REG - Phoenix Group Hldgs - 2023 Annual Financial Report
22/03/2024 07:00
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RNS Number : 8935H Phoenix Group Holdings PLC 22 March 2024
Phoenix Group Holdings plc: 2023 Full Year Results
22 March 2024
Phoenix announces strong full year 2023 results and new progressive dividend
policy
Commenting on the results announcement, Phoenix Group CEO, Andy Briggs said:
"Phoenix's vision is to be the UK's leading retirement savings and income
business, and we are making great progress in delivering our strategy to
achieve this, as our strong 2023 financial results demonstrate.
We have achieved our 2025 growth target two years early with £1.5bn of new
business cash delivered by our Standard Life business - a new record. We
delivered over £2bn of cash generation and maintained our resilient balance
sheet, and our strong performance has enabled the Board to recommend a 2.5%
dividend increase.
The next phase of our strategy will see us balance our investment across our
strategic priorities to grow, optimise and enhance our business. This will
support us in delivering the ambitious new 2026 targets we are announcing
today. Our confidence in this strategy is demonstrated by the new progressive
and sustainable dividend policy we will operate going forward."
2023 financial results highlights
Cash: growing sustainable cash generation
· £2,024m total cash generation(1) in 2023 (FY22: £1,504m)
exceeded our upgraded target of c.£1.8bn for the year, including a c.£400m
benefit from the Part VII transfer of Standard Life and Phoenix Life as
announced in November.
· £1,514m of incremental new business long-term cash generation
(FY23: £1,233m), achieving our 2025 target of c.£1.5bn two years early.
Includes strong growth from our capital-light Pensions and Savings business to
£395m (FY22: £249m) and an increase in our Retirement Solutions business to
£1,066m (FY22: £934m), supported by enhanced capital efficiency.
Capital: resilient balance sheet
· £3.9bn(2) Solvency II ('SII') Surplus remains resilient (FY22:
£4.4bn) and is inclusive of a prudent £70m Consumer Duty provision,
following a comprehensive review of our back book products ahead of the July
2024 compliance deadline.
· 176%(2,3) SII Shareholder Capital Coverage Ratio ('SCCR') (FY22:
189%(3)), towards top-end of 140-180% operating range.
· 36% SII leverage ratio (FY22: 34%) and 23% Fitch ratio(4) (FY22:
23%(4)).
Earnings: driving improved profitability
· IFRS adjusted operating profit before tax increased 13%
year-on-year to £617m (FY22: £544m(5)), driven by strong growth in our
Pension and Savings business, which is up 27% year-on-year to £190m (FY22:
£150m).
· New business net fund flows of £6.7bn increased 72% year-on-year
(FY22: £3.9bn), driven by strong Workplace flows.
· Significantly reduced IFRS loss after tax of £(88)m (FY22:
£(2,657)m(5)) due to lower market volatility impacts in 2023.
· Contractual Service Margin of £2.9bn (gross of tax), grew 10%
driven by new business and Sun Life of Canada UK.
Attractive 2023 dividend growth supported by strong business performance
· The Board is recommending a 2.5% increase in the Final 2023
dividend to 26.65p per share; Total dividend of 52.65p.
The next phase of our strategy delivers growing, sustainable cash generation
and supports a new progressive dividend policy
· In the next phase of our strategy we will build the remaining
capabilities required to deliver a full-service customer proposition, through
developing compelling Retail market propositions and innovative retirement
income solutions.
· We will also bring together our former Heritage and various Open
businesses under a single Group-wide operating model, to offer a seamless
journey for customers across their savings life cycle, and realise further
cost efficiencies.
· Operating Cash Generation is our new primary cash metric, which
is the sustainable level of annual surplus generation in our life companies,
that is then remitted to our Group HoldCo. It comprises our ongoing surplus
emergence (£0.8bn in 2023) and the recurring management actions (£0.3bn in
2023) which we expect to deliver every year into the long term.
· We expect to grow Operating Cash Generation by c.25% from £1.1bn
in 2023 to £1.4bn in 2026, as we grow, optimise and enhance our business,
after which it is expected to grow at a mid-single digit rate over the long
term.
· The Board's confidence in the delivery of growing Operating Cash
Generation supports the move to a new progressive and sustainable ordinary
dividend policy(6).
An evolved financial framework that delivers cash, capital and earnings, with
new targets and guidance
· Cash: we will deliver growing Operating Cash Generation that more
than covers our recurring uses and dividend, and generates excess cash.
o Operating Cash Generation target of £1.4bn in 2026.
o Total Cash Generation 1-year target range of £1.4bn-1.5bn in 2024 and
3-year target of £4.4bn across 2024-26.
· Capital: we will maintain a resilient balance sheet and allocate
surplus capital in accordance with our new capital allocation framework.
o Continue to operate within our 140-180% Shareholder Capital Coverage Ratio
operating range.
o We intend to repay at least £500m(7) of debt by the end of 2026,
targeting a SII leverage ratio of c.30%(8) by the end of 2026.
· Earnings: drive strong growth in IFRS adjusted operating profit,
through business growth and cost efficiencies.
o Targeting £900m of IFRS adjusted operating profit in 2026 (FY23: £617m).
o £250m of annual cost savings by the end of 2026.
New cash emergence profile disclosure demonstrates sustainability of cash
generation
· We are today providing new disclosure on the profile of cash
emergence from both our 2023 in-force and new business (contained on page 43
of the appendix of our Full Year 2023 Results presentation that is available
on our website).
· This disclosure supports our cash targets and demonstrates the
long-term sustainability of our cash generation.
All page references in this document refer to the Phoenix Group Holdings plc
Annual Report and Accounts 2023.
Enquiries
Investors/analysts:
Claire Hawkins, Director of Corporate Affairs & Investor Relations,
Phoenix Group
+44 (0)20 4559 3161
Andrew Downey, Investor Relations Director, Phoenix Group
+44 (0)20 4559 3145
Media:
Douglas Campbell, Teneo
+44 (0)7753 136 628
Shellie Wells, Corporate Communications Director, Phoenix Group
+44 (0)20 4559 3031
Presentation and webcast details
There will be a live virtual presentation for analysts and investors today
starting at 09:30 (GMT). You can register for the live webcast at: Phoenix
Group 2023 Full Year results
(https://storm-virtual-uk.zoom.us/webinar/register/WN_wLbkahQsQM-V2tfw18IDJQ#/registration)
A copy of the presentation is available at:
https://www.thephoenixgroup.com/investor-relations/results-reports-and-presentations
(https://www.thephoenixgroup.com/investor-relations/results-reports-and-presentations)
A replay of the presentation and transcript will also be available on our
website following the event.
Dividend details
The recommended Final 2023 dividend of 26.65 pence per share is expected to be
paid on 22 May 2024.
The ordinary shares will be quoted ex-dividend on the London Stock Exchange as
of 11 April 2024. The record date for eligibility for payment will be 12 April
2024.
Footnotes
1. Cash generation is a measure of cash and cash equivalents, remitted by
Phoenix Group's operating subsidiaries to the holding companies and is
available to cover dividends, debt interest, debt repayments and other items.
2. 31 December 2023 Solvency II capital position is an estimated position
and reflects a regulator approved recalculation of transitionals as at 31
December 2023 and recognition of the foreseeable Final 2023 shareholder
dividend of £267m.
3. The Shareholder Capital Coverage Ratio excludes Solvency II Own Funds
and Solvency Capital Requirements of unsupported With-Profit funds and
unsupported pension schemes.
4. Fitch leverage ratio is estimated by management based on Fitch's
published methodology. Ratio allows for currency hedges over foreign currency
denominated debt.
5. 2022 restated comparative to reflect adoption of IFRS 17 and
incorporates changes to the Group's methodology for determining adjusted
operating profit since HY 2023.
6. The Board will continue to prioritise the sustainability of our
dividend over the very long term. Future dividends and annual increases will
continue to be subject to the discretion of the Board, following assessment of
longer-term affordability.
7. £500m of debt repayment includes the £250m Tier 2 Bond that is
callable in June 2024, subject to regulatory approval.
8. Assuming economic conditions in line with 31 December 2023.
Legal Disclaimers
This announcement in relation to Phoenix Group Holdings plc and its
subsidiaries (the 'Group') contains, and the Group may make other statements
(verbal or otherwise) containing, forward-looking statements and other
financial and/or statistical data about the Group's current plans, goals,
ambitions, outlook, guidance and expectations relating to future financial
condition, performance, results, strategy and/or objectives.
Statements containing the words: 'believes', 'intends', 'will', 'may',
'should', 'expects', 'plans', 'aims', 'seeks', 'targets', 'continues' and
'anticipates' or other words of similar meaning are forward looking. Such
forward-looking statements and other financial and/or statistical data involve
risk and uncertainty because they relate to future events and circumstances
that are beyond the Group's control. For example, certain insurance risk
disclosures are dependent on the Group's choices about assumptions and models,
which by their nature are estimates. As such, actual future gains and losses
could differ materially from those that the Group has estimated.
Other factors which could cause actual results to differ materially from those
estimated by forward-looking statements include, but are not limited to:
domestic and global economic, political, social, environmental and business
conditions; asset prices; market-related risks such as fluctuations in
investment yields, interest rates and exchange rates, the potential for a
sustained low-interest rate or high interest rate environment, and the
performance of financial or credit markets generally; the policies and actions
of governmental and/or regulatory authorities including, for example, climate
change and the effect of the UK's version of the 'Solvency II' regulations on
the Group's capital maintenance requirements; developments in the UK's
relationship with the European Union; the direct and indirect consequences for
European and global macroeconomic conditions of the conflicts in Ukraine and
the Middle East, and related or other geopolitical conflicts; political
uncertainty and instability; the impact of changing inflation rates (including
high inflation) and/or deflation; information technology or data security
breaches (including the Group being subject to cyber-attacks); the development
of standards and interpretations including evolving practices in ESG and
climate reporting with regard to the interpretation and application of
accounting; the limitation of climate scenario analysis and the models that
analyse them; lack of transparency and comparability of climate-related
forward-looking methodologies; climate change and a transition to a low-carbon
economy (including the risk that the Group may not achieve its targets); the
Group's ability along with governments and other stakeholders to measure,
manage and mitigate the impacts of climate change effectively; market
competition; changes in assumptions in pricing and reserving for insurance
business (particularly with regard to mortality and morbidity trends, gender
pricing and lapse rates); the timing, impact and other uncertainties of any
acquisitions, disposals or other strategic transactions; risks associated with
arrangements with third parties; inability of reinsurers to meet obligations
or unavailability of reinsurance coverage; and the impact of changes in
capital, and implementing changes in IFRS 17 or any other regulatory, solvency
and/or accounting standards, and tax and other legislation and regulations in
the jurisdictions in which members of the Group operate.
As a result, the Group's actual future financial condition, performance and
results may differ materially from the plans, goals, ambitions, outlook,
guidance and expectations set out in the forward-looking statements and other
financial and/or statistical data within this announcement. The Group
undertakes no obligation to update any of the forward-looking statements or
data contained within this announcement or any other forward-looking
statements or data it may make or publish. Nothing in this announcement
constitutes, nor should it be construed as, a profit forecast or estimate.
Chair's statement
Delivering on our purpose
We want to help people journey to and through retirement while investing in a
better future for us all. Our approach focuses on two key areas: People and
Planet. We are looking to address the UK pensions savings gap and manage the
risk and opportunities of climate change.
At Phoenix our purpose is our North Star and it drives all that we do. I am
delighted with the progress we have made this year to bring about better
outcomes for all our stakeholders.
Nicholas Lyons, Chair of the Group Board
Sabbatical reflections
1 December 2023 marked my return as Chair of Phoenix Group, following a
14-month sabbatical where I fulfilled the role of Lord Mayor of the City of
London. I am delighted to be back and look forward to supporting the continued
evolution of our business.
As Lord Mayor it was my great privilege and responsibility to represent and
promote the UK financial services industry. In doing so, my sabbatical
confirmed to me that this industry is an essential element of the UK economy,
with a critical role to play in supporting both economic growth and the
trajectory to net zero by 2050 through sustainable investment. The clear
feedback from my international travels is that the UK financial services
industry is perceived as market-leading and there is great optimism about its
future.
I would like to thank Alastair Barbour who assumed the role of Chair in my
absence. He has made an enormous contribution to Phoenix over his ten-year
tenure as a Director, and I wish him well for the future now that he has
stepped down from the Board.
Delivering on our purpose
The pensions savings gap in the UK is a growing societal problem. As the UK's
largest long-term savings and retirement business, we are striving to raise
awareness of this problem and advocate for the changes needed to deliver the
solutions and help people secure a life of possibilities.
We know that people can only save for their retirement if they have access to
good work over their longer lives. That is why we are playing a role in
promoting good work through Phoenix Insights, working in collaboration with
others to influence government policy.
We are committed to innovating to develop the retirement income solutions of
the future and we are advocating for the removal of policy barriers to enable
us to support customers as they save for, journey to, and secure income in,
retirement. More specifically we have recommended a framework to support an
increase in auto-enrolment contributions from 8% to 12%, and we believe that
guidance and advice should be available for everyone, not just those who can
afford to pay for it.
We can drive good outcomes for our customers and manage the risks of climate
change by delivering on our Net Zero Transition Plan commitments, outlined in
our plan published in May, and by helping to unlock the barriers to allow
capital to flow at scale into productive and sustainable investments.
I was delighted that we were a leading signatory and vocal proponent of the
Mansion House Compact when it was unveiled in July. This seeks to address some
of the issues around investing in unlisted equity, and the growth of UK
companies of the future. I have every confidence the Compact will accomplish
the dual aim of securing a brighter future for retirees and helping to channel
billions of pounds into the UK economy.
Strong cash generation provides opportunity to invest and realise our vision
The team has delivered strong cash generation in 2023 with an acceleration in
the organic growth story clearly evident, whilst at the same time maintaining
a resilient balance sheet.
We are on a journey to deliver our vision of becoming the UK's leading
retirement savings and income business. The clear strategic success in
building the organic growth business over the last three years means we have
reached a key milestone on our journey, as we evolve the business. The focus
is now on investing to grow, optimise and enhance the business even further.
Strategic outcomes support a new dividend policy
I am delighted to announce that the Board is recommending a 2.5% increase in
the Group's 2023 Final dividend to 26.65 pence per share. This means the
Group's Total dividend for 2023 will be 52.65 pence per share.
The Board is confident in the Group's ability to deliver the next phase of our
strategic journey, as we transition to our vision of becoming the UK's leading
retirement savings and income business. This has supported our decision to
move to a progressive and sustainable ordinary dividend policy, which is
underpinned by the sustainable growth in Operating Cash Generation we now
expect to deliver.
Thank you
Finally, I would like to take this opportunity to thank the Board, our
colleagues, our partners and our wider stakeholders for their hard work,
dedication and support in delivering another year of strong progress.
Nicholas Lyons
Chair of the Group Board
Group Chief Executive Officer's report
Successfully delivering our strategy
2023 has seen Phoenix Group deliver significant strategic progress and strong
results, further supporting our track record of dividend growth.
We are on a journey from being a closed-book life consolidator to a
purpose-led retirement savings and income business
Strong 2023 results delivered through strategic execution
We are balancing our investment to grow, optimise and enhance our business
Our strategy delivers sustainable, growing Operating Cash Generation that more
than covers our recurring uses and a growing dividend
Phoenix will now operate a progressive and sustainable ordinary dividend
policy
£2.0bn
2023 Total cash generation
(2022: £1.5bn) REM APM
+2.5%
2023 Final dividend increase
I am delighted that 2023 was another year of strong new business growth for
Phoenix Group. Having now built the component parts of a sustainably growing
business, the next stage on our journey will see us grow, optimise and enhance
our business so we can meet more of our customers' retirement needs and
deliver more value for our stakeholders.
Andy Briggs, Group Chief Executive Officer
Delivering strong results
2023 has been another year of clear strategic delivery for Phoenix.
We're a highly cash generative business, as demonstrated by the delivery of
£2.0 billion of total cash generation in 2023 (2022: £1.5 billion),
exceeding our upgraded target of c.£1.8 billion target for the year. This was
supported by the completion of one of the largest ever UK insurance Part VII
transfers.
Executing against our strategic priorities enabled us to deliver another
record year of new business long-term cash generation ('NB LTCG') of £1.5
billion (2022: £1.2 billion). This was supported by a c.70% increase in new
business net fund flows in 2023 to £6.7 billion (2022: £3.9 billion).
Performance in our Pensions and Savings business included the transfer of the
Siemens workplace scheme, one of the largest workplace scheme transfers to
have been tendered in the UK market in recent years. This clearly demonstrates
the success we have had in re-establishing the Standard Life brand as a major
workplace player. Growth in our Retirement Solutions business was also strong,
driven by our Bulk Purchase Annuities ('BPA') business, which saw the Group
write £6.2 billion of premiums during the year (FY22: £4.8 billion) at a
reduced capital strain.
From a capital perspective, we saw a reduction in our Solvency II surplus to
£3.9 billion (2022: £4.4 billion) and our Shareholder Capital Coverage Ratio
('SCCR') to 176% (2022: 189%) after allocating capital into growth
opportunities. However, we continue to operate towards the upper-end of our
140-180% SCCR operating range.
In terms of our earnings, our IFRS adjusted operating profit increased by 13%
to £617 million (2022: £544 million) supported by growth in our Pensions and
Savings business. However, we reported an IFRS loss after tax of £(88)
million, reflecting our investment into growth opportunities, as well as
integration and transformation expenses in the period. However, this was
significantly lower than the 2022 loss of £(2,657) million, benefiting from
less accounting volatility from market movements.
As a result of this strong strategic and financial performance, the Board has
recommended a 2.5% increase in the Final dividend of 26.65 pence per share,
bringing the Total 2023 dividend to 52.65 pence per share, extending our
strong track record of dividend growth.
A strategy supported by existing large and growing markets
Phoenix Group is the UK's largest long-term savings and retirement business,
managing c.£283 billion of assets for c.12 million customers. Our purpose of
'helping people secure a life of possibilities' is embedded in everything that
we do and informs our single strategic focus, which is to help customers
journey to and through retirement.
We have a diversified and balanced business mix, across the long-term savings
and retirement market, which can be largely categorised as 'Pensions and
Savings' and 'Retirement Solutions'. Around two-thirds of our business is
Pensions and Savings, which principally consists of capital-light fee-based
products.
The UK long-term savings and retirement market is already large, with c.£3
trillion of total stock, but it is also growing fast, with annual flows of
c.£150-200 billion. The breadth of our product portfolio means we are able to
take advantage of a number of growing market opportunities. See pages 18 to 19
for 'Our growth drivers'.
