrangement that provided support from Punter Southall Group, which was put in place at the time of the acquisition to cover the period to 11 January 2020. This made sense for the business as it enables us to run the business as one and to use common processes across our wide range of support functions including Legal, Compliance, Finance, HR and IT. Underlying business The table below shows the revenue by business line. The 2019 results are compared to the actual 2018 results which only included PS businesses for the period 11 January 2018 (acquisition) to 31 March 2018. The ‘pro-forma’ column provides a comparison on a like-for-like basis as if we had owned the PS businesses for the full year in 2018. The Pensions business, being our largest business, was the business most affected by the integration activities and that combined with a lack of large-scale projects meant that, on a pro-forma basis, the business slipped back by 2% compared to the previous year. No large clients were lost and indeed several new clients were won, particularly in the final quarter, which gives good optimism for 2020. We also expect to see the volume of project work increase again. Adjusted diluted earnings per share Administration Revenue Pensions 9.8p (2018: 8.3p) Investment SSAS/SIPP NPT Total Revenue 28 XPS Pensions Group Annual Report 2019 2018 Pro-forma £’m 2019 to 2018 Pro-forma change % 2019 £’m 56.8 37.5 8.1 6.1 1.4 2018 £’m 37.6 13.7 5.0 5.4 1.0 58.1 32.7 7.0 5.4 1.0 109.9 62.7 104.2 (2) 15 16 13 40 5 Strategic Report Governance Financial Statements Outside of the pensions business the remainder of the firm’s activities all saw a year of strong growth. Outside of the pensions business the remainder of the firm’s activities all saw a year of strong growth. The Administration business grew by 15% buoyed by the full year impact of a large first time outsourcing project completed during 2018 and continued underlying growth. In addition, £2.2m of revenue was added from the Kier acquired business which accounts for circa 7% of the 15% growth. The Investment business continued to grow with a number of new wins in the period including the mandate for a £1bn client which would have been outside the reach of the old Xafinity or PS businesses. The SSAS/SIPP business also grew by 13% benefitting from rate increases and NPT grew by 40% with assets now at £464m. M&A activity Kier pensions administration acquisition The business and assets were purchased for £3.5m, funded out of operating cash flow. The acquisition created intangible assets of £3.1m, which will be amortised over 10 years. Healthcare sale The Healthcare business was sold to Punter Southall Group for £1.2m on 30 September 2018. The gain on the sale of the business was £1.2m and has been recognised in the income statement within ‘profit on discontinued operations’. The operating results of the acquired business are included in the income statement for the period 1 November 2018 to 31 March 2019 and amount to revenue of £2.2m and profit before tax of £0.7m. The profit before tax from the Healthcare business activities in the period from the start of the financial year to the time of sale amounted to £0.2m which arose from revenue of £0.4m and expenses of £0.2m. This also appears in the income statement under ‘profit from discontinued operations’. In the full year to 31 March 2018 the Healthcare business had revenue of £1.0m, and profit of £0.7m. The table below shows the impact of the acquisition and disposal on our results. Financial Highlights Revenue 2019 £’m Revenue 2018 £’m Revenue growth % Profit before tax 2019 £’m Profit before tax 2018 £’m Profit after tax 2019 £’m Profit after tax 2018 £’m XPS Kier post acquisition Total continuing operations Healthcare pre disposal (2018 = 12 months) Healthcare gain on disposal 107.7 2.2 109.9 0.4 – 62.7 – 62.7 1.0 – Total including discontinued operations1 110.3 63.7 71.8 – 75.3 N/A – 73.2 10.7 0.7 11.4 0.2 1.2 12.8 3.3 – 3.3 0.7 – 4.0 9.8 0.6 10.4 0.1 1.0 11.5 2.2 – 2.2 0.5 – 2 .7 1 Discontinued operations here excludes the HR Trustees business, disposed of in January 2018, from the 2018 results. As it is not included here this table does not tie directly back to the statement of comprehensive income in the Financial Statements. XPS Pensions Group Annual Report 2019 29 Financial Review continued Exceptional items The acquisition of the Kier Pensions Unit and Healthcare disposal required us to incur fees of £0.7m for advisors and other related costs. We incurred £3.1m of one-off costs in relation to the integration of the Punter Southall pensions business, through a mixture of restructuring and dual-running costs. In 2018 there were exceptional costs of £4.4m, of which £3.7m related to acquisition-related costs of the PS transaction. Earnings per share The Basic EPS for 2019 is 5.7p (2018: 7.7p). Adjusted EPS in 2019 is 9.8p (2018: 8.3p) an increase of 18%. The reconciliation of the profit used in the adjusted EPS to the statutory profit measure can be found in note 6 to the Financial Statements. Adjusted profit excludes exceptional costs and non-cash costs such as share-based payment costs, acquired intangible amortisation and fair value adjustments to contingent consideration, so gives a better view of underlying performance. Dividend A final dividend of 4.3p is being proposed by the Board (2018: 4.2p). The final dividend, if approved, which amounts to £8.8m (2018: £8.8m), will be paid on 26 September 2019 to those shareholders on the register on 30 August 2019. Cash flow and cash position At 31 March 2019, the Group had £5.5m (2018: £9.4m) of cash balances and generated £15.5m (2018: £10.5m) of cash from its operating activities. This, combined with an £80m committed financing facility until December 2022, of which £57.3m is drawn at year end, mean the Group is well placed to meet future working capital cash requirements. The Group had net cash outflows from financing activities of £11.4m driven almost entirely by the dividends paid of £13.2m (2018: inflow of £84m caused by £66.9m proceeds from the issue of share capital relating to the Punter Southall acquisition, the drawdown of new bank facilities of £41.1m, the repayment of bank borrowings of £19.3m and associated finance costs of £0.8m, less dividends paid in the year of £3.8m). The Group had net cash outflows from investing activities of £8.0m (2018: £89.9m). This arose from £4.9m in respect of payments relating to the Kier transaction and the prior year Punter Southall Holdings Limited acquisition, £2.5m related to the purchase of software and tangible assets, and a £1m increase in other cash balances. (2018: £88.9m in respect of the acquisition of Punter Southall Holdings Limited and its subsidiaries, and £1m for purchase of software). 30 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements Financing The existing committed loan facility from HSBC and Bank of Ireland, totalling £80m, remains in place. At year-end the facility was £57.3m drawn (2018: £55.8m). Outside of further M&A activity we expect that balance to reduce during 2020. The facility matures in December 2022 and along with the healthy cash conversion from the business we are well placed to cover our working capital needs going forward. Net interest and financing costs totalled £1.6m (2018: £1.5m). Net debt at year end stood at £51.7m with net debt to pro-forma adjusted EBITDA of 1.79x (the pro-forma measure is calculated by taking the Kier acquisition impact for a full year). The margin on the facility is now 1.75% (previously 1.50%) over LIBOR. Going concern Details on the Directors continuing to adopt the going concern basis in preparing the Financial Statements can be found in the Viability statement in the Directors’ Report on page 90. Capital expenditure Capital expenditure remains low and for 2019 was £2.6m (2018: £1.3m), again driven by software purchases and development and investment in facilities and IT related tangible assets. Statement of financial position At 31 March 2019 the Group had net assets of £156.46m (31 March 2018: £153.4m). The increase is principally driven by the acquisition of the Kier Pensions Unit, the generation of profit after tax in the period of £11.5m net of an interim dividend paid of £4.7m. Subsidiary undertakings The subsidiary undertakings of the Group in the year are listed in note 38 to the Financial Statements. Significant accounting matters IFRS 15 IFRS 15 Revenue from contracts with customers was adopted in the financial statements with an effective date of 1 April 2018. Following a review in the previous year, the Group had identified that this standard would impact fixed fees, particularly those relating to the triennial valuation exercises carried out for clients. Details of the impact of the implementation of this standard can be found in note 1 to the Financial Statements. IFRS 9 IFRS 9 Financial Instruments was also adopted into the financial statements this year with an effective date of 1 April 2018. The impact of this standard on the Group is immaterial, as the Group’s current policies and processes were largely in line with this new standard already. The main difference for the Group has been to include a consideration of the expected credit loss (ECL) on debtor balances when reviewing provisions required by the Group. IFRS 16 We completed a review of our activities to consider the impact of IFRS 16 Leases on reported performance of the Group. This standard requires that all building leases are reclassed from operating leases to finance leases. This will mean that while the overall profit impact for the Group is immaterial, EBITDA for the Group will increase by over £2m due to the removal of rent charges from the Statement of Comprehensive Income and the inclusion of additional depreciation and interest charges for the new finance leases. The Group will see an increase in its non-current assets of £6.6m at 31 March 2020, offset with an increase in lease liabilities of £6.7m. Adjusted numbers We continue to show ‘adjusted’ numbers in our results. The ‘adjusted’ concept ignores exceptional items, the amortisation of acquisition intangible assets as well as share-based payment costs. The figure is key to defining our dividend policy. The amounts are clearly disclosed in note 6 of the Financial Statements. This alternative performance measure may not be similar to those defined by other entities. Mike Ainslie Chief Financial Officer 26 June 2019 XPS Pensions Group Annual Report 2019 31 Principal Risks and Uncertainties The Group recognise the need to take risk to help its customers achieve their objectives and achieve commercial success – seeking to take risk where it has the skills to exploit that risk and can manage it within risk tolerance. It avoids risk where it sees it as unrewarded or it cannot be well managed or understood. Risk Management Framework Board of Directors/Audit and Risk Committee Senior Management/Risk Management Committee Operational Management 1st Line Risk Management 2nd Line Internal Audit 3rd Line • Implement governance, risk and control frameworks • Measure and manage • Manage risk (within project performance agreed risk appetite) and control framework • Design governance, risk • Monitor adherence • Provide timely, to framework balanced information • Review framework • Offer independent application objectively oversight of 1st and 2nd Lines Control of Risks Confirmation of Control Effectiveness Strategic Overview of Controls s e i t i v i t c A y e K s e m o c t u O We have continued to develop the risk management capabilities within the Group, including the recruitment of a new Head of Risk who has worked with senior management to combine the best practices from the legacy businesses and introduce a new unified risk framework. This new framework provides clarity on governance as well as processes for ongoing risk assessment, reporting, monitoring and review. The Group has also formalised its three lines of defence model which supports the promotion of effective risk management and prevents risk taking that exceeds the business’s appetite. 32 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements The Board, with the support of the Audit and Risk Committee, have identified the principal key risks that may impact the Group’s ability to achieve its objectives, agreeing individual risk appetites for each of these, as well as the key controls. The Principal Risks Principal Risk Strategy Description Key Mitigations Risks linked to the assumptions of future development and size of pensions market used to develop the strategy or business model or business portfolio, e.g. poor data, group think, lack of diversity of opinions. The Board approves and regularly reviews the Group’s strategy in conjunction with budgets, targeting long-term increases in shareholder value and ensuring robust independent challenge. Strategic Planning and Execution Risks linked to assessing, evaluating, planning and executing the strategy, e.g. poor budgeting and planning, inadequate or misleading communications, poor management of change or projects. Key decisions are assessed against risk appetites for key Group risks with a Risk Management framework in place to identify and escalate where strategic decisions may have unintended impacts. The Board regularly reviews the Group’s strategy, supported by the Executive with responsibilities assigned for the delivery of initiatives and provision of regular progress updates. Specific project management resources are used to deliver large-scale change initiatives, allowing risks to delivery of initiatives to be clearly identified at planning stage along with mitigations. Errors Risks relating to material mistakes made by staff, including the non-compliance with established procedures, e.g. failure to calculate benefits correctly, not following peer review processes. The Group recruitment process ensures only high-calibre staff are recruited who are then supported by training programmes, standardised documented processes and checklists for key processes. Theft and Fraud (Financial, Physical Assets) Risks relating to the safeguarding of Group and Client financial and physical assets from malicious actors, e.g. stealing physical assets, deliberate misrepresentation leading to fraud, theft from Group or Client bank accounts. Higher risk work is identified with peer review and additional signoff required, with regular quality audits to confirm processes are being followed correctly. Insurance arrangements are in place to limit the loss should an error occur, with root cause analysis used to identify where controls can be improved. The Group deploys robust physical and systems access controls, along with enforcing segregation of duties to preventing individuals from making fraudulent payments or transfers. These controls are supported with staff training and awareness and are regularly independently audited. Insurance arrangements are in place to protect against larger claims. XPS Pensions Group Annual Report 2019 33 Principal Risks and Uncertainties continued The Principal Risks continued Principal Risk Information/ Cyber Security Description Key Mitigations Risks relating to the confidentiality, integrity and availability of information assets including IT systems, e.g. unauthorised access or disclosure of staff or client information, denial of access to systems or data required, business continuity incidents caused by equipment breakdown/fire/flood. The Group has an Information Security Management System (ISMS) in place to ensure that risks are identified and managed effectively. This is supported by a range of state of the art technical controls, which are independently validated via audit and penetration tests. All staff are provided with comprehensive policies and guidance, with awareness of key topics reinforced with regular training initiatives, e.g. Phishing Awareness. The Group has a range of Business Continuity capabilities in place to minimise impact of incidents impacting the Group’s data, facilities or systems. These include documented plans which are tested regularly. The Group’s recruitment strategy is to seek professional, experienced and qualified staff utilising robust staff recruitment and selection processes. This is supported by comprehensive training, development and performance management processes, with longer-term incentives in place to aid retention. Regular key staff reviews ensure succession planning is kept up to date and remains appropriate. Staffing requirements are considered as part of strategy and budgeting process to ensure alignment with business plans. The Group has a formal selection process that ensures due diligence is carried out, which is proportionate to the risk of the potential failure of the third party. The approvals and signing framework also ensures contracts include key risks relating to services provided and risks identified are managed and accepted prior to agreements being signed. This is supported by ongoing monitoring of key third parties, including SLAs and financial status. Where there is a reliance on a single supplier contingency plans are in place to protect against failure. The Group client engagement process ensures that expectations are matched to Group capabilities. Regular ongoing dialogue with clients ensures that the services provided meet their requirements and continue to be appropriate to their specific needs. Client surveys are used to gather feedback and identify trends and insights. Staff/Human Resources Risks relating to our people, e.g. compensation, retention, succession planning, skills and competence, management capability. Third Party Supplier/ Outsourcing Risks relating to the use of third parties to support our operations, e.g. poor due diligence and selection processes, failure of a supplier to follow agreed upon procedures, financial failure of supplier resulting in inability to deliver service. Client Engagement Risks relating to the provision of poor service or advice to clients, e.g. advice that is not clear, not understood by the client, poorly presented or using out of date technologies, but not errors. 34 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements Principal Risk Description Key Mitigations Political Economic and Social Competition Legal and Regulatory Risks created by the political, economic/ financial and social environment in which we operate, e.g. war, demographic trends, Government influence on business, currency changes, market volatility, interest rates, liquidity, XPS share price. The Board regularly reviews the Group’s strategy, taking into account potential short-term and longer-term changes to the business environment. They are supported by Group functions (e.g. Compliance) as well as business level technical teams who provide specialist advice on proposed changes and their potential impacts. Risks of change on demand side of business due to changes in customer demands or competitors, likely to influence entire industry, e.g. aggressive competitor pricing, consolidation trends, major technological innovation, substitute technologies. Changes may not directly affect Group but could influence entire industry. The Group actively encourages staff membership of professional bodies and will lobby on key issues. The Board regularly reviews the Group’s strategy, considering and taking into account changes in the competitive landscape such as trends and new entrants. This includes regularly reviewing the pensions market and requesting feedback from clients and advisors. Product innovation is a key part of the Group’s core strategy. Risks associated with the criminal and civil judicial processes and contract law, e.g. not identifying changes required by changes to legislation, liabilities created by contract commitments, increased litigation in a particular field, environmental impacts, and industrial accidents. The Group Compliance and Legal functions, as well as business level technical teams, support the business with specialist expertise on new and existing requirements. This is supported by regular staff training, with awareness initiatives in place for new developments. Expert teams are in place to manage specialist risks, e.g. H&S. Business Conduct and Reputation Risks that could lead to a breach of acceptable conduct or ethics and/or impact the Group’s brand, image or reputation, e.g. inadvertent use of child labour in supply chain, failure to ensure services are appropriate for client’s needs, discrimination, poor response to a cyber incident. The Approvals and Signing framework ensures that the correctly authorised individuals are involved in the approval and sign off on non- standard contracts, with appropriate insurance cover in place. The Group’s Mission, Vision and Values clearly set out the tone from the top, highlighting to all staff the conduct and ethics that are expected of them at all times. This is supported by a recruitment strategy that seeks professional, experienced and qualified staff who fit with the Group’s values. Due diligence of third parties considers supply chain risks, ensuring that only suppliers that comply with their legal obligations are selected. The Group have an Incident Management processes in place to ensure that it is able to effectively respond to significant events that could impact its brand or reputation, which are regularly tested. The Directors confirm that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. The principal risks are those listed above. The Directors confirm in the Directors’ Responsibility Statement on page 86 that they consider that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position, performance, business model and strategy. This Report has been approved by the Board and signed by order of the Board: Paul Cuff Co-Chief Executive Officer 26 June 2019 Ben Bramhall Co-Chief Executive Officer 26 June 2019 XPS Pensions Group Annual Report 2019 35 Chairman’s Governance Overview I am pleased to introduce the Governance Report for 2018/19, our first full financial year as XPS Pensions Group following the acquisition of the Punter Southall pensions businesses. Tom Cross Brown Chairman Our improved Board We were delighted to announce the appointment of Sarah Ing as an independent Non-executive Director. Sarah is a qualified chartered accountant and brings 30 years of experience in financial services including audit, corporate finance, investment banking and asset management. Snehal Shah has joined the Company and will replace Mike Ainslie as the new Company CFO and Executive Director of the Board subject to FCA approval. Snehal has over 20 years of experience in finance, investor relations, M&A execution and post deal integration which fits perfectly with the strategic direction of the Company. Snehal’s investor relations experience will also be invaluable to the Board and the Executive team. We look forward to the challenge and new ideas that Sarah and Snehal’s skill set and experience will allow them to bring to the Board. We have also brought the Company secretarial function in-house with the appointment of Zoe Adlam as our General Counsel and Company Secretary. As a result of the changes required by the 2018 UK Corporate Governance Code (2018 Code), John Batting and Jonathan Bernstein have stepped down from the Board to focus on their respective senior leadership roles in the business. On behalf of the Board I would like to thank Mike, John and Jonathan for their contribution to the Board. 36 XPS Pensions Group Annual Report 2019 The above Board member changes improve governance structures and the balance of skills, independence and expertise on the Board. The Board is committed to developing governance structures through structured succession planning and appropriate recruitment processes. Following the new appointments the Board has taken the opportunity to review and improve the induction plan for Board members. The scope of the induction has been expanded to include meetings with employees at various levels and locations within the business. A new schedule of training for Board members has also been put in place. We hope that a solid induction and training process together with our existing board effectiveness evaluation process will continue to drive improvement across the Board and the business. Governance in action New Non-executive Director Induction Plan “As part of the induction process I met with key individuals at XPS including both Board members, other individuals and senior executives across different business functions. This not only allowed me to gain a more detailed understanding and different perspective of the business but also confirmed my confidence in the high quality of people throughout the Group.” Sarah Ing Non-executive Director Strategic Report Governance Financial Statements Statement of compliance with the UK Corporate Governance Code The 2016 UK Corporate Governance Code (the ‘2016 Code’) applied to the Group’s 2018 financial year. The Code is publicly available at www.frc.org.uk. The Company has applied all of the main principles of the Code as they apply to it as a ‘smaller company’ (defined in the 2016 Code as being a company below the FTSE 350) and has complied with all relevant provisions of the Code throughout the financial year. The Group has been subject to the provisions of the 2018 Code since 1 April 2019, and will report on this basis next year. The Company’s governance structure has been reviewed and improved following the acquisition of Punter Southall; and also to ensure compliance with the 2018 Code which has applied to the Company from 1 April 2019. A gap analysis was conducted with support from external advisers and a plan was agreed with the Board in relation to the changes required. Progress is regularly reviewed at Board meetings. In the report to shareholders that follows, we have included a description of how the Company has applied the main principles of the 2016 Code, and complied with all its relevant provisions, throughout the financial year. It should be noted that a number of changes have already been made in light of the 2018 Code which has applied to the Company from 1 April 2019 and will be reported on more fully next year Tom Cross Brown Chairman 26 June 2019 Culture and workforce engagement We mentioned in the last Governance Report that there was a need to ensure that a corporate governance framework was embedded into the enlarged business post acquisition. Transparency, accountability and challenge were identified as key requirements of the new business culture and values. So much work has been done in this area over the last year. The roll out of the new Company values was a real success and will underpin a number of new initiatives that aim to promote a culture of integrity, openness and diversity. The results from a recent employee survey are mentioned on page 26, but from a governance and employee engagement perspective were very pleasing. A new Diversity, Equality and Inclusion Working Group is up and running. Margaret Snowdon OBE attends these meetings and regular updates are provided to the Board. The Company is also a member of the UK 30% club, further details can be found on page 25. An external whistleblowing hotline has been put in place in order to promote transparency and accountability. The Board is also considering with the Company’s brokers a plan for wider stakeholder engagement. XPS Pensions Group Annual Report 2019 37 Board of Directors The Board is composed of eight members, including the Chairman, three Executive Directors, three independent Non-executive Directors and one other Non-executive Director. N ARI R Tom Cross Brown Independent Non-executive Chairman Appointed: January 2017 Paul Cuff Co-Chief Executive Officer Appointed: October 2016 Ben Bramhall Co-Chief Executive Officer Appointed: April 2014 Tom Cross Brown was independent upon appointment as Chairman of XPS in January 2017. Until 2003, he was Chief Executive Officer of ABN AMRO Asset Management. Prior to joining ABN AMRO Asset Management in 1997, he spent 21 years at Lazard Brothers & Co., Limited, latterly as Chief Executive Officer of Lazard Brothers Asset Management from 1994 to 1997. Tom was Non-executive Chairman of Pearl Assurance plc from 2005 to 2009 and of Just Retirement Group from 2006 to 2016. Tom was a Non-executive Director of Artemis Alpha Trust plc and a Non-executive member of the management committee of Artemis Investment Management LLP from 2006 until 2018. Tom is Chair of the Nomination Committee of XPS Pensions Group plc and was a member of the Audit and Risk Committee and the Remuneration Committee for the financial year but has stepped down as a member of the Audit and Risk Committee for the new financial year. Paul Cuff is a qualified actuary with over 20 years of experience in the pensions industry. Paul was a partner at KPMG for 8 years, and joined XPS in October 2016. Immediately prior to joining XPS, Paul was head of the KPMG London pensions team, where he was instrumental in growing the London pensions business. Paul is primarily responsible for raising the profile of XPS in the market and generating new business. This covers both growing the client base in the Group’s traditional service areas and the development of new service offerings to help clients meet the challenges they face as the market evolves. Paul is also responsible for the Group’s strategy with regard to acquisitions and investment, including, for example, the development of technology. Ben Bramhall is a senior actuary with around 20 years of experience in the pensions industry and advises a wide range of pension scheme trustees and sponsoring employers on all matters relating to pension provision. Ben joined XPS in April 2014, and is primarily responsible for the day-to-day operations of the business. This covers the provision of services to XPS’s existing clients, revenue generation and the Group’s people agenda. Since joining XPS, he has played a key role in the development and implementation of the strategy for XPS as well as the hiring of key staff and development of new services and infrastructure. Ben joined XPS from KPMG in London where he played a key role in its development from a small team to one of the leading providers of corporate pensions advisory services. Snehal Shah Chief Financial Officer Appointed: On date upon which FCA approval is received Jonathan Punter Non-executive Director Appointed: January 2017 Snehal Shah is a Chartered Accountant with over 20 years of experience in finance, investor relations, M&A execution and post deal integration. Snehal spent 10 years in the early part of his career with PwC, specialising in complex audits of US and UK listed technology businesses. He joined Ladbrokes plc in 2009 where he held a number of senior finance roles including Group Financial Controller, Head of Investor Relations and Finance Director for Integration following the £2bn merger with Coral Group in 2016. Since leaving Ladbrokes Coral plc in 2017, Snehal has held senior interim finance roles at Parkdean Resorts Ltd and Countrywide plc. Jonathan Punter is the Punter Southall Group’s Chief Executive Officer and one of the founders of the Punter Southall Group which sold Punter Southall Holdings Limited and its subsidiaries to XPS in January 2017. Jonathan began his actuarial career with Duncan C Fraser & Co, where he became a partner, prior to the company being acquired by William M Mercer. He has 40 years of experience in the actuarial profession, with particular expertise in the areas of UK pensions and investment strategy. Jonathan is also a Non-executive Director of the River & Mercantile Group. 