Embarking on the next stage of our journey
Back in 2020, we had a single core capability, which was executing M&A and
integrating those businesses. However, over the past three years we have built
a number of sustainably growing organic businesses too.
This has seen us acquire and invest into the trusted Standard Life brand, and
re-establish it amongst customers, corporates and advisers.
We have used that brand to help turbo-charge our growth as we built a
competitive and capital efficient annuities business, followed by our now
large and rapidly growing capital-light Workplace business.
In addition, we have built a highly-skilled in-house asset management
capability, enabling us to efficiently manage our third-party asset managers,
and to create long-term value through optimising our c.£38 billion
shareholder credit portfolio.
We have an ongoing programme of initiatives to review our products and
services and over the past seven years, we have invested significantly in
focusing on good customer treatments and outcomes across our businesses.
During that time, we have set aside over £200m on reducing charges and we are
making planned investment to migrate customers to more modern technology. We
are actively working to ensure we are well positioned to comply fully with the
upcoming Consumer Duty requirements which come into effect on 31 July 2024,
for which we have set aside £70 million of Solvency II capital.
Our successful execution has enabled us to prove "the wedge" hypothesis, with
the new business cash from our Open businesses more than offsetting the
Heritage run-off. That means we are today a sustainably growing business, and
no longer reliant on M&A.
The next phase of our strategy is therefore about building on the strong
foundations we have developed, and completing our full-service customer
offering.
We will do this by building an innovative range of retirement income solutions
and a compelling set of retail propositions, supported by a digital customer
interface with personalised data, guidance and advice.
We are also now at the stage where we can further simplify our organisational
structure, through integrating our Heritage and Open businesses onto a single
Group-wide operating model. This will enable us to grow faster, by offering
all of our customers, whether in an Open or Heritage product, a seamless
journey across their savings life cycle. It will also further enhance our
existing cost efficiency.
The successful execution of our strategy will enable us to win market share
and grow our business sustainably over time as we journey towards our vision
of becoming the UK's leading retirement savings and income business.
Balancing investment across our strategic priorities
To support us on our journey we have a clear set of strategic priorities to 1)
Grow 2) Optimise and 3) Enhance, which are informed by - and in support - of
our ESG themes of Planet and People and are underpinned by robust investment
programmes within our new capital allocation framework. See pages 24 to 29 for
more detail on our strategic priorities.
Firstly, we will Grow through building an innovative range of retirement
income solutions, and a compelling set of Retail propositions, supported by a
digital customer interface, with personalised data, guidance and advice. We
will also further strengthen our Workplace proposition and optimise our
annuities business. This will require c.£100 million of investment into our
growth propositions, alongside c.£200 million of capital per annum into
annuities, the outcome of which is to support mid-single digit growth in
Operating Cash Generation over the long term.
Our second priority is to Optimise. As part of this we plan to continue our
approach of repaying M&A-related debt with surplus cash. We expect to
repay at least £500 million of debt by the end of 2026, on top of the c.£800
million we have repaid since 2020. This will support us in getting to a c.30%
Solvency II leverage ratio by the end of 2026, which we believe is an
appropriate steady-state level for our business, absent M&A.
We will also invest c.£100 million to enhance our asset and liability
optimisation capabilities. This, alongside strong business growth, will
support us in delivering increased recurring management actions of c.£400
million by 2026.
Our Enhance priority is designed to support us in transforming our operating
model and culture, to create a leading, cost efficient and modern
organisation.
We continue to invest to complete our remaining customer migrations onto TCS
Diligenta. In addition, we intend to invest to improve the support we give our
customers throughout their lives and to drive scale cost efficiencies by
integrating our business onto a single Group-wide operating model. Together,
these migration, transformation and cost efficiency progammes will require
c.£500 million of investment.
Our focus on driving cost efficiency will enable us to deliver c.£250 million
of annual cost savings by the end of 2026, which will enhance all of our key
reporting metrics.
We also continue to strive to make Phoenix Group 'the best place any of us
have ever worked'; through providing a great colleague experience. We
passionately believe that by being diverse and inclusive we'll be a better
organisation, we'll make better decisions, and we'll do a better job of
representing our customers and communities.
Our new simplified, diverse and inclusive organisational structure will better
empower our colleagues to make the right decisions for our customers.
Demonstrating the long-term sustainability of our business
Our strategy will support the delivery of sustainable, growing cash
generation, a resilient capital position and improved earnings.
As part of our evolved financial framework we are introducing Operating Cash
Generation ('OCG') as a new metric, to demonstrate the long-term
sustainability of our business.
OCG is the sustainable level of surplus generation in our Life Companies, each
and every year, that is also then remitted as cash to our Group Holding
Company. See page 33 in our Business Review for more detail.
Executing against our strategic priorities will help us to grow OCG by c.25%
over the next three years, from £1.1bn in 2023 to £1.4bn in 2026. After this
time, we expect it to grow at a sustainable, mid-single digit growth rate over
the long term.
Importantly, this OCG more than covers our recurring uses, and a growing
dividend. Which generates excess cash that can support additional investment
back into the business and/or additional shareholder returns.
M&A can add further scale to our business
Our existing scale and the success of our organic growth strategy mean that we
are no longer reliant on M&A to grow our business and dividend, in the way
we were when I joined.
We continue to believe that M&A can generate significant shareholder
value, as demonstrated by our strong track record, and we see it as a
potential lever to add further scale to our business.
However, we now have a range of organic growth opportunities available, in
which to deploy our excess cash at very attractive returns, and so the bar for
acquisitions is now higher than it has ever been.
Outlook
The economic backdrop in the UK means our societal purpose of helping people
secure a life of possibilities has never been more important.
As we continue to strive to meet the needs of our customers, colleagues and
other key stakeholders, this will support us in achieving our vision of
becoming the UK's leading retirement savings and income business.
We are investing to grow, optimise and enhance our business to deliver this
vision, which will enable us to win market share and grow our business
sustainably over time.
As a result, the Board believes it is now appropriate for us to move to a
progressive and sustainable ordinary dividend policy, which is underpinned by
the sustainable, growing OCG we expect to deliver over the long term.
We see this as a pivotal step in the evolution of Phoenix Group's investment
case, and it is a reflection of the Board's confidence in our future strategy.
Thank you
The fantastic progress Phoenix Group has made this year could not have been
achieved without our exceptional people. I would therefore like to thank my
colleagues throughout the Group for their continued contribution and
dedication.
I look forward to our team delivering another year of significant progress in
2024.
Andy Briggs
Group Chief Executive Officer
Business review
Delivering sustainable cash generation
A strong performance in 2023
Key financial performance metrics: 2023 2022 YOY change
Cash Total cash generation £2,024m £1,504m +35%
New business Incremental new business long-term cash generation £1,514m £1,233m +23%
Net fund flows £6.7bn £3.9bn +72%
Dividends Total dividend per share 52.65p 50.8p +3.6%
Final dividend per share 26.65p 26.0p +2.5%
IFRS Adjusted operating profit before tax1,2 £617m £544m +13%
Loss after tax1,2 £(88)m £(2,657)m N/A
Solvency II capital PGH Solvency II surplus £3.9bn £4.4bn -11%
PGH Shareholder Capital Coverage Ratio 176% 189% -13%pts
Assets Assets under administration £283bn £259bn +9%
Leverage Solvency II leverage ratio 36% 34% +2%pts
1 2022 restated comparative to reflect adoption of IFRS 17
2 Incorporates changes to the Group's methodology for determining
adjusted operating profit since Half Year 2023 (see note B.1 to the
consolidated financial statements for further details).
In 2023 we have once again delivered a year of strong performance, as we
execute on our strategy and fulfil our purpose.
We have delivered another year of resilient cash generation, with £2.0
billion of total cash generated in 2023, exceeding our upgraded target of
c.£1.8 billion. With £5.2 billion delivered across 2021 to 2023, we have
also therefore over-delivered our three-year cash generation target of £4.4
billion, by c.£0.8 billion.
We saw a strong performance in our growth businesses, which increased our
incremental new business long-term cash generation ('NB LTCG') by 23%
year-on-year to £1,514 million, and therefore have achieved our 2025 target
two years early. This was supported by new business net fund flows that grew
72% to £6.7 billion (2022: £3.9 billion).
Our Shareholder Capital Coverage Ratio ('SCCR') of 176% remains towards the
upper-end of our operating range of 140-180%, but reduced given our investment
into growth, as well as our integration and transformation expenses.
Similarly, our Solvency II ('SII') surplus reduced to £3.9 billion, but
remains resilient.
Our strong overall performance this year has therefore enabled the Board to
recommend a dividend increase of 2.5% for the year.
In terms of our IFRS earnings, the Group's adjusted operating profit grew 13%
to £617 million, supported by 27% growth in our Pensions and Savings business
and an 8% increase in our Retirement Solutions business. While we reported an
IFRS loss after tax of £88 million, this was a £2,569 million improvement on
2022. The loss in 2023 was primarily driven by £(781) million of
non-operating items, as outlined on page 36.
The segmental information given reflects the Group's new operating segments,
further information is provided in note B.1 on page 180.
Clear strategic progress
We have made significant strategic progress in delivering sustainable organic
growth.
In Pensions and Savings, our Workplace business continues to see an attractive
retention rate with existing clients but is also now winning new larger
schemes. Our Retail business remains in net outflow, but we have a clear
strategy to address this over the coming years, by investing to deliver
compelling customer propositions.
In Retirement Solutions, we continue to adopt a disciplined approach to Bulk
Purchase Annuities ('BPA') and have been successful in reducing our capital
strain. In September, we also launched a new individual annuity product, our
first that is available in the open market.
From an M&A perspective, we successfully completed the acquisition of Sun
Life of Canada UK ('SLOC') in April with the integration progressing well.
In summary, 2023 has been another year of clear strategic progress, that has
supported the delivery of a strong set of results.
We continue to deliver sustainable and resilient cash generation, which
underpins our new progressive and sustainable ordinary dividend policy. Our
Solvency capital position also remains highly resilient, and can support the
investment to grow, optimise and enhance our business going forward.
An evolved financial framework for the next phase of our journey
We are introducing our evolved financial framework that focuses on the three
financial outcomes we deliver for our shareholders: cash, capital and
earnings.
Phoenix has always managed its business for cash and capital, but our evolved
key metrics provide clearer line of sight to the underlying business
performance and more comparability with peers. We are also elevating the
importance of IFRS earnings in our framework, following the transition to IFRS
17.
The key metrics we use can be seen here
The progress we have made in executing our strategic priorities has enabled us
to deliver a strong set of results in 2023, and supported the Board's decision
to recommend a 2.5% increase in the Final 2023 dividend.
Rakesh Thakrar, Group Chief Financial Officer
Our key performance indicators
With our financial framework designed to deliver cash, capital and earnings,
we recognise the need to use a broad range of metrics to measure and report
the performance of the Group, some of which are not defined or specified in
accordance with Generally Accepted Accounting Principles ('GAAP') or the
statutory reporting framework. The IFRS results are discussed on pages 36 to
37 and the IFRS financial statements are set out from page 164 onwards.
Alternative performance measures
In prioritising the generation of sustainable cash flows from our operating
companies, performance metrics are monitored where they support this strategic
purpose, which includes ensuring that the Solvency II capital strength of the
Group is maintained. We use a range of Alternative Performance Measures
('APMs') to evaluate our business, including the below. Please see the APM
section on page 312 for further details.
Total cash generation
Cash generation represents the total cash remitted from the operating entities
to the Group, supported by the Operating Cash Generation (see below) and the
release of free surplus above capital requirements in the Life Companies,
which is generated through margins earned on life and pension products and the
release of capital requirements, and Group tax relief. This cash generation is
used by the Group to fund expenses, interest costs and shareholder dividends,
with any surplus then available to reinvest into organic and inorganic growth
opportunities.
Operating Cash Generation
Operating Cash Generation ('OCG') is a new reporting metric. It represents the
sustainable level of cash generation in our life companies each and every
year, that is remitted from our underlying business operations. It comprises
the emergence of cash as in-force business runs off over time and capital
unwinds, plus day one surplus from writing new business (net of day one strain
for fee-based business), group tax relief and recurring management actions. In
addition, it includes a small cash contribution from the release of the
Capital Management Policy that we hold in our Life Companies. The measure
provides the sources of recurring organic cash generated which can be used to
support sustainable cash remittances from the Life Companies, which in turn
supports the Group's dividend, group costs and debt interest as well as
funding investment to generate sustainable growth.
Incremental new business long-term cash generation
Incremental new business long-term cash generation is a key metric for
measuring growth. It represents the operating companies' cash generation that
is expected to arise in future years as a result of new business transacted in
the period.
New business net fund flows
Represents the aggregate net position of assets under administration inflows
less outflows for new business.
Adjusted operating profit
The Group uses adjusted operating profit as a measure of IFRS performance
based on long-term assumptions. Adjusted operating profit is less affected by
the short-term market volatility driven by Solvency II hedging (as illustrated
on page 36) and non-recurring items than IFRS profit. A more detailed
definition of adjusted operating profit is set out on page 312.
Solvency II
Solvency II is a key metric by which the Group makes business decisions and
measures capital resilience. It is a regulatory measure that prescribes the
measurement of value on a Solvency II basis and the calculation of the
solvency capital requirement ('SCR'). The excess value above the SCR is
reported as both a financial amount, 'Solvency II surplus', and as a ratio
'Solvency II Shareholder Capital Coverage Ratio ('SCCR')'.
Solvency II leverage
The Group seeks to manage the level of debt on its balance sheet by monitoring
its financial leverage ratio. Solvency II leverage is calculated as the
Solvency II value of debt divided by the value of Solvency II Regulatory Own
Funds. Values for debt are adjusted to allow for the impact of currency hedges
in place over foreign currency denominated debt.
Cash
£2,024m
Total cash generation REM APM
£1,514m
Incremental new business long-term cash generation REM APM
Group cash flow analysis
£m 2023 2022
Cash and cash equivalents at 1 January 503 963
Total cash generation1 2,024 1,504
Uses of cash:
Operating expenses (97) (78)
Pension scheme contributions (16) (16)
Debt interest (229) (244)
Non-operating cash outflows (111) (395)
Debt repayments (350) (450)
Debt issuance 346 -
Shareholder dividend (520) (496)
Total uses of cash (977) (1,679)
Support of BPA activity (288) (285)
Cost of Sun Life of Canada UK acquisition (250) -
Closing cash and cash equivalents at 31 December 1,012 503
1 Total cash receipts include £219 million received by the holding
companies in respect of tax losses surrendered (2022: £55 million).
Total cash generation
Cash generation represents cash remitted by the Group's operating companies to
the holding companies. Please see the APM section on page 312 for further
details of this measure.
Cash generation is principally used to fund the Group's operating costs, debt
interest and repayments, investment into growth and shareholder dividends.
Excess cash is available for investment into the business and/or additional
shareholder returns.
The cash flow analysis that follows reflects the cash paid by the operating
companies to the Group's holding companies, as well as the uses of those cash
receipts.
Cash receipts
Total cash generated by the operating companies during 2023 was £2,024
million (2022: £1,504 million). This exceeded the Group's upgraded target of
c.£1.8 billion for the year, due to additional management actions being
delivered.
Uses of cash
Operating expenses of £97 million (2022: £78 million) represent corporate
office costs, net of income earned on holding company cash and investment
balances. The increase compared to 2022 reflects the investment we have made
in our Group capabilities to support our growth strategy,
Debt interest of £229 million (2022: £244 million) reflects interest paid in
the period on the Group's debt instruments. The decrease year-on-year is due
to the repayment of debt in July 2022.
Non-operating cash outflows were £111 million (2022: £395 million). This
primarily comprises centrally funded projects and investments totalling £307
million. Of this, £129 million relates to Group project expenses for the
transition activity in relation to legacy platform migrations, £18 million
for other ongoing integration programmes including ReAssure and SLOC, £56
million of investment related to our growth propositions, and £12 million for
our Finance Transformation. These costs were partially offset by a £196
million inflow in respect of net collateral cash and hedge close-outs.
Debt repayments and issuance in 2023 reflect the debt re-terming exercise we
undertook in the fourth quarter.
The shareholder dividend of £520 million represents the payment of £260
million in May for the 2022 Final dividend and the payment of the 2023 Interim
dividend of £260 million in September.
Funding of £288 million (2022: £285 million) has been provided to the Life
Companies to support another strong year in BPA with £6.2 billion of premiums
written (2022: £4.8 billion). The Group's success in further optimising its
capital efficiency is reflected in the reduction of the Group's capital strain
on BPA to 2.7% (2022: 3.2%) on a pre-Capital Management Policy ('CMP') basis,
including the benefit of the Solvency II reform risk margin reduction. This
enabled the Group to write increased NB LTCG but with a similar level of
capital invested.
Incremental new business long-term cash generation
NB LTCG reflects the impact on the Group's future cash generation arising as a
result of new business transacted in the year. It is stated on an undiscounted
basis.
In 2023 we delivered another record year of organic new business growth
including NB LTCG of £1,514 million (2022: £1,233 million), enabling us to
achieve our 2025 target two years early.
Strong growth in our capital-light fee-based business, Pensions and Savings,
led to a contribution of £395 million (2022: £249 million). Our disciplined
approach in a buoyant BPA market drove an increase in NB LTCG in our
Retirement Solutions business to £1,066 million (2022: £934 million). Europe
and Other contributed £53 million (2022: £50 million).
Strong incremental new business long-term cash generation
Introducing Operating Cash Generation
As part of our evolved financial framework we are introducing Operating Cash
Generation ('OCG') as a new alternative performance metric to demonstrate the
long-term sustainability of our cash generation.
OCG is the combination of the operating surplus emerging and recurring
management actions. It represents the sustainable surplus generation remitted
from our Life Companies to the Group Holding Company. OCG can be easily
reconciled to operating surplus generation ('OSG'), with the bridge being the
small release of the Capital Management Policy ('CMP') held in our Life
Companies.
OCG totalled £1.1 billion in 2023, comprising £0.8 billion of surplus
emergence and £0.3 billion of recurring management actions.
Outlook
We will grow OCG sustainably over the long term through investing our surplus
cash across our three strategic priorities of Grow, Optimise and Enhance.
We will Grow by investing c.£100 million into our growth propositions and by
continuing to grow our annuities business with c.£200 million of capital
invested annually. This will support strong growth across our Pensions and
Savings and Retirement Solutions businesses.
As we Optimise, we will deliver recurring management actions of c.£400
million per annum by 2026, supported by c.£100 million investment in our
asset and liability optimisation capabilities and as our business grows.
As we Enhance our business, we will continue to migrate customers and drive
through cost efficiencies that will deliver c.£250 million of annual cost
savings by the end of 2026.