38 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements Key to Committees I Independent A Member of Audit & Risk Committee R Member of Remuneration Committee N Member of Nomination Committee Chair of Committee Financial Expert F A R N N F I RA N F I A R AR N N I Alan Bannatyne Senior Independent Non-executive Director Appointed: January 2017 Alan Bannatyne is a Chartered Accountant. After qualifying with Deloitte & Touche, Alan was Commercial Manager of Primecom and then Financial Director of Foresight, both subsidiaries of Primedia, a listed South African Media Group. Alan joined Robert Walters plc as Group Financial Controller in September 2002 and was appointed to the board of Robert Walters plc as Group Finance Director in March 2007. He is Chair of the Audit and Risk Committee of XPS Pensions Group plc, and a member of the Remuneration and Nomination Committees. Alan is recognised as having recent and relevant financial experience. Sarah Ing Independent Non-executive Director Appointed: May 2019 Margaret Snowdon OBE Independent Non-executive Director Appointed: January 2017 Sarah Ing is a Chartered Accountant with 30 years’ experience in financial services including audit, corporate finance, investment banking and asset management. During her executive career, she was a top-rated equity research analyst covering the UK general financial services sector and also founded and ran a hedge fund investment management business. Sarah is also Non-executive Director at CMC Markets plc, the FTSE Small Cap UK-based global provider of online retail trading, where she chairs the Group Risk Committee. Sarah is a member of the Audit and Risk Committee, the Remuneration Committee and the Nomination Committee of XPS Pensions Group plc. Sarah is recognised as having recent and relevant financial experience. Margaret Snowdon OBE is a pensions professional and experienced Non-executive Director. Margaret is a Non-executive Director of the Pensions Regulator and a Non- executive member of the Phoenix Group With Profits Committee. She also serves on the Advisory Board of Moneyhub Financial Technology Limited. Margaret previously held partner and director level positions with leading employee benefit consultancies. Among her many voluntary roles within the pensions industry, Margaret is Chair of the Pension Scams Industry Group and was Chair of the Pensions Administration Standards Association until the end of 2018 when she became their first honorary president. Margaret was appointed an OBE in 2010 and has received many awards for her contribution to pensions. Former Board Members that served during the year under review Mike Ainslie Former Chief Financial Officer Tenure: October 2015 – June 2019 Mike Ainslie is a Chartered Accountant who, on leaving the profession, spent 18 years in Corporate Banking working for a US Bank. His roles included Head of Audit, CFO and COO for the Bank’s International operations. Mike worked for 10 years as CFO or COO for a number of fast growing companies owned by private equity or other investment firms, covering industries including Life Insurance; Anti-Money Laundering Due Diligence; Offshore Company Formation and Administration and Social Media Analytics (SaaS). Mike joined XPS Pensions Group plc in October 2015 and as CFO, Mike was responsible for the finance, legal and compliance functions. Mike will leave XPS on 30 June 2019 as announced in November 2018. Jonathan Bernstein Former Executive Director, Chief Operating Officer Tenure: June 2015 – April 2019 Jonathan Bernstein is a senior actuary with over 25 years of experience in the pensions industry. He joined XPS in June 2015 and was made Head of Pensions at XPS in January 2016 until April 2019 when he became Chief Operating Officer. Prior to joining XPS, Jonathan was a senior partner at Mercer, UK. He has extensive experience of operational management, having run Mercer’s Tower Retirement Unit for approximately five years before taking on a regional management role. His last role at Mercer was as UK Chief Actuary where Jonathan managed commercial risks across Mercer’s Retirement Consulting business as well as leading on all aspects of professionalism and quality for approximately 500 qualified and trainee actuaries. Jonathan stepped down from the Board of XPS Pensions Group plc effective from 1 April 2019 and remains with XPS as Chief Operating Officer. John Batting Former Executive Director Tenure: January 2017 – April 2019 John Batting was CEO of Punter Southall Ltd between 2004 and 2018, and he was one of the four founders of BGJ & Co Limited, an actuarial consulting business which was established in 1993 and subsequently merged with the Punter Southall businesses in 2002. He is a Scheme Actuary with over 38 years of experience in the actuarial profession, providing pensions and investment advice to both pension scheme trustees and sponsoring employers, and has acted as an expert witness on pension matters. John stepped down from the Board of XPS Pensions Group plc effective from 1 April 2019, and remains with XPS as a Senior Actuary. XPS Pensions Group Annual Report 2019 39 Executive Committee 40 XPS Pensions Group Annual Report 2019 Zoe Adlam General Counsel and Company Secretary John Batting Senior Actuary Zoe is General Counsel, she is responsible for ensuring that the legal and compliance needs of the Group are met. Zoe has significant in-house experience as trusted corporate advisor and Company Secretary, and whilst in private practice advised on corporate and financial transactions. Zoe is also Company Secretary at XPS. John was CEO of Punter Southall Ltd between 2004 and 2018. He was one of the four founders of BGJ & Co Limited; an actuarial consulting business which was established in 1993 and subsequently merged with the Punter Southall businesses in 2002. John is a Scheme Actuary with over 40 years of experience in the actuarial profession; providing pensions and investment advice to both pension scheme trustees and sponsoring employers, and has acted as an expert witness on pension matters. Jonathan Bernstein Chief Operating Officer Rachel Gillion HR Director Jonathan is Chief Operating Officer, he is responsible for the central functions of XPS including HR, IT, Marketing and Risk, as well as more general operational matters across the firm. A key aspect is ensuring that XPS operates consistently, effectively and efficiently in a coordinated manner across key business lines including Pensions and Administration. As well as business leadership, he is also involved with major client relationships and holds Scheme Actuary appointments. Rachel is HR Director, she is responsible for the HR function encompassing a headcount of 1,111 across 15 UK sites. Rachel has significant experience of developing and implementing HR and People strategies whilst delivering effective HR team management. Rachel is solutions focused and has a proven track record of managing multiple projects, for example, TUPE, M&A and Reward programmes competently. Rachel has excellent interpersonal and relationship management skills. Strategic Report Governance Financial Statements Patrick McCoy Head of Advisory Wayne Segers Head of Transactions Wayne is Head of Transactions and is committed to helping XPS clients reach fair, good value pension outcomes in deals or restructuring situations. He also provides ongoing advice to companies, helping them manage cost and risk in their pension schemes. Having helped companies and trustees work together to set strategy – and seen the consequences when this breaks down – Wayne is passionate about finding ways for parties to work collaboratively to achieve good outcomes. Patrick leads the XPS Advisory business which comprises pensions (actuarial), investment and covenant. Joining the Advisory structure across all our disciplines, and using our market-leading technology ‘Radar’, means we are innovative, practical and cost-effective. Patrick has created an environment where XPS develops well thought through solutions to help our clients solve their pensions challenges. He continues to advise clients from £100m to £5bn on the full range of investment issues and is known for explaining complex issues clearly, helping clients make effective investment decisions. Prior to taking on this role, Patrick led XPS Investment. Before joining XPS, Patrick was a Partner at KPMG where he built and led the Investment Advisory practice. Richard Thomas Group Strategy Director David Watkins Managing Director of Administration Richard is Group Strategy Director. He created and led Punter Southall’s administration business between 2007 and 2018. Richard has a strong commercial background, having previously been a Director of a global management consultancy, and a policy official at HM Treasury. Richard is responsible for leading XPS Group’s M&A activity. David is Managing Director of XPS Administration and has over 30 years’ experience within the pensions administration sector, with notable success in growing the client base and revenue, the consistent delivery of services and the subsequent creation of an offering focused on high-quality administration and member/client experience. He has also overseen the introduction of multiple systems and new technologies that have enhanced the efficiency and effectiveness of XPS’ administration offering. David has led the development of the administration business, building a strong and highly capable senior team and business which now administers pensions for over 870,000 pension scheme members from across the network of offices in the UK. XPS Pensions Group Annual Report 2019 41 Corporate Governance Report 42 XPS Pensions Group Annual Report 2019 Group governance framework Board composition and independence The Board is composed of eight members, including the Chairman, three Executive Directors, three independent Non-executive Directors and one other Non-executive Director. New members Sarah Ing was appointed as an independent Non-executive Director with effect from 17 May 2019. Sarah brings to the Board 30 years’ experience within financial services including audit, corporate finance, investment banking and asset management. Snehal Shah was appointed as an Executive Director, in line with his appointment as Chief Financial Officer, effective June 2019, subject to FCA approval. Snehal brings to the Company and the Board 20 years’ experience in finance, investor relations, M&A execution and post-deal integration. The Company complies with the provisions of the Code for smaller companies below the FTSE 350 which requires the composition of the Board of directors of a UK listed company to include at least two independent Non-executive Directors (excluding the Chairman). The Board concluded that Tom Cross Brown met the independence criteria set out in the 2016 Code on his appointment as Chairman. The Board considers that Non-executive Directors Alan Bannatyne, Margaret Snowdon OBE and Sarah Ing are each independent of management in character, judgement and opinion and are free from relationships or circumstances that could affect their judgement. One of the Non-executive Directors, Alan Bannatyne, acts as the Senior Independent Director (SID). The Board acknowledges that Jonathan Punter, as the nominated shareholder director in the Company’s relationship agreement with Punter Southall Group Limited (PSGL), must therefore be considered non-independent within the meaning of the Code. The relationship agreement entered into between PSGL and the Company entitles PSGL to appoint one nominee director to the Board, for so long as PSGL holds a beneficial interest, directly or indirectly, in 10% or more of the aggregate voting rights in the Company from time to time. The Board benefits from the wide experience of its Non- executive Directors. Biographical details of all Board members are given on pages 38-39. Strategic Report Governance Financial Statements Board Committees The Board operates in accordance with the Company’s Articles of Association and has a Nomination Committee, a Remuneration Committee and an Audit and Risk Committee, with formally delegated duties, authorities and reporting responsibilities, to assist it with the direction and control of the Group. From time to time, separate committees may be set up by the Board to consider specific issues when the need arises. Written terms of reference for each Committee are subject to annual review and periodic updating to reflect any changes in legislation, regulation or best practice. The terms of reference for the three main Board Committees are available on the Company’s website at www.xpsgroup.com. The Board Audit and Risk Committee Remuneration Committee Nomination Committee Executive Committee Senior Management Department Heads Other working groups The Company complies with the Code provision that a UK listed company’s Remuneration and Audit Committees should comprise at least three independent Non-executive Directors (including the independent Non-executive Chairman) and that its Nomination Committee should comprise a majority of independent directors. The Chairman and the two independent Non-executive Directors were members of all three committees for the 2018 financial year. Tom Cross Brown chairs the Nomination Committee, Alan Bannatyne chairs the Audit and Risk Committee and Margaret Snowdon OBE chairs the Remuneration Committee. Each Chair reports on the business of their previous Committee meeting at the next scheduled Board meeting. The Audit and Risk Committee’s role is to assist the Board in discharging its oversight responsibilities by reviewing and monitoring the following: the integrity of the financial information provided to shareholders; the effectiveness of the Company’s system of internal controls and risk management; the external audit process and auditors; and the processes for compliance with laws, regulations and ethical codes of practice. Further details are given in the Audit and Risk Committee report on page 49. The role of the Remuneration Committee is to assist the Board to fulfil its responsibility to shareholders to ensure that remuneration policy and practices of the Company reward fairly and responsibly, with a clear link to corporate and individual performance, having regard to statutory and regulatory requirements. The Committee recommends the policy the Board should adopt on executive remuneration and, within the terms of the Directors’ Remuneration Policy approved by shareholders at the AGM in September 2017, determines and agrees with the Board the levels of remuneration for each of the Executive Directors, the Company Chairman and designated senior management below Board level. Further details are given in the Remuneration Report on pages 54 to 61. The Remuneration Policy will be reviewed and shareholder approval sought at the Annual General Meeting in 2020. XPS Pensions Group Annual Report 2019 43 Corporate Governance Report continued Group Executive Committee The Co-Chief Executive Officers operate a Group Executive Committee to support them in the performance of their duties, including the development and implementation of strategy and the day-to-day operational management of the business. The Group Executive Committee meets bi-weekly and comprises the Executive Directors, in addition to Jonathan Bernstein (Chief Operating Officer), John Batting (Senior Actuary), Zoe Adlam (General Counsel and Company Secretary), Rachel Gillion (HR Director), David Watkins (Managing Director of Administration), Patrick McCoy (Head of Investment), Richard Thomas (Head of M&A) and Wayne Segers (Head of Transactions), further details of all Executive Committee members are available on pages 40-41. The Group Executive Committee also holds monthly management calls with the senior management team comprising the heads of business lines and divisions. Board responsibilities and operation The Board is focused on providing entrepreneurial leadership to the Group. It is responsible for directing and controlling the Group and has overall authority for the effective and prudent management and conduct of the Group’s business and the Group’s strategy and development. The Board monitors performance, being responsible for ensuring that appropriate financial and human resources are in place for the Group to meet its objectives, and takes the lead in setting and embedding the Company’s culture, values and standards. The Board is also responsible for ensuring the maintenance of a sound system of internal control and risk management (including financial, operational and compliance controls, and for reviewing the overall effectiveness of systems in place), and for the approval of any changes to the capital, corporate or management structure of the Group. There is a formal schedule of matters reserved for Board approval which is subject to annual review and includes: The Group’s long-term objectives, business strategy and risk appetite; The Company’s policies, values and standards; Annual business plans, budgets and forecasts; Extension of the Group’s activities into new business or geographic areas; Changes in capital structure and any form of fundraising or asset securitisation; Major changes to the corporate structure, including material acquisitions and disposals; Interim and annual financial statements and dividend policy; Material guarantees, indemnities and letters of comfort; The Group’s system of internal control and risk management; Contracts which are material strategically or by reason of size or duration; Calling of shareholder meetings and related documentation; Changes to the membership of the Board and its Committees; Remuneration policy for the directors and senior executives; Introduction of new share incentive plans or major changes to existing plans; and The Company’s overall corporate governance arrangements. Read more on page 47 regarding Board skills 44 XPS Pensions Group Annual Report 2019 There is a clear division of key responsibilities between the Chairman and the two Co-CEOs. The Chairman is responsible for the effective leadership and governance of the Board, but takes no part in the day-to-day running of the Group’s business. His key responsibilities include: Leading the Board effectively to ensure it is primarily focused on business strategy, performance, value creation and accountability; Ensuring the Board determines the risk appetite it is willing to embrace in the implementation of strategy; Leading the succession planning process and chairing the Nomination Committee; Encouraging all Directors to contribute fully to Board discussions and ensuring sufficient challenge applies to major proposals; Fostering relationships within the Board and providing a sounding board for the Co-CEOs on important business issues; Identifying development needs for the Board and Directors; Leading the process for evaluating the performance of the Board, its Committees and individual directors; and Ensuring effective communication with shareholders. Co-CEOs The Company has Co-CEOs. They have worked together for over 20 years, having both started as trainee actuaries at Punter Southall, before spending many years in the same team at KPMG. Both have leadership roles on large clients, which takes some of their time, and which is important to show leadership in the firm and to truly understand the market. Their long friendship and history of working together, and their complementary skill sets, make the Co-CEO arrangement a success. The Co-CEOs report to the Chairman and the Board and are responsible for jointly leading the Group’s business and managing it in accordance with the business plan approved by the Board, the Board’s overall risk appetite, the policies approved by the Board and its delegated authorities, and all applicable laws and regulations. They also recommend budgets and forecasts for Board approval, lead the developing investor relations programme, and maintain a dialogue with the Chairman on significant business developments and strategy issues. Key divisions of responsibilities include: Ben Bramhall is primarily responsible for the operation of the business, covering the provision of services to existing clients, revenue generation and the Group’s people strategy; and Paul Cuff is primarily responsible for raising the profile of the XPS Group in the market and generating new business, both in traditional service areas and in the development of new services as the market evolves. He is also responsible for the Group’s strategy with regard to acquisitions and technology investment. Strategic Report Governance Financial Statements Board meetings and attendance Decisions on operational matters are delegated by the Board to the Executive Directors, consistent with the schedule of matters reserved for Board approval. In advance of scheduled Board meetings each Director receives documentation providing updates on Group strategy, finances, operations and business development. The Board meets at least seven times a year and at other times as and when necessary. At least once a year, the Board will meet to review business strategy. The Directors are expected to attend all meetings of the Board and any Committees of which they are members, and to devote sufficient time to the Company’s affairs to fulfil their duties as Directors. Non-executive Directors each need to commit a minimum of 28 days service per year to the Company. Where Directors are unable to attend a meeting, they are encouraged to submit to the Chairman any comments on matters to be considered at the meeting to ensure that their views are recorded and taken into account during the meeting. The table below shows the attendance of each Director at meetings of the Board and of the Committees of which they are a member during the financial year: Director Board Audit & Risk Committee Remuneration Committee Nomination Committee Tom Cross Brown Alan Bannatyne Margaret Snowdon OBE Jonathan Punter Ben Bramhall Paul Cuff 7/7 7/7 7/7 7/7 7/7 7/7 4/4 4/4 4/4 – – – 6/6 6/6 6/6 – – – Former Board Members that served during the year under review Mike Ainslie Jonathan Bernstein John Batting 7/7 6/7* 7/7 – – – – – – 4/4 4/4 4/4 – – – – – – * Unable to attend due to a clash with an important business matter. In addition to the formal scheduled meetings, all Directors attended a full strategy review session in February 2019. Non-executive Directors remain in regular contact with the Chairman, whether in face-to-face meetings or by telephone, to discuss matters relating to the Company without the Executives present. If a director misses a board meeting they will still receive board papers before the meeting and will have an opportunity to flag any questions or points they would like raised at the meeting. The director will also receive the minutes and matters arising in the usual way in order to ensure that they are fully briefed. The Board is ultimately responsible for the effectiveness and monitoring of the Group’s system of internal controls. The Audit and Risk Committee’s role is to assist the Board with its oversight responsibility by reviewing and monitoring the Company’s system of internal controls. It met four times in the financial year and considered the internal controls assurance framework used during the financial year, concluding that it was sound and appropriate for the Business. Directors are reminded at the commencement of each meeting to notify the Board of any conflicts of interest. Any actual or potential conflicts of Directors with the interests of the Company that arise must be disclosed for consideration and, if appropriate, authorisation by the Board in accordance with the Company’s Articles of Association. The Board may authorise conflicts and potential conflicts, as long as the potentially conflicted Director is not counted in the meeting quorum and does not vote on the resolution to authorise. Directors are required to notify the Group Chairman when a conflict or potential conflict does arise in order that Board authorisation can be considered. If the Board determines that a conflict or potential conflict can be authorised, it may impose additional conditions on the Director concerned. Board effectiveness An annual performance evaluation of the Board, its Committees and of individual Directors was carried out in March 2019 prior to publication of the Annual Report for 2018/19. The evaluation process was conducted by the Group Chairman through the completion of detailed questionnaires designed to assess the effectiveness and assist in the objective review of the performance of the Board, Committees and individual Directors. The findings of these questionnaires were reviewed and discussed at the Board meeting in May 2019. The Board considered that the overall outcome of the evaluation process was encouraging, noting that there was an appropriate split of skill sets on the Board and its Committees, and concluding that all forums were performing effectively with all Directors considered to be effective and committed to their roles. Three specific actions were identified to further improve the effectiveness of the Board: To increase the amount of discussion time together, outside of formal Board meetings, devoted to business strategy; To consider shareholder engagement further to fully understand views on governance and performance against strategy; and To continue to develop and embed the new risk management framework. 1 2 3 XPS Pensions Group Annual Report 2019 45 Corporate Governance Report continued Outcome These actions will be reviewed and monitored by the Board and Nomination Committee, with progress assessed as part of the Board evaluation exercise next year. The Board acknowledges that the 2018 Code requires regular external board evaluations (as a Company below FTSE 350) and has committed to conduct an external board evaluation in 2020 when the Board would have been established for 3 years. The Non-executive Directors, in addition to their role of constructively challenging and facilitating the development of the Group’s strategy, met to evaluate the performance of the Chairman in May 2019, led by the Senior Independent Director. The Senior Independent Director also engaged with the Executive Directors separately for their feedback. The results of that process were communicated by the Senior Independent Director to the Board at its meeting in May 2019. As the SID, Alan Bannatyne provides a sounding board for the Chairman and will deputise for him in his absence. The Chairman and Non-executive Directors are in regular contact and may meet on a number of occasions each year without the Executive Directors being present. A formal induction programme has been developed and tailored for any new directors joining the Board. The Chairman, with the support of the Company Secretary, ensures that the development and ongoing training needs of individual directors and the Board as a whole are reviewed and agreed following the annual performance evaluation of the Board, its Committees and individual Directors. A plan for the Board’s ongoing training has been developed and it is intended that the Board will receive training, on a broad range of topics, from the Company’s external advisors three times per year at Board meetings. Directors may seek independent professional advice at the Company’s expense where they consider it appropriate in relation to their duties. All Directors have access to the advice and services of the Company Secretary. Engagement with shareholders The Board has adopted an updated Share Dealing Code, in compliance with the EU Market Abuse Regulation, which requires compliance by the Company’s Persons Discharging Managerial Responsibilities. As part of its investor relations programme, the Company seeks to maintain an ongoing dialogue with major institutional shareholders relating to the performance of the Group including strategy and new developments. Investor activity is a standing report on the Board’s agenda and includes the views communicated by shareholders. As the SID, Alan Bannatyne is available to shareholders if they have concerns which contact through the normal channels of Chairman, the Co-CEOs or other Executive Directors has failed to resolve or for which such channels of communication are inappropriate. Annual General Meeting The Company’s Annual General Meeting (AGM) will take place at 2.00pm on Thursday 12 September 2019 at the Group’s Reading office. The AGM notice setting out the resolutions to be proposed at the meeting and including explanatory notes, together with this Annual Report and Accounts, will be available on the Company’s website (www.xpsgroup.com) and distributed to shareholders who have elected to receive hard copies of shareholder information at least 20 working days prior to the date of the meeting. Voting at the AGM will be conducted by way of a poll and the results will be announced through the London Stock Exchange Regulatory News Service and made available on the Company’s website. All Board members are expected to attend the meeting and the Chair of each of the Board’s Committees will be present to answer any questions put to them by shareholders. 46 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements Nomination Committee Report The Nomination Committee continues to assist the Board in determining the composition and make-up of the Board and in developing succession plans to ensure the continued ability of the Group to deliver its strategic goals and to compete effectively. Tom Cross Brown Chair of the Nomination Committee Dear Shareholder, I am pleased to present the report of the Nomination Committee for the year-ended 31 March 2019. The Committee has met four times during the 2018/19 financial year and all meetings were attended by all members of the Committee. The Committee intends to continue to meet at least two times annually with additional meetings as required. The Nomination Committee assists the Board in determining the composition and make-up of the Board, including its skills, knowledge, experience and diversity. It is responsible for developing and maintaining a formal, rigorous and transparent procedure for identifying appropriate candidates for Board appointments and making recommendations to the Board. The Committee is also responsible for keeping under review the leadership needs of the Group, both executive and Non-executive, and for ensuring that succession planning focuses on the continued ability of the Group to deliver its strategic goals and compete effectively. The constitution and terms of reference of the Committee are reviewed annually. Membership of the Committee The members of the committee are myself, Alan Bannatyne, Margaret Snowdon OBE and since her recent appointment Sarah Ing. The Executive Directors are invited to each meeting, and other members of the management team as the agenda dictates. Board changes The Committee reviewed the composition of the Board in line with the 2018 Code and worked with Russell Reynolds to find potential candidates for the new Non-executive Director and the new Chief Financial Officer roles. The Committee met to consider the potential candidates and to agree their recommendations to the Board. The Committee is satisfied that following the recent Board changes, the composition of the Board is now well balanced between Executive Directors and Non-executive Directors and there is an appropriate balance of skills, experience, independence and knowledge on the Board and all its Committees. As part of the recent Board evaluation review the Board completed a skills audit covering competencies including actuarial, investment management, financial, regulatory and mergers and acquisitions. Directors were asked to confirm if the relevant competency was a core skill, a secondary skill or not a skill. The Committee reviewed the responses and remains satisfied that the Board has the appropriate split of skill sets. XPS Pensions Group Annual Report 2019 47 Nomination Committee Report continued Board effectiveness evaluation I lead the annual Board effectiveness evaluation. The questionnaire used last year was reviewed and revamped with support from the Company Secretary taking into account the requirements of the 2018 Code. The results from the evaluation were positive and next year we will conduct an external Board effectiveness evaluation. Succession planning During the year, the Nomination Committee reviewed detailed succession plans covering all key executive roles including those of the Executive Directors. The Committee is satisfied that the contingency and talent management plans in place for senior executive positions are appropriate, and has agreed that the Group’s succession planning should be kept under review and further developed over time to cover the Chairman and Non-executive Director roles. Induction programme and training During the year, the induction programme for new Non-executive Directors has developed further and its scope expanded. A formal tailored induction is now in place supported by a programme of training, to further their knowledge of the Group, its business, culture, operations, employee and governance and to ensure awareness of their regulatory duties and obligations as a director of a UK premium listed company. Diversity, equality and inclusion During the year, the Company established a Diversity, Equality and Inclusion Working Group, championed by Non-executive Director Margaret Snowdon, OBE and chaired by a female actuary within the Group. The Group has made great progress and had a significant impact across the business within a short space of time, and is a key channel of communication and engagement for employees. The Group has sub-groups focusing on areas such as disability, support for parents, gender/ethnicity, LGBT+ etc. The Group has also reviewed and provided input into new HR policies including diversity across the Group, the employee promotions process and recruitment best practice guide, in addition to working towards setting up an apprenticeship scheme. The Group has significant plans for the financial year ahead and looks forward to reporting on further progress made. The Company acknowledges that there remains a gender pay gap within the business which reflects a higher proportion of males in higher paid roles than females. Whilst this is partly a challenge of the UK industry in which the Company operates, with a male-dominated actuarial profession, the Board believes it has a responsibility to promote change both within XPS and the industry more generally. In the last financial year the Company has appointed a number of senior females, has improved the Company’s maternity pay policy, offering flexibility around returning to work to encourage female employees to pursue a long-term career with XPS, and is participating in a mentoring programme for female actuaries in conjunction with Women Ahead, aimed at retaining female actuaries within the profession through ongoing career advice and support. Diversity remains a key focus of the Company and further initiatives are planned. The Board believes that no individual should be discriminated against, whether for reasons of gender, ethnicity or other grounds that restrict social inclusion, and this extends to Board appointments which it considers should be made on merit and on the basis of ensuring an appropriate balance of skills and experience within the Board. The Company’s Board diversity improved during the year, however, the Board recognises that greater diversity, in the widest sense of diversity of race, experience and approach, can generate a more diverse perspective on issues which, in turn, has the ability to benefit Board effectiveness through improved discussions and better decisions. Tom Cross Brown Chair of the Nomination Committee 26 June 2019 48 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements Audit and Risk Committee Report We took the decision last year to create an internal audit function. Alan Bannatyne Chair of the Audit and Risk Committee Dear Shareholder, I am pleased to present the report of the Audit and Risk Committee for the year-ended 31 March 2019. The Committee met four times during the 2018/19 financial year and intends to continue to meet at least three times annually. All meetings were attended by all members of the Committee. Membership of the Committee The members of the Committee are myself, Tom Cross Brown and Margaret Snowdon. For the next financial year we welcome a new Committee member, Sarah Ing. Sarah is chair of the Group Risk Committee for CMC Markets plc and, as a qualified chartered accountant with 30 years’ experience in financial services including audit, corporate finance, investment banking and asset management, Sarah brings a wealth of very recent and relevant financial experience. In line with the changes required by the 2018 Code, Tom Cross Brown as Chairman of the Board, has stepped down as a member. The Board is satisfied that the Audit and Risk Committee as a whole has competence relevant to the sector in which the Company operates and that I and Sarah Ing have recent relevant financial experience as can be seen in our biographies included on pages 38 to 39 of the Annual Report. The Executive Directors are invited to each meeting as well as the Chief Operating Officer, Head of Risk, General Counsel, the Financial Controller and other members of the management team as the agenda dictates. Auditor The Committee is responsible for making recommendations to the Board regarding the appointment of its external auditors and their remuneration. BDO LLP has been the Group’s auditor since 2014. The Group Audit Partner is required to rotate after a maximum of 5 years; the current audit partner, Simon Brooker, was appointed in September 2018. The Committee is responsible for making recommendations on the independence of the Company’s Auditor, BDO LLP. In addition, the Auditor has internal processes, which include peer reviews, to ensure that independence is maintained. The Committee will review the level of audit fees and non-audit fees on an ongoing basis. See note 5 to the Financial Statements on page 96. The Committee has reviewed the approach to the annual audit at a meeting that the Auditor attended ahead of the start of fieldwork. The Auditor then attended a further Committee meeting at the completion stage of the audit to present their findings. There is an open line of communication between the Chair of the Audit and Risk Committee and the audit engagement partner. The Committee assessed the effectiveness of the external audit process by obtaining feedback from parties involved in the process, including management and the external auditor. Based on this feedback and its own ongoing assessment, the Committee remains satisfied with the efficiency and effectiveness of the audit. After due and careful consideration the Committee remains satisfied with the effectiveness and independence of BDO LLP and has recommended to the Board that BDO LLP be reappointed as the Company’s Auditor. Significant accounting matters considered during the year Revenue recognition and accrued income We reviewed the approach that management take to revenue recognition and discussed the treatment of accrued income for services not billed and the deferral of income billed in advance of work performed. We were satisfied with the processes put in place by management for recording revenue. XPS Pensions Group Annual Report 2019 49 An effective Risk Management culture has been embedded throughout the organisation with strong leadership and direction from Executive Management. Impact of future Accounting Standards See note 1 to the Financial Statements. IFRS 16 Leases will apply for the financial year 2019 and the Committee will continue to assess the impact on the Group’s Financial Statements. Annual Report review A final draft of the Annual Report is reviewed by the Committee prior to consideration by the Board and the Committee considered whether the 2019 Annual Report was fair, balanced and understandable and whether it provided the necessary information for shareholders to assess the Group’s performance, business model and strategy. They were satisfied that, taken as a whole, the Annual Report is fair, balanced and understandable and provided the necessary information. The Administration Risk Team reviews all administrative processes and our Actuarial business follows the guidelines for full peer review as set out by the Institute of Actuaries. The Audit and Risk Committee also reviews the wider internal control processes and will enlist external support to review and test when it is deemed necessary. Our approach to risk management is continually reviewed to ensure that it remains fit for purpose and that ownership for Risk Management rests with local management. Risks are recorded and assessed based on their potential impact on the business and their likelihood. The process requires action to mitigate any risk where existing controls are considered to be insufficient or where the risk is considered beyond tolerable limits. Risk An effective Risk Management culture has been embedded throughout the organisation with strong leadership and direction from Executive Management and in order to enhance this the decision was taken last year to create an internal audit function. We are pleased to report that we have appointed a new Head of Risk and that the risk framework is currently being reviewed by the Risk Management Committee. XPS Group is committed to actively identifying and mitigating risk and demonstrating transparent corporate governance. Our Risk Management process seeks to focus on those business and control objectives that must be met in order to evidence achievement of client needs and relevant statutory compliance. As such, XPS Group looks to focus on key inherent risks that may impact on the achievement of control objectives and to embed control measures into its process to render reasonable assurance that they will be achieved in practice. All local reports are consolidated into a core report for the Board to evidence that all risks have been identified and mitigated, and where necessary corrective action is planned. Underpinning the approach to Risk Management is a strong culture of control which is supported by: Clear and well documented compliance policies available to all staff; Fully documented processes which are subject to review; Local quality checks; and Customer and client surveys. 50 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements The process embraces the whole spectrum of activities and measures addressing risk (identification, evaluation, treatment, reporting and monitoring) which, taken together, support the achievement of the organisation’s objectives. The underlying processes and control procedures are regularly reviewed and amended to reflect the findings of the process, including improvements in operational administration, regulatory compliance and legislative changes. Whistleblowing The Group has a clear, formalised Whistleblowing Policy and procedure available to all staff in order to raise concerns about perceived wrongdoing, non-compliance with our own standards, regulatory requirements and/or the law. This policy was reviewed this year. We have a confidential helpline, run by a third party, Expolink, in order that staff can report any concerns or perceived shortcomings within our operations without fear of sanction or disadvantage. The helpline is promoted through the intranet and posters. Incidents are reported and then reviewed by the Board at the next available meeting or sooner if appropriate. The Group’s Audit and Risk Committee reviews the policy and process annually to ensure they remain fit for purpose. Alan Bannatyne Chair of the Audit and Risk Committee 26 June 2019 XPS Pensions Group Annual Report 2019 51 Directors’ Remuneration Report The Remuneration Committee continues to evaluate the most appropriate structure for the executive directors’ remuneration, to ensure alignment with XPS Pension Group’s internal pay structure and external market competitiveness. Margaret Snowdon, OBE Chair of the Remuneration Committee Dear Shareholder, XPS Pensions Group has continued to make good progress against the strategy the Board has agreed. During the year ended 31 March 2019, we launched a new brand for our merged business. The executive directors delivered a strong operational performance with the integration of Xafinity and the Punter Southall Group businesses largely completed and we have had some very encouraging new business wins. We also completed the acquisition of the Kier Pensions Administration business which is a solid foothold into the market for the administration of public sector pension schemes. The Group achieved a creditable financial performance in the year and delivered profitable revenue growth, a healthy operating margin and strong cash generation. Revenue grew by 5% with Adjusted Diluted Earnings Per Share increasing by 18%. This builds on growth in Adjusted Diluted Earnings Per Share since XPS was floated on the London Stock Exchange in 2017 of 36%. The regulatory environment During the year, the Committee has reviewed the various changes to the regulatory environment and in particular the new Corporate Governance Code and the new legislation requiring companies to make additional pay disclosures, including those required under the Shareholder Rights Directive II. The Remuneration Committee has sought to adopt many of the new requirements early. They include: Ensuring that the annual bonus plan and PSP permit the necessary Committee discretion to override formulaic outcomes; Formalising the post-vesting holding period into the rules of the PSP; Reviewing the recovery provisions in the annual bonus plan and PSP to ensure that they remain fit for purpose; and Updating the Committee’s terms of reference to reflect the expanded scope required by the new Code – i.e. (i) responsibility for setting remuneration for the Board and senior management, and (ii) taking account of Group-wide remuneration and policies when setting executive pay; and 52 XPS Pensions Group Annual Report 2019 Engaging employees on executive remuneration and its alignment with the wider company pay policy – the Group is in the process of setting up a consultation committee to work with the Non-executive Directors. This committee is expected to review various remuneration comparison measurements and take these into consideration when considering executive remuneration. Board changes John Batting and Jonathan Bernstein have stepped down from the Board effective 1 April 2019 as part of an adjustment to the composition of the Board in the light of the new Corporate Governance Code. Sarah Ing joined the Board of the Company as an Independent Non-executive Director on the 17 May 2019. As announced on 29 November 2018, Mike Ainslie stepped down from the Board and his appointment as Chief Financial Officer at the end of June 2019. Details of his remuneration arrangements and the arrangements linked to his cessation of employment are included in the implementation section of this report. He will be replaced by Snehal Shah who joined XPS in May 2019 to enable an orderly handover. Engaging with our shareholders At last year’s Annual General Meeting held on 13 September 2018 the Remuneration Committee was disappointed that 20.01% of the votes cast were against the resolution to approve the Directors’ Remuneration Report. Since the AGM, I have offered to meet shareholders to discuss their concerns and I am grateful for the constructive feedback received. Whilst in line with the bounds of the shareholder approved Policy, the salary increases for four of the five executive directors caused concern for some shareholders and for some voting guidance services, as did the pension contribution and annual bonus of a new executive director to the Board. Strategic Report Governance Financial Statements The current Directors’ Remuneration Policy was approved by shareholders at the 2017 AGM and therefore will be due for renewal at the 2020 AGM. John Batting was appointed to the Board following the completion of the acquisition of Punter Southall Holdings Limited in January 2018. His fixed pay arrangements reflected his legacy Punter Southall service contract where he had been CEO since 2004. In line with standard practice, the Regulations and our Policy, the fixed pay limits within the 2017 approved Directors’ Remuneration Policy do not apply to newly- appointed directors. As part of the negotiations for the transaction, the Remuneration Committee took the view that it would be a breach of trust to renegotiate the terms of John Batting’s contract. His pension contribution level was also maintained, as it was for all other employees who joined the Group at the same time. The Remuneration Committee continues to evaluate the most appropriate structure for the executive directors’ remuneration, to ensure alignment with XPS Pension Group’s internal pay structure and external market competitiveness and will be mindful of shareholders’ views in making any future changes to remuneration. The current Directors’ Remuneration Policy was approved by shareholders at the 2017 AGM and therefore will be due for renewal at the 2020 AGM. The Remuneration Committee will consult with our major shareholders and the voting guidance services well in advance in relation to the policy. XPS Pensions Group Annual Report 2019 53 Directors’ Remuneration Report continued Remuneration of the Executive Directors for 2019/2020 The table below summarises our approach to the remuneration of the Executive Directors for 2019/2020. There have been no salary increases or changes to benefits during the year. Component of remuneration Base salary and benefits Pension Annual bonus Long-term incentives All-employee share plans Share ownership guidelines Summary of approach Base salary and benefits are reviewed annually at 1 April in light of a number of factors, including the approach to salary reviews more generally across the Group. The base salaries of the Executive Directors have not been increased for the 2019/20 financial year and therefore remain: Ben Bramhall – £288,000 Paul Cuff – £288,000 Mike Ainslie – £252,000 (to 30 June 2019) Snehal Shah – £238,500 (from 27 June 2019) Defined contribution/cash supplements of between 6% and 8% in line with contributions for employees generally Payable subject to the achievement of challenging financial/ strategic/personal performance conditions. Malus clawback provisions apply. Maximum bonus opportunity from the Executive Directors potentially payable in cash and deferred shares: Ben Bramhall – 150% of salary Paul Cuff – 150% of salary Mike Ainslie – N/A (not eligible for a bonus in 2019/20) Snehal Shah – 112.5% of salary Provided via a Performance Share Plan (PSP). Annual awards over shares made that vest subject to stretching performance conditions generally measured over a three-year period. Maximum ’normal‘ grant level is 150% of salary. Malus and clawback provisions apply Executive Directors are entitled to participate in all of the Company’s employee share plans, including the Share Save Plan, on the same terms as other employees Executive Directors are subject to a minimum shareholding requirement of 200% of salary 54 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements Annual bonus payments for 2018/19 The financial element of these bonuses is based on Group Profit Before Tax (PBT). The reported Group Adjusted PBT for 2018/19 would normally have resulted in a bonus payment of 75% of the maximum for this element of the bonus. The Remuneration Committee has exercised its discretion to override the formulaic outcome above, taking into account the effect on Group PBT (and consequentially on Earnings per Share) of the discount implicit in the Transitional Services Agreement that the Group benefited from during the year. This was done by adding £2m to the actual cost base of the Group when assessing the change in PBT against performance targets. This approach would have given a pay out to executives of 45% of this element of the bonus. When combined with the performance against strategic objectives, this would have led to bonuses of 54% of the maximum. However, following discussions with the executive directors, the Remuneration Committee agreed that the level of bonus payable to be 12% of maximum. This has helped to fund a higher bonus pool for staff. On this basis, the bonus outturn for 2018/19 for the Executive Directors is as follows: Executive Director Ben Bramhall Paul Cuff Mike Ainslie Jonathan Bernstein John Batting % of salary 18% 18% 14% 14% 14% % of bonus maximum 12% 12% 12% 12% 12% Other activities to note The Remuneration Committee has also overseen the operation of the all-employee Share Save plan and reviewed the Group’s gender pay gap analyses and action plans. It also monitors the development and implementation of the action plans. I have also played an active role throughout the year on the Group’s Diversity, Equality and Inclusion Working Group. I trust that you find this Report to be informative and transparent and I hope to receive your support for the Directors’ Remuneration Report at the AGM. I am very keen to encourage an open dialogue with our shareholders on executive remuneration and look forward to the consultation exercise in the autumn. Margaret Snowdon OBE Chair of the Remuneration Committee 26 June 2019 XPS Pensions Group Annual Report 2019 55 Directors’ Remuneration Report continued Directors’ Remuneration Policy This Remuneration Policy, which was approved by shareholders at the 2017 AGM, contains the material required to be set out in the Directors’ Remuneration Report for the purposes of Part 4 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013, which amended The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (the DRR Regulations). The Directors’ Remuneration Policy took effect for all payments made to Directors with effect from the conclusion of the 2017 AGM. The policy was developed with reference to the UK Corporate Governance Code in force at the time of approval and is appropriate to support the long-term success of the Company while ensuring that it does not promote inappropriate risk-taking. The full policy can be found on the Company’s website (www.xpsgroup.com). However, for convenience we have set out below a summary of the policy’s key terms: Element and purpose Policy and operation Maximum Performance measures Base salary The core element of pay, reflecting the individual’s position within the Company and experience The base salary of each Executive Director takes into account the performance of each individual and is set at an appropriate level to secure and retain the talent needed to deliver the Group’s strategic objectives. Salaries are reviewed annually on 1 April and are influenced by: information from relevant comparator groups (referencing the Group’s competitors and public companies in other industries); the performance of each individual Executive Director; and average increases for employees across the Group as a whole. Benefits in kind To provide market- competitive benefits valued by recipients Pension To provide retirement benefits Benefits currently include permanent health insurance, life insurance, private medical insurance and car allowance and may also include other benefits in the future. In certain limited circumstances, relocation allowances may be necessary. All benefits are subject to annual review to ensure they remain in line with market practice. Executive Directors participating in the pension plan benefit from matching annual Group contributions worth between 6% and 8% of base salary. Executive Directors are entitled to take all or part of their pension contributions as a cash allowance. Annual increases will not exceed 7.5% + RPI or the average increase of employees across the Group in any given year, whichever is higher. The level of increase may deviate from this maximum in the case of special circumstances for example, increases in responsibilities or promotion. As an example, this may occur if the market capitalisation of the Company increases as the shares are ‘re-rated’ by investors such that the comparator group changes. In this scenario, the Board would consider the increase and the performance of the Company and other elements of remuneration may also change. In these cases, any exceptional increase will not exceed 20% of salary a year. Benefits (excluding any relocation allowances) may be provided up to an aggregate value of normally £30,000 for each Executive Director (indexed to inflation). n/a n/a The maximum employer’s contribution (or cash supplement) is 8% of salary. n/a 56 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements Element and purpose Policy and operation Maximum Performance measures The maximum annual bonus opportunity is 150% of base salary. For 2019/20, the maximum opportunity will be 150% of base salary for the Co-CEOs and 112.5% of salary for the other Executive Directors. Annual bonus To motivate Executive Directors and support the delivery of Group’s financial and strategic business target over a one-year operating cycle Annual bonus plan levels and the appropriateness of measures are reviewed annually to ensure they continue to support our strategy. Once set, performance measures and targets will generally remain unchanged for the year, except to reflect events (e.g. corporate acquisitions, other major transactions) where the Committee considers it to be necessary in its opinion to make appropriate adjustments. The Remuneration Committee retains the flexibility to pay annual bonus outcomes in cash and/or deferred shares (which may allow for dividend roll-up). Clawback and malus provision apply as explained in more detail in the notes to this Policy table. Bonuses will be payable subject to the achievement of performance conditions which will be set by the Remuneration Committee. The targets may be financial and/or personal and strategic. The intended weighting of these measures is not less than 60% financial. Where a sliding scale of targets is used, attaining the threshold level of performance for any measure will not typically produce a pay-out of more than 20% of the maximum portion of overall annual bonus attributable to that measure, with a sliding scale to full pay-out for maximum performance. Bonus payments will also be subject to the Committee considering that the proposed bonus amounts, calculated by reference to performance against the targets, appropriately reflect the Company’s overall performance and shareholders’ experience. If the Committee does not believe this to be the case, it may adjust the bonus outturn accordingly. XPS Pensions Group Annual Report 2019 57 Directors’ Remuneration Report continued Element and purpose Policy and operation Maximum Performance measures The Remuneration Committee may impose such conditions as it considers appropriate which must be satisfied before any award will vest. All awards made to Executive Directors will be subject to performance conditions which measure performance over a period normally no less than three years. No more than 25% of awards vest for attaining the threshold level of performance. Performance Share Plan To motivate Executive Directors and incentivise the delivery of sustained performance over the long term, and to promote alignment with shareholders’ interests Share ownership guidelines To promote stewardship and to further align the interests of Executive Directors with those of shareholders Awards under the PSP may be granted as nil/nominal cost options which vest to the extent performance conditions are satisfied over a period normally of at least three years. The market value of shares to be awarded to Executive Directors in respect of any year will normally be up to 150% of base salary, with awards of a maximum of 200% of salary in exceptional circumstances. XPS also continues to operate within the dilution limits of no more than 10% in ten years for all incentive schemes. No maximum level but not less than 200% of base salary for any Executive Director. Awards will vest at the end of the specified vesting period at the discretion of the Remuneration Committee and are subject to a further holding period of two years (or such shorter period so that the period from the date of grant until the end of the holding period will be equal to five years). The PSP rules allow that the number of shares (or the cash equivalent) subject to vested PSP awards may be increased to reflect the value of dividends that would have been paid in respect of any record dates falling between the grant of awards and the expiry of any vesting period. Clawback and malus provisions applied are explained in more detail in the notes to this Policy table. The share ownership guidelines encourage Executive Directors to build or maintain (as appropriate) a shareholding in the Company. If any Executive Director does not meet the guideline, they will be expected to retain up to 50% of the net of tax number of shares vesting under any of the Company’s discretionary share incentive arrangements (including any deferred bonus shares) until the guideline is met. The Executive Directors will be entitled to participate in all of the Company’s employee share plans, including the Share Save Plan, on the same terms as other employees. The maximum participation levels for all-employee share plans will be the limits for such plans set by HMRC from time to time. However the Company may impose lower limits on a scheme by scheme basis. Consistent with normal practice, such awards would not be subject to performance conditions. All-employee share plans To facilitate and encourage share ownership by staff, thereby allowing everyone to share in the long-term success of the Company and align interests with those of shareholders These all-employee share plans are established under HMRC tax- advantaged regimes and follow the usual form for such plans. 58 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements Chairman and Non-executive Directors Element and purpose Policy and operation Maximum Performance measures n/a The aggregate fees and any benefits 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 £500,000 p.a. in aggregate. Any increases in fee levels made will be appropriately disclosed. Chairman and Non-executive Directors’ fees To enable the Company to recruit and retain Company Chairs and Non-executive Directors of the highest calibre, at the appropriate cost The fees paid to the Chairman and Non-executive Directors aim to be competitive with other listed companies of equivalent size and complexity. The fees payable to the Non- executive Directors are determined by the Board, with the Chairman’s fees determined by the Committee. No Director participates in decisions regarding their own fees. The Chairman and Non-executive Directors do not participate in any new cash or share incentive plans. The Chairman and Non-executive Directors are entitled to benefits relating to travel and office support and such other benefits as may be considered appropriate. The Chairman is paid a single fee for the role, although he will be entitled to an additional fee if he is required to perform any specific and additional services. Non-executive Directors receive a base fee for the role. Additional fees are paid for acting as Senior Independent Director or for Chairman of the Audit, Remuneration of other Board Committees to reflect the additional time commitment. They will be entitled to an additional fee if they are required to perform any specific and additional services. Service contracts Executive Directors Ben Bramhall, Paul Cuff, Mike Ainslie and Jonathan Bernstein entered into a service agreement with the Company that was effective upon Admission and dated 16 February 2017. John Batting entered into a service agreement with the Company that was effective 11 January 2018 (the date of the acquisition of the Punter Southall businesses). The policy is that each Executive Director’s service agreement should be of indefinite duration, subject to termination by the Company or the individual on no more than 12 months’ notice. However, the Committee reserves flexibility to alter these principles if necessary, to secure the recruitment of an appropriate candidate and if appropriate introduce a longer initial notice period of up to two years (reducing over time to no more than 12 months). The service agreements of all Executive Directors, which are available for inspection at the Company’s registered office, comply with this policy: The Executive Directors’ service agreements are terminable by either party on not less than 9 months’ written notice for the Co-CEO, 6 months for CFO and Head of Pensions and 12 months for John Batting or immediately upon payment in lieu of notice and contain a garden leave clause; In each case any payment in lieu of notice will be calculated by reference to base salary and contractual benefits only and will not include any entitlement to bonus. XPS Pensions Group Annual Report 2019 59 Directors’ Remuneration Report continued Chairman and Non-executive Directors The appointments of Tom Cross Brown, Alan Bannatyne and Margaret Snowdon are subject to the terms of letters of appointment agreed between each of them and the Company dated 24 January 2017, the appointment of Jonathan Punter is subject to the terms of a letter of appointment dated 5 June 2018 and the appointment of Sarah Ing is subject to the terms of a letter of appointment dated 19 March 2019. They are not entitled to receive any compensation on termination of their appointment (other than payment in respect of a notice period where notice is served) and are not entitled to participate in the Company’s share plans, bonus arrangements or pension schemes. They are entitled to be reimbursed all reasonable out-of-pocket expenses incurred in the proper performance of their duties. Their appointment may be terminated at any time upon 3 months’ written notice by either party and with immediate effect in certain circumstances. The appointment may also be terminated pursuant to the Articles or as otherwise required by law. They are subject to retirement by rotation every 3 years under the Articles but intend to retire and submit themselves for re-election by shareholders each year at the Annual General Meeting. The full policy also provides full details of our approach to: Committee discretions Travel and hospitality Past obligations Malus/clawback Performance conditions Recruitment and terminations External appointments Differences between the Policy in respect of remuneration for Executive Directors and the policy on remuneration for other staff Consideration of shareholders’ views. Illustrations of application of the Directors’ Remuneration Policy The charts below show how the Remuneration Policy set out above will be applied for Executive Directors in the financial year 2019/20 based on three performance scenarios and using the assumptions below. Minimum Target Maximum Consists of base salary, benefits and pension Base salary is the salary to be paid in the 2019/20 financial year Benefits measured as benefits paid in the year ended 31 March 2019 Pension measured as the defined contribution or cash allowance in lieu of Company contributions of 6-8% Based on what the Executive Director would receive if performance were in line with expectations or on-target (excluding share price appreciation and dividends): Annual Bonus: consists of the on-target bonus (67% of maximum opportunity used for illustrative purposes) PSP: consists of the threshold level of vesting (25% vesting) under the PSP Based on the maximum remuneration receivable (excluding share price appreciation and dividends): Annual Bonus: consists of maximum bonus of 150% of salary for the Co-CEOs and 112.5% of salary for the other Executive Directors PSP: consists of the face value of awards (150% of base salary for Co-CEOs and 125% of base salary for the other Executive Directors) under the PSP Maximum with 50% share price growth As the Maximum scenario plus the value resulting from a share price growth of 50% in relation to the PSP award Ben Bramhall – Co-Chief Executive Paul Cuff – Co-Chief Executive £1,600 £1,400 £1,200 £1,000 £800 £600 £400 Share price growth Performance share plan Annual bonus Total fixed pay £711 15% 41% £315 £1,395 15% 31% £1,179 37% 37% 31% £200 100% 44% 26% 23% £0 £1,395 15% 31% £1,179 37% 37% 31% £711 15% 41% £315 100% 44% 26% 23% Minimum In line with expectation Maximum Maximum with share price growth Minimum In line with expectation Maximum Maximum with share price growth 60 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements Remuneration Committee membership The Remuneration Committee is chaired by Margaret Snowdon OBE, who is an Independent Non-executive Director. Tom Cross Brown, who is the Company Chairman and Alan Bannatyne, an Independent Non-executive Director, were also members of the Committee during the year. With effect from 17 May 2019, Sarah Ing joined the Remuneration Committee as an independent Director. A table showing the attendance of each member at meetings of the Committee is provided on page 52. Other individuals, such as the Co-Chief Executive Officers, the Chief Financial Officer, the Chief Operating Officer, the Head of HR and external professional advisers may be invited to attend for all or part of any meeting as and when appropriate and necessary. The purpose of the Committee is to establish a formal and transparent procedure for developing policy on remuneration in accordance with the Code and to set the remuneration of the Chairman and selected individuals with due account taken of all relevant factors such as individual and Group performance as well as remuneration payable by companies of a comparable size and complexity. The Committee meets at least twice a year and at such other times as the Chair of the Committee shall require or as the Board may direct. The Committee met six times during the year which were attended by all members of the Committee. The Committee has formal terms of reference which can be viewed on the Company’s website: www.xpsgroup.com Advisers FIT Remuneration Consultants LLP (FIT), signatories to the Remuneration Consultants Group’s Code of Conduct, were appointed by the Committee in 2017 following a Request for Proposal. FIT has been retained to provide advice to the Committee on matters relating to executive remuneration. FIT provided no other services to the Company and, accordingly, the Committee was satisfied that the advice provided by FIT was objective and independent. FIT’s fees in respect of the 2018/19 financial year were £88,492 (2017/18: £66,007). FIT’s fees are charged on the basis of the firm’s standard terms of business for advice provided. The following section provides details of how the Directors were paid during the financial year to 31 March 2019. Taxable benefits2 £ Bonus3 £ Long-term incentives £ Pension4 £ Total remuneration £ Director Executive Directors Ben Bramhall Paul Cuff Mike Ainslie Jonathan Bernstein John Batting1 Non-executive Directors Tom Cross Brown – Chair of Board & Chair of Nominations Committee Alan Bannatyne – £60k NED salary + £10k Chair of Audit & Risk Committee + £5k Senior Independent Director Margaret Snowdon – £60k NED salary + £5k Chair of Remuneration Committee Jonathan Punter1 Total 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 Salary/fees £ 288,000 240,000 288,000 240,000 252,000 210,000 252,000 210,000 258,370 56,643 120,000 120,000 75,000 75,000 65,000 65,000 60,000 13,462 11,206 9,831 11,206 9,416 10,301 9,038 10,981 9,821 3,521 480 51,840 284,550 51,840 284,550 34,020 186,736 34,020 186,736 34,880 33,000 – – – – – – – – – – – – – – – – 1,658,370 1,230,105 47,215 38,586 206,600 975,572 – – – – – – – – – – – – – – – – – – – – 11,757 11,757 11,757 11,757 11,248 11,248 20,088 14,569 33,907 7,433 – – – – – – – – 362,803 546,138 362,803 545,723 307,569 417,022 317,089 421,126 330,678 97,556 120,000 120,000 75,000 75,000 65,000 65,000 60,000 13,462 88,757 56,764 2,000,942 2,310,027 1 John Batting and Jonathan Punter joined the Company and became Directors on 11 January 2018. 