Together these will increase OCG by c.25% from £1.1 billion in 2023 to £1.4
billion in 2026. After which we expect it to grow at a sustainable mid-single
digit growth rate over the long term.
Future sources and uses of total cash generation
While OCG is our new primary metric, total cash generation remains very
important, as we invest across our strategic priorities.
We have set a new total cash generation target of £4.4 billion across
2024-2026, that will enable us to cover our recurring uses, pay our growing
dividend and invest in our business.
We expect to generate c.£3.7 billion of OCG over this period, which will more
than cover our recurring uses and our planned investment of capital into
annuities each year.
In addition we expect to generate a further c.£0.7 billion of non-operating
cash generation across 2024-2026 comprising other management actions and the
release of historic excess capital that has built up in our Life Companies.
That provides us with a significant amount of surplus cash that we can invest
across our strategic priorities.
Our HoldCo cash position is a healthy £1 billion today, which we expect to
remain broadly consistent over 2024 to 2026.
We are introducing Operating Cash Generation as a new metric to demonstrate
the long-term sustainability of our business model
Operating Cash Generation is expected to more than cover our recurring uses
and generates surplus to invest into our business
Capital
£3.9bn
Group Solvency II surplus (estimated)
176%
Group Solvency II shareholder capital Coverage Ratio (estimated) APM
Capital management
A Solvency II capital assessment involves a valuation in line with Solvency II
principles of the Group's Own Funds and a risk-based assessment of the Group's
Solvency Capital Requirement ('SCR').
The Group's Own Funds differ materially from the Group's IFRS equity for a
number of reasons, including the recognition of future shareholder transfers
from the With-Profits funds and future management charges on investment
contracts, the treatment of certain subordinated debt instruments as capital
items, and a number of valuation differences, most notably in respect of
insurance contract liabilities, taxation and intangible assets.
Group Solvency II capital position
Our Solvency II capital position remains strong and resilient, with a surplus
of £3.9 billion (2022: £4.4 billion), after the accrual for the deduction of
our 2023 Final dividend of £267 million. Our SCCR reduced marginally to 176%
(2022: 189%) but remains towards the upper-end of our 140-180% operating
range, providing the capacity to continue investing to grow, optimise and
enhance our business.
Change in Group Solvency II surplus and SCCR
Operating surplus generation increased the SII surplus by £1.1 billion,
contributing to an increase in the SCCR of 27%pts. This was comprised of our
ongoing surplus emergence which increased the SII surplus by £0.8 billion
during the year and recurring management actions of £0.3 billion.
Other management actions increased the SII surplus further by £0.4 billion
and added 16%pts to the SCCR.
Operating costs, debt interest and dividend totalled £0.9 billion, reducing
the SCCR by 19%pts.
We have also chosen to invest £0.4 billion of surplus capital into growth.
This includes £0.3 billion of capital investment to fund £6.2 billion of BPA
premiums written in the year, reducing the SCCR by 10%pts, and £0.1bn of
investment into our organic growth propositions, reducing the SCCR by a
further 3%pts.
Our comprehensive hedging strategy is designed to protect our capital
position. In 2023 this led to a small adverse impact from economic variances
of £(0.3) billion on our Solvency II surplus. This included a £(0.1) billion
adverse impact from unhedged gilt-swap spread movements, as well as adverse
currency movements and some other smaller adverse impacts.
We are on track for the effective date for Consumer Duty on back-book products
in July. Our ongoing focus on ensuring good outcomes for Heritage customers
means we have identified only a small number of products that we believe need
addressing in advance of the compliance date. We have set aside a prudent
c.£70 million of Solvency II capital to reflect the impact of the possibility
of introducing further charging caps on certain products, reducing the SCCR by
2%pts.
Other movements include the benefit of the Solvency II risk margin reform and
favourable longevity assumption changes. These were offset by the
strengthening of expense provisions associated with our transformation
projects, in addition to a net adverse impact arising on the completion of the
SLOC acquisition. Overall, these movements decreased Solvency II surplus by
£0.3 billion and the SCCR by 13%.
£3.9 billion Group Regulatory Solvency II surplus
£3.9 billion Group Shareholder Solvency II surplus
2023 change in Group Solvency II surplus
Estimated impact on PGH Solvency II(1) Surplus £bn SCCR %
Solvency II base 3.9 176
Equities: 20% fall in markets 0.1 5
Long-term rates: 100bps rise in interest rates2 0.1 6
Long-term rates: 100bps fall in interest rates2 (0.1) (5)
Long-term inflation: 50bps rise in inflation3 (0.1) (1)
Property: 12% fall in values4 (0.2) (5)
Credit spreads: 135bps widening with no allowance for downgrades5 (0.2) (4)
Credit downgrade: immediate full letter downgrade on 20% of portfolio6 (0.3) (9)
Lapse: 10% increase/decrease in rates7 (0.1) (1)
Longevity: 6 months increase8 (0.4) (8)
1 Illustrative impacts assume changing one assumption on 1 January 2024,
while keeping others unchanged, and that there is no market recovery. They
should not be used to predict the impact of future events as this will not
fully capture the impact of economic or business changes. Given recent
volatile markets, we caution against extrapolating results as exposures are
not all linear.
2 Assumes the impact of a dynamic recalculation of transitionals and an
element of dynamic hedging which is performed on a continuous basis to
minimise exposure to the interaction of rates with other correlated risks
including longevity.
3 Rise in Inflation: 15yr inflation +50bps.
4 Property stress represents an overall average fall in property values
of 12%.
5 Credit stress varies by rating and term and is equivalent to an
average 135bps spread widening. It assumes the impact of a dynamic
recalculation of transitionals and makes no allowance for the cost of
defaults/downgrades.
6 Impact of an immediate full letter downgrade across 20% of the
shareholder exposure to the bond portfolio (e.g. from AAA to AA, AA to A,
etc). This sensitivity assumes management actions are taken to rebalance the
annuity portfolio back to the original average credit rating and makes no
allowance for the spread widening which would be associated with a downgrade.
7 Assumes most onerous impact of a 10% increase/decrease in lapse rates
across different product groups.
8 Only applied to the annuity portfolio.
Sensitivity and scenario analysis
As part of the Group's internal risk management processes, the Own Funds and
regulatory SCR are regularly tested against a number of financial scenarios.
The table provides illustrative impacts of changing one assumption while
keeping others unchanged and reflects the business mix at the balance sheet
date. Extreme market movements outside of these sensitivities may not be
linear. While there is no value captured in the Group stress scenarios for
recovery management actions, the Group does proactively manage its risk
exposure. Therefore in the event of a stress, we would expect to recover some
of the loss reflected in the stress impacts shown.
Unrewarded market risk sensitivities
We have a low appetite to equity, interest rate, inflation and currency risks,
which we see as unrewarded, i.e. the return on capital for retaining the risk
is lower than for hedging it. In order to stabilise our Solvency II surplus,
we regularly monitor risk exposures and use a range of hedging instruments to
remain within a Board-approved target range. Equity risk primarily arises from
our exposure to a variation in future management fees on policyholder assets
exposed to equities, while our currency exposure primarily arises from our
foreign currency denominated debt. Our interest rate exposure principally
relates to our shareholder credit portfolio, while our inflation exposures
arises from both cost inflation expectations and inflation-linked policies.
Rewarded market risk sensitivities
We do however retain the credit risk in our c.£38 billion shareholder credit
portfolio, and property risk in equity release mortgages, where we see these
risks as rewarded. The shareholder credit assets are primarily used to back
the Group's annuity portfolio. Exposure to these risks is needed to back
growth in the Group's annuity portfolio. Stress testing is used to inform the
level of risk to accept and to monitor exposures against risk appetite. We
actively manage our portfolio to ensure it remains high quality and
diversified, and to maintain our sensitivities within risk appetite. Our
portfolio is c.99% investment grade and we have suffered no defaults,
testament to the proactive approach taken by our in-house asset management
team.
We also remain conservative in our property exposure. We have c.£4.5 billion
of our credit portfolio exposed to equity release mortgages, which are all
UK-based with an average rating of AA and average loan-to-value ('LTV') of
33%, and c.£1.1 billion in commercial real estate which is high quality and
all UK-based with an average LTV of 47%. The full sensitivity we focus on for
credit is a full letter downgrade of 20% of our credit portfolio, which is
£(0.3) billion and is therefore small relative to the Group's £3.9 billion
Solvency II surplus.
Managing demographic risks
We have three key demographic risks - lapse risk from early surrenders,
longevity risk on our annuity portfolio and mortality risk on our protection
book. We manage lapse risk through our strong customer proposition. Our
longevity risk principally arises from our annuity book, but this is managed
through reinsurance. We retain around half of this risk across our current
in-force book, and reinsure most of this risk on new business. Mortality risk
arises from our protection business and we seek to manage this as part of a
well-diversified portfolio.
Life Company Free Surplus
Life Company Free Surplus represents the Solvency II surplus for the Life
Companies that is in excess of their Board-approved CMPs. It is this Free
Surplus from which the Life Companies remit cash to Group. We retain a
significant Life Company Free Surplus of £2.2 billion which provides
resilience to the Group's long-term cash generation.
Solvency II capital outlook
We maintain a 140-180% SCCR operating range, which reflects our low
sensitivity to economic volatility due to our comprehensive hedging.
We have been at the top-end of our range for the past three years, but will
invest some of this surplus as we transform our business, with the investment
more front-end weighted across 2024-26. In addition, our intention to repay at
least c.£500 million of debt by the end of 2026 will also reduce our SCCR
over the coming years.
Leverage
We manage our leverage position by considering a range of factors including
our cash interest cover, the interplay of our balance sheet hedging, and our
capital tiering headroom. It also includes a number of output metrics that we
monitor, such as the Fitch leverage ratio and Solvency II leverage ratio.
Our approach to leverage has always been to increase leverage to support
M&A and then pay down that debt with surplus cash as it emerges. Since
2020 the Group has repaid c.£800 million of debt through this approach.
As at 31 December 2023, our Solvency II leverage ratio was 36% (2022: 34%).
This increased in 2023, largely due to our investment in growth, integration
and transformation. The Group's Fitch leverage ratio was 23% compared to full
year 2022 on a restated basis of 23%,and is favourably below Fitch's stated
range of 25-30% for an investment grade credit rating.
We plan to continue our approach of repaying M&A-related debt with surplus
cash, and subject to regulatory approval, we intend to repay at least £500
million of debt by the end of 2026, including the £250 million Tier 2 bond
that is callable in June 2024. This will support us in achieving a c.30%(1)
Solvency II leverage ratio by the end of 2026. This is a steady-state level of
leverage that we will believe is the appropriate for our business, absent
M&A.
1 Assuming economic conditions in line with 31 December 2023.
Earnings
£617m
Adjusted operating profit before tax APM
£4.6bn
Adjusted shareholders' equity APM
IFRS profit and loss statement 2023 20221,2
Pensions and Savings £190m £150m
Retirement Solutions £378m £349m
With-Profits £10m £54m
Europe and Other £132m £60m
Corporate Centre £(93)m £(69)]m
Adjusted operating profit before tax £617m £544m
Investment return variances and economic assumption changes £147m £(3,309)m
Amortisation and impairment of intangibles £(322)m £(353)m
Other non-operating items £(439)m £(262)m
Finance costs £(195)m £(199)m
Profit before tax attributable to non-controlling interest £28m £67m
Loss before tax attributable to owners £(164)m £(3,512)m
Tax credit attributable to owners £76m £855m
Loss after tax attributable to owners £(88)m £(2,657)m
1 2022 restated comparative to reflect adoption of IFRS 17
2 Incorporates changes to the Group's methodology for determining
adjusted operating profit since Half Year 2023 (see note B1 to the
consolidated financial statements for further details).
IFRS results
IFRS (loss)/profit is a GAAP measure of financial performance and is reported
in our statutory financial statements on page 164 onwards. Adjusted operating
profit before tax is a non-GAAP financial performance measure based on
expected long-term investment returns. It is stated before amortisation and
impairment of intangibles, other non-operating items, finance costs and tax.
Please see the APM section on page 312 for further details of this measure.
On 1 January 2023, the Group adopted the new accounting standard, IFRS 17:
'Insurance Contracts', with comparatives restated from 1 January 2022. IFRS 17
requires a company to recognise profits as it delivers insurance services
(rather than when it receives premiums) and to provide information about
insurance contract profits the company expects to recognise in the future. The
impact of the transition to IFRS 17 is set out in note A2.1.
IFRS loss after tax attributable to owners
The Group generated an IFRS loss after tax attributable to owners of £88
million (2022: loss of £2,657 million). The improvement versus 2022,
primarily reflects a £3,456 million improvement in economic variances due to
a much lower level of market volatility in the period, particularly interest
rates. This has been partially offset by an increase in non-operating items as
a result of our investment into growth in the period and ongoing migrations
and transformation.
Basis of adjusted operating profit
Adjusted operating profit is based on expected investment returns on financial
investments backing business where asset returns accrue to the shareholder and
surplus assets over the reporting period, with allowance for the corresponding
expected movements in liabilities (being the interest cost of unwinding the
discount on the liabilities). Adjusted operating profit includes the unwind of
the Contractual Service Margin ('CSM') and risk adjustment attributable to the
shareholder. The principal assumptions underlying the calculation of the
long-term investment return are set out in note B 2.1 to the IFRS consolidated
financial statements.
Adjusted operating profit includes the effect of variances in experience
relating to the current period for non-economic items, such as mortality and
expenses. It also incorporates the impacts of asset trading optimisation and
portfolio rebalancing where not reflected in the discount rate used in
calculating expected return. Any difference between expected and actual
investment return, along with other economic variances described further in
note B1.1 are shown outside of adjusted operating profit. Adjusted operating
profit is net of policyholder finance charges and policyholder tax.
Adjusted operating profit
The Group increased adjusted operating profit by 13% to £617 million (2022:
£544 million). This primarily reflects strong growth in our Pensions and
Savings business, which delivered adjusted operating profit of £190 million,
an increase of 27% year-on-year (2022: £150 million). This was largely driven
by higher AUA resulting in increased charges, and an improved margin through
operating leverage.
Our Retirement Solutions business delivered an adjusted operating profit of
£378 million (2022: £349 million). The 8% increase year-on-year primarily
reflects a higher expected investment margin as a result of higher risk-free
rates. The positive impact of BPA new business on CSM amortisation has offset
the run-off of the remaining annuity book despite the phasing of a significant
proportion of new business in late 2023.
With-Profits adjusted operating profit declined to £10 million (2022: £54
million) principally as a result of the run-off of this business and the
adverse impacts of modelling refinements in the period.
Europe and Other adjusted operating profit increased to £132 million (2022:
£60 million). This segment includes the expected investment margin from
surplus assets within shareholder funds, which has increased due to the
significant increases in interest rates over 2022. This has been partially
offset by a reduction in CSM amortisation following the strengthening of the
mortality assumptions on our Protection business.
The Group's Corporate Centre includes net operating costs in the period of
£93 million (2022: £69 million), which increased due to investment in
central functions to support our growth ambitions in the first phase of our
journey, partially offset by increased interest income on Holding Company
cash.
Investment return variances and economic assumption changes
The net positive economic variances of £147 million (2022: £3,309 million
loss) results from a more stable market environment compared with the
significant volatility experienced during 2022. The impact of positive changes
to discount rates, primarily on annuities and including the impact of
methodology refinements, more than offsets the losses arising from the impact
of positive equity market movements on the hedges the Group holds to protect
the Solvency II position. As the full value of future profits impacted by
equity markets is not held on the IFRS balance sheet, this results in an
'over-hedged' position on an IFRS basis.
Amortisation and impairment of intangibles
The previously acquired in-force business, relating to IFRS 9 accounted
capital-light fee-based products, is being amortised in line with the expected
run-off profile of the investment contract profits to which it relates. The
amortisation and impairment of acquired in-force business during the period of
£316 million (2022: £347 million) has decreased year-on-year reflecting the
impact of the business run-off. Amortisation and impairment of other
intangible assets totalled £6 million in the period (2022: £6 million).
Other non-operating items
Other non-operating items in the period totalled a £439 million loss (2022:
£262 million loss), inclusive of a £66 million gain recognised on the Sun
Life of Canada UK acquisition. This includes £169 million expenditure to
support our growth strategy and £36 million impact from setting up a new
European subsidiary that was required post-Brexit to continue serving some of
our overseas Heritage customers.
Other items include £217 million of costs relating to finance transformation
activities, £111 million in respect of ongoing integration, transition and
transformation projects, £12 million of other corporate project costs, and
net other one-off items totalling £74 million, including costs associated
with the Part VII transfer of three of the Group's Life insurance entities.
Lastly, finance costs of £195 million reflect interest borne on the Group
debt instruments and were broadly stable year-on-year (2022: £199 million).
Tax charge attributable to owners
The Group's approach to the management of its tax affairs is set out in its
Tax Strategy document which is available in the corporate responsibility
section of the Group's website.
The Group tax credit for the period attributable to owners is £76 million
(2022: £855 million tax credit) based on a loss (after policyholder tax) of
£(164) million (2022: loss of £(3,512) million). A reconciliation of the tax
charge is set out in note C8 to the Group financial statements.
Contractual Service Margin ('CSM')
The CSM represents a stock of future profits that will unwind into the P&L
in future years.
The Group had a CSM (gross of tax) of £2.9 billion as at 31 December 2023,
which grew by 10% in 2023 (2022: £2.6 billion) primarily due to new BPA
business written, the acquisition of the SLOC in 2023, interest accretion and
assumption changes, which was partly offset by the CSM release into the income
statement.
The CSM release in the period represents c.8% of the closing CSM (gross of
tax) pre release of £3.1 billion. We expect the release of the CSM (gross of
tax) to be c.5-7% over time, primarily driven by annuities.
Assets under administration
AUA provides an indication of the potential earnings capability of the Group
arising from its insurance and investment business, whilst AUA flows provide a
measure of the Group's success in achieving growth from new business.
Group AUA as at 31 December 2023 was £282.5 billion (2022: £259.0 billion),
an increase of 9% year-on-year. This increase was primarily driven by an
£18.7 billion benefit from positive market and other movements and £8.0
billion relating to the SLOC acquisition. Net inflows in Workplace, Retirement
Solutions, Europe and Other were £4.7 billion, £3.3 billion and £0.3
billion respectively, but these were offset by £1.6 billion of outflows in
Retail and £9.9 billion of legacy outflows.
Outlook
The investments we are making across our strategic priorities will support
strong growth in our IFRS adjusted operating profit before tax over the next
few years.
We are targeting £900 million of IFRS adjusted operating profit in 2026, up
from £617 million in 2023, reflecting a c.50% increase. This includes the
majority of the £250 million cost savings as well as the impact of our
organic growth and management actions.