2 Each of the Executive Directors is entitled to a range of benefits, comprising permanent health insurance, life insurance, private medical insurance and car allowance. The Non-executive Directors do not receive other benefits. 3 No element of annual bonus was deferred in respect of bonuses shown. 4 Pension values shown all relate either to pension contributions or to cash allowances in lieu of pension. 5 As noted on page 2, John Batting’s fixed pay arrangement reflect his legacy Punter Southall service agreement where he had been CEO since 2004. The Remuneration Committee took the view that it would be a breach of trust to renegotiate the terms of his contract and pension contribution level. XPS Pensions Group Annual Report 2019 61 Directors’ Remuneration Report continued 2018/19 Annual Bonus (audited) The Executive Directors’ annual bonus targets were set at the beginning of the financial year. The financial targets which account for 70% of the annual bonus were set based on Group PBT. As a result of strong underlying financial performance, the Group’s PBT performance exceeded the Target Group PBT set by the Board for the purposes of awarding the 2018/19 annual bonuses of the Executive Directors. The Group PBT targets set were as follows: £m Threshold (£000) Target (£000) Maximum (£000) Actual (£000) Pay-out (% of this element) Group Adjusted PBT (70% of potential) £21,186 £23,243 £27,356 £24,286 75% The Remuneration Committee has exercised its discretion to override the formulaic outcome above, taking into account the effect on Group PBT (and consequentially on Earnings per Share) of the discount implicit in the Transitional Services Agreement that the Group benefited from during the year. This was done by adding £2m to the actual cost base of the Group when assessing the change in PBT against performance targets. This approach provides a pay out to executives of 45% of this element of the bonus. The personal performance goals which account for 30% of the annual bonus were agreed with each Executive Director and were based on a range of strategic and other objectives set at the start of the year. The targets were principally designed to focus and reward the Executive Directors for accomplishing strategic goals which directly support the Company’s strategy. Details of the measures, to the extent they are not commercially sensitive, are outlined below. Examples of the individual objectives which are not commercially sensitive include: Ben Bramhall Paul Cuff Mike Ainslie Example personal objectives: Integration of Punter Southall businesses across all areas including smooth transition from Transitional Services Agreement (by July 2019 other than facilities). Overseeing the development of a firm-wide structure for training and PDR processes by 1 April 2019. Implementation of PDR process for Principals and establishing a ‘talent management’ programme. Reviewing and implementing a revised approach to Business Continuity across the merged XPS Group. Review and implement appropriate measures to improve diversity within the XPS business. Identifying opportunities to enhance existing services, develop new services for clients and apply XPS skills to new markets. Example personal objectives: Development of new business processes and training across XPS to generate new business wins on terms consistent with internal budget. This includes establishing appropriate bid team structure, developing best practice on bids and ensuring uniform adoption, implementation of CRM system and building relationships with intermediaries. Identifying opportunities to enhance existing services, develop new services for clients and apply XPS skills to new markets through implementation of ‘DB Growth’ approach across the merged firm. In particular, oversight of new key initiative in relation to member options. Development and launch of XPS rebranding and corporate values during 2018. Review of use of software/technology across XPS client base for actuarial/investment and implementation of approach for ‘merged’ business, including roll-out of Radar software (and training) across client base. Review and implement appropriate measures to improve diversity within the XPS business. Act as an ambassador for XPS and demonstrate behaviours in line with the corporate values. Example personal objectives: Develop the necessary capabilities within the finance team and implement a smooth transition from the Finance TSA with effect from April/May 2019 (following the year end). Detailed plan to be prepared and agreed with PSG by end September. Improve Board reporting format and develop improved KPIs for merged business to provide more granular analysis of performance against our strategy and outlook. Increase analyst coverage on XPS by working with existing analysts, increasing the number of analysts who cover XPS and overseeing a review of broker arrangements. Develop and implement internal audit process and framework including implementing an internal audit of actuarial business in current financial year with clear action plan to address any issues raised. Act as an ambassador for XPS and demonstrate behaviours in line with the corporate values. 62 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements Jonathan Bernstein John Batting Example personal objectives: Responsibility for oversight of any client contractual terms across the pensions, investment and administration businesses and delivery/client relationship management on specific clients. To take on responsibility for risk management function across XPS and oversee the implementation of a new risk management system and framework. Complete roll-out of ‘client service training’ and develop/roll-out training in relation to ‘fee discussions with clients’ across relevant staff with a view to improving recovery across the firm. Roll-out of approach to financial disciplines within Xafinity businesses (including forecasts, monitoring of chargeable hours) across the Punter Southall pensions business. Carry out a review of the resourcing requirements of the pensions business required to provide high-quality client services and the capacity to meet our growth objectives. This includes managing out underperforming senior staff to facilitate recruitment, refining our recruitment needs and establishing a transparent process for the promotion of developing talent. Act as an ambassador for XPS and demonstrate behaviours in line with the corporate values. Example personal objectives: Review of all aspects of delivery across XC and PS pensions businesses to recommend (to Integration Steering Committee) a ‘best of both’ approach encapsulating actuarial ‘best practice’ and implement revised approach across both businesses. This includes Implementation of revised ‘XPS template reports’ across pensions business covering all key areas of work. Design and implementation of a refined client service programme to gather feedback from clients on XPS service across pensions, investment and administration. Work with finance functions and Jonathan Bernstein as part of the month end processes to provide an analysis of the trading performance of PS Advisory businesses. Act as an ambassador for XPS and demonstrate behaviours in line with the corporate values. Each objective is measurable, with target achievement levels ‘as evidenced by’ activities and outcomes. The Remuneration Committee then assessed performance against each objective in each category on the basis of evidenced outcomes and rated the percentage achievement. In the light of the high standards of attainment of each of the Executive Directors and the need for them to continue to operate as an integrated team, the Remuneration Committee, having assessed the performance of each of the Executive Directors in the round decided to rate their achievement at the same level and, based on the weightings of the categories, awarded reach 75% of maximum for this element of bonus. Financial Performance (% of this element) Strategic Performance (% of this element) Total Performance Outcome (% of maximum) Total Performance Outcome (% of salary) Total Performance Outcome (£) Agreed actual outcome (£)* Weightings Ben Bramhall 70% 30% 45% 75% 54% 81% Paul Cuff 45% 75% 54% 81% £233k £233k £52k £52k Outcomes Mike Ainslie Jonathan Bernstein John Batting 45% 75% 54% 61% £154k £34k 45% 75% 54% 61% £154k £34k 45% 75% 54% 61% £157k £35k * Following discussions with the executive directors, the Remuneration Committee agreed that the level of bonus payable to be reduced from 54% of maximum to 12% of maximum. This has helped to fund a higher bonus pool for staff. Statement of Directors’ shareholding and share interests (audited) For each Director, the total number of Directors’ interests in shares at 31 March 2019 was as follows: Director Ben Bramhall Paul Cuff Mike Ainslie Jonathan Bernstein John Batting Tom Cross Brown Alan Bannatyne Margaret Snowdon Jonathan Punter Number of ordinary shares held as at 31 March 2019 1,509,380 768,450 252,637 315,796 74,328 38,861 36,594 Share ownership requirement (% of salary) Share ownership requirement met Holding as % of March 2019 salary 200% 200% 200% 200% 200% Y Y N N N 723% 368% 138% 173% 40% n/a n/a n/a n/a n/a n/a Number of ordinary shares held as at 31 March 2019 1,509,380 768,450 252,637 315,796 74,328 38,861 36,594 – n/a n/a n/a – – n/a n/a n/a – XPS Pensions Group Annual Report 2019 63 Directors’ Remuneration Report continued The shareholdings above include those held by Directors and their respective connected persons. There were no changes in the Directors’ interests in shares between 31 March 2019 and 26 June 2019. Under the share ownership guidelines, the Executive Directors will be required to build and maintain a shareholding equivalent to at least 200% of salary. John Batting and Jonathan Punter each have an indirect interest in the Company’s issued ordinary share capital through their interests in the issued ordinary share capital of Punter Southall Group Limited. The following interests were held as at 31 March and 25 June 2019: Punter Southall Group Limited held 25,543,887 ordinary shares in the Company; John Batting held 74,328 ordinary shares in Punter Southall Group Limited and Jonathan Punter and his connected persons held in aggregate 1,927,382 ordinary shares in Punter Southall Group Limited (out of a total issued share capital of 24,195,852 ordinary shares). Awards granted in the year under the PSP (audited) The following nominal cost option PSP awards were granted in July 2018. These awards vest in 2021 subject to performance relating to (i) adjusted EPS targets as to 50% of the award, and (ii) relative TSR targets as to the remaining 50% of the award. The details of these targets are shown in the ‘Outstanding share plan awards’ section below. Director Ben Bramhall Paul Cuff Michael Ainslie Jonathan Bernstein John Batting Date of grant 26 July 2018 26 July 2018 26 July 2018 26 July 2018 26 July 2018 £432,000 £432,000 £315,000 £315,000 150% 150% 125% 125% 58% 241,340 241,340 Date of vesting July 2021 July 2021 175,977 July 2021 175,977 July 2021 £150,000 83,798 July 2021 Basis of award (% of salary) Face value of awards at grant1 Number of shares under award 1 Based on the share price of £1.79 on 25 July 2018. Outstanding share plan awards (audited) Details of all outstanding PSP awards made to Executive Directors are set out below: Director Ben Bramhall Paul Cuff Michael Ainslie Jonathan Bernstein John Batting Date of grant 16 February 2017 26 July 2018 16 February 2017 26 July 2018 16 February 2017 26 July 2018 16 February 2017 26 July 2018 18 January 2018 26 July 2018 Exercise price Interests held at 31 March 2018 Interests awarded during the year Interests vested during the year Interests lapsed during the year Interests held at 31 March 2019 Vesting Period 0.05p 0.05p 0.05p 0.05p 0.05p 0.05p 0.05p 0.05p 0.05p 0.05p 258,992 — — 241,340 258,992 — — 241,340 188,848 — 188,848 — 153,374 — — 175,977 — 175,977 83,798 — — — — — — — — — — — 258,992 June 2020 — 241,340 July 2021 — 258,992 June 2020 — 241,340 July 2021 — 188,848 June 2020 175,977 July 2021 — — 188,848 June 2020 175,977 July 2021 — — — 153,374 June 2021 83,798 July 2021 2016/17 PSP Awards (granted in February 2017) These awards comprise nominal cost options with an exercise price of 0.05p per option and vest in 2020 following announcement of annual results in 2020 subject to performance relating to (i) adjusted Earnings per Share (EPS) (see note 7 to the Financial Statements for calculations) targets as to 50% of the award, and (ii) Relative Total Shareholder Return (TSR) targets as to the remaining 50% of the award. The details of the EPS and TSR target ranges are shown in the table below. Diluted Adjusted EPS for the 3 year period to the end of FY 2019/20 Portion of award vesting Compound annual growth in EPS (CAG) of less than 8% above CPI CAG of 8% above CPI 0% 25% CAG between 8% and 18% above CPI Between 25% and 100% on a straight-line basis CAG of 18% or more above CPI 100% 64 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements XPS Pensions Group’s TSR ranking vs a Comparator Group of Companies Portion of award vesting Below median Median 0% 25% Between median and upper quartile Between 25% and 100% on a straight-line basis Upper quartile 100% The TSR Comparator Group consists of 20 companies (excluding investment trusts) whose shares are listed on the London Stock Exchange and whose market capitalisation was similar to that of the Company at the date of grant as described in the IPO Prospectus. 2017/18 PSP Awards (granted in July 2018) These awards comprise nominal cost options with an exercise price of 0.05p per option and vest in 2021 following announcement of annual results in 2021 subject to performance relating to (i) adjusted Earnings per Share (EPS) (see note 7 to the Financial Statements for calculations) targets as to 50% of the award, and (ii) Relative Total Shareholder Return (TSR) targets as to the remaining 50% of the award. The details of the EPS and TSR target ranges are shown in the table below. Diluted Adjusted EPS for the three year period to the end of FY 2020/21 Portion of award vesting Compound annual growth in EPS (CAG) of less than 8% above CPI CAG of 8% above CPI 0% 25% CAG between 8% and 18% above CPI Between 25% and 100% on a straight-line basis CAG of 18% or more above CPI 100% XPS Pensions Group’s TSR ranking vs a Comparator Group of Companies Portion of award vesting Below median Median 0% 25% Between median and upper quartile Between 25% and 100% on a straight-line basis Upper quartile 100% The TSR Comparator Group (excluding investment trusts) consists of the constituents of the FTSE SmallCap Index at the start of the performance period. External Board appointments The Executive Directors did not hold any external directorships during the year. The approved Directors’ Remuneration Policy makes provision for them to retain any fees for one appointment. Payments to past Directors (audited) There were no payments to past Directors in the financial year 2018/19 (2017/18: nil) Payments for loss of office (audited) No payments were made to any Director in respect of loss of office in the financial year 2018/19 (2017/18: nil). Compensation arrangements for John Batting and Jonathan Bernstein As announced on 1 April 2019, John Batting and Jonathan Bernstein have stepped down from the Board effective 1 April 2019. As announced, both will remain employees of the Group and will continue to be remunerated in connection with their employment as normal. They will not receive any payment for loss of office and this change will not affect the vesting of any existing awards made to them under any of the Group’s share incentive schemes, as they remain employees of the Group. These awards will continue to be governed by the underlying scheme rules. Compensation arrangements for Mike Ainslie Mike Ainslie will step down as Chief Financial Officer with effect from 30 June 2019. During this period Mike has continued to perform all his responsibilities as CFO and in addition has undertaken an orderly transition and handover and has continued to receive his base salary, pension supplement and contractual benefits in the normal way. A bonus under the 2018/19 bonus scheme has been calculated by reference to performance in the normal way. In line with other Executive Directors this was significantly reduced. XPS Pensions Group Annual Report 2019 65 Directors’ Remuneration Report continued Subject to certain terms, half of each of the two outstanding PSP awards will vest subject to the applicable performance conditions and time-pro rating from the date of grant to the departure date. The two-year holding period will also apply. The other half of awards will lapse on departure. He will not participate in the 2019/20 bonus scheme although he served for three months of the financial year nor will he receive a 2019/20 PSP award. Mike Ainslie is not eligible for any pay in lieu of notice or severance as a result of his departure. The Company will contribute up to £1,000 (plus VAT) in respect of reasonable legal costs in connection with the departure direct to the relevant law firm. Recruitment arrangements for Snehal Shah Salary entitlement: £238,500. Bonus will be pro-rated based on complete months’ service in 2019/20. Review of past performance and CEO remuneration table (unaudited) The graph below shows the TSR of the Company and the FTSE SmallCap Index (excluding investment trusts) over the period from Admission to 31 March 2019. This is considered an appropriate comparator for XPS Pensions Group which is a constituent of the FTSE SmallCap Index. 140 130 120 110 100 90 80 ) 0 0 1 o t d e s a b e r ( n r u t e R r e d o h e r a h S l l a t o T 15 Feb 2017 31 Mar 2017 31 Mar 2018 31 Mar 2019 XPS Pensions Group PLC FTSE Small Cap Excl. Investment Trusts The table below details certain elements of the CEOs’ remuneration since Admission: 2019 2018 2017 Ben Bramhall Paul Cuff Ben Bramhall Paul Cuff Ben Bramhall Paul Cuff Single total figure of remuneration Annual bonus pay-out Long-term incentive vesting as % of maximum rates as % of maximum £362,803 £382,803 £546,138 £545,724 £286,882 £4,179,695 12%1 12%1 79% 79% 31% 31% n/a n/a n/a n/a n/a n/a 1 The bonus was reduced with the agreement of the CEO’s from the formulaic outcome of 54%. Percentage change in remuneration of the CEOs (unaudited) The table below presents the year-on-year % change in remuneration received by the CEOs, compared with the change in remuneration received by all XPS Pensions Group staff. Salary Annual bonus All taxable benefits 66 XPS Pensions Group Annual Report 2019 Ben Bramhall 20% (82)% 14% Paul Cuff 20% (82)% 19% All XPS Pensions Group staff 4.1% 47% 48% Strategic Report Governance Financial Statements CEO PAY RATIO The UK Corporate Governance Code will introduce mandatory CEO pay ratio reporting from 2019 financial year. Whilst XPS is not required to report on the provisions of the 2018 Miscellaneous Company Act until 2020, the Committee are taking a proactive approach in this area. We are demonstrating our consideration of pay in the wider workforce and we welcome the regulations and are adopting them early by publishing our CEO pay ratio. For 2019 reporting, in line with the legislative requirements, the table below sets out the Chief Executive pay ratio at the 25th, 50th and 75th percentiles for total pay and benefits using method C. The calculation is based on full time equivalent (FTE) salary as at 31 March 2019 for all employees in our Group. FTE is calculated as salary divided by contractual hours then multiplied by standard full time hours and includes all fixed allowances that make up base pay. The data was ranked and three representative employees reflecting 25th, 50th and 75th percentile identified; total pay and benefits were calculated on the same basis as the single figure table for the purposes of pay ratio calculation, which includes taxable benefits (car allowance), bonus and employer pension contribution as set out in the tables below: Financial Year 31 March 2019 Pay Salary (000s) Total Pay (000s)1 Salary Ratio Total Pay Ratio P25 12.3:1 15.3:1 P50 9.0:1 8.1:1 P75 5.9:1 7.2:1 CEO P25 P50 P75 £288.0 £23.4 £42.0 £49.0 £359.2 £24.72 £46.72 £53.0 1. Excludes risk benefits such as life insurance, private medical insurance, permanent health insurance. 2. Includes bonus figures based on FTE salaries therefore not in line with actual bonus payments. Relative importance of spend on pay (unaudited) The table below details the change in total staff pay between financial years 2017/18 and 2018/19 as detailed in note 11 of the Financial Statements, compared with distributions to shareholders by way of dividend, share buy backs or any other significant distributions or payments. These figures have been calculated in line with those in the audited Financial Statements. Total gross staff pay Distributions to shareholders % change 2018/19 £’000 2017/18 £’000 63% 48,244 29,630 246% 13,206 3,822 Statement of shareholder voting The table below shows the outcome of the advisory vote on the 2017/18 Directors’ Remuneration Report at the Annual General Meeting held on 13 September 2018 and of the binding vote on the Directors’ Remuneration Policy on 14 September 2017. AGM resolution Votes for % Votes against Votes withheld Directors’ Remuneration Policy AGM 2017 Directors’ Remuneration Report AGM 2018 122,743,535 98.40 1,993,027 0 155,472,501 79.99 38,886,746 1,707,609 XPS Pensions Group Annual Report 2019 67 Directors’ Remuneration Report continued The Board acknowledged, at the time that the results of the Annual General Meeting held on 13 September 2018 were released, that 20.01% of the votes cast were against the Directors’ Remuneration Report. The salary increases for four of the five executive directors and the pension and annual bonus of a new director on the board caused concern for some of the Company’s shareholders and certain voting guidance services. Since September 2018, Margaret Snowdon, the Chair of the Remuneration Committee, has met with shareholders that wished to engage and discussed their concerns. In the ordinary course of events, the Directors’ Remuneration Policy will next be put to shareholders at the Annual General Meeting in 2020 and it is anticipated a consultation exercise with the Company’s major shareholders and the voting guidance services will be undertaken in advance of this. Implementation of Policy for 2019/20 (unaudited information) Base salary Base salaries remain as last year as follows and the next annual review will be effective from 1 April 2020. Ben Bramhall: £288,000 Paul Cuff: £288,000 Michael Ainslie: £252,000 Snehal Shah: £238,500 Benefits in kind Benefits will be paid in line with the Directors’ Remuneration Policy. Details of the benefits received by Executive Directors are set out in the single figure table on page 61. There is no intention to introduce additional benefits in 2019/20. Pension Contribution rates will be between 6% and 8% of base salary depending on age for the continuing executives. Contributions may be made as cash supplements in full or in part. These contributions are in line with those for the majority of employees in the Group. The range of contributions across the Group is from 4% to 20% of base salary (with the larger rates relating to legacy employment terms). Annual Bonus Bonus maxima of 150% of salary will be applied for the Co-Chief Executive Officers and 112.5% for the other Executive Directors. The weightings are as follows: 75% (increased from 70%) of the bonus will be payable by reference to performance based on Adjusted PBT, with performance against personal/strategic targets determining the extent to which the remaining 25% (reduced from 30%) of the overall bonus opportunity is payable. In addition: No bonus will be payable unless the Committee is satisfied that the Company’s underlying performance warrants it; and As set out in the policy table, bonus payments will also be subject to the Committee considering that the proposed bonus amounts, calculated by reference to performance against the targets, appropriately reflect the Company’s overall performance and shareholders’ experience. If the Committee does not believe this to be the case, it may adjust the bonus outturn accordingly. Owing to the Board’s concerns about commercial sensitivity, we do not believe it is in shareholders’ interests to disclose any further details of these targets on a prospective basis. However, the Company is committed to adhering to principles of transparency and will, provided disclosure of targets is not deemed to be commercially sensitive, make appropriate and relevant levels of disclosure of bonus targets and performance against these targets for the 2019/20 bonus in next year’s report. The targets will be set to ensure both consistency and fairness to all stakeholders. PSP awards It is intended that the PSP awards will be made in 2019/20. There are two performance criteria and they are based on EPS and relative Total Shareholder Return (TSR) performance. The awards will normally vest three years after grant based upon performance. XPS Pensions Group’s TSR ranking vs a Comparator Group of Companies Portion of award vesting Below median Median 0% 25% Between median and upper quartile Between 25% and 100% on a straight-line basis Upper quartile 100% The TSR Comparator Group consists of the constituents of the FTSE SmallCap Index (excluding investment trusts) at the start of the performance period. 68 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements The Remuneration Committee has not, at the date of the publication of the Directors’ Remuneration Report, decided on the appropriate target range for the EPS performance target. The targets will be disclosed in the RNS published shortly after the grant date and in next year’s Directors’ Remuneration report. The target range will take into account the Group’s expectations for EPS performance over the next three years. The Remuneration Committee will determine the appropriate award levels at the time of grant which will be no more than 150% of salary for the Co-CEOs and 125% for the CFO. The Chairman’s and the Non-executive Directors’ Fees Tom Cross Brown receives an annual fee of £120,000 for his role as Board Chairman. Margaret Snowdon OBE receives an annual fee of £65,000 and Alan Bannatyne receives an annual fee of £75,000. Jonathan Punter receives an annual fee of £60,000. Sarah Ing receives an annual fee of £60,000. The above fees are unchanged from the prior year. This report was reviewed and approved by the Board of Directors on 26 June 2019 and was signed on its behalf by: Margaret Snowdon OBE Chair of the Remuneration Committee 26 June 2019 XPS Pensions Group Annual Report 2019 69 Statement of the Directors in respect of the Annual Report As required by the UK Corporate Governance Code, the Directors confirm that they consider that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy. When arriving at this position the Board was assisted by a number of processes, including the following: The Annual Report is drafted by appropriate senior management with overall coordination by the Chief Financial Officer and Financial Controller to ensure consistency across sections; An extensive verification process is undertaken to ensure factual accuracy; Comprehensive reviews of drafts of the Annual Report are undertaken by members of the Executive Board and senior management team; and The final draft is reviewed by the Audit and Risk Committee prior to consideration by the Board. Responsibility statement The Directors confirm that to the best of their knowledge: The Group Financial Statements, prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and The Annual Report includes a fair review of the development and performance of the business and the financial position of the Group and the Parent Company, as a whole; and The Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. By order of the Board: Mike Ainslie Chief Financial Officer 26 June 2019 Directors’ Responsibility Statement The Directors are responsible for preparing the Annual Report and the Group Financial Statements in accordance with applicable laws and regulations. Company law requires the Directors to prepare Financial Statements for each financial year. Under that law the Directors are required to prepare the Group Financial Statements and have elected to prepare the Company Financial Statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss for the Group and Company for that period. In preparing these Financial Statements, the Directors are required to: Select suitable accounting policies and then apply them consistently; Make judgements and accounting estimates that are reasonable and prudent; State whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; Prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business; and Prepare a directors’ report, a strategic report and directors’ remuneration report which comply with the requirements of the Companies Act 2006. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the Financial Statements comply with the Companies Act 2006 and, as regards the Group Financial Statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for ensuring the Annual Report and the Financial Statements are made available on a website. Financial Statements are published on the Company’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the Financial Statements contained therein. The Directors consider it appropriate to adopt the going concern basis of accounting in preparing the Financial Statements. The Directors’ have not identified any material uncertainties to the Group and the Parent Company’s ability to continue to do so over a period of at least twelve months from the date of approval of the Financial Statements. 70 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements Directors’ Report Overview The Directors present their Annual Report on the activities of XPS Pensions Group plc (the Group), together with the audited Financial Statements for the year ended 31 March 2019. The Governance section on pages 36 to 37 forms part of this Directors’ Report. Other requisite components of this report are set out elsewhere in this Annual Report. The Strategic Report provides information relating to the Group’s activities, its business and strategy, the principal risks and uncertainties faced by the business and environmental and employee matters. These sections, together with the Corporate Governance and the Directors’ Remuneration reports provide an overview of the Group and give an indication of future developments in the Group’s business, so providing a balanced assessment of the Group’s position and prospects. These reports and this Directors’ Report have been drawn up and presented in accordance with, and in reliance upon, applicable English company law and any liability of the Directors in connection with such reports shall be subject to the limitations and restrictions provided by such law. On 6 February 2017, the Company name changed from Xafinity Group Holdings (Reading) Limited to Xafinity plc. On 16 February 2017, all the Company’s 136,896,244 ordinary shares were admitted to the premium listing segment of the Official List and to trading on the main market of the London Stock Exchange (Admission). From Admission the Company’s ordinary shares are registered under ISIN GB00BDDN1T20, SEDOL number BDDN1T2, and LEI 2138004Y8OBPJEAACJ11 and, until 16 May 2018, traded under the ticker symbol XAF. In connection with the acquisition of Punter Southall Holdings Limited, which completed on 11 January 2018, a further 41,176,470 and 25,766,871 ordinary shares in the Company were admitted on 5 and 11 January 2018 respectively to the premium listing segment of the Official List and to trading on the main market of the London Stock Exchange. The Company had 203,839,585 ordinary shares in issue on 31 March 2018. On 16 May 2018, the Company name changed from Xafinity plc to XPS Pensions Group plc. From 17 May 2018 the Company’s ordinary shares trade under the ticker symbol XPS. XPS Pensions Group plc is a member of the FTSE All-Share Index. The table below details where certain other information, which forms part of the Directors’ Report, can be found within this Annual Report: Information Location within Annual Report Likely future developments in the business of the Company Strategic Report (pages 12 to 13) Equality and diversity Employee involvement Directors’ shares interests Co-Chief Executive Officers’ Report (pages 20 to 23) and Corporate Governance Report (pages 36 to 37) Co-Chief Executive Officers’ Report (pages 20 to 23) Directors’ Remuneration Report (page 63) Financial risk management objectives and policies Note 2 to the Financial Statements (page 95) Results and dividend The Group’s audited Financial Statements for the year ended 31 March 2019 are set out on pages 81 to 122 and the Company’s audited Financial Statements are set out on pages 123 to 128. The Group’s profit after taxation for the year ended 31 March 2019 was £11.50m (2018: £11.60m). An interim dividend of 2.3p per ordinary share (2018: 2.1p) was paid on 8 February 2019. The Directors recommend a final dividend for the year of 4.3p per ordinary share (2018: 4.2p) to be paid on 26 September 2019 to shareholders on the register on 30 August 2019. Further information regarding dividend policy and payments can be found in the Financial Review on page 30 and in note 39 to the Financial Statements on page 122. Post balance sheet events On 31 May 2019, the Group acquired RL Corporate Pension Services Limited (RLCPS) from the Royal London Mutual Insurance Society Limited, for total consideration of £4.8 million in cash upon completion. Further information regarding this can be found in note 41 to the Financial Statements on page 138. XPS Pensions Group Annual Report 2019 71 Directors’ Report continued Directors The current Directors of the Company, with summaries of their key skills and experience, are set out in the Governance section on pages 38 to 39. Directors on the Board during the year and up to the date of this report are as follows: Ben Bramhall Paul Cuff Tom Cross Brown Alan Bannatyne Margaret Snowdon Sarah Ing (appointed 17 May 2019) Jonathan Punter Mike Ainslie (stepping down 27 June 2019) John Batting (stepped down 1 April 2019 Jonathan Bernstein (stepped down 1 April 2019) Details of the Directors’ service contracts are shown in the Report of the Remuneration Committee on pages 59 to 60. Details of share options granted to Directors and the interests of the Directors in the ordinary shares of the Company are set out in the Remuneration Report on pages 63 to 65. In accordance with its articles of association, the Company made qualifying third-party indemnity provisions for the benefit of its Directors against any liability that attaches to them in defending proceedings brought against them, to the extent permitted by company law, which were in place throughout the year and remain in force at the date of this report. In addition, Directors’ and Officers’ liability insurance cover was maintained throughout the year at the Company’s expense and remains in force at the date of this report. As part of the acquisition of Punter Southall Holdings Limited (PSHL) and its subsidiaries, the Company and Punter Southall Group Limited (PSGL) agreed a Transitional Services Agreement (TSA) on 11 January 2018, pursuant to which PSGL provided certain IT, finance, human resources, legal and compliance and facilities management services to PSHL for up to two years after that date, with the Company paying up to £2.125 million per annum for such services (subject to additional charges that may be agreed). The Board acknowledges that this is a significant contract in which Jonathan Punter, a Non-executive Director, is materially interested given his position as Chief Executive of PSGL. As mentioned previously, the TSA concluded ahead of the 2 year agreement for the majority of Group functions. Capital structure The Company’s issued ordinary share capital and total voting rights at 31 March 2019 and the date of this report were respectively 203,872,875 and 203,893,056 ordinary shares (each with a par value of £0.05p and all fully paid). There were no ordinary shares held in treasury. Further details of the Company’s issued share capital are given in note 30 on page 114. The Company’s ordinary shares rank pari passu in all respects with each other, including for voting purposes and for all dividends. Each share carries the right to one vote at general meetings of the Company. Further information on the voting and other rights of shareholders, including deadlines for exercising voting rights, are set out in the Company’s Articles of Association and in the explanatory notes that accompany the Notice of the Annual General Meeting, which are available on the Company’s website at www.xpsgroup.com Restrictions on shares The Company’s ordinary shares are freely transferable and there are no restrictions on the size of a holding. Transfers of shares are governed by the provisions of the Articles of Association and prevailing legislation. The ordinary shares are not redeemable; however, the Company may purchase any of the ordinary shares, subject to prevailing legislation and the requirements of the Listing Rules. The Directors are not aware of any agreements between holders of the Company’s shares that may result in restrictions on the transfer of securities or on voting rights. Awards of shares under the Company’s Performance Share Plan incentive arrangement are subject to restrictions on the transfer of shares prior to vesting. The Trustee of the Xafinity Employee Benefit Trust holds 691,193 ordinary shares in the Company but has waived its entitlement to dividends and does not seek to exercise the voting rights on those shares. Major interests in shares The table below shows the interests in shares (whether directly or indirectly held) notified to the Company in accordance with Chapter 5 of the Disclosure Guidance and Transparency Rules as at 31 March 2019 and 31 May 2019 (being the latest practicable date prior to publication of this Annual Report): 72 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial Statements Shareholder Punter Southall Group Ltd BlackRock Inc. Invesco Asset Management Ltd Axa Investment Managers Threadneedle Asset Management Ltd Franklin Templeton Fund Management Ltd At 31 March 2019 At 31 May 2019 Number of ordinary shares Percentage of total voting rights 25,543,887 16,400,859 15,938,140 15,289,836 13,636,877 12,789,633 12.53 8.05 7.82 7.50 6.69 6.27 Number of ordinary shares 25,543,887 16,147,061 16,064,574 15,289,836 13,603,110 12,789,633 Percentage of total voting rights 12.53 7.92 7.88 7.50 6.67 6.27 Appointment and retirement of Directors The Board may from time to time appoint one or more additional Directors so long as the total number of Directors does not exceed the limit of 12 as prescribed in the Articles of Association. Any person so appointed will retire at the next Annual General Meeting and then be eligible for re-election. The UK Corporate Governance Code recommends that all Directors be subject to annual re-election by shareholders. Therefore, being eligible, all Directors (except Mike Ainslie) will offer themselves for re-election at the 2019 Annual General Meeting. Powers of Directors The business of the Company shall be managed by the Directors, who may exercise all powers of the Company, subject to legislation, the provisions of the Articles of Association and any directions given by special resolution. The Articles of Association contain specific provisions governing the Company’s power to borrow money and also provide the powers to issue shares and to make purchases of its own shares. In accordance with the authorities granted at the 2018 Annual General Meeting, the Directors are authorised, within certain limits, to allot shares or grant rights to subscribe for shares in the Company and to make market purchases of the Company’s own shares representing up to 10% of its share capital at that time. Details of the proposed renewal of authorities of the Directors are set out in the Notice of the 2019 Annual General Meeting. Political donations No political contributions were made, or political expenditure incurred, by the Company and its subsidiaries during the year (2018: £nil). Employment of disabled persons The Group continues to give full and fair consideration to applications for employment by disabled persons, bearing in mind their aptitudes and abilities. In the event of an employee becoming disabled whilst working for the Group, every effort will be made by the Group to ensure their continued employment and to provide retraining where practicable and appropriate. The policy of the Group is that training, career development and promotion should, as far as possible, be identical to that of other employees. Provisions on change of control The Company is subject to a change of control provision in the following significant agreement: The Company’s £80m agreement with HSBC Bank plc and the Bank of Ireland in multicurrency revolving facilities, with a further uncommitted facility of up to £20m, includes a customary provision for a lending counterparty to amend, alter or cancel the relevant commitment to the Group following a change of control of the Company. The Company does not have agreements with any Director or employee that would provide specific compensation for loss of office or employment resulting from a takeover, except that provisions of the Company’s Performance Share Plan incentive arrangement may cause awards to vest on a takeover. Articles of Association A copy of the full Articles of Association are available on the Company’s website. The Company’s Articles of Association may only be amended by a special resolution of shareholders in a general meeting. Viability Statement The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the reports referred to in the Overview section on page 71 of this Directors’ Report. The Directors have assessed the long-term prospects of the Group based upon business plans and upon cash flow projections for the three-year period ending 31 March 2022. The three-year period was chosen as it is considered the longest timeframe over which any reasonable view can be formed. The forecasts and cash flow projections being used to assess going concern have been comprehensively stress-tested by using simulation techniques involving sensitivity analysis. It should be noted that the Group has limited forward visibility and consequently there is a high degree of uncertainty in respect of future outcomes. In forming their opinion the Directors have performed a robust assessment of the principal risks and uncertainties facing the Group as set out on pages 32 to 35. In addition, note 2 on page 95 of the accounts includes the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives and its exposure to credit risk, liquidity risk and market risk. The Directors have also considered what impact Brexit may have on the Group, and have concluded that it is not expected to have a significant impact on the Group’s activities. XPS Pensions Group Annual Report 2019 73 Directors’ Report continued The Group had £5.5m of cash at 31 March 2019 and a £80m committed financing facility until December 2022. Further details of the financial position of the Group, its cash flows, liquidity position and borrowing facilities are described within the Financial Statements and notes. The Group has a strong balance sheet, access to financial resources and long-term growth prospects. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully. After making enquiries, the Directors have formed a judgement, at the time of approving the Financial Statements, that there is a reasonable expectation that the Group has adequate resources to continue in operational existence and meet its liabilities as they fall due over the three-year assessment period. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements. At the same time, the Directors also considered the appropriateness of adopting the going concern basis of accounting in preparing the Financial Statements and the Directors’ identification of any material uncertainties to the Group and the Parent Company’s ability to continue to do so over a period of at least twelve months from the date of approval of the Financial Statements. Auditors and disclosure of information to the Auditors In accordance with section 418 of the Companies Act 2006, each of the Directors who were members of the Board at the date of the approval of this report confirms that: So far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and The Director has taken all 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 auditors are aware of that information. The Company’s auditor, BDO LLP, has expressed its willingness to continue in office and the Board has agreed, based on the recommendation of the Audit and Risk Committee, that a resolution for their reappointment will be proposed at the forthcoming Annual General Meeting. Annual General Meeting Details of the forthcoming Annual General Meeting are given on page 46 of the Governance section. Listing Rule (LR) disclosures For the purposes of LR 9.8.4CR, the information required to be disclosed by LR 9.8.4R can be found in the following locations: Item Interest capitalised Location None Publication of unaudited financial information Not applicable Details of long-term incentive schemes Waiver of emoluments by a Director Waiver of future emoluments by a Director Details of the Company’s long-term incentive scheme can be found in the Remuneration Committee Report on page 52 None None Non pre-emptive issues of equity for cash Not applicable Non pre-emptive issues of equity for cash in relation to major subsidiary undertakings Not applicable Contracts of significance in which a director is or was interested Transitional Services Agreement with Punter Southall Group Ltd – see page 72 of this report Provision of services by a controlling shareholder Not applicable Shareholder waiver of dividend for the year and future dividends Dividend waiver by the Trustee of the Xafinity Employee Benefit Trust – see page 72 of this report Agreements with controlling shareholder Not applicable The Directors’ Report was approved by the Board of Directors of XPS Pensions Group plc. By order of the Board: Mike Ainslie Chief Financial Officer 26 June 2019 74 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements Independent Auditor’s Report to the Members of XPS Pensions Group plc Opinion We have audited the Financial Statements of XPS Pensions Group plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) for the year ended 31 March 2019 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows, the Statement of Financial Position – Company, the Statement of Changes in Equity – Company, the Statement of Cash Flows – Company and the Notes to the Financial Statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (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. In our opinion: 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 March 2019 and of the Group’s profit for the year then ended; The Group Financial Statements have been properly prepared in accordance with IFRSs as adopted by the European Union; The Parent Company Financial Statements have been properly prepared in accordance with IFRSs as adopted by the European Union and 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 Group financial statements, Article 4 of the IAS Regulation. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) 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. We are independent of the Group and the 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. 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 32 to 35 that describe the principal risks and explain how they are being managed or mitigated; The Directors’ confirmation set out on page 70 in the Annual Report that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; The Directors’ statement set out on page 86 in the Financial Statements about whether the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the Financial Statements and the Directors’ identification of any material uncertainties to the Group and the Parent Company’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 relating 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 73 in the Annual Report as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to 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. XPS Pensions Group Annual Report 2019 75 Independent Auditor’s Report to the Members of XPS Pensions Group plc continued Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the Financial Statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How we addressed the key audit matter in the audit Revenue recognition The Group generates revenue from pension advisory, administration and investment consulting services as well as providing independent trustee, SSAS and SIPP services. IFRS 15 requires the identification of the different performance obligations embedded in a contract, and the allocation of the transaction price to the separate performance obligations which necessitates applying the recognition of revenue according to the separate performance obligations. Identifying the separate performance obligations is complex as, dependent upon the income stream and nature of the engagement, revenue is recognised on either time costs incurred, fixed fee or rateably over the period of providing the service basis. Refer also to note 1 (Accounting policies) in the Financial Statements for further details where the revenue recognition policy has been updated to reflect this. The prior year balances have been restated to reflect this change in accounting policy. Revenue is billed on a monthly, quarterly or, in the case of SSAS and SIPP services, on an annual basis. Services may be billed in arrears, as in the case of pensions advisory work, or in advance as is the case with SSAS and SIPP revenues. As a result of such arrangements, judgement is involved in the timing of revenue recognition to ensure the performance obligations have been met. Risks over revenue recognition include: Inherent fraud risk in respect of overstatement of revenue and accrued income and the understatement of deferred revenue; Incorrect deferral of revenue on SSAS services; Recoverability of accrued income in respect of pension advisory services; Completeness of production captured within the timecard system and subsequently recorded in the accounting system. Incorrect revenue recognised under IFRS 15 due to the judgements involved in implementing the new standard. We identified the Group’s revenue streams and tested that the related revised revenue recognition policy was in accordance with IFRS 15. We utilised our IT audit specialists to review revenue transactions and identify transactions which do not appear to arise from standard billing arrangements. We then agreed a sample of any such transactions to underlying support to gain an understanding of the transaction and ensure related revenue had been appropriately recognised. We tested a sample of revenue transactions for each material income stream by agreeing back to timecard data and to receipt of payment to check the existence of revenue and that it was accurately recorded. In respect of the prior year adjustment, we tested a sample of items to supporting contracts. We tested the recoverability of a sample of accrued income through to its subsequent billing and cash receipt. For any unpaid items we considered the recoverability of these. We tested deferred income on a sample basis by recalculating deferrals based on invoice amounts and associated dates and reviewing for revenue deferrals not made. Where contracts exist, for a sample we have ensured that revenue is being recognised in accordance with the terms of the contract as well as IFRS 15. We tested the completeness of timecards recorded within the timecard system and the subsequent recognition of related revenue by reconciling the timecards recorded to the amounts billed and written off, agreeing exceptions noted to underlying support. We tested the transition to IFRS 15 and assessed the reasonableness of the judgements taken by management in the adoption of IFRS 15. Key observations Our testing did not identify any material misstatements in the amount of revenue recognised. 76 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements Our application of materiality We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. For planning, we consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole. Based on our professional judgement, we determined materiality for the Financial Statements as follows: Overall materiality £615,000 (2018: £400,000) Group How we determined it Materiality was based on 5% of profit before tax excluding accelerated amortisation of £4.8m for the Punter Southall brand (2018: based on 5% of profit before tax excluding acquisition costs of £3.7m). £615,000 was calculated based on the original figures provided during the audit. We recalculated final materiality based on the adjusted numbers and have decided to retain the lower materiality amount. Parent Company £240,000 (2018: £350,000) Materiality for the Parent Company’s Financial Statements capped at 39% (2018: 88%) of Group materiality which represents <1% (2018: <1%) of gross assets. Rationale for benchmark applied We determined profit before tax excluding accelerated amortisation as our benchmark for materiality on the basis that profit before tax is a key performance indicator used by the market. Accelerated amortisation is considered non-recurring. We considered an asset based measure to best reflect the nature of the Parent Company which acts as a Parent Holding Company for the Group. Where financial information from components was audited separately, component materiality levels were set for this purpose at lower levels varying from 5% to 71% of Group materiality. In considering the individual account balances and classes of transactions we apply a lower level of materiality (performance materiality) in order to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceed materiality. Performance materiality was set at £430,000 (2018: £280,000) for the Group, representing 70% of materiality. 70% of materiality was selected as there have historically been a low number of audit adjustments, management post audit adjustments where necessary, a limited number of balances are subject to estimation and our assessment of the overall control environment. The same % was applied to each component materiality including the Parent Company. We agreed with the Audit Committee that we would report to the Committee all individual audit differences in excess of £25,000 (2018: £16,000), being 4% (2018: 4%) of Group materiality. We also agreed to report differences below this threshold that, in our view, warranted reporting on qualitative grounds. An overview of the scope of our audit The Group comprises the Parent Company, six trading subsidiaries, five of which are considered to be significant components, and five intermediate holding companies all based in the United Kingdom, together with a Jersey based trust company controlled by the Parent Company, which contains the Group’s Employee Benefit Trust. Full scope audits of all components were carried out by the Group audit team given the need for statutory audit requirements for all of those components. Our Group audit was scoped by obtaining an understanding of the Group and its environment, including the Group’s system of internal control, and assessing the risks of material misstatement in the Financial Statements at the Group level. As discussed under the Key Audit Matters above, the scope of the audit was tailored to ensure specific testing over the revenue recognition under IFRS 15. Whilst the Directors have ultimate responsibility for the prevention and detection of fraud, we are required to obtain reasonable assurance that the Financial Statements are free from material misstatement, including those arising as a result of fraud. XPS Pensions Group Annual Report 2019 77 Independent Auditor’s Report to the Members of XPS Pensions Group plc continued We gained an understanding of the legal and regulatory framework applicable to the Group and the industry in which it operates, and considered the risk of acts by the Group which were contrary to applicable laws and regulations, including fraud. These included but were not limited to compliance with the Companies Act 2006, IFRSs as adopted by the European Union, the Financial Conduct Authority’s regulations and the Listing Rules. We designed audit procedures to respond to the risk, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through collusion. We focused on laws and regulations that could give rise to a material misstatement in the Financial Statements. Our tests included, but were not limited to: Agreement of the financial statement disclosures to underlying supporting documentation; Enquiries of management and the Audit Committee; Enquiries of the legal team and compliance department including the Head of Compliance and MLRO; Reviewing correspondence with the Financial Conduct Authority; Review of minutes of Board meetings throughout the period; and Considering the effectiveness of the control environment in monitoring compliance with laws and regulations. We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal specialists and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit. There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. As in all of our audits we also addressed the risk of management override of internal controls, including testing journals and evaluating whether there was evidence of bias by the Directors that represented a risk of material misstatement due to fraud. Other information The Directors are responsible for the other information. The other information comprises the information included in the Annual Report and Accounts, other than the Financial Statements and our Auditor’s Report thereon. Our opinion on the Financial Statements does not cover the other information and, except to the extent otherwise explicitly stated in our 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. 78 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements We have nothing to report in this regard. In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions: Fair, balanced and understandable set out on page 70 – 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 position and performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or Audit committee reporting set out on pages 49 to 51 – 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 pages 36 and 48 – 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 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 Directors’ responsibilities statement set out on page 70, 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’s and the Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. XPS Pensions Group Annual Report 2019 79 Independent Auditor’s Report to the Members of XPS Pensions Group plc continued 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. A further description of our responsibilities for the audit of the Financial Statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our Auditor’s Report. Other matters which we are required to address Following the recommendation of the audit committee, we were reappointed by the shareholders on 13 September 2018 to audit the Financial Statements for the year ending 31 March 2019 and subsequent financial periods. The period of total uninterrupted engagement is six years, covering the years ended 31 March 2014 to 31 March 2019. 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 our audit. Our audit opinion is consistent with the additional report to the Audit Committee. Use of our report This report is made solely to the Parent 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 Parent 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 Parent Company and the Parent Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Simon Brooker (Senior Statutory Auditor) For and on behalf of BDO LLP, Statutory Auditor Reading, United Kingdom 26 June 2019 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). 80 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements Consolidated Statement of Comprehensive Income for the year ended 31 March 2019 Revenue Other operating income Administrative expenses Profit from operations Finance income Finance expenses Profit before tax Income tax expense Profit and total comprehensive income from continuing operations for the year Profit on discontinued operations, net of tax Profit after tax Earnings per share attributable to the ordinary equity holders of the Company: Profit: Basic earnings per share Diluted earnings per share Adjusted basic earnings per share Adjusted diluted earnings per share Profit from continuing operations: Basic earnings per share Diluted earnings per share Adjusted basic earnings per share Adjusted diluted earnings per share The notes on pages 85 to 122 form part of these Financial Statements. Note 1, 17 4 10, 17 15 15 1, 16, 17 17 Year ended 31 March 2019 £'000 109,890 6,459 (103,436) Year ended 31 March 2018 Restated £'000 62,667 472 (58,423) 12,913 17 (1,564) 11,366 (995) 10,371 1,137 4,716 23 (1,473) 3,266 (1,049) 2,217 9,384 11,508 11,601 Pence Pence 37 37 37 37 37 37 37 37 5.7 5.6 10.0 9.9 5.1 5.0 9.9 9.8 7.7 7.5 9.4 9.1 1.5 1.4 8.6 8.3 XPS Pensions Group Annual Report 2019 81 Consolidated Statement of Financial Position as at 31 March 2019 Assets Non-current assets Property, plant and equipment Intangible assets Deferred tax assets Other financial assets Current assets Trade and other receivables Cash and cash equivalents Total assets Liabilities Non-current liabilities Loans and borrowings Deferred income tax liabilities Current liabilities Loans and borrowings Provisions for other liabilities and charges Trade and other payables Current income tax liabilities Deferred consideration Total liabilities Net assets Equity and liabilities Equity attributable to owners of the parent Share capital Share premium Merger relief reserve Investment in own shares held in trust Accumulated deficit Total equity Note 18 19 20 21 1, 22 23 24 20 24 28 1, 26 1, 27 29 31 March 2019 £'000 2,104 208,218 840 1,000 212,162 33,075 5,539 38,614 31 March 2018 Restated £'000 1,017 215,692 774 – 217,483 28,762 9,404 38,166 250,776 255,649 56,962 16,370 73,332 49 2,033 17,414 1,393 152 21,041 94,373 55,072 17,942 73,014 27 1,459 17,682 1,757 8,332 29,257 102,271 156,403 153,378 30 31 31 31 31 102 116,795 48,687 (167) (9,014) 102 116,782 48,687 (465) (11,728) 156,403 153,378 The notes on pages 85 to 122 form part of these Financial Statements. The Financial Statements were approved by the Board of Directors on 25 June 2019 and were signed on its behalf by: Mike Ainslie Chief Financial Officer 26 June 2019 Registered number: 08279139 82 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements Consolidated Statement of Changes in Equity for the year ended 31 March 2019 Share capital £'000 Share premium £'000 Investment in own shares £'000 Merger relief reserve £’000 Accumulated deficit £'000 Total equity/ (deficit) £'000 Balance at 1 April 2017 (as previously stated) Prior year adjustment: IFRS 15 revenue from contracts with customers (see note 1) Balance at 1 April 2017 (as restated) Comprehensive income and total comprehensive income for the year (as restated) Contributions by and distributions to owners Share capital issued Share issue costs Dividends paid Share-based payment expense – IFRS 2 charge in respect of long-term incentives Deferred tax movement in respect of long-term incentives Total contributions by and distributions to owners Balance at 31 March 2018 (as restated) Balance at 1 April 2018 (as restated) Comprehensive income and total comprehensive income for the year Contributions by and distributions to owners Share capital issued Dividends paid Share-based payment expense – equity settled from employee benefit trust Share-based payment expense – IFRS 2 charge in respect of long-term incentives Deferred tax movement in respect of long-term incentives Total contributions by and distributions to owners 68 49,958 (465) – 68 – 34 – – – – 34 102 102 – – – – – – – – – 49,958 (465) – 69,979 (3,155) – – – 66,824 116,782 116,782 – 13 – – – – 13 – – – – – – – (465) (465) – – – 298 – – 298 – – – – (20,612) 28,949 30 30 (20,582) 28,979 11,601 11,601 48,687 – – – – (3,822) 118,700 (3,155) (3,822) – – 1,051 24 1,051 24 48,687 48,687 48,687 (2,747) 112,798 (11,728) 153,378 (11,728) 153,378 – – – – – – – 11, 508 11,508 – (13,206) 13 (13,206) 1,701 1,999 2,859 2,859 (148) (148) (8,794) (8,483) Balance at 31 March 2019 102 116,795 (167) 48,687 (9,014) 156,403 The notes on pages 85 to 122 form part of these Financial Statements. XPS Pensions Group Annual Report 2019 83 Consolidated Statement of Cash Flows for the year ended 31 March 2019 Cash flows from operating activities Profit for the year Adjustments for: Depreciation Amortisation Finance income Finance costs Gain on sale of discontinued operations, net of tax Share-based payment expense Other operating income Income tax expense (Increase)/decrease in trade and other receivables Increase/(decrease) in trade and other payables Increase in provisions Income tax paid Net cash inflow from operating activities Cash flows from investing activities Finance income received Acquisition of a subsidiary, net of cash acquired Disposal of discontinued operations Purchases of property, plant and equipment Purchases of software Increase in other cash balances Net cash outflow from investing activities Cash flows from financing activities Proceeds from the issue of share capital net of share issue costs Proceeds from new loans net of capitalised costs Repayment of loans Sale of own shares Interest paid Payment of finance lease liabilities Dividends paid to the holders of the parent Net cash outflow from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at start of the year Cash and cash equivalents at end of year 23 The notes on pages 85 to 122 form part of these Financial Statements. 