We have an elevated level of non-operating costs at present, but we expect
these to normalise after we are through our three-year investment programme.
We have also suffered significant headwinds to shareholders equity from
adverse economics over the past two years, primarily related to the
significant rise in long-term interest rates and rise in equities. While
future economic impacts are hard to forecast, we would expect to see some
unwind of this adverse impact if interest rates return to normalised levels.
We would also earn higher revenue from higher asset values in our Pensions and
Savings business.
The other below the line items are more predictable and while we expect our
shareholders' equity to decline over the coming years, we expect it to remain
positive over the long term.
Our adjusted shareholders' equity, inclusive of the CSM, will remain broadly
stable near-term and then begin to grow. Supported by strong CSM growth from
our annuities business and other management actions.
As a reminder, our Group consolidated shareholders' equity is not a constraint
to the payment of our dividends. This is because our dividends are paid from
the Phoenix Group Holding Company, which is not impacted by IFRS 17 and has
c.£4.6 billion of distributable reserves.
Movement of IFRS 17 adjusted shareholders' equity over 2023
Capital allocation
52.65p
Total 2023 dividend per share
+2.5%
Final 2023 dividend increase
2023 dividend increase
Phoenix has demonstrated a strong dividend track record over the past 13
years, with a c.4% compound annual growth rate ('CAGR') since 2011. Our strong
strategic and financial performance in 2023 has supported a 2.5% recommended
increase in the Final 2023 dividend to 26.65p per share, taking the Total
dividend to 52.65p per share.
New capital allocation framework for the next phase of our journey
As we embark on the next stage of our journey, we are outlining a new capital
allocation framework.
There are two key underpins to our framework. The first is that we will
operate a progressive and sustainable ordinary dividend policy. The second is
that we will maintain our strong and resilient balance sheet, by operating
within a 140-180% Shareholder Capital Coverage Ratio range.
We will seek to balance the investment of our 2024-2026 surplus capital across
our strategic priorities of grow, optimise and enhance.
In our Grow strategic priority, we will invest c.£100 million into developing
our growth propositions and c.£200 million of capital per annum to grow our
annuities.
In our Optimise strategic priority, we will continue our approach of repaying
M&A-related debt using surplus cash, with an intention to repay at least
£500 million of debt by the end of 2026. This will support a Solvency II
leverage ratio of c.30%(1) by the end of 2026. We will also invest c.£100
million into our asset and liability optimisation capabilities to support
recurring managements over the long term.
In our Enhance strategic priority, we will invest c.£500 million on
migration, transformation and cost efficiency programmes bringing our
businesses onto a single Group-wide operating model that will further enhance
our cost efficiency.
Additional surplus capital, over and above these committed investments, will
be allocated to the highest return opportunities. This could include
additional investment into growth, further deleveraging, M&A, and/or
additional capital return to shareholders.
1 Assuming economic conditions in line with 31 December 2023.
New progressive dividend policy
The Board has evolved Phoenix's dividend policy to reflect the confidence it
has in the Group's strategy. The Group will now operate a progressive and
sustainable ordinary dividend policy.
The Board will continue to announce any potential annual dividend increase
alongside the Group's Full Year results and expects the Interim dividend to be
in-line with the previous year's Final dividend. The Board will continue to
prioritise the sustainability of our dividend over the very long term. Future
dividends and annual increases will continue to be subject to the discretion
of the Board, following assessment of longer-term affordability.
Outlook
Growing Operating Cash Generation that more than covers our recurring uses and
supports our new progressive and sustainable ordinary dividend policy.
Looking ahead
Our purpose is to help people secure a life of possibilities. The continued
execution against our three strategic priorities of Grow, Optimise and
Enhance, will support us in delivering strong financial outcomes for our
shareholders.
Clear financial outcomes for shareholders
We have a new set of ambitious 2026 targets, across our evolved financial
framework of cash, capital and earnings.
Starting with cash, Phoenix has set three new cash generation targets. The
first is that we expect Operating Cash Generation to grow to £1.4 billion in
2026, a c.25% increase from 2023. This growth underpins our Total cash
generation target, with a one-year target for 2024 of £1.4-1.5 billion, and a
three-year target of £4.4 billion across 2024-2026.
Our cash targets demonstrate our confidence in our ability to deliver
sustainable, growing cash generation over time.
In terms of capital, we will continue to maintain a strong Solvency II balance
sheet through our comprehensive hedging approach. This will see us continue to
operate within our Solvency II SCCR operating range of 140-180% and continue
to manage our key individual risk sensitivities on a Solvency II surplus
basis.
Our intention to repay at least £500 million of debt by the end of 2026. This
will support us on our path towards a c.30% Solvency II leverage ratio by the
end of 2026, which is an appropriate steady-state level for our business
absent M&A.
Turning to earnings, we are targeting IFRS adjusted operating profit to grow
c.50% to £900 million in 2026, as we grow, optimise and enhance our business.
This will include the majority of the c.£250 million of annual cost savings
we aim to deliver by the end of 2026.
We expect the improving macroeconomic outlook, with interest rates and
inflation normalising, to support our future growth ambitions and targets.
Delivering against the targets across our evolved financial framework of cash,
capital and earnings, in turn supports our new progressive and sustainable
ordinary dividend policy.
2024 will be another exciting year for Phoenix Group on our journey and as we
continue to deliver on our purpose and our strategy.
Rakesh Thakrar
Group Chief Financial Officer
Growing Operating Cash Generation supports our new progressive dividend policy
We have a clear set of supporting targets:
Cash
£1.4 billion Operating Cash Generation in 2026
£4.4 billion of Total cash generation across 2024-2026
£1.4-to-£1.5 billion of Total cash generation in 2024
Capital
140-180% Shareholder Capital Coverage Ratio operating range
Solvency II leverage ratio of c.30% by the end of 2026
Earnings
Targeting £900 million of IFRS adjusted operating profit in 2026
c.£250m of annual cost savings by 2026
Principal risks and uncertainties facing the Group
The Group's principal risks and uncertainties are detailed in this section,
together with their potential impact, mitigating actions in place and any
change in risk exposure since the Group's 2022 Annual Report and Accounts,
published in March 2023.
A principal risk is a risk or combination of risks that can seriously affect
the performance, future prospects or reputation of the Group, including risks
that would threaten its business model, solvency or liquidity. The Board Risk
Committee has carried out a robust assessment of principal risks and emerging
risks. As a result of this review, the 13 risks noted in the Group's 2022
Annual Report and Accounts have been retained. The articulation of the
principal risks related to transitioning acquired businesses and
Environmental, Social and Governance ('ESG') has been refined to reflect the
evolution of how these risks could impact the Group. The overall level of risk
exposure for ESG risks is now reported as 'Heightened' for the first time
since introduction in 2019, in recognition of the external headwinds which
could impact the Group's ability to effectively manage sustainability risks.
Both strategic and operational risk categories contain multiple principal
risks; risks in these categories are broadly ordered for their relevance to
enabling the Group to achieve its strategic priorities.
Further details of the Group's exposure to financial and insurance risks and
how these are managed are provided in note E6 and F11 to the IFRS consolidated
financial statements.
Strategic priorities
1 Grow
2 Optimise
3 Enhance
Impact Mitigation Change from 2022 Annual Report and Accounts
Strategic risk The Group fails to deliver long-term organic cash generation in
line with its Annual Operating Plan 1 3
Confidence in the Group might be diminished if it fails to deliver organic The Group's business unit structure brings focus and accountability. The key Unchanged
cash generation in line with targets shared, particularly as the Group seeks areas of growth are Pensions and Savings and Retirement Solutions.
to support people by offering a wide range of solutions to help customers
The Group viewed this risk as 'Improving' in the 2022 Annual Report and
journey to and through retirement. Each business unit holds an annual strategy setting exercise to consider the Accounts, reflecting the demonstrated success of the strategy to pursue
needs of potential and existing customers, the interests of shareholders, the organic cash generation; this view of the level of risk exposure is unchanged.
competitive landscape and the Group's overall purpose and objectives.
The Group has delivered strong organic growth in 2023, with new business net
The Group's Annual Operating Plan commits it to making significant investment fund flows of c. £7bn, compared to £3.9bn in 2022. This is in line with the
in its growth businesses, including propositional enhancements driven by Group's strategy to deliver a balanced business mix through leveraging its
customer insight. scale in the capital-light fee-based businesses and maintaining a disciplined
level of growth in annuities.
The Group is established in the Bulk Purchase Annuity ('BPA') market and
continues to invest in its operating model to further strengthen its As a result of this strong performance, the Group has delivered c. £1.5bn of
capability to support its growth plans. total new business long-term cash generation in 2023, achieving its 2025
target two years early.
For new BPA business, the Group continues to be selective and proportionate,
focusing on value not volume, by applying its rigorous Capital Allocation During 2023, the Group completed BPA transactions with a combined premium of
Framework. c. £6bn, compared to £4.8bn in 2022. This continues to demonstrate that the
Group has the ability to compete and win in the BPA market.
In September, the Group launched the Standard Life Pension Annuity to the open
market in the UK, becoming the first new provider to enter the annuity market
since the introduction of Pension Freedoms legislation in 2015.
The Pensions and Savings business, operating under the Standard Life brand,
has developed its operating model to centre around three trading channels:
Workplace, Retail Intermediated and Retail direct.
The Workplace business continues to attract good flows in, delivering net fund
flows of c. £4.5bn in 2023, nearly double the £2.4bn delivered in 2022. This
is supported by c. £2bn of new scheme assets transferred in 2023, including
the Siemens workplace scheme, which represents one of the largest scheme
transfers to have been tendered in the UK market in recent years,
demonstrating the strength of the Group's proposition.
The operating model and organisational design are being developed and
implemented for the Retail businesses, with the aim of maximising
opportunities for growth, both directly and through advisers, from new and
existing customers. During 2023, £1.079bn of assets were internally
transferred to Retail direct to enable existing customers to access modern
pension offerings to support them to and through retirement.
The Group is looking to expand the current offering of financial guidance and
advice to support customers in better preparing for their retirement.
Strategic risk continued The Group's strategic partnerships fail to deliver
the expected benefits 1 2 3
Strategic partnerships are a core enabler for delivery of the Group's The Group has in place established engagement processes and a rigorous Unchanged
strategy; they allow it to meet the needs of its customers and clients and governance structure to manage relationships with its strategic partners, in
deliver value for its shareholders. The Group's end state operating model will line with the Group's Supplier Management Model. The Group assessed this risk as 'Heightened' in the 2019 Annual Report and
leverage the strengths of its strategic partners whilst retaining in-house key
Accounts due to the increased dependency it placed on its strategic
skills which differentiate it from the market. The Group takes steps to monitor its supplier concentration risks and has partnerships, and then 'Improved' in 2020 due to strengthening controls around
business continuity plans to deploy should there be a significant failure of a the operation of those partnerships. Whilst the Group has further strengthened
However, there is a risk that the Group's strategic partnerships do not strategic partner. and simplified its strategic partnerships since that time, its assessment of
deliver the expected benefits leading to adverse impacts to customer outcomes, the level of risk exposure is unchanged from the 2020 position, reflecting the
strategic objectives, regulatory obligations and the Group's reputation and Group's ongoing reliance on its strategic partners to deliver the volume of
brand. change needed to advance the Group's strategic objectives.
Some of the Group's key strategic partnerships include: The Group continues to develop its partnership with TCS Diligenta to support
its strategic deliverables. The successful migration of another 700,000
abrdn plc: Provides investment management services to the Group including the Phoenix Life customer policies to TCS Diligenta's BaNCS platform was completed
development of investment solutions for customers. abrdn plc manages c. in November 2023. Planning for further migrations in 2024 and beyond is
£154bn of the Group's assets under administration, at December 2023. underway.
HSBC plc: Provides custody and fund accounting services to the Group to manage During 2023 the Group successfully transferred the custody and fund accounting
c. £165bn of its unit linked operations. services for £12.3bn of assets to HSBC plc. This is a key milestone in the
Group's journey towards implementing harmonised investment administration
TCS Diligenta: The Group's partnership covers a range of services including processes, and boosts its strategic partnership with HSBC plc.
customer administration and digital and technology capabilities to support
customer outcomes.
Strategic risk continued The Group fails to effectively transition acquired
businesses 1 2 3
The Group is exposed to the risk of failing to transform, simplify and better Integration plans are developed and resourced with appropriately skilled staff Unchanged
integrate the component parts of our acquired businesses to deliver leading to ensure target operating models are delivered in line with expectations. The
customer experiences and realise scale efficiencies successfully and Group's priority at all times is on delivering for its customers. Customer This risk was assessed as 'Heightened' in the Group's 2018 Annual Report and
efficiently. migrations are planned thoroughly with robust execution controls in place. Accounts due to the transformational nature of the Standard Life acquisition.
Lessons learned from previous migrations are applied to future activity to The assessment of the level of exposure to this risk is unchanged from the
The transition of acquired businesses into the Group, including customer continuously strengthen the Group's processes. 2018 position due to the volume of ongoing transition and integration
migrations, could introduce structural or operational challenges that, without
activity.
sufficient controls, could result in the Group failing to deliver the expected The Group views future M&A activity as an optional strategy accelerant and
outcomes for customers or achieve the efficiencies of its target operating will assess new inorganic growth opportunities against a clear set of criteria The Group has worked to transform from a financial engineering business to a
model. and seeks to execute those opportunities which score positively against these purpose-led, organically growing business. Focus is now on pivoting to
criteria. transform and simplify the business in the next phase of our journey.
The Group's acquisition strategy is supported by the Group's financial The Group continues to develop its partnership with TCS Diligenta to support
strength and flexibility, strong regulatory relationships and its track record its target operating model. Further customer migrations to TCS Diligenta's
of generating shareholder value and delivering good customer outcomes. BaNCS platform are planned in upcoming years, which will support delivery of
the Group's target operating model and enable all Phoenix policies to benefit
The financial and operational risks of target businesses are assessed in the from a more advanced administration platform. The key risk in respect of
acquisition phase and potential mitigants are identified which may include migration activity is that the time, and associated cost, to deliver these
temporary capital or liquidity buffers. whilst protecting customer outcomes is greater than expected and the Group
regularly assesses its reserving basis as a result.
In April 2023 the Group completed the acquisition of Sun Life of Canada UK, a
closed book UK life insurance company, from Sun Life Assurance Company of
Canada. The integration is progressing well, with the majority of functions
due to complete activity in April 2024.
The Group has now delivered c. 20% of the targeted c. £500m incremental
long-term cash generation target from this acquisition, with the remainder due
to emerge in 2025 and 2026.
Strategic risk continued The Group does not have sufficient capacity and
capability to fully deliver its significant change agenda which is required to
execute the Group's strategic objectives 1 2 3
The Group's ability to deliver change on time and within budget could be The Group's Change Management Framework defines a clear set of prioritisation Unchanged
adversely impacted by insufficient resource and capabilities as well as criteria and scheduling principles for new projects. This is to support the
inefficient prioritisation, scheduling and oversight of projects. The risk safe and controlled mobilisation of change in line with capacity and risk Whilst significant progress has been made on developing the change capability
could materialise within both the Group and its strategic partners. appetite and to strengthen business readiness processes to deliver change and capacity, there has been no change to the assessment of exposure to this
safely into the operational environment. These prioritisation principles are a risk since its introduction in the 2020 Annual Report and Accounts, which
This could result in the benefits of change not being realised by the Group core part of the Annual Operating Plan process, alongside a significant focus reflects the potential impact of failing to deliver the Group's significant
in the time frame assumed in its business plans and may result in the Group on the deliverability of the change portfolio in 2024. strategic and regulatory change agenda.
being unable to deliver its strategic objectives. Poor change delivery
could affect the Group's ability to operate its core processes in a controlled Information setting out the current and forecast levels of resource supply and The Group has continued to strengthen its Change Management Framework during
and timely manner. demand continues to be provided to accountable Senior Management to enable 2023 and expects to see an improving trend in this risk as those enhancements
informed decision-making. This aims to ensure that all material risks to are seen in project delivery, noting that the Group has a number of multi-year
project delivery are appropriately identified, assessed, managed, monitored change programmes so benefits will emerge in 2024 and beyond. The Group's
and reported. Chief Operating Officer is driving further enhancements to evolve and mature
the Group's change operating model. In 2023 this included significant effort
being put into the recruitment of senior change professionals, alongside the
assessment and further development of all internal change resources.
Strategic risk continued The Group fails to appropriately prepare for and
manage the effects of climate change and wider ESG
risks 1 2 3
The Group is exposed to the risk of failing to respond adequately to ESG risks The Group has a clear sustainability strategy in place which is updated Heightened
and delivering on its purpose; for example, failing to meet and make its annually to reflect the Group's latest plans and risk exposures, with key
sustainability commitments. metrics on progress monitored throughout the year. This risk is considered 'Heightened' for the first time since its introduction
as a principal risk in the 2019 Annual Report and Accounts.
A failure to manage ESG risk could result in adverse customer outcomes, Sustainability risk and climate risk are both embedded into the Group's RMF.
reduced colleague engagement, reduced proposition attractiveness, reputational
The key driver for this change is the rapidly evolving external ESG
risks and litigation. Sustainability risk 'cross-cuts' the Group's Risk Universe. This means the environment. In particular, the increasing politicalisation and weakening of
consideration of material sustainability-related risks is embedded in the government policies in relation to ESG risk (such as that of the UK
The Group is exposed to risks arising from the transition to a lower-carbon Group's risk policies, with regular reporting undertaken to ensure ongoing Government) as this could delay the necessary actions to transition to a low
economy, which could result in a loss in the value of policyholder and visibility of its exposure to these risks. Several sustainability-related risk carbon economy, making the potential future crystallisation of physical
shareholder assets. policies are also in place to cover the main sources of sustainability risk. climate events increasingly likely.
In addition, physical risk can give rise to financial implications, such as The Group is making good progress on integrating the management of climate Anti-climate change and ESG sentiment, particularly in high carbon-emitting
direct damage to assets, operational impacts either direct or due to supply change and wider ESG risks across the business, including in investment countries, could have far-reaching consequences for the pace and effectiveness
chain disruption, and impacts on policyholder health and wellbeing, impacting portfolios, with further work underway to embed its consideration fully across of climate action and continue to slow down policy changes. This could limit
demographic experience. the business. future ESG-aligned investment opportunities and make it more difficult for the
Group to manage ESG risk and meet its climate commitments.
The Group continues to engage with suppliers and asset managers on their
progress and approach to managing climate change and wider ESG risks. Recent reports from bodies such as the Intergovernmental Panel on Climate
Change and the United Nations Environment Programme highlight the slow
The Group undertakes annual climate-related stress and scenario testing and progress and significant scale of the challenge in restricting global warming
continues to build its climate scenario modelling capabilities. below 1.5°C. Real world events are occurring at a high rate, with 2023
setting the record for the hottest year ever on record.
The Group undertakes deep dives on emerging ESG risk areas (such as
greenwashing and ESG litigation risk) to increase understanding and awareness The Group is cognisant of this changing environment and undertakes thought
for Boards and Management, and facilitate control improvements where required. leadership and wide engagement with policymakers and market participants to
actively raise the debate around key sustainability themes.
Analysis indicates the Group is on track to achieve its 2025 targets if
planned actions are implemented. However, further internal actions will likely
be needed to achieve the 2030 targets, which are also increasingly dependent
on external factors such as the decarbonisation of the wider economy and
actions by others - in particular government, regulators, and the high
transition risk sector.
Customer risk The Group fails to deliver good outcomes for its customers or
fails to deliver propositions that continue to meet the evolving needs of
customers 1 2
The Group is exposed to the risk that it fails to deliver good outcomes for The Group's Conduct Risk Appetite sets the boundaries within which the Group Unchanged
its customers, leading to adverse customer experience and potential customer expects customer outcomes to be managed.
harm. This could also lead to reputational damage for the Group and/or
There has been no change to the overall level of exposure to this risk since
financial losses. The Group's Conduct Strategy, which overarches the Risk Universe and all risk it was introduced in the 2018 Annual Report and Accounts.
policies, is designed to detect where customers are at risk of poor outcomes,
In addition, a failure to deliver propositions that meet the evolving needs of minimise conduct risks, and respond with timely and appropriate mitigating The FCA's Consumer Duty represents a step change in approach for the industry,
customers may result in the Group's failure to deliver its purpose of helping actions. re-enforcing a shift away from a rules-based regime to principles-based
people secure a life of possibilities.
regulation. The Duty introduces an overarching requirement that firms, and
The Group has a suite of customer policies that set out key customer risks and their employees, must act to deliver good outcomes for retail customers. In
the Control Objectives that determine the Key Controls required to mitigate response, the Group mobilised a programme of work to implement the changes
them. required to achieve its interpretation of compliance in line with the key
regulatory deadlines of end-April 2023, end-July 2023 and end-July 2024.
The Group maintains a strong and open relationship with the FCA and other
regulators, particularly on matters involving customer outcomes. Despite having met the first two deadlines, the Group's view is that the risk
exposure around the Duty is elevated whilst the supervisory approach matures,
The Group's Proposition Development Process ensures consideration of customer and closed products are reviewed against the Duty's principles, most notably
needs and conduct risk when developing propositions. fair value, ahead of the end-July 2024 deadline. The Group has built on its
strong foundations, enhancing existing and creating new Group frameworks,
processes and strategies to meet Duty requirements. This includes a Fair Value
Framework designed to assess value in its broadest definition and refreshing
the Conduct Strategy to embed and maintain the culture of the Group, informed
by monitoring behaviours and customer outcomes.
The FCA is raising the bar in terms of expectations on firms to ensure and
evidence good outcomes are being achieved for their customers. The FCA
continues to provide guidance to the industry to support firms' plans to embed
the Duty within their businesses. It also recognises that its own
understanding and development of guidance and its supervisory approach will
continue to evolve.
The Group continues to monitor the impacts of the cost-of-living crisis on its
customers. Proactive action to support customers, including those most
vulnerable, is a priority. The Group is using customer behaviour research and
analysis to provide customers with the support and help that they need. This
has included improving all brand websites to provide general cost-of-living
support, encouraging customers to get in touch for help and including links to
external support websites.
Operational risk The Group or its outsource partners are not sufficiently
operationally resilient 1 2 3
The Group is exposed to the risk of causing intolerable levels of disruption The Group's Operational Resilience Framework enhances the protection of Unchanged
to its customers and stakeholders if it cannot maintain the provision of customers and stakeholders. It is designed to prevent intolerable harm and
important business services when faced with a major operational disruption. supports compliance with the regulations. The Group continues to work closely This strategic risk has been assessed as 'Heightened' in the Group's Annual
This could occur either in-house or within the Group's primary and downstream with its outsource partners to ensure that the level of resilience delivered Report and Accounts since 2020.
outsource partners, and be triggered by a range of environmental and climatic is aligned to the Group's impact tolerances.
factors such as the cost-of-living crisis and adverse weather phenomena.
Key drivers of this assessment are the increasing threat of cyber-attacks and
The Group has already taken some action, through previous strategic the Group's dependency on its outsource partners to have appropriate
The Group regularly conducts customer migrations as part of transition transformation activity, to reduce exposure to technological redundancy and resilience to operational disruption.
activities in delivering against its strategic objectives. In doing so, it key person dependency risk, increasing the resilience of its customer service.
faces the risk of interruption to its customer services, which may result in It continues to do so where further exposure is identified. The Group has a significant change and customer migration agenda over the next
the failure to deliver expected customer outcomes.
three to five years, effective completion of which is required to deliver
The Group regularly reviews important business service MI to ensure planned strengthening of its operational resilience both internally and with
Regulatory requirements for operational resilience, and a timetable to achieve appropriate action is taken to rectify and prevent customer harm. The Group is some material outsourced service providers. This exposes the Group to
full compliance, were published in March 2021. Whilst the specific requirement working to further strengthen and enhance the overall resilience of the Group increased risk. However, this is mitigated through strengthened Operational
to work within set impact tolerances takes effect in March 2025, the Group is and its outsource partners by March 2025 through its Operational Resilience Resilience and Change Management Frameworks, where the risk of late delivery
already exposed to regulatory censure in the event of operational disruption Remediation Project. is actively managed by both the relevant change programme and separate
should the regulator determine that the cause was a breach of existing
operational resilience remediation governance and reporting.
regulation. The Group and its outsource partners have well-established business continuity
management and disaster recovery frameworks that are annually refreshed and The quantum of strategic customer transformation activity requires subject
regularly tested. Disruption events are used to assess lessons learned to matter expertise to execute successfully. The Group's operational resilience,
identify any continual improvements to be made. internally and with material third parties, would be impacted by a large-scale
loss of colleagues, for example due to illness or incapacity such as
influenza, in the UK or globally. Such impacts are difficult to mitigate in
the short-term; however, the Group and material suppliers made substantial
investments in remote working capability to manage the impacts of COVID-19,
which would be expected to help mitigate the impacts of a further pandemic to
service continuity.
Operational risk continued The Group is impacted by significant changes in the
regulatory, legislative or political environment 1 2 3
Changes in regulation could lead to non-compliance with new requirements that The Group undertakes proactive horizon scanning to understand potential Unchanged
could impact the quality of customer outcomes, lead to regulatory sanction, changes to the regulatory and legislative landscape. This allows the Group to
impact financial performance or cause reputational damage. These could require understand the potential impact of these changes to amend working practices to This risk was assessed as 'Heightened' in the Group's 2021 Annual Report and
changes to working practices and have an adverse impact on resources and meet the new requirements by the deadline. Accounts due to the uncertainty around Solvency II reforms and the FCA's
financial performance.
proposed Consumer Duty. These, and the significant undertaking to achieve
The Group engages with many political parties and industry bodies to foster compliance with IFRS 17 in 2023, were the key drivers of the assessment of
Political uncertainty or changes in the government could see changes in policy collaboration and inspire change which supports the Group's purpose of helping risk as further 'Heightened' in the 2022 Annual Report and Accounts and the
that could impact the industry in which the Group operates. customers secure a life of possibilities. current assessment is unchanged from that position.
The volatile political environment remains 'Heightened' ahead of worldwide
elections in 2024, including an expected UK General Election. The current
administration continues to face economic headwinds, management of which has
implications for the Group's customer base, including the cost-of-living
crisis, increased borrowing costs and the potential increase in vulnerability.
In June 2023, HMT published draft legislation related to the Solvency II
reforms, indicating the reform implementation would be staged with some
reforms coming into force on 31 December 2023 and the remainder on 30 June
2024. The Prudential Regulation Authority ('PRA') has since issued two of
three anticipated consultations on the rules to implement those reforms in H2
2023, and its near final policy to go live at year-end 2024, relating to
Internal Models, Transitional measures on Technical Provisions and Group
supervision. Internal teams are reviewing the detail to assess what actions
are needed to ensure the Group is compliant with the new rules.
The Group supports the PRA and HMT's objectives to reform the regulations to
better suit the UK market whilst maintaining appropriate safeguards for
policyholders. The financial impact of the reforms will depend on the exact
detail of the final legislation. The relatively short time period between the
PRA's final Policy Statement and the implementation date of the new rules
contributes to the status of this risk. The Group will therefore remain
actively involved in industry lobbying on Solvency II and is preparing as much
as possible ahead of time to ensure compliance with new rules at the point of
implementation.
The Group views the FCA's Consumer Duty as well aligned to its strategic
priority of helping people secure a life of possibilities and, from 31 July
2023, the Group is materially compliant with the Duty for its open products.
Focus remains on reviewing customer journeys and fair value assessments for
closed products to achieve compliance with the Duty's principles for these
products ahead of the 31 July 2024 deadline.
In November 2023 the FCA issued Sustainability Disclosure Requirements and
investment labelling requirements which aim to inform and protect consumers
and improve trust in the market for sustainable investments. The Group
supports the FCA's aims noting that terminology used and a lack of consistency
between providers makes it difficult for consumers to navigate. The Group has
mobilised a project to ensure its practices align with the new regulation.
In December 2023, the FCA issued the Advice Guidance Boundary Review
consultation paper. The consultation could lead to a significant change in the
way that people who cannot access advice are supported in the industry and the
Group is actively engaging with the FCA on this topic.
IFRS 17 aims to standardise insurance accounting across the industry and
achieving compliance has been a significant undertaking. The Group will
continue its finance transformation programme in 2024 to further streamline
and automate IFRS 17 processes to support efficient financial reporting in the
future.
Operational risk continued The Group or its supply chain are not sufficiently
cyber resilient 2 3
Phoenix Group is the UK's largest long-term savings and retirement business, The Group is continually strengthening its cyber security controls, attack Unchanged
with a significant profile, which leads to greater interest from cyber detection and response processes, identifying weaknesses through ongoing
criminals. The world continues to become increasingly digitally connected and assessment and review. This risk was assessed as 'Heightened' in the Group's 2022 Annual Report and
cyber-attacks remain a major threat to the Group. Over the past five years the
Accounts and this remains unchanged.
Group has grown from 5m to 12m customers, while the number of colleagues in The Enterprise Information Security Strategy includes a continuous Information
the Group has grown from 900 to over 7,500, not including contractors. In Security and Cyber Improvement Programme, which is driven by input from the The UK cyber threat level remains elevated, due to the sustained
addition, the Group's footprint includes engagement with c. 1,800 suppliers Annual Cyber Risk Assessment and Annual Cyber Threat Assessment that utilises Russia/Ukraine war, China/Taiwan tensions, and the addition of the
which increases the attack surface significantly. This continual growth poses internal and external threat intelligence sources. Israel/Palestine armed conflict. Cyber threat levels remain high with
a greater risk of cyber-attack which could have a significant impact on
increased likelihood of a cyber-attack from a State actor; however it is
customer outcomes, strategic objectives, regulatory obligations and the The Group continues to consolidate its cyber security tools and capabilities highly unlikely that a Nation State actor would directly target the Group and
Group's reputation and brand. and the Enterprise Information Security Strategy 2023-2025 includes delivery any impact would be as a result of indirect cyber-attacks against the UK's
of a Group Identity Platform and Zero Trust model, Supplier Assurance critical national infrastructure, IT or information security service providers
Based on external events and trends, the threat posed by a cyber security Platform, Secure Cloud Adoption and proactive Data Loss Prevention. or global financial services companies. Cyber criminals continue to be the
breach remains high and the complexity of the Group's increasingly
Group's most likely threat, primarily due to the type of data held by
interconnected digital ecosystem exposes it to multiple attack vectors. These The specialist second line Information Security and Cyber Risk team provides financial sector organisations being attractive to criminal actors.
include phishing and business email compromise, hacking, data breach and independent oversight and challenge of information security controls,
supply chain compromise. identifying trends, internal and external threats and advising on appropriate On 19 April 2023, the UK's National Cyber Security Centre issued an alert
mitigation solutions. warning of a heightened risk from attacks by state-aligned Russian
Increased use of online functionality to meet customer preferences and
hacktivists, urging all organisations in the country to apply recommended
flexible ways of working, including remote access to business systems, adds The Group continues to enhance and strengthen its outsourced service provider security measures.
additional challenges to cyber resilience and could impact service provision and third-party oversight and assurance processes. Regular Board, Executive,
and customer security. Risk and Audit Committee engagement occurs within the Group. The Group's cyber controls are designed and maintained to repel the full range
of cyber-attack scenarios; whilst the Group's main threat is considered to be
The pace of change is accelerating due to the rapid rise of artificial The Group holds ISO 27001 Information Security Management Certification for cyber crime, from individuals or organised crime groups, the same controls are
intelligence ('AI'), which in turn is compounding the threats and as a result, its Workplace Pension and Benefits schemes, which provides confidence to both utilised to defend against a Nation State-level cyber-attack.
the cyber world is a more dangerous place than ever before. AI also has the clients and internal stakeholders that it is committed to managing security.
potential to improve cyber security by dramatically increasing the timeliness The single consolidated Group Supplier Information Security Framework, which
and accuracy of threat detection and response. Cyber security is an essential is improving the Security Oversight and Assurance of the Group's large
pre-condition for the safety of AI systems and is required to ensure portfolio of Outsourced Service Providers ('OSP'), third- and fourth-party
resilience, privacy, fairness, reliability and predictability. suppliers, continues to mature. Further embedding and maturing over the next
12 months will help mitigate the risks associated with supply chain cyber
security, which is considered the Group's top cyber security threat.
Vulnerability management continued to mature throughout 2023 with the
Enterprise Cyber Exposure Score ('CES') remaining steady. The Group received
formal approval from the FCA and PRA in July 2023 for closure of the
Cybersecurity Best Practice Evaluation and Testing ('CBEST') remediation
programme.
Operational risk continued The Group fails to retain or attract a diverse and
engaged workforce with the skills needed to deliver its strategy 1 2 3
Delivery of the Group's strategy is dependent on a talented, diverse and The Group aims to attract and retain colleagues from all backgrounds by Unchanged
engaged workforce. creating a shared sense of purpose and commitment to our strategy, supported
by offering competitive terms and conditions, benefits, and flexibility. There has been no change to the overall level of exposure to this risk since
This risk is inherent in the Group's business model given the nature of Monthly colleague surveys promote continuous listening, allow rapid it was introduced in the 2018 Annual Report and Accounts. This is driven by
acquisition activity and specialist skill sets. identification of concerns and actions that help improve engagement. The Group acknowledgement of the significant amount of integration activity within the
looks to respond proactively to external social, economic and marketplace Group and uncertainty regarding the longer-term social and marketplace impacts
Potential areas of uncertainty include the ongoing transition of ReAssure events that impact colleagues. of the pandemic and cost-of-living crisis on colleague attrition, sickness,
businesses into the Group, the expanded strategic partnership with TCS
motivation and engagement. Skills essential to the Group continue to be in
Diligenta and the introduction of the flexible working model. The increased scale and presence of the Group, and success in multi-site and high-demand in the wider marketplace. The Group monitors this closely and
remote working, gives greater access to a larger talent pool to attract and continues to remain confident in the attractiveness of its colleague
Potential periods of uncertainty could result in a loss of critical corporate retain in the future. In addition, the Group's graduate and early career proposition.
knowledge, unplanned departures of key individuals, or the failure to attract programmes helps to support the talent pipeline.
and retain individuals with the appropriate skills to help deliver the Group's The Group launched Midlife MOT assessments to help colleagues take stock in
strategy. the key areas of wealth, work and wellbeing.
This could ultimately impact the Group's operational capability, its customer The Group continues to leverage apprenticeships to support workforce diversity
relationships and financial performance. and to fill key skills, creating bespoke graduate and early careers programmes
for specialist technical areas.
The Group continues to successfully operate a flexible working model, with
strategic investments in technology and other resources maximising its
effectiveness. The Group introduced Phoenix Flex as a core part of its
employee offering in 2023, to help support colleagues in balancing their
personal and professional lives, by encouraging and celebrating flexibility at
work, embracing differences, and helping colleagues to thrive.
Market risk Adverse investment market movements or broader economic forces can
impact the Group's ability to meet its cash flow targets, along with the
potential to negatively impact customer investments or sentiment 1 2 3
The Group and its customers are exposed to the implications of adverse market The Group undertakes regular monitoring activities in relation to market risk Unchanged
movements. This can impact the Group's capital, solvency, profitability and exposure, including limits in each asset class, cash flow forecasting and
liquidity position, fees earned on assets held, the certainty and timing of stress and scenario testing. In particular, the Group's increase in exposure This risk was assessed as 'Heightened' in the Group's 2019 Annual Report and
future cash flows and long-term investment performance for shareholders and to residential property and private investments, as a result of its BPA Accounts, and then again in 2020 due to ongoing economic uncertainty,
customers. investment strategy, is actively monitored. geopolitical tensions, the impacts of COVID-19 and uncertainty around interest
rates. Whilst some of these have lessened, they remain the key drivers for the
There are a number of drivers for market movements including government and The Group continues to implement de-risking strategies and control current assessment of exposure to this risk.
central bank policies, geopolitical events, market sentiment, sector-specific enhancements to mitigate unwanted customer and shareholder outcomes from
sentiment, global pandemics and financial risks of climate change, including certain market movements, such as equities, interest rates, inflation and The global macro-economic environment remains highly uncertain; although
risks from the transition to a low carbon economy. foreign currencies. prices continue to rise, the rate of inflation is lower. The UK Consumer Price
Index is down to 4.0% in January 2024 from a peak of 11.1% in October 2022.
The Group maintains cash buffers in its holding companies and has access to a There is an increased expectation that the Bank of England will achieve its
credit facility to reduce reliance on emerging cash flows. target of 2% by the end of 2025.
The Group closely monitors and manages its excess capital position and it The Bank of England base rate has increased from 0.1% in December 2021 to
regularly discusses market outlook with its asset managers. 5.25% in August 2023, and remains at this level, with the outlook for this to
remain stable until summer 2024 before reductions can be expected. Higher
interest rates, coupled with cost-of-living rises, have suppressed residential
property prices. These are expected to bottom out in summer 2024 and see a
return to growth after interest rates start to come down. UK gilt yields
remain high, rivalling the levels seen during the 2022 mini-budget market
event. The Group continues to monitor and manage its market risk exposures,
including to interest rates and inflation, and to markets affected by the
increasing number of geopolitical conflicts and concerns. For example,
continued attacks on shipping in the Red Sea pose a risk of worsening
inflationary pressures and the downstream effects on interest rates. The
Group's strategy continues to involve hedging the major market risks and, in
2023, the Group's Stress and Scenario testing programme continued to
demonstrate the resilience of its balance sheet to market stresses.