84 XPS Pensions Group Annual Report 2019 Year ended 31 March 2019 £'000 Note Year ended 31 March 2018 Restated £'000 11,508 11,601 18 19 15 15 17 14 4 16 15 7,29 17 18 19 21 841 12,302 (17) 1,564 (1,164) 2,859 (6,459) 1,262 22,696 (3,698) 64 387 19,449 (3,941) 15,508 17 (4,925) 550 (1,928) (715) (1,000) 577 5,299 (23) 1,473 (8,160) 1,051 (472) 1,336 12,682 2,276 (4,232) 390 11,116 (628) 10,488 23 (88,886) 262 (241) (1,103) – (8,001) (89,945) 13 1,500 – 1,999 (1,644) (34) (13,206) (11,372) (3,865) 9,404 5,539 66,858 41,070 (19,250) – (841) (34) (3,822) 83,981 4,524 4,880 9,404 Strategic Report Governance Financial statements Notes to the Consolidated Financial Statements for the year ended 31 March 2019 1 Accounting policies XPS Pensions Group plc (the ‘Company’) is a public limited company incorporated in the UK. The principal activity of the Group is employee benefit consultancy and related business services. The registered office is Phoenix House, 1 Station Hill, Reading RG1 1NB. The Group Financial Statements consolidate those of the Company and its subsidiaries (together referred to as the ‘Group’). Basis of preparation These Financial Statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU), IFRS – IC Interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The Consolidated Financial Statements have been prepared under the going concern basis. The preparation of Financial Statements in conformity with IFRSs requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the Financial Statements, are disclosed at the end of this section. The principal accounting policies adopted in the preparation of the Financial Statements are set out below. The policies have been consistently applied to all the periods presented, unless otherwise stated. Functional and presentation currency The Financial Statements are presented in British Pounds which is the Company’s functional currency. Figures are rounded to the nearest thousand. Measurement convention The financial information is prepared on the historical cost basis except for the measurement of certain financial instruments and contingent consideration. Basis of consolidation Where the Company has control over an investee, it is classified as a subsidiary. The Company controls an investee if all 3 of the following elements are present: power over the investee, exposure to variable returns from the investee, and the ability of the investor to use its power to affect those variable returns. Control is reassessed whenever facts and circumstances indicate that there may be a change in any elements of control. De facto control exists in situations where the Company has the practical ability to direct the relevant activities of the investee without holding the majority of the voting rights. In determining whether de facto control exists the Company considers all relevant facts and circumstances, including: The size of the Company’s voting rights relative to both the size and dispersion of other parties who hold voting rights. Substantive potential voting rights held by the Company and by other parties. Other contractual arrangements. Historic patterns in voting attendance. The consolidated financial information presents the results of the Company and its subsidiaries (the Group) as if they formed a single entity. Intercompany transactions and balances between Group companies are therefore eliminated in full. The consolidated financial information incorporates the results of business combinations using the acquisition method. In the statement of financial position, the acquiree’s identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of the acquired operations are included in the consolidated statement of comprehensive income from the date on which control is obtained. They are deconsolidated from the date on which control ceases. XPS Pensions Group Annual Report 2019 85 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 1 Accounting policies continued Property, plant and equipment Property, plant and equipment are stated at historic cost less accumulated depreciation. For items acquired as part of a business combination, cost comprises the deemed fair value of those items at the date of acquisition. Depreciation on those items is charged over their estimated remaining useful lives from that date. Depreciation is charged to profit and loss in the statement of comprehensive income on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Estimated useful lives are as follows: Office equipment Leasehold improvements Fixtures and fittings 3 to 10 years 5 years 3 to 10 years Going concern Accounting standards require the Directors to consider the appropriateness of the going concern basis when preparing the Financial Statements. The Directors have taken notice of the Financial Reporting Council guidance ‘Guidance on the going concern basis of accounting and reporting on solvency and liquidity risks’ which requires the reasons for this decision to be explained. The Directors have prepared cash flow forecasts for a period including 12 months from the date of approval of these Financial Statements which show that during that period the Group is expected to generate sufficient cash from its operations to settle its liabilities as they fall due without the requirement for additional borrowings. Therefore the Directors conclude that the Group has adequate resources to continue in operational existence for the foreseeable future and they continue to adopt the going concern basis of accounting in preparing these annual financial statements. Intangible assets and goodwill Goodwill represents amounts arising on acquisition, being the difference between the cost of the acquisition and the net fair value of the identifiable assets and liabilities acquired on a business combination. Identifiable intangibles are those which can be sold separately or which arise from legal rights regardless of whether those rights are separable. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units for the purposes of impairment testing and is not amortised. It is tested annually for impairment. Externally acquired intangible assets are stated at cost less accumulated amortisation and impairment losses. Acquired software is valued based on replacement cost valuations where identifiable or at cost less accumulated amortisation and impairment. Internally produced software is valued at cost less accumulated amortisation and impairment. Customer relationships are valued based on the net present value of the excess earnings generated by the revenue streams over their estimated useful lives. Brands valuation is based on net present value of estimated royalty returns. 86 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements Amortisation is charged to profit and loss in the statement of comprehensive income over the estimated useful lives of intangible assets unless such lives are indefinite. Intangible assets with an indefinite useful life, such as goodwill, are systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date they are available for use. Estimated useful lives are as follows: Goodwill Customer relationships* Brands Software Indefinite life 10 years, reducing balance method 10 years, straight-line method 3 to 4 years, straight-line method * Except for Pensions and investment customer relationships acquired as part of the Punter Southall acquisition, which have an estimated useful life of 20 years, on a reducing balance basis. Contingent consideration Contingent consideration is included in cost at its acquisition date fair value and is classified as a financial liability, remeasured at fair value subsequently through profit or loss. Contingent consideration classified as equity is not remeasured. Impairment of non-financial assets Assets that have an indefinite useful life, for example goodwill or intangible assets not ready for use, are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Financial assets The Group classifies its financial assets into one of the categories discussed below, depending on the purpose for which the asset was acquired. Amortised cost Amortised cost includes non-derivative financial assets where they are held within a business model whose objective is to hold the financial asset in order to collect contractual cash flows and those contractual terms give rise to cash flows on specified dates that are solely payments of principal and interest on the principal amount outstanding. These assets are included in non-current assets if their maturity is greater than 12 months. Trade receivables are stated initially at fair value then measured at amortised cost less provisions for impairment. The Group applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision. The expected loss rates are based on the Group’s historical credit losses experienced over the three-year period prior to year end. The historical loss rates are then adjusted for current and forward- looking information on macroeconomic factors affecting the Group’s customers. Any impairment required is recorded in the statement of comprehensive income within administrative expenses. Cash and cash equivalents comprise cash balances and call deposits. Restricted cash is cash which the Group is not entitled to receive, withdraw, transfer or otherwise deal with the Deposit, save as expressly permitted by the Blocked Account Agreement during the Security Period. The Security Period is the period beginning on the date of the Deed and ending on the date on which the Beneficiary is satisfied that the Secured Liabilities have been irrevocably and unconditionally paid and discharged in full and all agreements which might give rise to Secured Liabilities have terminated. The restricted cash has been included in non-current assets as it is expected that the cash will remain in the blocked account for more than 12 months after the end of the reporting period. XPS Pensions Group Annual Report 2019 87 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 1 Accounting policies continued Financial liabilities The Group classifies its financial liabilities into one of two categories, depending on the purpose for which the liability was acquired. The Group’s accounting policy for each category is as follows: Fair value through profit or loss This category comprises contingent consideration. The contingent consideration is carried in the consolidated statement of financial position at fair value with changes in fair value recognised in the consolidated statement of comprehensive income. Other financial liabilities Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the statement of comprehensive income over the period of the borrowings on an effective interest basis. When borrowings are extinguished, any difference between the cash paid and the carrying value is recognised in the statement of comprehensive income. Trade payables and other short-term monetary liabilities represent liabilities for goods and services received by the Group prior to the end of the financial year which are unpaid. The amounts within trade payables are unsecured. They are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method. Provisions A provision is recognised in the statement of financial position when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected, risk adjusted, future cash flows at a pre-tax risk-free rate. Dilapidations provisions relate to the estimated cost to put leased premises back to the required condition expected under the terms of the lease. These include provisions for wear and tear along with provisions where leasehold improvements have been made that would require reinstatement back to the original status on exit. These are uncertain in timing as leases may be terminated early or extended. To the extent that exits of premises are expected within 12 months of the end of the year they are shown as current. Professional indemnity provisions relate to complaints against the Group. The amount provided is based on management’s best estimate of the likely liability and is capped to the excess on the Group’s professional indemnity insurance on a case by case basis where covered and settled on a net basis. Social security costs provisions represent estimates of the Group’s national insurance contributions liability on the cost of the Group’s Performance Share Plan. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Retirement benefits: Defined contribution schemes Contributions to defined contribution pension schemes are charged to the consolidated statement of comprehensive income in the year to which they relate. Employee Benefit Trust (EBT) As the Group is deemed to have control of its EBT, it is treated as a subsidiary and consolidated for the purposes of the Consolidated Financial Statements. The EBT’s investment in the Group’s shares is deducted from equity in the consolidated statement of financial position as if it were treasury shares. Consideration paid (or received) for the purchase (or sale) of these shares is recognised directly in equity. The cost of shares held is presented as a separate reserve (the ‘investment in own shares’). Any excess of the consideration received on the sale of these shares over the weighted average cost of the shares sold is credited to retained earnings. The equity-settled share-based payment expense represents the amount of share awards made by the Employee Benefit Trust on behalf of the Company as instructed by the Company. EBT equity-settled awards, which vest immediately on issue, are measured at the fair value of the shares issued on the date of the award, representing the bid price of the shares, the share-based payment expense is charged to the consolidated statement of comprehensive income. 88 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements Dividends Dividends are recognised when they become legally payable. In the case of interim dividends to equity shareholders, this is when declared by the Directors and in the case of final dividends, this is when approved by the shareholders at the Annual General Meeting. Revenue Revenue, which excludes value added tax, represents the value of employee benefit consultancy and related business services supplied. Revenue is derived mainly from sales made in the United Kingdom. Revenue derived from outside the United Kingdom is immaterial. Amounts recognised as revenue but not yet billed are reflected in the statement of financial position as accrued income. All performance obligations have been satisfied. Amounts billed in advance of work performed are deferred in the statement of financial position as deferred income. Revenue in respect of time and materials contracts is recognised as the services are performed. For fixed fee contract work, the performance obligations under the contract are identified. A transaction price for each performance obligation is determined, which is based on the amount of time each performance obligation is expected to require. Revenue is then recognised as the performance obligations of the contract are met. Commission income is recognised on renewal of scheme membership, as the performance obligations are met at the time the contract is won or renewed with the insurer. Expenses Exceptional costs Exceptional costs are items which due to their size, incidence and non-recurring nature have been classified separately in order to draw them to the attention of the reader of the Financial Statements and, in management’s judgement, to show more accurately the underlying profits of the Group. Such items are included within the statement of comprehensive income caption to which they relate, and are separately disclosed in the notes to the Financial Statements. Operating lease payments Payments made under operating leases are recognised in profit and loss in the statement of comprehensive income on a straight-line basis over the term of the lease. Lease incentives received are recognised in the statement of comprehensive income as an integral part of the total lease expense and are spread over the term of the lease. Finance lease payments Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Foreign exchange policy Transactions entered into by Group entities in a currency other than the functional currency (GBP) are recorded at the rates ruling when the transactions occur. Any exchange rate differences are recognised immediately through the statement of comprehensive income. Net finance costs Net finance costs comprise interest payable, interest receivable on own funds, foreign exchange gains and losses and costs directly related to the raising of loans. Interest income and interest payable is recognised in profit or loss as it accrues, using the effective interest method. XPS Pensions Group Annual Report 2019 89 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 1 Accounting policies continued Share-based payment costs – Performance Share Plan The Group operates an equity-settled, share-based compensation plan, under which the entity receives services from the executive Directors and key management personnel in consideration for equity instruments of the Group. The fair value of the services received in exchange for the grant of the awards is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the awards granted: Including any market performance conditions (for example, an entity’s share price); and Including the impact of any service and non-market performance vesting conditions (for example, profitability and remaining a director for a specified period of time). See the Employee Benefit Trust (EBT) policy above for information on the Employee Benefit Trust element of share-based payment costs. Discontinued operations The results of operations disposed of during the year are included in the consolidated statement of comprehensive income up to the date of disposal. A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations or is a subsidiary acquired exclusively with a view to resale, that has been disposed of, has been abandoned, or that meets the criteria to be classified as held for sale. Discontinued operations are presented in the consolidated statement of comprehensive income as a single line which comprises the post-tax profit or loss of the discontinued operation along with the post-tax gain or loss recognised on the remeasurement to fair value less costs to sell or on disposal of the assets or disposal groups constituting discontinued operations. Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in profit and loss in the statement of comprehensive income except to the extent that it relates to items recognised in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. 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 enacted or substantively enacted at the balance sheet date. 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. Changes in accounting policies – New standards, interpretations, and amendments effective from 1 April 2018 IFRS 9 Financial Instruments is a new standard which has been adopted in the annual financial statements for the year ended 31 March 2019, however its impact has not been material. IFRS 9 has replaced IAS 39 Financial Instruments: Recognition and Measurement. Under IFRS 9 the Group applied the expected credit loss model when calculating impairment losses on its financial assets measured at amortised costs (such as trade and other receivables). This resulted in greater judgement due to the need to factor in forward-looking information when estimating the appropriate amount of provisions. In applying IFRS 9 the Group considered the probability of a default occurring over the contractual life of its trade receivables and contracts asset balances on initial recognition of those assets. 90 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements IFRS 15 Revenue from Contracts with Customers is a new standard which impacts the Group, and has been adopted in the annual financial statements for the year ended 31 March 2019. It has given rise to changes in the Group’s accounting policies. IFRS 15 has replaced IAS 18 Revenue and IAS 11 Construction Contracts as well as various Interpretations previously issued by the IFRS Interpretations Committee. It has impacted the Group in the following ways: The Group has a number of customers who are on a fixed price contract. This contract covers a number of services, most of which are ongoing and therefore require no adjustment. These are recognised monthly at the time of billing, as the benefit the customer receives as the work is done is largely in line with the amount billed each month. For some fixed price customers, an element of the fixed fee includes the triennial valuation of their Defined Benefit pension schemes which is a distinct performance obligation. Under IAS 18 Revenue, the Group had been recognising the revenue as it was billed, on a monthly basis over the term of the contract (3 years). Under IFRS 15, the Group has assessed these contracts and has determined that an adjustment is needed to recognise the revenue for the performance obligation relating to the triennial valuations in the specific periods that the work is undertaken. For the contracts where an adjustment is required, the Group has identified the element of the fixed fee that is attributable to the triennial valuation. This has been calculated based on the expected time required to perform a triennial valuation for each specific customer. To ensure that the revenue is allocated to the relevant period, the Group has undertaken a review of the work performed, and after analysing timesheet data has determined the timespan for the triennial valuation work for the two teams impacted (Punter Southall and Xafinity). The work on the triennial valuations was broken down into separate stages, and a % applied to each stage, based on the proportion of total effort. The Group chose to adopt the standard on a fully retrospective basis, enabling it to take advantage of the following transitional provisions: Completed contracts have not been restated. Completed contracts are those contracts which: began and ended within the same annual reporting period; or were completed by 31 March 2017. When identifying satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to performance obligations, the Group has considered only the aggregate effect of all contract modifications made before 1 April 2017. The impact of adopting IFRS 15 on a fully retrospective basis was to increase net assets at 1 April 2017 by £30,000 as shown in the Statement of Changes in Equity for the year ending 31 March 2018. Net profit for the 12 months to 31 March 2018 decreased by £227,000. This is analysed as follows: Decrease to revenue of £279,000; and Decrease to tax expense of £52,000. Had the Group continued to report in accordance with IAS 18 Revenue for the year ended 31 March 2019, it would have reported the following amounts in these financial statements: Revenue Tax expense Profit for the period Contract assets/Accrued income (included in trade and other receivables) Contract liabilities/Deferred income (included in trade and other payables) Total equity As reported under IFRS £'000 110,313 (1,262) 11,508 11,630 (2,199) 156,403 As would have been reported £'000 109,915 (1,187) 11,186 10,671 (1,429) 156,214 Effect £’000 398 (76) 322 959 (770) 189 XPS Pensions Group Annual Report 2019 91 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 1 Accounting policies continued The main reasons for the differences are: The identification of additional performance obligations in certain fixed price contracts and the recognition of the revenue on some of those performance obligations at a point in time rather than over time under IAS 18. The related changes in the tax expense arising from the above adjustment. The cumulative impact on the balance sheet as at 31 March 2018 is: Current assets: Trade and other receivables (Contract assets) Current liabilities: Trade and other payables (Contract liabilities) Current income tax liabilities Equity Accumulated deficit 31 March 2018 as previously reported £'000 31 March 2018 restated £'000 Effect £’000 27,964 798 28,762 16,641 1,803 1,041 (46) 17,682 1,757 (11,531) (197) (11,728) Other new and amended standards and Interpretations issued by the IASB that apply for the first time in these annual financial statements do not impact the Group as they are either not relevant to the Group’s activities or require accounting which is consistent with the Group’s current accounting policies. New standards and interpretations not yet adopted A number of new standards, amendments to standards, and interpretations are not effective for 2019, and therefore have not been applied in preparing the XPS Pension Group’s Financial Statements. IFRS 16 Leases IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees – leases of ‘low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. IFRS 16 is effective for annual periods beginning on or after 1 January 2019, subject to endorsement by the European Union. Early application is permitted, but not before an entity applies IFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard’s transition provisions permit certain reliefs. The Group has entered into a number of long-term leases in respect of land and buildings. The Group has assessed the leases under IFRS 16 and expects an impact as the right-of-use assets and lease liabilities will come onto the consolidated statement of financial position for the first time in respect of its current operating leases. The Group expects that IFRS 16 will have an impact on the financial statements of the Group, as the long-term rental in respect of land and buildings will no longer be charged through administrative expenses – instead the right-of-use asset will be capitalised, and depreciated over the life of the lease. At the same time, an interest expense will also be recognised to unwind the discount on the lease liability. The overall impact on profit after tax is not expected to be significant, however the Group’s overall administrative expenses will fall, offset with an increase in finance costs. To see the volume of operating leases please see note 33 to the Group’s consolidated financial statements for the year ended 31 March 2019 for more information. 92 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements XPS Pensions Group has reviewed the impact of IFRS 16 and expects this to increase expense in the year of initial application by approximately £100,000. This increase in cost is due to the interest charge calculated on the leases being higher in earlier years, as the discount unwinds. The other standards, interpretations and amendments issued by the IASB (of which some still are subject to endorsement by the European Union), but not yet effective are not expected to have a material impact on the Group’s consolidated financial statements. Critical accounting estimates and judgements The Group makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The estimates and underlying assumptions are reviewed on an ongoing basis, with revisions to accounting estimates applied prospectively. In the future, actual experience may differ from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Fair values of intangible assets Goodwill and intangibles are tested for impairment on an annual basis at the year end and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the cash-generating unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. Application of the goodwill impairment test requires judgment, including the identification of cash-generating units, assignment of assets and liabilities to such units, assignment of goodwill to such units and determination of the fair value of a unit. The fair value of each cash-generating unit or asset is estimated using the income approach, on a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the business, estimation of the useful life over which cash flows will occur and determination of our weighted average cost of capital. Revenue recognition Revenue is recognised once the performance obligations of the contract with the customer have been met, in line with IFRS 15. This may be at a point in time or over time according to when control passes to the customer. Dependent upon the income stream and nature of the engagement, revenue is recognised on either a time costs incurred, fixed fee or rateably over the period of providing the service basis. Revenue is billed on a monthly, quarterly or, in the case of SSAS and SIPP services, on an annual basis. Services may be billed in arrears, as in the case of pensions advisory work, or in advance as is the case with SSAS and SIPP revenues. As a result of such arrangements, critical accounting judgements are made in determining the timing of revenue recognition. These relate to identifying individual performance obligations and then allocating an appropriate amount of revenue to those obligations which largely depends on the time incurred in providing the services. Management apply judgement in assessing timesheet data to ensure that revenue is allocated proportionally to effort. There are significant judgements involved in determining the level of performance obligations met as part of the triennial valuation work. These have been recognised on the basis of work complete through the 15-month valuation process. XPS Pensions Group Annual Report 2019 93 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 1 Accounting policies continued Deferred tax Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised based upon the likely timing and the level of future taxable profits together with future tax planning strategies. Throughout the current and prior periods the Directors consider that the IAS 12 recognition criteria have been satisfied. Provisions Dilapidations provisions have been made for properties which the Group currently lease based upon the cost to make good the property in accordance with lease terms where applicable. Provisions are made for claims in respect of complaints against the Group. The amount provided is based on management’s best estimate of the likely liability. The cost to the business is capped to the excess on the Group’s professional indemnity insurance in respect of each individual claim. Useful lives of intangible assets Intangible assets are amortised over their estimated useful lives with the charge recorded in administrative expenses. Useful lives are based on management’s estimates of the period that the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to estimates can result in significant variations in the carrying value and amounts charged to the consolidated income statement in specific periods. Business combinations The Directors determine and allocate the purchase price of an acquired business to the assets acquired and liabilities assumed as of the business combination date. The purchase price allocation process requires the use of significant estimates and assumptions, including the estimated fair value of the acquired intangible assets. While the Directors use their best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the date of acquisition, our estimates and assumptions are inherently uncertain and subject to refinement. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to: Future expected cash flows from customer relationships and brands; and Discount rates. Exceptional costs Exceptional costs are recognised to the extent that they meet the definition outlined in the accounting policy above. This requires a certain amount of judgement that is applied consistently by management. Contingent consideration Contingent consideration is recognised at its acquisition date fair value, and is classified as a financial liability. At each reporting period the liability is remeasured at fair value through profit or loss. This remeasurement is based on movement in the Group share price, as well as management’s expectation of future performance. Therefore, judgement is necessary in assessing the amount of consideration that will be payable in the future. As a result of the inherent uncertainty in this evaluation process, actual gains or losses may be different from the originally estimated consideration. Fair value measurement A number of assets and liabilities included in the Group’s Financial Statements require measurement at, and/or disclosure of, fair value. The fair value measurement of the Group’s financial and non-financial assets and liabilities utilises market observable inputs and data as far as possible. Inputs used in determining fair value measurements are categorised into different levels based on how observable the inputs used in the valuation technique utilised are (the ‘fair value hierarchy’): Level 1: Quoted prices in active markets for identical items (unadjusted). Level 2: Observable direct or indirect inputs other than Level 1 inputs. Level 3: Unobservable inputs (i.e. not derived from market data). 94 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements The classification of an item into the above levels is based on the lowest level of the inputs used that has a significant effect on the fair value measurement of the item. Transfers of items between levels are recognised in the period they occur. Share-based payments are measured at fair value to the extent that the options are initially measured at fair value on grant. 