Contingency actions remain available to help manage the Group's capital and
liquidity position in the event of unanticipated market movements.
Insurance risk The Group may be exposed to adverse demographic experience
which is out of line with expectations 1 2
The Group has guaranteed liabilities, annuities and other policies that are The Group undertakes regular reviews of demographic experience and monitors Unchanged
sensitive to future longevity, persistency and mortality rates. For example, exposure relative to quantitative risk appetite limits.
if annuity policyholders live for longer than expected, then the Group will
This risk was assessed as 'Heightened' in the 2020 Annual Report and remains
need to pay their benefits for longer. Monitoring includes identifying any trends or variances in experience, in 'Heightened'. The assessment is driven by continued uncertainty around future
order to appropriately reflect these in assumptions. demographic experience driven primarily by the long-term effects of COVID-19
The amount of additional capital required to meet additional liabilities could
on life expectancy; potential health risks from rising NHS waiting times; the
have a material adverse impact on the Group's ability to meet its cash flow The Group continues to manage its longevity risk exposures, which includes the rise in long-term sickness rates observed across the UK workforce; and health
targets. use of longevity swaps and reinsurance contracts to maintain this risk within and customer behaviour implications from the cost-of-living crisis.
appetite.
Demographic experience and the latest assessment of future trends continue to
Where required, the Group continues to take capital management actions to be considered in regular assumption reviews, including making appropriate
mitigate adverse demographic experience. allowance for the impacts of COVID-19 on both longevity and mortality as part
of the 2023 assumption reviews.
The Group continues to monitor customer behaviour as a result of the
cost-of-living crisis to ensure its impact on demographic assumptions is
appropriately reflected in regular assumption reviews. Proactive action is
being taken to ensure support is provided to customers as the impacts from the
cost-of-living crisis continue to materialise.
The Group completed BPA transactions with a combined premium of c. £6bn in
2023. Furthermore, the launch of the new Standard Life Pension Annuity
('SLPA') product in the second half of 2023 is a significant milestone for the
Group. Consistent with previous transactions, the Group continues to reinsure
the vast majority of the longevity risk using longevity swaps and reinsurance
contracts that are reviewed regularly.
Credit risk The Group is exposed to the risk of downgrade or failure of a
significant counterparty 1 2 3
The Group seeks rewarded credit risk in order to drive value for shareholders The Group seeks to take credit risk by maintaining a high quality and Unchanged
and invests in a wide range of credit risky assets in accordance with its diversified credit investment portfolio and ensuring relationships are with
strategic asset allocation. highly rated counterparties. In the Group's 2020 Annual Report and Accounts, this risk was assessed as
'Heightened' as a result of the market volatility and wider economic and
The Group is exposed to the risk of downgrades and deterioration in the The Credit Risk Policy and Counterparty Limit Framework sets out a system of social impacts arising from COVID-19. While the residual risks from COVID-19
creditworthiness or default of investments, derivatives or banking controls to manage this risk within appetite with early warning indicators to have receded, the current assessment of the level of exposure to this risk is
counterparties. manage the most material exposures within acceptable tolerances. This includes unchanged from the 2020 position, driven by the ongoing geopolitical tensions,
the management of risks linked to climate change, including the impact on economic uncertainty and persistent high inflation.
This could cause immediate financial loss or a reduction in future profits. assets from transitioning to a low carbon economy.
Over 2023 the Group continued to undertake actions to increase the overall
The Group is also exposed to trading counterparties, such as reinsurers or The Group regularly monitors its counterparty exposures and has specific credit quality of its portfolio and mitigate the impact on risk capital of
service providers, failing to meet all or part of their obligations. This limits in place relating to individual counterparties (with sub-limits for future downgrades. This positive progress is balanced by risks arising from
would negatively impact the Group's operations that may in turn have adverse each credit risk exposure), sector concentration, geographies and asset class. geopolitical conflicts such as those in Ukraine and the Middle East, and
effects on customer relationships and may lead to financial loss. Limits also restrict exposure to BBB+ and below rated assets. supply chain disruptions arising from the risk of deterioration in the
relationship between the USA and China. Uncertainties over the global economic
The Group undertakes regular stress and scenario testing of the credit outlook, persistent high inflation and higher for longer interest rates
portfolio. Where possible, exposures are diversified using a range of present an increased risk of defaults and downgrades. However, a UK sovereign
counterparty providers. All material reinsurance and derivative positions are downgrade is less probable than at the end of 2022, following both Moody's and
appropriately collateralised. S&P's revision of the UK credit rating's outlook from 'negative' to
'stable' during 2023. This has a positive impact on UK-related assets
The Group regularly discusses market outlook with its asset managers in including Gilts, Housing Associations and Local Authority Loans.
addition to the second line Risk oversight provided.
Despite the failure of a number of US regional banks and a
For mitigation of risks associated with stock-lending, additional protection regulator-facilitated merger of Credit Suisse with UBS in early 2023, the
is provided through collateral and indemnity insurance. Group's view is that a full-blown banking crisis will not follow. In addition,
the Group has limited exposure to banks with idiosyncratic risks.
The Group has no direct shareholder credit exposure to Russia or Ukraine and
no exposure to sanctioned entities.
The Group continues to increase investment in illiquid credit assets as a
result of BPA transactions. This is within appetite and in line with the
Group's strategic asset allocation plans. The growth in illiquid assets will
be met by growth in the overall Group credit portfolio.
Emerging risks and opportunities
The Group's Senior Management and Board take emerging risks and opportunities
into account when considering potential outcomes. This determines if
appropriate management actions are in place to manage the risk or take
advantage of the opportunity. Two examples of key risks and opportunities
discussed by Senior Management and the Board during 2023 are:
Description Risk Universe category
Quantum computing
Quantum computing has the potential to deliver improved actuarial analysis, Operational
portfolio optimisation, risk modelling and management, forecasting and
enhanced fraud prevention. It has the ability to arrive at feasible solutions
for optimisation problems, or find better accuracies for machine learning
problems, or run simulations exponentially faster. However, there are
significant risks to consider, such as the potential for quantum computing to
be used with malicious intent against the Group. The Group will seek to get
'quantum-safe' as soon as possible, to minimise the magnitude of emerging
threats, including the potential of breaking current encryption systems, which
would leave personal data of the Group's customers vulnerable to hackers.
Switching from one encryption regime to another will take years to implement
with the payoff timeline for incorporating quantum resources currently
perceived as being in excess of three years. It is crucial for the Group to
develop quantum-resistant encryption algorithms and implement robust security
measures to protect sensitive information. There is a potential opportunity to
maximise capital preservation and commercial differentiation, by leveraging
the exponential growth in data available to the market.
Pensions innovation
Changing customer expectations around simplicity of products, personalisation Customer
and increasing technology-based interaction presents greater risk from market
disruptions. Customers are increasingly looking for frictionless services,
which will heighten competition in offering a complete experience and
solutions to customer needs. Aside from these risks, this does represent a
significant opportunity for the Group to meet ever-evolving customer needs to
become a trusted partner to and through retirement.
The Group continues to partner with innovative start-ups, providing user
experience and technical delivery support for priority proposition
initiatives. Digital and Workplace successfully launched Phoenix Group's
Innovation Forum, inviting new partners from TCS COIN and FinTech Scotland
networks to apply to work with the Group on defined challenges. The Group
tracks industry change including on the use of analytics; ensuring compliance
with cookies regulation; simplifying the process to gather permissions to
market; and changes via Consumer Duty. The Group has an opportunity around
future ways of working and innovation, leading to improved and enhanced
customer experiences whilst ensuring that regulatory work fully supports good
customer outcomes within the next one to three years.
Statement of Directors' responsibilities
Statement of Directors' responsibilities in respect of the Annual Report of
Phoenix Group Holdings plc
The Directors are responsible for preparing the Annual Report, consolidated
financial statements and the Company financial statements in accordance with
applicable United Kingdom law and regulations.
The Board has prepared a Strategic report which provides an overview of the
development and performance of Phoenix Group's business for the year ended 31
December 2023, covers the future developments in the business of Phoenix Group
and its consolidated subsidiaries and provides details of any important events
affecting the Company and its subsidiaries after the year end. The Strategic
report and the Directors' report together constitute the management report as
required under DTR 4.1.8R.
Company law requires the Directors to prepare the consolidated and the Company
financial statements for each financial year. Under that law the Directors
have elected to prepare the consolidated and Company financial statements in
accordance with UK-adopted International Accounting Standards ('IASs') in
conformity with the requirements of the Companies Act 2006. 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
Phoenix Group and of the profit or loss of Phoenix Group and the Company for
that period.
In preparing these financial statements the Directors are required to:
· select suitable accounting policies in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors and then apply
them consistently;
· make judgements and accounting estimates that are reasonable,
relevant and reliable;
· present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable information;
· provide additional disclosures when compliance with the specific
requirements in IASs is insufficient to enable users to understand the impact
of particular transactions, other events and conditions on Phoenix Group
financial position and financial performance;
· in respect of Phoenix Group financial statements, state whether
UK-adopted IASs have been followed, subject to any material departures
disclosed and explained in the financial statements;
· in respect of the parent Company financial statements, state
whether applicable UK accounting standards, have been followed, subject to any
material departures disclosed and explained in the financial statements; and
· prepare the consolidated and the Company financial statements on
the Going concern basis unless it is inappropriate to presume that Phoenix
Group will continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain Phoenix Group's transactions and disclose with
reasonable accuracy at any time the financial position of Phoenix Group, and
enable them to ensure that the Company and the consolidated financial
statements and the Directors' Remuneration report comply with the Companies
Act 2006. They are also responsible for safeguarding the assets of Phoenix
Group and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic report, Directors' report, Directors' Remuneration
report and Corporate governance statement that comply with that law and those
regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
The Directors as at the date of this Directors' report, whose names and
functions are listed in the Board of Directors section on pages 64 to 67,
confirm that, to the best of their knowledge:
· the consolidated financial statements, prepared in accordance
with UK-adopted IASs give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company and undertakings included
in the consolidation taken as a whole;
· the Annual Report, including the Strategic report, includes a
fair review of the development and performance of the business and the
position of the Company and undertakings included in the consolidation taken
as a whole, together with a description of the principal risks and
uncertainties that they face; and
· the Annual Report, taken as a whole, is fair, balanced and
understandable and provides the information necessary for users (who have a
reasonable knowledge of business and economic activities) to assess the
Company's position, performance, business model and strategy.
The Strategic report and the Directors' report were approved by the Board of
Directors on 20 March 2024.
By order of the Board
Andy Briggs
Group Chief Executive Officer
Rakesh Thakrar
Group Chief Financial Officer
21 March 2024
Consolidated income statement
For the year ended 31 December 2023
2023 2022
restated1
Notes £m £m
Insurance revenue C1 4,861 5,142
Insurance service expenses C5 (4,354) (5,248)
Insurance service result before reinsurance contracts 507 (106)
Net expenses from reinsurance contracts (180) (162)
Insurance service result C5 327 (268)
Fees and commissions C2 967 858
Net investment income/(expense) C3 20,840 (38,012)
Other operating income 86 102
Gain on acquisition H2 66 -
Total income/(expense) 22,286 (37,320)
Net finance (expense)/income from insurance contracts C4 (6,982) 22,879
Net finance income/(expense) from reinsurance contracts C4 179 (1,053)
Net insurance finance (expense)/income (6,803) 21,826
Change in investment contract liabilities (13,894) 14,487
Change in reinsurers' share of investment contract liabilities 873 (1,448)
Amortisation and impairment of acquired in-force business G2 (318) (349)
Amortisation of other intangibles G2 (6) (6)
Administrative expenses C5 (1,674) (1,421)
Net (expense)/income attributable to unitholders (186) 372
Profit/(loss) before finance costs and tax 278 (3,859)
Finance costs C7 (258) (230)
Profit/(loss) for the year before tax 20 (4,089)
Tax (charge)/credit attributable to policyholders' returns C8 (184) 577
Loss before the tax attributable to owners (164) (3,512)
Tax (charge)/credit C8 (108) 1,432
Add: tax attributable to policyholders' returns C8 184 (577)
Tax credit attributable to owners C8 76 855
Loss for the year attributable to owners (88) (2,657)
Attributable to:
Owners of the parent (116) (2,724)
Non-controlling interests D5 28 67
(88) (2,657)
Earnings per ordinary share
Basic (pence per share) B3 (13.8)p (274.9)p
Diluted (pence per share) B3 (13.8)p (274.9)p
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
Statement of comprehensive income
For the year ended 31 December 2023
Notes 2023 2022
restated1
Loss for the year (88) (2,657)
Other comprehensive (expense)/income:
Items that are or may be reclassified to profit or loss:
Cash flow hedges:
Fair value (losses)/gains arising during the year D3 (107) 181
Reclassification adjustments for amounts recognised in profit or loss D3 75 (186)
Exchange differences on translating foreign operations 4 32
Items that will not be reclassified to profit or loss:
Remeasurement of owner-occupied property D3 2 (5)
Remeasurements of net defined benefit asset/liability G1 (66) 940
Tax credit/(charge) relating to other comprehensive income items C8 21 (283)
Total other comprehensive (expense)/income for the year (71) 679
Total comprehensive expense for the year (159) (1,978)
Attributable to:
Owners of the parent (187) (2,045)
Non-controlling interests D5 28 67
(159) (1,978)
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
Statement of consolidated financial position
As at 31 December 2023
Notes 31 December 2023 31 December 2022 1 January 2022
£m restated1 restated1
£m £m
Assets
Pension scheme asset G1 26 14 36
Reimbursement rights G1 204 205 212
Intangible assets
Goodwill 10 10 10
Acquired in-force business 1,912 2,177 2,509
Brands 106 112 118
G2 2,028 2,299 2,637
Property, plant and equipment G3 106 125 130
Investment property G4 3,698 3,727 5,283
Financial assets
Loans and deposits 248 268 465
Derivatives E3 2,766 4,068 4,567
Equities 87,628 76,737 86,981
Investment in associate H4 349 329 431
Debt securities 93,374 83,116 104,761
Collective investment schemes 78,909 75,389 85,995
Reinsurers' share of investment contract liabilities 9,672 9,065 9,961
E1 272,946 248,972 293,161
Insurance assets
Insurance contract assets F1 - 48 65
Reinsurance contract assets F1 4,876 4,071 4,720
4,876 4,119 4,785
Deferred tax asset G8 143 158 -
Current tax receivable G8 502 519 419
Prepayments and accrued income 439 403 354
Other receivables G5 2,578 4,455 1,693
Cash and cash equivalents G6 7,168 8,839 9,112
Assets classified as held for sale H3 4,594 7,205 9,946
Total assets 299,308 281,040 327,768
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
Approved by the Board on 21 March 2024.
Andy Briggs
Rakesh Thakrar
Chief Executive
Officer
Chief Financial Officer
Company registration number 11606773.
Notes 31 December 2023 31 December 2022 1 January 2022
£m restated1 restated1
£m £m
Equity and liabilities
Equity attributable to owners of the parent
Share capital D1 100 100 100
Share premium 16 10 6
Shares held by employee benefit trust D2 (15) (13) (12)
Foreign currency translation reserve 91 87 55
Merger relief reserve D1 1,819 1,819 1,819
Other reserves D3 16 46 56
Retained earnings 469 1,162 3,743
Total equity attributable to owners of the parent 2,496 3,211 5,767
Tier 1 Notes D4 494 494 494
Non-controlling interests D5 549 532 460
Total equity 3,539 4,237 6,721
Liabilities
Pension scheme liability G1 2,557 2,520 3,103
Insurance liabilities
Insurance contract liabilities F1 115,741 107,608 132,497
Reinsurance contract liabilities F1 147 7 -
115,888 107,615 132,497
Financial liabilities
Investment contracts 158,004 141,169 157,449
Borrowings E5 3,892 3,980 4,225
Derivatives E3 3,342 5,875 1,248
Net asset value attributable to unitholders 2,921 3,042 3,592
Obligations for repayment of collateral received 1,005 1,706 3,442
E1 169,164 155,772 169,956
Provisions G7 155 184 184
Deferred tax liabilities G8 257 309 1,407
Current tax payable G8 41 34 19
Lease liabilities G9 74 92 99
Accruals and deferred income G10 579 544 551
Other payables G11 2,272 1,373 1,485
Liabilities classified as held for sale H3 4,782 8,360 11,746
Total liabilities 295,769 276,803 321,047
Total equity and liabilities 299,308 281,040 327,768
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
Statement of consolidated changes in equity
For the year ended 31 December 2023
Share capital (note D1) Share premium (note D1) Shares held by the employee benefit trust (note D2) Foreign currency translation reserve Merger relief reserve (note D1) Other reserves (note D3) Retained earnings Total Tier 1 Notes (note D4) Non-controlling interests (note D5) Total equity
£m £m £m £m £m £m £m £m £m £m £m
At 1 January 2023(1) 100 10 (13) 87 1,819 46 1,162 3,211 494 532 4,237
(Loss)/profit for the year - - - - - - (116) (116) - 28 (88)
Other comprehensive income/(expense) for the year - - - 4 - (30) (45) (71) - - (71)
Total comprehensive income/(expense) for the year - - - 4 - (30) (161) (187) - 28 (159)
Issue of ordinary share capital, net of associated commissions and expenses - 6 - - - - - 6 - - 6
Dividends paid on ordinary shares - - - - - - (520) (520) - - (520)
Dividends paid to non-controlling interests - - - - - - - - - (11) (11)
Credit to equity for equity-settled share-based payments - - - - - - 22 22 - - 22
Shares distributed by the employee benefit trust - - 12 - - - (12) - - - -
Shares acquired by the employee benefit trust - - (14) - - - - (14) - - (14)
Coupon paid on Tier 1 Notes, net of tax relief - - - - - - (22) (22) - - (22)
At 31 December 2023 100 16 (15) 91 1,819 16 469 2,496 494 549 3,539
1 There has been no impact on equity from the transition to IFRS 9 Financial
Instruments (see note A2.2 for further details).