2 Financial risk management The XPS Pensions Group’s operations expose it to a variety of financial risks including credit risk, liquidity risk, market risk and the effects of changes in interest rates on debt. The Group has in place a risk management programme that seeks to limit the adverse effects on the financial performance of the Group by monitoring levels of debt finance and the related finance costs. The Group’s principal financial instruments comprise sterling cash, bank deposits and bank loans together with trade receivables and trade payables that arise directly from its operations. Risk management policies are established for the XPS Pensions Group of companies and the Group Audit Committee oversees how management monitors compliance with these policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty, including brokers, to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers. Due to the nature of the business the majority of the trade receivables are with trustees of pension schemes and large institutions and losses have occurred infrequently over previous years. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that the Group will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions. Market risk Market risk is the risk that changes in market prices such as foreign exchange rates and equity prices will affect the Group’s income or the value of its financial instruments. Interest rate risks are discussed in the cash flow interest rate risk below. The Group’s financial instruments are currently in sterling, hence foreign exchange movements do not have a material effect on the Group’s performance. The Group is exposed to movements in interest rate in its net finance costs and also in a small element of its operating revenue. The RCF facilities are linked to LIBOR. The Group earns income in relation to client and shareholder deposits as well as interest income on its own deposits. The Group does not hold its own position in trading securities, being involved only in arranging transactions on behalf of its clients. The Group does not engage in holding speculative financial instruments or derivatives. Further quantitative disclosures are included throughout these Consolidated Financial Statements. Cash flow interest rate risk The XPS Pensions Group is exposed to cash flow interest rate risk in two main respects. Firstly corporate and client bank deposits, which earn interest at a variable rate, although not at a material level. Secondly, interest expense arising on bank facilities at a margin over LIBOR. XPS Pensions Group Annual Report 2019 95 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 3 Capital risk management The Group is focused on delivering value for its shareholders whilst ensuring the Group is able to continue effectively as a going concern. Value adding opportunities to grow the business are continually assessed, although strict and careful criteria are applied. The policies for managing capital are to increase shareholder value by maximising profits and cash. The policy is to set budgets and forecasts in the short and medium term that the Group feels are achievable. The process for managing capital are regular reviews of financial data to ensure that the Group is tracking the targets set and to reforecast as necessary based on the most up-to-date information. This then contributes to the XPS Pensions Group’s forecast which ensures future covenant test points are met. The Group continues to meet these test points and they have been achieved over the last year. Due to the nature of some of the services provided, 3 subsidiaries within the Group were regulated by the Financial Conduct Authority (FCA) during the year. They are required to hold a minimum level of capital and this is monitored on a monthly basis. Formal compliance returns are submitted to the FCA in line with their reporting requirements. From 1 April 2019, XPS Pensions Consulting Limited de-registered from the FCA with the regulated activity going through another regulated subsidiary from that date. 4 Other operating income Other operating income arose from the revaluation of the share-based consideration for the Punter Southall acquisition. Since this is not considered to be part of the main revenue generating activities of the Group, the Group presents this income separately from revenue. Fair value adjustment of contingently issuable ordinary shares (note 29) Year ended 31 March 2019 £'000 Year ended 31 March 2018 £'000 6,459 472 5 Auditors’ remuneration During the period the following services were obtained from the Group’s auditor at a cost detailed below: Audit services Fees payable in respect of the Parent Company and consolidated accounts Fees payable in respect of the subsidiary accounts Audit related services Non-audit services Tax advisory Other assurance services Total Year ended 31 March 2019 £'000 Year ended 31 March 2018 £'000 100 63 163 42 – 47 47 252 98 74 172 26 2 28 30 228 96 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements 6 Adjusted operating profit and adjusted profit after tax from continuing operations Profit from operating activities Adjustments to administrative expenses Exceptional costs Share-based payment cost Amortisation of acquired intangible assets Other operating income Adjusted operating profit Finance income Finance costs Add back unamortised loan arrangement fees written off as part of refinancing exercises Add back unwinding of discount on contingent consideration Adjusted profit before tax, amortisation of acquired intangible assets, share- based payment costs, fair value adjustment of contingent consideration and exceptional costs Tax Adjustments to tax Tax on exceptional costs Tax on share-based payment costs Tax on written off loan arrangement fees Deferred tax related to acquired intangibles Adjusted profit after tax from continuing operations Year ended 31 March 2019 £’000 Note Year ended 31 March Restated 2018 £’000 12,913 4,716 8 14 19 4 15 15 15 15 20 3,858 3,987 11,730 19,575 (6,459) 26,029 17 (1,564) – (196) 4,373 3,614 4,773 12,760 (472) 17,004 23 (1,473) 220 195 24,286 15,969 (995) (1,049) (674) (456) – (2,100) (427) (651) (42) (834) 20,061 12,966 Earnings have been adjusted for the tax impact of the adjusting items set out in note 6 by applying the statutory tax rate of 19%. Adjusted profit after tax from continuing operations is a key measure used by the Board when reviewing the performance of the Group. It excludes all significant non-cash transactions, and aids understanding of the underlying performance of the Group. XPS Pensions Group Annual Report 2019 97 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 7 Business combinations during the period On 31 October 2018, the Group acquired the trade and assets of Kier Pensions Unit from Kier Business Services Limited for a total consideration of £3.5m, which comprises cash on completion of £3.2m, and deferred cash consideration of £0.3m, paid in January 2019, once certain conditions had been met. The Kier Pensions Unit provides pension administration services in the public sector, including to around half of the police forces in the UK and to Middlesbrough Borough Council. It also provides services to a small number of private sector schemes. The transaction is intended to provide added impetus to the continued growth of the administration business. The deal provides the Group with a significant presence in the market for public sector third-party pension administration, complementing its strong presence in the market for private sector pension schemes. Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill are as follows: Customer relationships Deferred tax liability Total net assets Fair value of consideration paid Cash Total consideration Goodwill (note 19) Book value £’000 Adjustment £’000 Fair value £’000 – – – 3,105 (528) 2,577 3,105 (528) 2,577 £'000 3,500 3,500 923 The main factors leading to the recognition of goodwill are the presence of certain intangible assets, such as the assembled workforce of the acquired entities and the expected growth in the business generated by new customers, which do not qualify for separate recognition. The goodwill arising on the Kier Pensions Unit acquisition is not deductible for tax purposes. Since the acquisition date, the Kier Pensions Unit has contributed £2,211,000 to Group revenues and £733,000 to Group profit before tax. If the acquisition had occurred on 1 April 2018, Group revenue would have been £113,136,686 and Group profit before tax would have been £13,707,235. Acquisition expenses Costs relating to the acquisition of the Kier Pensions Unit totalled £225,000 and are included within exceptional costs. 98 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements 8 Exceptional costs Acquisition-related costs Disposal related costs (note 17) Restructuring costs Exceptional bonus settled from EBT in cash Total Year ended 31 March 2019 £’000 Year ended 31 March 2018 £’000 587 137 3,134 – 3,858 3,683 – 228 462 4,373 The restructuring costs above have arisen from integration activities relating to the Punter Southall acquisition in January 2018. 9 Operating segments In accordance with IFRS 8 ‘Operating Segments’, an operating segment is defined as a business activity whose operating results are reviewed by the chief operating decision maker (CODM) and for which discrete information is available. The Group’s CODM is the Board of Directors. The Group has one operating segment, and one reporting segment due to the nature of services provided across the whole business being the same, pension and employee benefit solutions. The Group’s revenues, costs, assets, liabilities and cash flows are therefore totally attributable to this reporting segment. The table below shows the disaggregation of the Group’s revenue, by product line. Pensions Administration Investment National Pension Trust SSAS and SIPP Total – Continuing operations Discontinued operations Total Year ended 31 March 2019 £’000 Year ended 31 March 2018 Restated £’000 56,735 37,492 8,121 1,444 6,098 109,890 423 110,313 37,689 13,673 4,921 957 5,427 62,667 3,091 65,758 XPS Pensions Group Annual Report 2019 99 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 10 Administrative expenses Included in the operating profit/(loss) for the year are the following: Expenses by nature Staff costs (note 11) Depreciation and amortisation Operating lease costs Premises costs (excluding rent under operating leases) Exceptional costs (note 8) Other general business costs Total Year ended 31 March 2019 £'000 Year ended 31 March 2018 Restated £'000 59,235 13,143 2,248 1,981 3,858 22,971 35,118 5,876 870 1,374 4,373 10,812 103,436 58,423 11 Staff numbers and costs The average number of people employed by the Group (including Directors) during the year, analysed by category, was as follows: Operational Administration Sales and marketing The aggregate payroll costs of these persons were as follows: Wages and salaries Social security contributions and similar taxes Defined contribution pension cost Other long-term employee benefits Share-based payment costs (note 14) Year ended 31 March 2019 Number of employees Year ended 31 March 2018 Number of employees 976 42 21 1,039 508 31 16 555 Year ended 31 March 2019 £'000 Year ended 31 March 2018 £'000 47,110 4,996 2,543 1,374 3,212 59,235 28,847 2,962 1,333 783 1,494 35,419 12 Employee benefits Defined contribution plan The Company operates a defined contribution pension plan. Outstanding contributions at the year end were £253,000 (2018: £418,000). 100 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements 13 Directors’ emoluments The Directors were remunerated for their services by the Group and their emoluments are disclosed below. Aggregate emoluments Company contributions to money purchase pension plans At 31 March 2019, retirement benefits are accruing to the following number of Directors under: Money purchase schemes The emoluments of the highest paid Director, including benefits and share-based payments Year ended 31 March 2019 £'000 Year ended 31 March 2018 £'000 1,971 30 2,001 2,271 30 2,301 Year ended 31 March 2019 Number of Directors Year ended 31 March 2018 Number of Directors 3 3 Year ended 31 March 2019 £'000 Year ended 31 March 2018 £'000 363 546 14 Share-based payment costs The Group operates a number of equity-settled share-based remuneration schemes for employees: Performance Share Plans (PSP) for executive directors and other key senior personnel. All employees are also eligible to participate in the Save as You Earn (SAYE) scheme, the only vesting condition being that the individual remains an employee of the Group over the savings period. The Executive PSP award expense relates to annual awards over shares that vest subject to certain, stretching performance conditions, measured over a three-year period. Maximum ‘normal’ grant level is 150% of salary, capped at a maximum of 200% in exceptional circumstances. Malus and clawback provisions apply. The fair value of awards granted during the year was determined using certain assumptions around vesting. More information about the Executive PSP can be found in the Remuneration Report section of this Annual Report. There is a further PSP for key senior staff which relates to annual awards over shares that vest subject to certain performance conditions, measured over a three-year period. The fair value of awards granted during the year was determined using certain assumptions around vesting. Performance Share Plan awards and SAYE scheme Social security cost on Performance Share Plan awards and SAYE scheme Share-based payments Accrued bonus to be settled from EBT Social security cost on accrued bonus to be settled from EBT Total Year ended 31 March 2019 £'000 Year ended 31 March 2018 £'000 2,859 246 3,105 775 107 3,987 1,051 151 1,202 2,120 292 3,614 XPS Pensions Group Annual Report 2019 101 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 14 Share-based payment costs continued The fair value of PSP options granted during the period were calculated using the Monte Carlo valuation method. The inputs to the model were as follows: Weighted average exercise price of options issued during the period (pence) Expected volatility (%) Expected life beyond vesting date (years) Risk-free rate (%) Dividend yield (%) Year ended 31 March 2019 – 25% 3 0.79% – The fair value of SAYE options granted during the period were calculated using the Black-Scholes valuation method. The inputs to the model were as follows: Weighted average exercise price of options issued during the period (pence) Expected volatility (%) Expected life beyond vesting date (years) Risk-free rate (%) Dividend yield (%) Year ended 31 March 2019 147.2 25% 3.35 0.92% 3.6% As at 31 March 2019 the following options had been granted and remained outstanding in respect of the Group’s ordinary shares of 0.05p each under the Group’s PSP and SAYE Option schemes: Share options granted Price granted (p) 447,840 447,840 1,722,711 806,574 1,533,722 146,835 31,349 31,349 120,590 107,361 459,216 459,216 1,578,232 1,015,050 16,073 16,072 10,278 55,238 9,005,546 90 139 163 37.6 163 187 90 139 163 163 87 172 183 35.2 87 172 187 183 Scheme Executive PSP Executive PSP Staff PSP SAYE Staff PSP Staff PSP Executive PSP Executive PSP Staff PSP Staff PSP Executive PSP Executive PSP Staff PSP SAYE Executive PSP Executive PSP Staff PSP Staff PSP 102 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements Executive PSP Staff PSP SAYE Outstanding at 1 April Granted during the year Outstanding at 31 March Outstanding at 1 April Granted during the year Forfeited during the year Exercised during the year Outstanding at 31 March Outstanding at 1 April Granted during the year Forfeited during the year Exercised during the year Outstanding at 31 March 2019 Weighted average Exercise price (pence) 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 130.20 147.20 133.74 130.20 2019 Number 927,029 925,354 1,852,383 3,637,390 1,671,346 (132,037) (23,461) 5,153,238 910,386 1,039,746 (118,679) (9,829) 2018 Weighted average Exercise price (pence) 0.05 0.05 0.05 – 0.05 – – 0.05 – 130.2 130.2 2018 Number 895,680 31,349 927,029 – 3,637,390 – – 3,637,390 – 929,738 (19,352) 139.67 1,821,624 130.2 910,386 The exercise price of options outstanding at 31 March 2019 ranged between £0.0005 (i.e. the nominal value of an ordinary share) in the case of the PSPs and £1.472 in the case of the SAYE scheme (2018: £0.0005 to £1.302). Their weighted average contractual life was 3 years (2018: 3 years). Of the total number of options outstanding at 31 March 2019, 59,954 (2018: nil) had vested and were exercisable. The weighted average fair value of each option granted during the year was £1.26 (2018 £1.34). 15 Finance income and expense Interest income on bank deposits Finance income Interest expense on bank loans Other costs of borrowing Amortisation of loan arrangement fees written off as part of refinancing exercises Interest on finance leases Other finance expense Unwinding of discount on contingent consideration Finance expenses Year ended 31 March 2019 £’000 Year ended 31 March 2018 £’000 17 17 1,422 286 – 7 45 (196) 1,564 23 23 802 192 220 12 52 195 1,473 Other costs of borrowing largely represent the amortisation expense of capitalised loan arrangement fees on the Group’s bank debt. XPS Pensions Group Annual Report 2019 103 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 16 Income tax expense Recognised in the statement of comprehensive income Current tax expense Current year Adjustment in respect of prior year Total current tax expense Deferred tax credit Origination and reversal of temporary differences Total income tax expense Continuing and discontinued operations: Income tax expense from continuing operations Income tax expense from discontinued operation (note 17) Profit for the year Total tax expense Profit before income tax Tax using the UK corporation tax rate of 19% (2018: 19%) Non-deductible expenses Gain on disposal not allowable Gain on revaluation not allowable Fixed asset differences Adjustment in respect of prior periods Amounts (charged)/credited directly to equity or otherwise transferred Excess relief on exercise of share options Effect of tax rate change Total tax expense Year ended 31 March 2019 £'000 Year ended 31 March 2018 Restated £'000 3,942 (366) 3,576 (2,314) 1,262 2,851 16 2,867 (1,531) 1,336 Year ended 31 March 2019 £'000 Year ended 31 March 2018 Restated £'000 995 267 1,262 1,049 287 1,336 Year ended 31 March 2019 £'000 Year ended 31 March 2018 Restated £'000 11,508 1,262 12,770 2,426 703 – (1,227) 17 (366) (148) (134) (9) 1,262 11,601 1,336 12,937 2,458 378 (1,550) – 17 16 24 – (7) 1,336 The standard rate of Corporation tax in the UK was 19% (2018: 19%). Deferred tax assets and liabilities have been measured at the rate they are expected to unwind at, using a rate substantively enacted at 31 March 2019, which is not lower than 17% (2018: 17%). Deferred tax not recognised relates to finance expense losses in a prior year and their future recoverability is uncertain. At 31 March 2019 the total unrecognised deferred tax asset in respect of these losses was approximately £1.2m (2018: £1.2m). 104 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements 17 Discontinued Operations On 11 January 2018, the Group sold its 100% interest in HR Trustees Limited, as part of a larger deal with the Punter Southall Group, for an agreed consideration of £8.5m. A further amount of consideration was agreed in respect of working capital adjustments. On 30 September 2018, the Group disposed of its Healthcare business, which is the only operation presented as discontinued in the year to 31 March 2019. Result of discontinued operations Cash consideration received Deferred cash consideration Other consideration received Total consideration received Net assets disposed (other than cash) Trade and other receivables Trade and other payables Pre-tax gain on disposal of discontinued operation The profit from disposal of discontinued operations was determined as follows: Result of discontinued operations Revenue Expenses Profit before tax Gain from selling discontinued operations Tax expense Profit for the year Earnings per share from discontinued operations Basic earnings per share Diluted earnings per share Statement of cash flows The statement of cash flows includes the following amounts relating to discontinued operations: Operating activities Net cash from discontinued operations Year ended 31 March 2019 £'000 Year ended 31 March 2018 £'000 550 614 – 1,164 – – – 1,164 262 – 8,480 8,742 (600) 18 (582) 8,160 Year ended 31 March 2019 £’000 Year ended 31 March 2018 Restated £’000 423 (183) 240 1,164 (267) 1,137 3,091 (1,580) 1,511 8,160 (287) 9,384 Year ended 31 March 2019 £ 0.01 0.01 Year ended 31 March 2018 Restated £ 0.06 0.06 Year ended 31 March 2019 £’000 323 323 Year ended 31 March 2018 Restated £’000 2,689 2,689 XPS Pensions Group Annual Report 2019 105 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 17 Discontinued Operations continued Adjusted profit before tax from discontinued operations: Profit and adjusted profit from operating activities in discontinued operations Adjusted profit before tax Tax Adjusted profit after tax 18 Property, plant and equipment Cost Balance at 1 April 2018 Additions Disposals Balance at 31 March 2019 Accumulated depreciation Balance at 1 April 2018 Depreciation charge for the year Disposals Balance at 31 March 2019 Net book value Balance at 1 April 2018 Balance at 31 March 2019 Cost Balance at 1 April 2017 Acquired through business combinations Additions Disposals Balance at 31 March 2018 Accumulated depreciation Balance at 1 April 2017 Depreciation charge for the year Disposals Balance at 31 March 2018 Net book value Balance at 1 April 2017 Balance at 31 March 2018 Year ended 31 March 2019 £’000 Year ended 31 March 2018 Restated £’000 240 240 (46) 194 1,511 1,511 (287) 1,224 Total £'000 2,614 1,928 (630) 3,912 1,597 841 (630) 1,808 1,017 2,104 Total £'000 2,558 11 241 (196) 2,614 1,216 577 (196) 1,597 1,342 1,017 Leasehold improvements £'000 Office equipment £'000 Fixtures and fittings £'000 1,060 558 (56) 1,562 705 284 (56) 933 355 629 633 1,184 (273) 1,544 317 374 (273) 418 316 1,126 921 186 (301) 806 575 183 (301) 457 346 349 Leasehold improvements £'000 Office equipment £'000 Fixtures and fittings £'000 1,028 – 34 (2) 1,060 498 209 (2) 705 530 355 636 – 190 (193) 633 324 186 (193) 317 312 316 894 11 17 (1) 921 394 182 (1) 575 500 346 The net book value of property, plant and equipment includes the following amounts held under finance lease: Office equipment: £252,000 (2018: £22,000). The depreciation charged in the year relating to these assets was £30,000 (2018: £20,000). 106 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements 19 Intangible assets Group Cost Balance at 1 April 2018 Acquired through business combinations Additions Disposals Reassessment of fair value of net assets Balance at 31 March 2019 Accumulated amortisation Balance at 1 April 2018 Amortisation for the year Disposals Balance at 31 March 2019 Net book value Balance at 1 April 2018 Balance at 31 March 2019 Cost Balance at 1 April 2017 Acquired through business combinations Additions Disposal Balance at 31 March 2018 Accumulated amortisation Balance at 1 April 2017 Amortisation for the year Disposals Balance at 31 March 2018 Net book value Balance at 1 April 2017 Balance at 31 March 2018 Goodwill £'000 Customer relationships £'000 115,585 923 – (101) 186 114,980 3,105 – (7,767) – 116,593 110,318 – – – – 21,565 6,852 (7,767) 20,650 115,585 93,415 116,593 89,668 Goodwill £'000 Customer relationships £'000 24,782 90,803 – – 49,898 65,082 – – 115,585 114,980 – – – – 24,782 115,585 17,447 4,118 – 21,565 32,451 93,415 Brands £'000 Software £'000 Total £'000 6,036 – – – – 6,036 913 4,878 – 5,791 5,123 245 2,248 – 715 (429) – 238,849 4,028 715 (8,297) 186 2,534 235,481 679 572 (429) 822 23,157 12,302 (8,196) 27,263 1,569 215,692 1,712 208,218 Brands £'000 Software £'000 Total £'000 628 5,408 – – 6,036 258 655 – 913 370 5,123 1,463 – 1,103 (318) 76,771 161,293 1,103 (318) 2,248 238,849 471 526 (318) 679 18,176 5,299 (318) 23,157 992 58,595 1,569 215,692 At 31 March 2019, the remaining amortisation period for customer relationships assets held at the start of the year was 5 years. The customer relationship asset acquired as part of the purchase of the Punter Southall Group of companies for the Actuarial CGU will be amortised over 20 years, and for the Administrative CGU over 10 years. As part of the Punter Southall acquisition in January 2018, the Group acquired the rights to use the Punter Southall brand for an agreed period (up to a maximum of two years). In the year to 31 March 2018, the intangible brand asset was amortised assuming a useful life of 2 years. During the year to 31 March 2019, the Group successfully rebranded all Punter Southall services. As a result, the Punter Southall brand intangible asset was fully amortised in the year. This resulted in an amortisation charge of £4.8m relating to the Punter Southall brand in the year (2018: £0.6m). Had the amortisation of the brand not been accelerated, the charge in the year would have been £2.8m, so the impact of the change in useful life has led to an increased amortisation charge in the year of £2m. Deferred tax relating to the intangible asset of £0.9m was credited to the accounts in the year (2018: £0.1m). XPS Pensions Group Annual Report 2019 107 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 19 Intangible assets continued The fair value of assets and liabilities taken into account in calculating goodwill at the date of acquisition has been reassessed by the Directors, as permitted under IFRS in the first year subsequent to the acquisition. In this regard, the requirement for dilapidations provisions in the Punter Southall acquisition has been considered, and on the basis that a liability did exist at the date of acquisition, this liability has been calculated and has been reflected in the provisions of the Group, with a corresponding adjustment of £186,389 to goodwill. As the adjustment is not considered to have a material impact on the Financial Statements, and this is not reflective of a change in accounting policy, the Directors consider it appropriate to reflect this as an adjustment to goodwill in the current year. Impairment test Goodwill represents the excess of the consideration over the fair value of the net assets acquired on the purchase of the subsidiary companies listed in note 38, as well as goodwill which has arisen on the purchase of trade and assets by the Group. In accordance with IFRS, this balance is not amortised and is subject to annual impairment reviews. A process of integrating the former Xafinity and Punter Southall businesses has been ongoing during the year and the goodwill impairment test was done during the year prior to the completion of this exercise. As a result, the carrying value of goodwill was assessed based on the three cash-generating units that were identified in the prior year. The Directors believed that this would be the best solution in a year of transition. The three CGUs to which goodwill has been allocated are: CGU 1 – Former Xafinity businesses CGU 2 – PS Actuarial CGU 3 – PS Admin The cash-generating unit at each year end was assessed on the basis of value in use using the following assumptions, which reflect past experience of the Group: Discount rate pre-tax Terminal value after period 8 Period on which detailed forecasts are based Growth rate during detailed forecast period (average) Growth rate applied beyond approved forecast period to year 8 CGU1 15% 2.0% 2019 CGU2 12% 2.0% CGU3 19% 2.0% CGU1 15% 2.0% 2018 CGU2 12% 2.0% CGU3 37% 2.0% 3 years 3 years 3 years 3 years 3 years 3 years 4.4% 6.0% 4.1% 12.5% 4.0% 8.0% 5.3% 6.0% 5.2% 4.4% 47.3% 4.4% The growth rate beyond the forecast period is based on a blend of average growth rates experienced by the Group and management’s assessment of industry and macro-economic outlooks. Such forecast rates have been accurate in the past, so the Directors believe they will be sufficiently representative of actual results. The impairment exercise demonstrated that there was significant headroom in all CGUs on this basis, but, given the ongoing integration exercise, the Directors decided to undertake an additional overall impairment test combining the CGUs above. This exercise demonstrated equally significant headroom so the Directors are satisfied that no impairment has arisen during the financial period. 108 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements Goodwill allocated to cash-generating units: Goodwill – Xafinity Consulting Limited, Xafinity SIPP Services Limited, Xafinity Pensions Consulting Limited and subsidiaries (CGU 1) Goodwill – Punter Southall Investment Consulting Limited, Punter Southall Limited (CGU 2) Goodwill – PS Administration Holdings Limited, PS Administration Limited, Punter Southall Holdings Limited (CGU 3) 2019 £'000 24,782 79,314 12,497 116,593 2018 £'000 24,782 79,239 11,564 115,585 Once the exercise has been completed the Directors will reallocate goodwill as necessary to CGUs on an appropriate basis. Sensitivity analysis of assumptions No further sensitivity analysis has been performed on the basis that there was no reasonably foreseeable changes in the above assumptions which would result in the recoverable amount falling below the carrying amount. 20 Deferred income tax Analysis of the breakdown and movement of deferred tax during the year is as follows: Property, plant and equipment Capital gains Short-term temporary differences Business combinations Property, plant and equipment Capital gains Short-term temporary differences Business combinations Balance at 1 April 2018 £'000 Recognised in income £'000 Recognised in equity £'000 Acquired 31 October 2018 £’000 (85) 717 (689) 17,225 17,168 (111) – (103) (2,100) (2,314) – – 148 – 148 – – – 528 528 31 March 2019 £'000 (196) 717 (644) 15,653 15,530 31 March 2019 Assets £'000 31 March 2019 Liabilities £'000 196 – 644 – 840 – 717 – 15,653 16,370 Balance at 1 April 2017 £'000 Recognised in income £'000 Recognised in equity £'000 Acquired 11 January 2018 £'000 31 March 2018 £'000 31 March 2018 Assets £'000 31 March 2018 Liabilities £'000 25 717 (36) 5,800 (110) – (629) (834) 6,542 (1,573) – – (24) – (24) – – – 12,259 12,259 (85) 717 (689) 17,225 17,168 85 – 689 – 774 – 717 – 17,225 17,942 Deferred income tax assets are recognised to the extent that the realisation of the related tax benefit through future taxable profits is probable. Deferred tax assets and liabilities have been measured at the rate they are expected to unwind at, using a rate substantively enacted at 31 March 2019, which is not lower than 17% (2018: 17%). 21 Other financial assets The non-current financial asset relates to restricted cash held by the Group as security for the National Pension Trust (NPT). For the NPT to gain approval to operate by the Pensions Regulator, the Group is required to demonstrate it can support the NPT in any eventuality. The Group has therefore placed £1m into a restricted bank account, which the trustees of the NPT are able to access in certain circumstances. There are no lifetime expected credit losses associated with this cash balance. XPS Pensions Group Annual Report 2019 109 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 22 Trade and other receivables Trade receivables Less: provision for impairment of trade receivables Net trade receivables Accrued income Contract assets Total financial assets other than cash and cash equivalents carried at amortised cost Prepayments Accrued consideration Other receivables includes £186,000 (2018: £186,000) of capitalised loan arrangement fees Total trade and other receivables 31 March 2019 £’000 17,171 (426) 16,745 10,692 938 28,375 3,744 614 342 33,075 31 March 2018 Restated £’000 16,382 (293) 16,089 9,498 798 26,385 1,967 – 410 28,762 The carrying value of trade and other receivables carried at amortised cost approximates to fair value. The Group applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision for trade receivables and contract assets. The expected loss rates are based on the Group’s historical credit losses experienced over the three-year period prior to the year end. The historical loss rates are then adjusted for current and forward-looking information on macroeconomic factors affecting the Group’s customers. The Group has identified the gross domestic product (GDP), unemployment rate and inflation rate as the key macroeconomic factors in the UK. 23 Cash and cash equivalents 31 March 2019 £’000 5,539 5,539 31 March 2018 £’000 9,404 9,404 Due after 2 years £’000 57,250 (314) 161 Sub-total (non- current) £’000 57,250 (500) 212 Total £’000 57,250 (500) 261 57,097 56,962 57,011 – – – (186) (135) 57,097 56,962 56,825 Due within 1 year (current) £’000 Due between 1 and 2 years £’000 – (186) 51 (135) – – 49 49 (186) (137) Cash and cash equivalents per statement of financial position Cash and cash equivalents per statement of cash flows The balance comprises solely cash at bank and on hand. 24 Loans and borrowings 31 March 2019 Drawn Revolving Credit Facility Capitalised debt arrangement fees Finance lease Sub-total Capitalised debt arrangement fees shown as current assets on balance sheet Total 110 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements 31 March 2018 Revolving Credit Facility Capitalised Senior debt arrangement fees Finance lease Sub-total Capitalised debt arrangement fees shown as current assets on balance sheet Total Due within 1 year (current) £’000 Due between 1 and 2 years £’000 Due after 2 years £’000 55,750 (500) – Sub-total (non- current) £’000 55,750 (686) 8 Total £’000 55,750 (686) 35 55,250 55,072 55,099 – (186) 8 (178) – – – (186) (178) 55,250 55,072 54,913 – – 27 27 (186) (159) The book value and fair value of loans and borrowings are not materially different. Terms and debt repayment schedule 31 March 2019 Revolving Credit Facility – A Revolving Credit Facility – B 31 March 2018 Revolving Credit Facility – A Revolving Credit Facility – B Amount £’000 38,000 19,250 Amount £’000 38,000 17,750 Currency Nominal interest rate GBP GBP 1.75% above LIBOR 1.75% above LIBOR Currency Nominal interest rate GBP GBP 1.25% above LIBOR 1.25% above LIBOR Year of maturity 2022 2022 Year of maturity 2022 2022 At 31 March 2019 the Group had drawn down £57,250,000 (2018: £55,750,000) of its £80,000,000 revolving credit facility. The related fees for access to the facility are included in the consolidated statement of comprehensive income. Capitalised loan-related costs are amortised over the life of the loan to which they relate. Bank debt is secured by way of debentures in the Group companies which are obligors to the loans. These are XPS Reading Limited, XPS Consulting (Reading) Limited, XPS Pensions Consulting Limited (and its subsidiaries), Xafinity Pensions Consulting Limited (and its subsidiaries), Xafinity SIPP Services Limited, and XPS Holdings Limited (and its subsidiaries). 