Statement of consolidated changes in equity
For the year ended 31 December 2022
Share capital (note D1) Share premium (note D1) Shares held by employee benefit trust (note D2) Foreign currency translation reserve restated1 Merger Other reserves (note D3) Retained earnings restated1 Total Tier 1 Notes (note D4) Non-controlling interests (note D5) Total equity restated1
£m £m £m £m relief £m £m £m £m £m £m
reserve
(note D1)
£m
At 1 January 2022 (as reported) 100 6 (12) 71 1,819 56 3,775 5,815 494 460 6,769
Impact of transition to IFRS 17 (note A2.1) - - - (16) - - (32) (48) - - (48)
At 1 January 2022 (restated) 100 6 (12) 55 1,819 56 3,743 5,767 494 460 6,721
(Loss)/profit for the year - - - - - - (2,724) (2,724) - 67 (2,657)
Other comprehensive income/(expense) for - - - 32 - (10) 657 679 - - 679
the year
Total comprehensive income/(expense) for the year - - - 32 - (10) (2,067) (2,045) - 67 (1,978)
Issue of ordinary share capital, net of associated commissions and expenses - 4 - - - - - 4 - - 4
Dividends paid on ordinary shares - - - - - - (496) (496) - - (496)
Dividends paid to non-controlling interests - - - - - - - - - (10) (10)
Credit to equity for equity-settled share based payments - - - - - - 16 16 - - 16
Shares distributed by employee benefit trust - - 12 - - - (12) - - - -
Shares acquired by employee benefit trust - - (13) - - - - (13) - - (13)
Non-controlling interests recognised on acquisition - - - - - - - - - 15 15
Coupon paid on Tier 1 Notes, net of tax relief - - - - - - (22) (22) - - (22)
At 31 December 2022 100 10 (13) 87 1,819 46 1,162 3,211 494 532 4,237
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
Statement of consolidated cash flows
For the year ended 31 December 2023
Notes 2023 2022
£m £m
Cash flows from operating activities
Cash (utilised)/generated by operations I2 (770) 1,019
Taxation paid (93) (153)
Net cash flows from operating activities (863) 866
Cash flows from investing activities
Acquisition of SLF of Canada UK Limited, net of cash acquired H2 (20) -
Net cash flows from investing activities (20) -
Cash flows from financing activities
Proceeds from issuing ordinary shares, net of associated commission and 6 4
expenses
Ordinary share dividends paid B4 (520) (496)
Dividends paid to non-controlling interests D5 (11) (10)
Repayment of policyholder borrowings E5.2 (58) (32)
Repayment of shareholder borrowings E5.2 (350) (450)
Repayment of lease liabilities G9 (14) (14)
Proceeds from new shareholder borrowings, net of associated expenses E5.2 346 -
Proceeds from new policyholder borrowings, net of associated expenses E5.2 64 61
Coupon paid on Tier 1 Notes (29) (29)
Interest paid on policyholder borrowings (3) (1)
Interest paid on shareholder borrowings (200) (215)
Net cash flows from financing activities (769) (1,182)
Net decrease in cash and cash equivalents (1,652) (316)
Cash and cash equivalents at the beginning of the year 8,872 9,188
(before reclassification of cash and cash equivalents to held for sale)
Less: cash and cash equivalents of operations classified as held for sale H3 (52) (33)
Cash and cash equivalents at the end of the year 7,168 8,839
Notes to the consolidated financial statements
A. Significant accounting policies
A1. Basis of preparation
The consolidated financial statements for the year ended 31 December 2023 set
out on pages 164 to 290 comprise the financial statements of Phoenix Group
Holdings plc ('the Company') and its subsidiaries (together referred to as
'the Group'), and were authorised by the Board of Directors for issue on 21
March 2024.
The consolidated financial statements have been prepared under the historical
cost convention except for investment property, owner-occupied property and
those financial assets and financial liabilities (including derivative
instruments) that have been measured at fair value.
The consolidated financial statements are presented in sterling (£) rounded
to the nearest million except where otherwise stated.
Assets and liabilities are offset and the net amount reported in the statement
of consolidated financial position only when there is a legally enforceable
right to offset the recognised amounts and there is an intention to settle on
a net basis, or to realise the assets and settle the liability simultaneously.
Income and expenses are not offset in the consolidated income statement unless
required or permitted by an International Financial Reporting Standard
('IFRS') or interpretation, as specifically disclosed in the accounting
policies of the Group.
Statement of compliance
The consolidated financial statements have been prepared in accordance with
UK-adopted international accounting standards ('IASs') and the legal
requirements of the Companies Act 2006.
Basis of consolidation
The consolidated financial statements include the financial statements of the
Company and its subsidiary undertakings, including collective investment
schemes, where the Group exercises overall control. In accordance with the
principles set out in IFRS 10 Consolidated Financial Statements, the Group
controls an investee if and only if the Group has all the following:
• power over the investee;
• exposure, or rights, to variable returns from its involvement with the
investee; and
• the ability to use its power over the investee to affect its returns.
The Group considers all relevant facts and circumstances in assessing whether
it has power over an investee, including relevant activities, substantive
and protective rights, voting rights and purpose and design of an investee.
The Group reassesses whether or not it controls an investee if facts and
circumstances indicate that there are changes to one or more of the three
elements of control. Further details about the consolidation of subsidiaries,
including collective investment schemes, are included in note H1.
Going concern
The consolidated financial statements have been prepared on a going concern
basis. The Directors have, at the time of approving the consolidated financial
statements, a reasonable expectation that the Company and the Group have
adequate resources to continue in operational existence for the period covered
by the assessment having assessed the principal risks, forecasts, projections
and other relevant evidence for the period to 31 March 2025. Further details
of the going concern assessment are included in the Directors' Report on page
143.
A2. Adoption of new accounting pronouncements in 2023
In preparing the consolidated financial statements, the Group has adopted the
following standards and amendments effective from 1 January 2023 and which
have been endorsed by the UK Endorsement Board ('UKEB'):
• IFRS 17 Insurance Contracts - see note A2.1;
• IFRS 9 Financial Instruments - see note A2.2;
• Disclosure of Accounting Policies (Amendments to IAS 1 Presentation of
Financial Statements and IFRS Practice Statement 2 Making Materiality
Judgements). The amendments are intended to assist entities in deciding which
accounting policies to disclose in their financial statements and requires an
entity to disclose 'material accounting policy information' instead of its
'significant accounting policies'. Accounting policy information is material
if, when considered together with other information included in an entity's
financial statements, it can reasonably be expected to influence decisions
that the primary users of general purpose financial statements make on the
basis of those financial statements. The IASB has also developed guidance and
examples to explain and demonstrate the application of the 'four-step
materiality process' described in IFRS Practice Statement 2;
• Definition of Accounting Estimates (Amendments to IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors). The amendments replace
the definition of a 'change in accounting estimates' with a definition of
'accounting estimates'. Under the new definition, accounting estimates are
'monetary amounts in financial statements that are subject to measurement
uncertainty'. The Board has retained the concept of changes in accounting
estimates in the standard by including a number of clarifications;
• Deferred Tax related to Assets and Liabilities arising from a Single
Transaction (Amendments to IAS 12 Income Taxes). The amendments narrow the
scope of the recognition exemption in paragraphs 15 and 24 of IAS 12 so that
it no longer applies to transactions that, on initial recognition, give rise
to equal taxable and deductible temporary differences. The IASB expects that
the amendments will reduce diversity in reporting and align the accounting for
deferred tax on such transactions with the general principle in IAS 12 of
recognising deferred tax for temporary differences; and
• International Tax Reform-Pillar Two Model Rules (Amendments to IAS 12
Income Taxes). The scope of IAS 12 has been amended to clarify that the
standard applies to income taxes arising from tax law enacted or substantively
enacted to implement the Pillar Two model rules published by the OECD,
including tax law that implements qualified domestic minimum top-up taxes
described in those rules. The amendments introduce a temporary exception to
the accounting requirements for deferred taxes in IAS 12, so that an entity
would neither recognise nor disclose information about deferred tax assets and
liabilities related to Pillar Two income taxes. The Group confirms that it has
applied this exception during the period.
The nature and impact of the adoption of IFRS 17 and IFRS 9 are disclosed in
notes A2.1 and A2.2 below. The remaining amendments to standards are not
considered to have a material effect on these consolidated financial
statements.
A2.1 Adoption of IFRS 17 Insurance Contracts
The Group has adopted IFRS 17 effective from 1 January 2023 and comparative
information for the year ended 31 December 2022 has been retrospectively
restated. IFRS 17 replaces IFRS 4 Insurance Contracts and significantly
changes the way the Group recognises, measures, presents and discloses its
insurance contracts, investment contracts with discretionary participation
features ('DPF') and reinsurance contracts held. It introduces a model that
measures groups of contracts based on the present value of future cash flows
with an explicit risk adjustment for non-financial risk and a contractual
service margin ('CSM'), representing the unearned profit to be recognised in
profit or loss over the coverage period.
New accounting policies adopted following the implementation of IFRS 17 are
included within note F1 and critical accounting estimates and judgements
applied are detailed in note A4.
A2.1.1 Transition approach
Changes in accounting policies resulting from the adoption of IFRS 17 have
been applied using a fully retrospective approach ('FRA') to the extent
practicable and using a Fair Value Approach ('FVA') approach where the FRA was
considered impracticable. The FRA requires the Group to:
• identify, recognise and measure each group of insurance and reinsurance
contracts as if IFRS 17 had always applied;
• derecognise any existing balances that would not exist had IFRS 17
always applied; and
• recognise any resulting net difference in equity.
In determining whether it was practicable for the FRA transition method to be
applied, the Group has considered the following key factors:
• the ability to obtain assumptions and data at the required level of
granularity, without the material use of hindsight, particularly in relation
to contracts within acquired businesses and where the Group's financial
reporting metrics did not require such information;
• the availability and usability of historic data given the significant
integration work performed by the Group on both its policy administration and
actuarial modelling systems where re-platforming from legacy systems onto a
unified platform has been carried out; and
• the significant level of regulatory change experienced by the insurance
industry, such as Solvency II, which impacts on the level of change undertaken
on both legacy and current policy administration and actuarial modelling
systems.
The FRA has been applied to the following insurance business on transition to
IFRS 17:
• bulk purchase annuities;
• annuities and unit-linked policies that originated from 1 January 2021
onwards for the acquired Standard Life Assurance business entities;
• SunLife policies that originated post 1 January 2018; and
• ReAssure Assurance Limited annuities and non-profit policies from
acquisition date of the ReAssure entities.
The FVA has been applied to the Group's remaining insurance business. On
transition, 58% of the CSM (net of reinsurance) is calculated under the FRA
and 42% under the FVA. However, of the business transitioned under FRA a
significant amount of the CSM relates to the ReAssure business acquired in
2020 and fair valued at that date. Management therefore considers c.95% of the
liabilities, equating to c.84% of the CSM, to be a more accurate reflection of
the use of the FVA.
In applying the FVA, the CSM (or loss component) has been determined at 1
January 2022 as the difference between the fair value of a group of contracts
and the present value of expected future cash flows including acquisition
costs, plus an explicit risk adjustment. In determining the fair value, the
Group has applied the requirements of IFRS 13 Fair Value Measurement, except
for the demand deposit floor requirement, as required by IFRS 17. The fair
value determined by the Group uses cash flows with contract boundaries
consistent with IFRS 17 requirements. The measurement of the fair value of
contracts includes items taken into consideration by a market participant but
which are not included in the IFRS 17 measurement of contracts, such as a risk
premium to reflect a market participant's view of uncertainty inherent in the
contract cash flows being valued and a profit margin. Significant judgements
and estimates used in determining the fair value have been set out in note
A4.1.
The fair value for the groups of with-profits contracts, has been determined
at transition date as the sum of the best estimate liability ('BEL'); the
policyholders' share of the estate; a risk premium; and other fair value
adjustments, i.e. profits on annuities vesting into the non-profit fund.
The treatment for reinsurance contracts held at transition is similar to that
for insurance contracts with a few exceptions. The reinsurance BEL is
calculated using the IFRS 17 discounted probability-weighted expected present
value of the cash flows on transition date. The cash flows under the
reinsurance contract are stressed in order to calculate the risk premium, plus
an adjustment is made for risk of reinsurer default (i.e. additional risk of
claims received being lower than the best estimate) in the risk premium.
A2.1.2 Impact of transition
Total equity attributable to owners of the parent
The Group has determined the quantitative impact of moving to IFRS 17 on 1
January 2022 to be a decrease in the total equity attributable to owners of
the parent of £48 million, from £5,815 million to £5,767 million. The main
drivers of this reduction are:
£m
Derecognition of intangible assets related to contracts measured under IFRS 17 On adoption of IFRS 17, the acquired in force business ('AVIF') and customer (2,030)
relationship intangibles and deferred acquisition cost assets associated with
the acquisition of insurance contracts are no longer held as separate assets
and instead are included implicitly in the measurement of insurance contract
assets and liabilities.
Remeasurement of insurance contract liabilities (net of reinsurance) The remeasurement of insurance contract liabilities primarily includes the 5,481
following items:
• removal of IFRS 4 margins as IFRS 17 requires cash flows to be measured
on a best estimate basis with the addition of an explicit adjustment for risk;
• inclusion of future shareholder profits from with-profit and unit-linked
business that are not fully recognised under IFRS 4; and
• changes in the discount rate, most materially impacting annuity
contracts.
Also included is the impact of a change in treatment in respect of hybrid
contracts. These are typically contracts which contain elements of unit-linked
and with-profits. Under IFRS 4 these components were separated and reported
under IAS 39 and IFRS 4 respectively. Under IFRS 17 if the contract as a whole
meets the definition of an investment with DPF contract, the whole contract
falls within the scope of IFRS 17 unless the criteria for a distinct
investment component is met. If it does not, the whole contract falls within
the scope of IFRS 9. On transition a significant proportion of the Group's
hybrid contracts were determined to fall within the scope of IFRS 17 and did
not meet the criteria to be separated into its components. A small portion of
hybrid contracts are accounted for under IFRS 9.
Recognition of a risk adjustment (net of reinsurance) IFRS 17 requires an explicit adjustment in respect of non-financial risk, this (1,061)
replaces some of the margins for uncertainty implicitly included in the
measurement of cash flows under IFRS 4.
Recognition of a The contractual service margin reflects the unearned profit to be recognised (2,430)
contractual service margin in profit or loss as services are provided.
(net of reinsurance)
Changes in deferred tax from the above items (8)
Change in total equity attributable to owners of the parent (48)
In addition to the above IFRS 17 has impacted how insurance and reinsurance
contract-related balances are presented in the statement of consolidated
financial position. Certain assets and liabilities previously reported
separately are now included within IFRS 17 balances, these include balances
such as unallocated surplus, deposits received from reinsurers and insurance
contract/reinsurance payables/receivables and payables related to direct
insurance contracts. Other liabilities and assets have been partly
reclassified within IFRS 17 liabilities and assets where these balances relate
to insurance contracts, such as provisions, loans and deposits (policy loans),
other payables and other receivables. Costs that are assessed as directly
attributable to insurance contracts are accounted for under IFRS 17 and this
includes those that would have previously determined in accordance with the
requirements of IAS 37 Provisions, Contingent Liabilities and Contingent
Assets to be included in provisions.
The impacts on the key line items in the Group's statement of consolidated
financial position are set out below:
31 December 2021 as previously reported £m Impact of implementation of IFRS 17 £m 1 January 2022 restated £m
Intangible assets 4,565 (1,928) 2,637
Financial assets 293,192 (31) 293,161
Insurance contract assets - 65 65
Reinsurance contract assets 8,587 (3,867) 4,720
Other insurance/reinsurance receivables 139 (139) -
Other assets 27,316 (131) 27,185
Total assets 333,799 (6,031) 327,768
Insurance contract liabilities 128,864 3,633 132,497
Unallocated surplus 1,801 (1,801) -
Financial liabilities
Investment contracts 160,417 (2,968) 157,449
Deposits received from reinsurers 3,569 (3,569) -
Provisions 235 (51) 184
Deferred tax liabilities 1,399 8 1,407
Other insurance/reinsurance payables 2,007 (2,007) -
Other liabilities 28,738 772 29,510
Total liabilities 327,030 (5,983) 321,047
Total equity 6,769 (48) 6,721
Loss attributable to owners for the year ended 31 December 2022
As a result of adopting IFRS 17, the loss after tax attributable to owners for
the year ended 31 December 2022 increased by £895 million from a loss of
£1,762 million to a loss of £2,657 million.
As previously Restated Change
reported £m £m
£m
Adjusted operating profit before tax 1,245 544 (701)
Economic variances (2,673) (3,309) (636)
Amortisation and impairment of acquired in-force business (501) (347) 154
Amortisation and impairment of other intangibles (21) (6) 15
Other non-operating items (179) (262) (83)
Finance costs attributable to owners (199) (199) -
Loss before tax attributable to owners of the parent (2,328) (3,579) (1,251)
Profit before tax attributable to non-controlling interest 67 67 -
Loss before tax attributable to owners (2,261) (3,512) (1,251)
Tax credit attributable to owners 499 855 356
Loss after tax attributable to owners (1,762) (2,657) (895)
Details of the adjusted operating profit methodology following the transition
to IFRS 17 is set out in note B1.
The main drivers of this reduction are:
• the change in profit recognition pattern. Under IFRS 17 profits are
spread over the life of contracts as service is provided. This includes the
deferral of new business profits from annuity contracts written in the period;
• economic variances have increased in relation to the Solvency II hedging
in place. The interest rate sensitive liabilities reduce compared to IFRS 4 as
the majority of the Group's CSM uses locked-in discount rates resulting in a
higher level of 'over-hedging'. In addition, the offset to the losses
primarily from interest rate hedging from gains arising on equity hedges in
the previously reported numbers is reduced, as under IFRS 17 these hedges now
partially offset adverse market impacts arising in the income statement from
unit-linked and with-profits business which have a loss component;
• a reduction in amortisation of the element of acquired in-force ('AVIF')
business associated with insurance contracts which is derecognised on
transition to IFRS 17; and
• other non-operating items have reduced due to costs that have been
assessed as directly attributable to insurance contracts being included in the
calculation of the CSM.
A2.2 Adoption of IFRS 9 Financial Instruments
IFRS 9 replaced IAS 39 Financial Instruments: Recognition and Measurement for
annual periods beginning on or after 1 January 2018. The Group elected, under
the amendments to IFRS 4, to apply the temporary exemption from IFRS 9, to
defer the initial application date of IFRS 9 to align with the initial
application of IFRS 17. The Group has therefore adopted the requirements of
IFRS 9 from 1 January 2023 and in accordance with the transition provisions in
the standard, comparatives have not been restated.
IFRS 9 introduces new requirements for classifying and measuring financial
assets and liabilities, impairment methodology, and general hedge accounting
rules and replaced the corresponding sections of IAS 39.
New accounting policies adopted following the implementation of IFRS 9 are
included within note E1.