25 Reconciliation of liabilities arising from financing activities Long-term borrowings Capitalised debt arrangement fees Lease liabilities Total liabilities from financing activities 31 March 2018 £’000 55,750 (872) 35 54,913 Cash flows £’000 1,500 – (34) 1,466 Non-cash change Fair value changes £’000 Non-cash change Other £’000 – 186 (1) 185 – – 261 261 31 March 2019 £’000 57,250 (686) 261 56,825 XPS Pensions Group Annual Report 2019 111 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 25 Reconciliation of liabilities arising from financing activities continued 31 March 2017 £’000 33,000 (261) 59 Cash flows £’000 22,750 (930) (34) 32,798 21,786 Long-term borrowings Capitalised debt arrangement fees Lease liabilities Total liabilities from financing activities 26 Trade and other payables Trade payables Accrued expenses Interest payable Other payables Total financial liabilities excluding loans and borrowings, classified as financial liabilities at amortised cost Other payables – tax and social security payments Other payables – VAT Deferred income Contract liabilities Total trade and other payables Non-cash change Fair value changes £’000 – 319 10 329 31 March 2019 £’000 2,716 7,474 22 667 10,879 1,453 2,883 1,415 784 17,414 31 March 2018 £’000 55,750 (872) 35 54,913 31 March 2018 Restated £’000 963 8,105 138 679 9,885 2,415 2,913 1,428 1,041 17,682 The carrying value of trade and other payables classified as financial liabilities measured at amortised cost approximates to fair value. 27 Current income tax liabilities Tax payable 28 Provisions for other liabilities and charges 31 March 2019 Current Balance at 1 April 2018 Provisions made during the year Provisions used during the year Provisions released unused during the year Balance at 31 March 2019 31 March 2019 £’000 1,393 1,393 31 March 2018 Restated £’000 1,757 1,757 Social security costs on Performance Share Plan £’000 Dilapidations £’000 Professional Indemnity £’000 158 270 (3) – 425 242 275 – – 517 1,059 201 (141) (28) 1,091 Total £’000 1,459 746 (144) (28) 2,033 112 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements 31 March 2018 Current Balance at 1 April 2017 Provisions made during the year Provisions used during the year Provisions released unused during the year Balance at 31 March 2018 Social security costs on Performance Share Plan £’000 Dilapidations £’000 Professional Indemnity £’000 6 152 – – 158 190 52 – – 242 873 335 (31) (118) 1,059 Total £’000 1,069 539 (31) (118) 1,459 The Group is involved in a small number of potential professional indemnity claims. The amount provided represents the Directors’ best estimate of the Group’s liability having taken legal advice. Uncertainties relate to whether claims will be settled out of court or if not whether the Group is successful in defending any action. Because of the nature of the disputes, the Directors have not disclosed future information on the basis that they believe that this would be seriously prejudicial to the Group’s position in defending the cases brought against it. 29 Deferred consideration Contingently issuable ordinary shares Deferred cash consideration Balance at 31 March 2019 Contingently issuable ordinary shares Deferred cash consideration Balance at 31 March 2018 Balance at 1 April 2018 £’000 6,655 1,677 8,332 Fair value adjustment £’000 Unwinding of discount £’000 Settled in year £’000 31 March 2019 £’000 (6,459) (100) (6,559) (196) – (196) – (1,425) (1,425) – 152 152 Balance at 1 April 2017 £’000 Acquisition £’000 Fair value adjustment £’000 Unwinding of discount £’000 31 March 2018 £’000 – – – 6,932 1,677 8,609 (472) – (472) 195 – 195 6,655 1,677 8,332 At the start of the year, the Group held contingent consideration of shares as consideration for the Punter Southall Group of companies, subject to certain criteria being met. In January 2019, once the results for the third quarter of the year were available to the Directors, there was a reasonable expectation that the criteria required for the contingently issuable ordinary shares to become payable was not going to be achieved. As a result, the contingently issuable shares were revalued and the discount unwound to that date, and then the amounts held as contingent consideration were revalued at fair value through profit and loss. 30 Share capital In issue at the beginning of the year Issued during the year In issue at the end of the year Ordinary shares (‘000) 31 March 2019 203,840 33 203,873 Ordinary shares (£’000) 31 March 2019 102 – 102 Ordinary shares (‘000) 31 March 2018 136,896 66,944 203,840 Ordinary shares (£’000) 31 March 2018 68 34 102 XPS Pensions Group Annual Report 2019 113 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 30 Share capital continued Allotted, called up and fully paid Ordinary shares of 0.05p (2018: 0.05p) each Shares held by the Group’s Employee Benefit Trust Ordinary shares of 0.05p (2018: 0.05p) each Shares classified in shareholders’ funds 31 March 2019 (‘000) 31 March 2019 (£’000) 31 March 2018 (£’000) 31 March 2018 (£’000) 203,182 691 203,873 102 – 102 202,003 1,837 203,840 101 1 102 The Group has invested in the shares for its Employee Benefit Trust (EBT). These shares are held on behalf of employees and legal ownership will transfer to those employees on the exercise of an award. This investment in own shares held in trust is deducted from equity in the consolidated statement of changes in equity. 31 Reserves The following describes the nature and purpose of each reserve within equity: Reserve Description and purpose Accumulated deficit: Share premium: Investment in own shares: Merger relief reserve: All net gains and losses recognised through the consolidated statement of comprehensive income. Amounts subscribed for share capital in excess of nominal value. Cost of own shares held by the EBT. The merger relief reserve represents the difference between the fair value and nominal value of shares issued on the acquisition of subsidiary companies. 32 Financial instruments The fair values and the carrying values of financial assets and liabilities are the same. Financial assets and financial liabilities measured at fair value in the statement of financial position are grouped into three levels of a fair value hierarchy. The three levels are defined based on the observability of significant inputs to the measurement, as follows: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. Level 3: unobservable inputs for the asset or liability. The Group's finance team perform valuations of financial items for financial reporting purposes, including Level 3 fair values, in consultation with third-party valuation specialists for complex valuations. Valuation techniques are selected based on the characteristics of each instrument, with the overall objective of maximising the use of market-based information. The finance team reports directly to the Chief Financial Officer. 114 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements Credit risk The maximum exposure to credit risk at the reporting date was: Trade receivables Provision for impairment of trade receivables Net trade receivables due Accrued income Contract assets Cash and cash equivalents Credit risk mitigation The ageing of trade receivables at the reporting date was: Not past due Past due 0-30 days Past due 31-90 days Past due more than 90 days Movement in impairment allowance for trade receivables Balance at start of the year Increase during the year Receivable written off during the year as uncollectable Reversal of allowances Balance at end of the year Carrying Amount 31 March 2019 £’000 17,171 (426) 16,745 10,692 938 5,539 33,914 Carrying Amount 31 March 2018 Restated £’000 16,382 (293) 16,089 9,498 798 9,404 35,789 31 March 2019 £’000 10,537 3,373 1,845 1,416 17,171 31 March 2018 £’000 10,734 2,721 2,118 809 16,382 293 308 (6) (169) 426 229 78 (6) (8) 293 The Group prepared a forward looking impairment model using a provision matrix based on historical data. Using this, the Group believes that an impairment allowance of £426,000 (2018: £293,000) is adequate in respect of trade receivables. All impaired debts are more than 90 days past due. Those debts which have not been provided against are considered recoverable by the Group. In accordance with IFRS 9, the expected credit loss (ECL) model was used to calculate the impairment loss. Cash flow risk The XPS Pensions Group is exposed to cash flow interest rate risk in 2 main respects. Firstly corporate and client bank deposits, which earn interest at a variable rate, although not at a material level. Secondly, interest expense arising on bank facilities at a margin over LIBOR. Interest rate risk The interest rate on long-term borrowings is a margin over LIBOR and as such the Company is at risk from LIBOR increases. XPS Pensions Group Annual Report 2019 115 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 32 Financial instruments continued Liquidity risk Liquidity risk arises from the Group’s working capital and the finance charges and principal repayments on its debt instruments. It is the risk the Group will encounter difficulty in meeting its financial obligations as they fall due. The following table sets out the contractual maturities (representing undiscounted cash flows) of financial liabilities: Trade and other payables Finance leases Loans and borrowings Bank interest Trade and other payables Finance leases Loans and borrowings Bank interest Up to 3 months £’000 10,639 12 – 398 11,049 Up to 3 months £’000 9,206 8 – 328 9,542 Between 3 and 12 months £’000 Between 1 and 2 years £’000 – 37 – 1,147 1,184 – 51 – 1,435 1,486 Between 3 and 12 months £’000 Between 1 and 2 years £’000 – 25 – 1,038 1,063 – 8 – 1,123 1,131 Between 2 and 5 years £’000 – 161 57,250 3,969 61,380 Between 2 and 5 years £’000 – – 55,750 2,392 58,142 Over 5 years £’000 – – – – – 31 March 2019 £’000 10,639 261 57,250 6,949 75,099 Over 5 years £’000 31 March 2018 £’000 – – – – – 9,206 41 55,750 4,881 69,878 Capital risk The Group’s objectives when managing capital is to maximise shareholder value whilst safeguarding the Group’s ability to continue as a going concern. Total capital is calculated as total equity in the statement of financial position. Management of capital Total equity 33 Operating leases The future aggregate minimum lease payments are payable as follows: Within 1 year Between 2 and 5 years More than five years 31 March 2019 £’000 156,403 31 March 2018 Restated £’000 153,378 31 March 2019 (£’000) 31 March 2018 (£’000) 1,667 2,848 39 4,554 813 331 – 1,143 Leasing commitments in respect of land and buildings amounted to £4,554,000 (2018: £1,143,000). 116 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements 34 Finance leases The Group holds a lease for some of its photocopying and printing equipment. These assets are classified as finance leases as the rental period amounts to the useful economic life of the assets. Future lease payments are due as follows: Not more than 1 year – current liabilities Between 1 and 5 years – non-current liabilities Not more than 1 year – current liabilities Between 1 and 5 years – non-current liabilities 35 Notes supporting statement of cash flows Cash and cash equivalents for purposes of the statement of cash flows comprise: Cash at bank available on demand Significant non-cash transactions from investing activities are as follows: Equity consideration for business combination Minimum lease payments 31 March 2019 £’000 55 206 261 Minimum lease payments 31 March 2018 £’000 34 8 42 Interest 31 March 2019 £’000 5 11 16 Interest 31 March 2018 £’000 7 – 7 Present value 31 March 2019 £’000 50 195 245 Present value 31 March 2018 £’000 27 8 35 Year ended 31 March 2019 £’000 Year ended 31 March 2018 £’000 5,539 9,404 Year ended 31 March 2019 £’000 Year ended 31 March 2018 £’000 – 48,699 XPS Pensions Group Annual Report 2019 117 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 35 Notes supporting statement of cash flows continued Non-cash transactions from financing activities are shown in the reconciliation of liabilities from financing transactions: At 1 April 2018 Cash flows Non-cash flows – Fair value changes – New finance lease – Loans and borrowings classified as non-current at 31 March 2018 becoming current by 31 March 2019 – Interest accruing in period At 31 March 2019 At 1 April 2017 Cash flows Non-cash flows – Fair value changes – Loans and borrowings classified as non-current at 31 March 2017 becoming current by 31 March 2018 – Interest accruing in period At 31 March 2018 36 Related party transactions Key management emoluments during the year Emoluments Company contributions to money purchase pension plans Social security costs Non-executive emoluments during the year Emoluments Social security costs Non-current loans and borrowings (note 24) £’000 Current loans and borrowings (note 24) £’000 55,072 1,500 365 261 (235) – (159) (34) (186) – 235 7 Total £’000 54,913 1,466 179 261 – 7 56,963 (137) 56,826 Non-current loans and borrowings (note 24) £’000 Current loans and borrowings (note 24) £’000 32,829 21,821 636 (214) – (31) (34) (319) 214 11 Total £’000 32,798 21,787 317 – 11 55,072 (159) 54,913 Year ended 31 March 2019 £’000 Year ended 31 March 2018 £’000 1,651 30 322 2,003 1,998 30 143 2,171 Year ended 31 March 2019 £’000 Year ended 31 March 2018 £’000 320 40 360 273 34 307 118 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements Services provided to related parties during the year PSFM Limited PS Independent Trustees Limited PSFM SIPP Limited Punter Southall Group Limited Psigma Investment Management Limited Punter Southall Analytics Limited Punter Southall Defined Contribution Consulting Limited 31 March 2019 £’000 31 March 2018 £’000 38 10 1 31 – 12 32 124 6 2 1 16 2 32 51 110 During the period the Group provided services of £124,640 (2018: £112,550) to other related parties. These transactions were included in turnover. All companies listed above are part of the Punter Southall Group Limited group, one of the Non-executive Directors of XPS Pensions Group is the Chief executive of Punter Southall Group. Services received from related parties during the year Punter Southall Group Limited CAMRADATA Analytical Services Limited Independent Transition Management Limited Punter Southall Defined Contribution Consulting Limited PS Independent Trustees Limited Punter Southall Health and Protection Limited Donna Cuff 31 March 2019 £’000 31 March 2018 £’000 3,355 30 2,076 2 1 3 43 5,510 981 7 535 – – – – 1,523 During the period the Group paid administration costs of £5,509,407 (2018: £1,523,596) to other related parties. These transactions were included in administrative expenses. All companies listed above are part of the Punter Southall Group. Donna Cuff is the wife of Paul Cuff (Co-CEO of XPS Pensions Group). XPS Pensions Group Annual Report 2019 119 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 36 Related party transactions continued Amounts receivable/(payable) to related parties at the balance sheet date PSFM Limited Punter Southall Group Limited PS Independent Trustees Limited Punter Southall Defined Contribution Consulting Limited Punter Southall Analytics Limited Independent Transition Management Limited CAMRADATA Analytical Services Limited 31 March 2019 £’000 31 March 2018 £’000 – (386) 12 10 – (206) (19) (589) 4 (1,107) 34 56 38 (510) (8) (1,493) All companies listed above are part of the Punter Southall Group. All transactions with related parties are made in the ordinary course of business and balances outstanding at the reporting date are unsecured. 37 Earnings per share Continuing operations 31 March 2019 £’000 Discontinued operations 31 March 2019 £’000 Total 31 March 2019 £’000 Continuing operations 31 March 2018 Restated £’000 Discontinued operations 31 March 2018 Restated £’000 Total 31 March 2018 Restated £’000 Profit for the year 10,371 1,137 11,508 2,217 9,384 11,601 Weighted average number of ordinary shares in issue Diluted weighted average number of ordinary shares Basic earnings per share (pence) Diluted earnings per share (pence) ‘000 ‘000 ‘000 ‘000 ‘000 ‘000 203,167 203,167 203,167 150,649 150,649 150,649 205,221 5.1 5.0 205,221 0.6 0.6 205,221 5.7 5.6 155,414 1.5 1.4 155,414 6.2 6.1 155,414 7.7 7.5 The calculation of basic earnings per share is based on the earnings attributable to ordinary shareholders divided by the weighted average number of shares in issue during the period. Share awards were made to the Executive Board members and key management personnel in 2017, 2018, and 2019, these are subject to certain conditions, and vest in 2020 and 2021. Dividend yield shares relating to these awards will also be awarded upon vesting of the main awards. Further shares have been issued under SAYE share schemes in 2017 and 2018, these will vest in 2020 and 2021 respectively. These shares are reflected in the diluted number of shares and diluted earnings per share calculations. 120 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements 37 Earnings per share continued Adjusted earnings per share Adjusted profit after tax (notes 6, 17) Adjusted earnings per share (pence) Diluted adjusted earnings per share (pence) Continuing operations 31 March 2019 £’000 Discontinued operations 31 March 2019 £’000 Total 31 March 2019 £’000 Continuing operations 31 March 2018 Restated £’000 Discontinued operations 31 March 2018 Restated £’000 20,061 9.9 9.8 194 0.1 0.1 20,255 10.0 12,966 8.6 9.9 8.3 1,224 0.8 0.8 Total 31 March 2018 Restated £’000 14,190 9.4 9.1 38 Subsidiaries The following is the list of wholly owned companies consolidated within the Financial Statements of XPS Pensions Group plc Company Name Company Number Principal activity Registered address XPS Pensions Group plc 08279139 Holding company XPS Financing Limited 08279274 Holding company XPS Reading Limited 08279362 Holding company XPS Consulting (Reading) Limited 08287502 Holding company XPS Pensions Consulting Limited 02459442 Xafinity SIPP Services Limited SC069096 Xafinity Pensions Consulting Limited 04436642 Employee benefit consultancy Employee benefit consultancy Dormant Xafinity PT Limited 00232565 Dormant Entegria Limited 05777554 Dormant Xafinity Pensions Trustees Limited 01450089 Dormant Hazell Carr (AT) Services Limited SC420031 Hazell Carr (SG) Services Limited 01867603 Employee benefit consultancy Dormant Hazell Carr (ES) Services Limited 02372343 Dormant Hazell Carr (PN) Services Limited 00236752 Dormant Hazell Carr (SA) Services Limited SC086807 Dormant Xafinity Trustees Limited 04305500 Dormant Xafinity Employee Benefit Trust 2013 N/A Trust 04807951 XPS Holdings Limited XPS Administration Holdings Limited 09655671 09428346 XPS Administration Limited XPS Investment Limited 06242672 XPS Pensions Limited 03842603 Holding Company Holding Company Employee benefit consultancy Employee benefit consultancy Employee benefit consultancy Phoenix House, 1 Station Hill, Reading, Berkshire, RG1 1NB Phoenix House, 1 Station Hill, Reading, Berkshire, RG1 1NB Phoenix House, 1 Station Hill, Reading, Berkshire, RG1 1NB Phoenix House, 1 Station Hill, Reading, Berkshire, RG1 1NB Phoenix House, 1 Station Hill, Reading, Berkshire, RG1 1NB Scotia House, Castle Business Park, Stirling, Stirlingshire, FK9 4TZ Phoenix House, 1 Station Hill, Reading, Berkshire, RG1 1NB Phoenix House, 1 Station Hill, Reading, Berkshire, RG1 1NB Phoenix House, 1 Station Hill, Reading, Berkshire, RG1 1NB Phoenix House, 1 Station Hill, Reading, Berkshire, RG1 1NB Scotia House, Castle Business Park, Stirling, Stirlingshire, FK9 4TZ Phoenix House, 1 Station Hill, Reading, Berkshire, RG1 1NB Phoenix House, 1 Station Hill, Reading, Berkshire, RG1 1NB Phoenix House, 1 Station Hill, Reading, Berkshire, RG1 1NB Scotia House, Castle Business Park, Stirling, Stirlingshire, FK9 4TZ Phoenix House, 1 Station Hill, Reading, Berkshire, RG1 1NB JTC Trustees Limited, Elizabeth House, 9 Castle Street, St Helier, Jersey, JE4 2QP 11 Strand, London, WC2N 5HR 11 Strand, London, WC2N 5HR 11 Strand, London, WC2N 5HR 11 Strand, London, WC2N 5HR 11 Strand, London, WC2N 5HR XPS Pensions Group Annual Report 2019 121 Notes to the Consolidated Financial Statements continued for the year ended 31 March 2019 39 Dividends Amounts recognised as distributions to equity holders of the parent in the year Final dividend for the year ended 31 March 2018: 4.2p per share (2017: 0.73p per share) Interim dividend for the year ended 31 March 2019: 2.3p (2018: 2.1p) per ordinary share was paid during the year 31 March 2019 £’000 8,533 4,673 13,206 31 March 2018 £’000 986 2,836 3,822 The recommended final dividend payable in respect of the year ended 31 March 2019 is £8.8m or 4.3p per share (2018: £8.5m). The proposed dividend has not been accrued as a liability as at 31 March 2019 as it is subject to approval at the Annual General Meeting. Proposed final dividend for year ended 31 March 2019 31 March 2019 £’000 8,767 31 March 2018 £’000 8,484 The Company statement of changes in equity shows that the Company has positive reserves of £1,704,000. There are sufficient distributable reserves in subsidiary companies which will be passed up to XPS Pensions Group plc in order to pay the proposed final dividend. 40 Ultimate controlling party The Directors do not consider that there is an ultimate controlling party. 41 Post balance sheet events On 31 May 2019, the Group acquired RL Corporate Pension Services Limited (RLCPS) from The Royal London Mutual Insurance Society Limited, for total consideration of £4.8 million in cash upon completion. RLCPS provides pensions actuarial, consulting and administration services to 150 smaller defined benefit pensions schemes, covering 8,000 scheme members. The acquisition will strengthen XPS's presence in the market for provision of full services to smaller defined benefit pension schemes. At the date of authorisation of these Financial Statements a detailed assessment of the fair value of the identifiable net assets has not been completed. On acquisition RLCPS held trade receivables with a book value of £285,917 representing contractual receivables of £305,373. The Group is still assessing the debtor book and is not yet in a position to accurately assess the final level of uncollectable contractual cash flows. The book value of the net assets acquired is as follows: Receivables Cash Payables Total Fair value of consideration paid Cash £'000 354 251 (84) 521 £'000 4,800 Goodwill and intangibles therefore amount to £4,279,000. This figure is pending a full purchase price allocation exercise, however it is expected that some goodwill will be recognised. This goodwill represents items, such as the assembled workforce, which do not qualify for recognition as assets. 122 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements Statement of Financial Position – Company as at 31 March 2019 Assets Non-current assets Investments Current assets Trade and other receivables Total assets Liabilities Current Liabilities Trade and other payables Total liabilities Net assets Equity and liabilities Share capital Share premium Merger relief reserve Other reserve Retained profit Total equity 31 March 2019 £’000 31 March 2018 £’000 Note 5 6 7 8 19,115 19,115 184,847 184,847 203,962 18,421 18,421 18,421 14,443 14,443 178,371 178,371 192,184 12,772 12,772 12,772 185,541 180,042 102 116,795 48,687 18,253 1,704 185,541 102 116,782 48,687 13,581 890 180,042 The notes on pages 126 to 128 form part of these Financial Statements. Under Section 408 of the Companies Act 2006 the Company is exempt from the requirement to present its own statement of comprehensive income. The profit for the financial year, of the holding Company, as approved by the Board, was £14,020,000 (2018 – £6,437,000). These Financial Statements were approved by the Board of Directors on 25 June 2019 and were signed on its behalf by: Mike Ainslie Chief Financial Officer 26 June 2019 Registered number: 08279139 XPS Pensions Group Annual Report 2019 123 Statement of Changes in Equity – Company for the year ended 31 March 2019 Share capital £’000 Share premium £’000 Merger relief reserve £’000 Balance at 1 April 2017 Comprehensive income and total comprehensive income for the year Contributions by and distributions to owners Share capital issued Share issue costs Share-based payment expense – IFRS 2 charge in respect of long-term incentives Deferred tax movement in respect of long-term incentives Dividends paid Total contributions by and distributions to owners Balance at 31 March 2018 Balance at 1 April 2018 Comprehensive income and total comprehensive income for the year Contributions by and distributions to owners Share capital issued Share-based payment expense – equity settled from employee benefit trust Share-based payment expense – IFRS 2 charge in respect of long-term incentives Deferred tax movement in respect of long-term incentives Dividends paid Total contributions by and distributions to owners 68 49,958 – – – – 34 – – – – 34 102 69,979 (3,155) 48,687 – – – – – – – 66,824 116,782 48,687 48,687 Retained earnings/ accumulated deficit £’000 Total £’000 (1,725) 60,777 6,437 6,437 – – – – (3,822) 118,700 (3,155) 1,081 24 (3,822) (3,822) 112,828 890 180,042 Other reserve £’000 12,476 – – – 1,081 24 – 1,105 13,581 102 116,782 48,687 13,581 890 180,042 – – – – – – – – 13 – – – – 13 – – – – – – – – – 1,999 2,821 14,020 14,020 – – – 13 1,999 2,821 (148) – – (13,206) (148) (13,206) 4,672 (13,206) (8,521) Balance at 31 March 2019 102 116,795 48,687 18,253 1,704 185,541 The notes on pages 126 to 128 form part of these Financial Statements. 124 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements Statement of Cash Flows – Company for the year ended 31 March 2019 The Company does not operate a bank account and therefore there were no cash flows during the year. All movements of funds have been dealt with through subsidiary companies. The notes on pages 126 to 128 form part of these Financial Statements. XPS Pensions Group Annual Report 2019 125 Notes to the Financial Statements – Company for the year ended 31 March 2019 1 Accounting policies XPS Pensions Group plc (the ‘Company’) is a public company incorporated in the UK. The principal activity of the Company is that of a holding company. The registered office is Phoenix House, 1 Station Hill, Reading, RG1 1NB. Basis of preparation These Financial Statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU), IFRS – IC Interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The Financial Statements have been prepared under the going concern basis. The preparation of Financial Statements in conformity with IFRSs requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the Financial Statements, are disclosed in the notes to the Group accounts. Measurement convention The Financial Statements are prepared on the historical cost basis. Investments in subsidiaries Investments in subsidiaries are carried at cost, plus capital contributions to the Group’s subsidiary companies in respect of share-based payment charges, less any provisions for impairment. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Dividends Dividends are recognised when they become legally payable. In the case of interim dividends to equity shareholders, this is when declared by the Directors and in the case of final dividends, this is when approved by the shareholders at the Annual General Meeting. Taxation Tax on the profit or loss for the period comprises current and deferred tax. Tax is recognised in profit and loss in the statement of comprehensive income except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the statement of financial position date, and any adjustment to tax payable in respect of previous years. New standards and interpretations adopted and not yet adopted Details of new standards and interpretations adopted and not yet adopted are contained in the Group accounting policies. 2 Financial risk management The Company is a holding company and has limited exposure to financial risks. Details of the financial risks are contained in the Group accounts. 3 Capital risk management The Company is a holding company and will apply the risk management policies of the Group contained in the Group’s Financial Statements. 126 XPS Pensions Group Annual Report 2019 Strategic Report Governance Financial statements 4 Staff numbers and costs The Company had no employees other than directors in the year to 31 March 2019 (2018: nil). No directors received remuneration for their services to the company during the year. Directors were remunerated for their services to the Group by a subsidiary company. Pension contributions of £nil (2018: £nil) were paid on behalf of the directors. 5 Investments in subsidiaries At the beginning of the year Investment in XPS Pensions Consulting Limited Investment in Xafinity SIPP Services Limited Investment in XPS Pensions Limited Investment in XPS Administration Limited Investment in XPS Investment Limited At the end of the year Subsidiary Ownership Country of Incorporation Class of shares held Principal Activities XPS Financing Limited 100% England and Wales Ordinary Holding company 31 March 2019 £’000 31 March 2018 £’000 14,443 3,479 57 813 297 26 19,115 13,338 873 26 149 52 5 14,443 Registered address Phoenix House, 1 Station Hill, Reading, Berkshire, RG1 1NB The additions to investments during the year represents amounts in respect of performance share plan awards and SAYE schemes, and an equity-settled award made by the Employee Benefit Trust to subsidiary companies as instructed by the Company. All other subsidiaries disclosed in note 38 of the Group accounts are indirectly owned by other Group companies. 6 Trade and other receivables Receivables due from related parties 7 Trade and other payables Accrued expenses Payables due to related parties Other payables – corporation tax Total trade and other payables 31 March 2019 £’000 184,847 31 March 2018 £’000 178,371 31 March 2019 £’000 – 17,667 754 18,421 31 March 2018 £’000 175 12,238 359 12,772 XPS Pensions Group Annual Report 2019 127 Notes to the Financial Statements – Company continued for the year ended 31 March 2019 8 Share capital Details on the share capital of the Company are contained in the Group Financial Statements. 9 Reserves Reserve Other reserve: Description and purpose The other reserve represents the amount in respect of the equity-settled awards made by the Employee Benefit Trust to subsidiary companies as instructed by the Company. Merger relief reserve: The merger relief reserve represents the difference between the fair value and nominal value of shares issued on the acquisition of subsidiary companies. 10 Financial instruments The fair values and the carrying values of financial assets are the same. Credit risk The maximum exposure to credit risk at the reporting date was: Receivables due from related parties Loans from related parties are repayable on demand. Carrying Amount 31 March 2019 £’000 184,847 Carrying Amount 31 March 2018 £’000 178,371 Capital risk management As part of the XPS Pensions Group, the Company is focused on delivering value for its shareholders whilst ensuring the Group is able to continue effectively as a going concern. Total capital for the Company comprises total equity. The policies for managing capital are to increase shareholder value by maximising profits and cash. The policy is to set budgets and forecasts in the short and medium term that the Company ensures are achievable. The process for managing capital are regular reviews of financial data to ensure that the Company is tracking the targets set and to reforecast as necessary based on the most up-to-date information. This then contributes to the XPS Pensions Group’s forecast which ensures future covenant test points are met. The XPS Pensions Group continue to meet these test points and they have been achieved over the last 12 months. Further information can be found within the Consolidated Financial Statements of XPS Pensions Group plc. Management of capital Total equity 11 Related party transactions Amounts receivable from related parties at the balance sheet date Loans to related parties 12 Ultimate controlling party The Directors do not consider that there is an ultimate controlling party. 31 March 2019 £’000 185,541 31 March 2018 £’000 180,042 31 March 2019 £’000 184,847 184,847 31 March 2018 £’000 178,371 178,371 128 XPS Pensions Group Annual Report 2019 Company Information Registered Office and Directors’ Address Phoenix House 1 Station Hill Reading Berkshire RG1 1NB Company Secretary Zoe Adlam Financial Adviser and Broker Liberum Capital Limited Ropemaker Place, Level 12 25 Ropemaker Street London EC2Y 9LY Financial Adviser and Broker RBC Capital Markets 2 Swan Lane London EC4R 3BF Legal Advisers to the Company Macfarlanes LLP 20 Cursitor Street London EC4A 1LT Auditor BDO LLP Level 12 Thames Tower Station Road Reading Berkshire RG1 1LX Registrar Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA Bankers HSBC Bank plc Apex Plaza, Block D, 5th Floor Forbury Road Reading RG1 1AX X P S P e n s i o n s G r o u p p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 9 Registered Office Phoenix House 1 Station Hill Reading Berkshire RG1 1NB T: 0118 918 5000 www.xpsgroup.com