A2.2.1 Classification and measurement of financial instruments
Financial assets
IFRS 9 requires all financial assets to be assessed based on a combination of
the Group's business model for managing the assets and the instruments'
contractual cash flow characteristics. As a result of adopting IFRS 9 on 1
January 2023, certain loans and deposits and cash and cash equivalents
investment asset balances, previously classified as amortised cost, have now
been reclassified at fair value through profit or loss ('FVTPL') (mandatory)
category. The classification adopted is driven by the business model
assessment which determined that these assets are managed and evaluated on a
fair value basis. These financial assets, which back policyholder liabilities,
are actively managed and therefore support the wider objective of the Group to
maximise Solvency II headroom. The reclassification of these assets has not
resulted in an adjustment to equity at 1 January 2023 as the fair value of
these assets at this date was equal to the amortised cost.
Under IAS 39, certain underlying items of participating contracts were
designated as at FVTPL because the Group managed them and evaluated their
performance on a fair value basis in accordance with a documented investment
strategy. Under IFRS 9, portfolios of these assets are mandatorily measured at
FVTPL as the business model assessment concludes that they are managed and
evaluated on a fair value basis and consequently the classification as FVTPL
remains unchanged upon adoption of IFRS 9.
All other financial assets that are not actively managed such as certain cash
and cash equivalents, receivables and loans and deposits, are typically held
to collect cash flows and therefore continue to be classified as amortised
cost under IFRS 9.
The Group has not elected to measure any equity securities financial assets at
fair value through other comprehensive income ('FVOCI'). Further, no other
debt securities financial assets are classified as FVOCI on adoption of IFRS
9.
Financial liabilities
IFRS 9 has not had a significant effect on the Group's accounting policies for
financial liabilities as the classification and measurement of financial
liabilities remains largely unchanged from IAS 39. Financial liabilities are
either classified as amortised cost or at FVTPL.
Investment contracts without DPF, which do not transfer significant insurance
risk, continue to be accounted for as a financial liability and designated at
FVTPL on the basis that these liabilities are both managed on a fair value
basis and are designated as such to avoid an accounting mismatch with the
assets held to back them.
On transition to IFRS 17 and IFRS 9, deposits from reinsurers are no longer
classified as financial liabilities under IFRS 9 in accordance with the IFRS
17 requirements for 'premium withheld' arrangements. The premiums withheld
have now become a component of fulfilment cash flows and for contracts with
deposit back arrangements, the presentation of the deposit back liability has
now changed to be shown as an offset to the reinsurance asset.
The Group has assessed the IFRS 9 requirement that changes in fair value of
financial liabilities relating to credit risk be presented in OCI, with the
balance of the change in fair value to be presented in profit and loss, unless
this treatment would create or enlarge an accounting mismatch in profit and
loss. Based on this assessment, no financial liabilities were identified as
requiring split presentation of movements between OCI and profit and loss as
this would create an accounting mismatch as the assets held to back these
liabilities are at FVTPL.
The valuation of investment contract liabilities without DPF are measured at
the fair value of the related assets and liabilities. The liability is the sum
of the investment contract liabilities plus an additional amount to cover the
present value of the excess of future policy costs over future charges.
The application of the classification and measurement requirements in IFRS 9
at 1 January 2023 resulted in the following reclassification adjustments:
IAS 39 IFRS 9
Financial assets Measurement category Carrying amount Measurement category Carrying amount
£m £m
Loans and deposits1 Amortised cost 254 FVTPL 254
Cash and cash equivalent1 Amortised cost 8,423 FVTPL 8,423
1 Actively managed investment assets.
A2.2.2 Impairment
The adoption of IFRS 9 has changed the Group's accounting for impairment
losses for financial assets held at amortised cost by replacing IAS 39's
incurred loss approach with a forward-looking expected credit loss ('ECL')
approach. The new impairment model applies to the Group's financial assets
carried at amortised cost.
A significant portion of Group's financial assets are carried at FVTPL under
IFRS 9 and are therefore not subject to ECL assessment. The other financial
assets classified as amortised cost and subject to ECL mainly relate to
certain loan assets, other receivables and certain cash and cash equivalents
balances.
In accordance with IFRS 9, the Group has applied the ECL model to financial
assets measured at amortised cost. For these in-scope financial assets at the
reporting date either the lifetime expected credit loss or a 12-month expected
credit loss is provided for, depending on the Group's assessment of whether
the credit risk associated with the specific asset has increased significantly
since initial recognition. The Group's current credit risk grading framework
comprises the following categories:
Category Description Basis for recognising ECL
Performing The counterparty has a low risk of default and does not have any past-due 12 month ECL
amounts
Doubtful There has been a significant increase in credit risk since initial recognition Lifetime ECL - not credit impaired
In default There is evidence indicating the asset is credit impaired Lifetime ECL - credit impaired
Write-off There is evidence indicating that the counterparty is in severe financial Amount is written off
difficulty and the Group has no realistic prospect of recovery
The financial assets held at amortised cost are assessed at transition as
'performing' and this assessment is summarised below.
Loans and deposits - the Group has assessed the estimated credit losses of
these loans and deposits as low due to the external credit ratings of the
counterparties resulting in low credit risk and there being no past-due
amounts.
Other receivables - these balances relate to investment broker balances and
other regular receivables due to the Group in the normal course of business.
Expected credit losses are assessed as being immaterial given the typically
short-term nature of these balances.
Cash and cash equivalents - the Group's cash and cash equivalents are held
with banks and financial institutions, which have investment grade credit
ratings of "BBB" or above. The Group considers that its cash and cash
equivalents have low credit risk based on the external credit ratings of the
counterparties and no history of default. The impact to the net carrying
amount stated in the table above is therefore considered not to be material.
Based on the above assessment, an immaterial credit loss balance has been
determined due to these financial assets being predominantly short-term and
having low credit risk.
A2.2.3 Hedge accounting
The Group has applied IFRS 9's hedge accounting requirements. The Group uses
cross currency swaps to hedge the currency risk arising from borrowings
denominated in foreign currencies. The Group has carried over the current
hedging relationships as cash flow hedges under IFRS 9. The IFRS 9 hedge
accounting model requires the extended documentation of each hedging
relationship. The Group has updated the existing hedging documentation to
reflect the changes to the effectiveness testing process to include
qualitative testing on a prospective basis including the analysis of the
economic relationship between the hedged item and hedging instrument, analysis
of source of hedge ineffectiveness, determining the hedge ratio and assessment
of whether the effect of credit risk dominates the value changes that result
from the economic relationship. The current hedging relationships are
straightforward arrangements whereby the cross currency swaps fully hedge the
underlying hedged item and they are all fully collateralised.
A3. Accounting policies
The principal accounting policies have been consistently applied in these
consolidated financial statements. An exception to this is where IFRS 9 has
been adopted prospectively from 1 January 2023 and IAS 39 has been applied in
the comparative period. Where an accounting policy can be directly attributed
to a specific note to the consolidated financial statements, the policy is
presented within that note, with a view to enabling greater understanding of
the results and financial position of the Group. All other significant
accounting policies are disclosed below.
A3.1 Foreign currency transactions
Items included in the financial statements of each of the Group's entities are
measured using the currency of the primary economic environment in which the
entity operates (the 'functional currency'). The consolidated financial
statements are presented in sterling, which is the Group's presentation
currency.
The results and financial position of all Group companies that have a
functional currency different from the presentation currency are translated
into the presentation currency as follows:
• assets and liabilities are translated at the closing rate at the period
end;
• income, expenses and cash flows denominated in foreign currencies are
translated at average exchange rates; and
• all resulting exchange differences are recognised through the statement
of consolidated comprehensive income.
Foreign currency transactions are translated into the functional currency of
the transacting Group entity using exchange rates prevailing at the date of
the translation. Foreign exchange gains and losses resulting from the
settlement of such transactions and from the translation of monetary assets
and liabilities denominated in foreign currencies are recognised in the
consolidated income statement. Translation differences on non-monetary items
at fair value through profit or loss are reported as part of the fair value
gain or loss.
A3.2 Other operating income
Other operating income includes income from all other operating activities
which are incidental to the principal activities of the Group.
A4. Critical accounting estimates and judgements
The preparation of financial statements requires management to make
judgements, estimates and assumptions that affect the application of policies
and reported amounts of assets and liabilities, income and expenses.
Disclosures of judgements made by management in applying the Group's
accounting policies include those that have the most significant effect on the
amounts that are recognised in the consolidated financial statements.
Disclosures of estimates and associated assumptions include those that have a
significant risk of resulting in a material change to the carrying value of
assets and liabilities within the next year. The estimates and associated
assumptions are based on historical experience and various other factors that
are believed to be reasonable under the circumstances, the results of which
form the basis of the judgements as to the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates.
Critical accounting estimates are those which involve the most complex or
subjective judgements or assessments. The areas of the Group's business that
typically require such estimates are the measurement of insurance and
investment contract liabilities with DPF, determination of the fair value of
certain financial assets and liabilities, and valuation of pension scheme
assets and liabilities.
The application of critical accounting judgements that could have the most
significant effect on the recognised amounts include classification of
contracts to be accounted for as insurance or investment contracts, the
determination of adjusted operating profit, the recognition of an investment
as an associate and determination of control with regard to underlying
entities.
Details of all critical accounting estimates and judgements are included
below.
A4.1 Insurance contract and investment contract with DPF liabilities
The Group applies significant judgement and estimation when classifying and
measuring insurance contracts, including determination of the inputs,
assumptions and techniques it uses to determine the BEL, risk adjustment and
CSM at each reporting period to measure the insurance contract and reinsurance
contact liabilities/assets. The main areas where significant judgement and
estimation were required are:
Contract classification
Classification of contracts as insurance (or reinsurance) is based upon an
assessment of the significance of insurance risk transferred to the Group.
Insurance contracts are defined by IFRS 17 as those containing significant
insurance risk if, and only if, an insured event could cause an insurer to
make significant additional payments in any scenario, excluding scenarios that
lack commercial substance, at the inception of the contract.
Classification of contracts as investment with DPF is based upon an assessment
of whether the discretionary amount of benefits is expected to be a
significant amount of the total benefits.
Measurement of insurance contract liabilities
In applying IFRS 17 requirements for the measurement of insurance contract
liabilities, the following inputs and methods were used that include
significant estimates:
• the present value of future cash flows is estimated using deterministic
scenarios, except where stochastic modelling involves projecting future cash
flows under a large number of possible economic scenarios for market variables
such as interest rates and equity returns and where the cash flows reflect a
series of interrelated options that are implicit or explicit;
• the approach and assumptions used to derive discount rates, including
any illiquid premiums (see note F11.2.1);
• the approach and confidence level for estimating risk adjustments for
non-financial risk (see note F11.2.2); and
• the assumptions about future cash flows relating to mortality,
morbidity, policyholder behaviour, and expense inflation (see note F11.2.3).
Details of how insurance contract liabilities are accounted for are included
within the accounting policies in note F1.
Amortisation of the CSM
The Group applies judgements when determining the amount of the CSM for a
group of insurance contracts to be recognised in profit or loss as insurance
revenue in each period to reflect the insurance contract services provided in
that period. The amount is determined by considering for each group of
contracts the quantity of the benefits provided and its expected coverage
period. Determining the coverage unit requires significant judgement, taking
into consideration a number of areas, including:
• identification of a coverage unit that is deemed to be a suitable proxy
for the service provided. This is particularly relevant for products that
provide a combination of different types of insurance coverage,
investment-related service and investment-return service; and
• the allowance for time value of money in the release of the coverage
unit (i.e. whether or not the coverage units should be discounted).
For deferred annuities the weighting between the deferral phase and the
payment phase coverage units is calculated so that the services provided in
the deferral phase reflect the investment return and those in the payment
phase reflect the annuity payment with the total services adjusted to provide
a consistent level of service when transitioning between the deferral phase
and the payment phase.
Following an assessment, the Group has determined the quantity of the benefits
provided under each contract to be a suitable proxy for the service provided
as follows:
Type of business/products Coverage unit (quantity of benefits)
Term life assurance Sum assured in force
Endowment
Non-participating whole-life
Other protection products
Immediate annuity Annuity payments
Deferred annuity Fund size during deferred period and annuity payments for the payment period
Unit linked Annual management charge and insurance charges
Conventional with-profits ('CWP') & Unitised with-profits ('UWP') Maximum of the guaranteed benefit and asset share
In relation to the application of discount rate in determining the coverage
units, the Group has elected to apply discounting as this gives a more even
allocation of profit as services are provided over the life of a group of
contracts. The discount rate is the locked-in rate for insurance contracts
measured under the general model ('GM') and current rates for insurance
contracts measured under the variable fee approach ('VFA').
In addition, the sections noted below are areas where significant judgement
and estimation has been required on transition to IFRS 17.
Determination of transition method and its application
The Group exercised significant judgement in determining which transition
method was applied for each group of insurance contracts, considering the
impracticability assessment for the application of the FRA, including
determining whether sufficient reasonable and supportable information was
available to apply the FRA. Where it was assessed that a FRA was
impracticable, the Group determined, in line with the options available in
IFRS 17, to use the FVA.
In applying the FVA, the Group has used reasonable and supportable information
at the transition date in order to identify groups of insurance contracts and
to determine whether any contracts are considered to be direct participating
contracts, which meet the VFA eligibility criteria. For groups of contracts
measured using the FVA, the Group has aggregated contracts issued more than
one year apart.
In estimating the fair value, the Group has used significant judgement to
determine adjustments required to reflect a market participant's view, and
also to allocate fair value between groups of insurance contracts as follows:
• only relevant future cash flows within the boundaries of the insurance
contracts were included in the fair value estimation;
• assumptions about BEL were adjusted and simplified by applying IFRS 17
parameters i.e. discount rate, expenses, contract boundary plus incorporating
the risk premium to reflect the view of a market participant;
• discount rates were determined at the transition date, based on the
risk-free rate with an allowance for illiquid premium taken into account;
• the risk premium was calibrated to a market participant view of an
appropriate cost of capital rate; and
• a proportional approach was used to allocate the risk premium to each
group of insurance contracts.
Eligibility assessment for use of VFA
The Group has issued unit-linked and with-profits contracts, which fall within
the scope of IFRS 17, where the return on the underlying items is shared with
policyholders. Underlying items comprise mainly specified portfolios of
investment assets for unit-linked contracts and the net assets of a
with-profits fund for with-profits policies that determine amounts payable to
policyholders. The Group has exercised significant judgement to assess whether
the amounts expected to be paid to the policyholder constitute a substantial
share of the fair value returns on the underlying items. The policyholder's
share of the fair value returns on underlying items includes amounts deducted
to cover non-investment services, e.g. administration and risk charges. The
fair value returns assumed on the underlying items also reflect the expected
real world returns over the duration of the contract or group of insurance
contracts being tested.
Determination of contract boundaries
The assessment of the contract boundary defines which future cash flows are
included in the measurement of a contract. This requires judgement and
consideration of the Group's substantive rights and obligations under the
contract. The Group exercises significant judgement in determining the
appropriate contract boundaries, taking into consideration a number of
factors, including: features and terms and conditions of products; any implied
substantive obligations and rights arising from the features of the product or
policyholder needs it is meeting; pricing practices; and administrative
practices.
Cash flows are within the boundaries of investment contracts with DPF if they
result from a substantive obligation of the Group to deliver cash at a present
or future date.
Separating distinct investment components from insurance and reinsurance
contracts
When assessing whether an investment component is distinct, the Group
considers the following, which may indicate that the insurance and investment
component are highly interrelated:
• the value of one component varies with the other component;
• existence of an option to switch between the different components;
• discounts that span both elements e.g. reduced asset management charges
based on total size of contract; and
• other interacting features, e.g. insurance risk from premium waivers,
return of premium covering both elements of the policy.
Where the investment component is non-distinct, the whole contract is measured
under IFRS 17. Distinct investment components are separated from the host
insurance contract and measured under IFRS 9.
A4.2 Fair value of financial assets and liabilities
Financial assets and liabilities are measured at fair value and accounted for
as set out in the accounting policies in note E1. Financial instruments valued
where valuation techniques are based on observable market data at the period
end are categorised as Level 2 financial instruments. Financial instruments
valued where valuation techniques are based on non-observable inputs are
categorised as Level 3 financial instruments. Level 2 and Level 3 financial
instruments therefore involve the use of estimates.
Further details of the estimates made are included in note E2. In relation to
the Level 3 financial instruments, sensitivity analysis is performed in
respect of the key assumptions used in the valuation of these financial
instruments. The details of this sensitivity analysis are included in note
E2.4.
A4.3 Pension scheme obligations
The valuation of pension scheme obligations is determined using actuarial
valuations that depend upon a number of assumptions, including discount rate,
inflation and longevity. External actuarial advice is taken with regard to
setting the financial assumptions to be used in the valuation. As defined
benefit pension schemes are long-term in nature, such assumptions can be
subject to significant uncertainty.
Further details of these estimates and the sensitivity of the defined benefit
obligation to key assumptions are provided in note G1.
A4.4 Adjusted operating profit
Adjusted operating profit is the Group's non-GAAP measure of performance and
provides stakeholders with a comparable measure of the underlying performance
of the Group. The Group is required to make judgements as to the appropriate
longer-term rates of investment return for the determination of adjusted
operating profit based on yields at the start of the financial year, as
detailed in note B2, and as to whether items are included within adjusted
operating profit or excluded as an adjustment to adjusted operating profit in
accordance with the accounting policy detailed in note B1. Items excluded from
adjusted operating profit are referred to as 'non-operating items'.
A4.5 Control and consolidation
The Group has invested in a number of collective investment schemes and other
types of investment where judgement is applied in determining whether the
Group controls the activities of these entities. These entities are typically
structured in such a way that owning the majority of the voting rights is not
the conclusive factor in the determination of control in line with the
requirements of IFRS 10 Consolidated Financial Statements. The control
assessment therefore involves a number of further considerations such as
whether the Group has a unilateral power of veto in general meetings and
whether the existence of other agreements restrict the Group from being able
to influence the activities. Further details of these judgements are given in
note H1.
A4.6 How climate risk affects our accounting judgments and estimates
In preparation of these financial statements, the Group has considered the
impact of climate change across a number of areas, predominantly in respect
of the valuation of financial instruments, insurance and investment contract
liabilities and goodwill and other intangible assets.
Many of the effects arising from climate change will be longer-term in nature,
with an inherent level of uncertainty, and have been assessed as having
a limited effect on accounting judgments and estimates for the current
period.
The majority of the Group's financial assets are held at fair value and use
quoted market prices or observable market inputs in their valuation. The use
of quoted market prices and market inputs to determine fair value reflects
current information and market sentiment regarding the effect of climate risk.
For the valuation of level 3 financial instruments, there are no material
unobservable inputs in relation to climate risk. Note E6 provides further risk
management disclosures in relation to financial risks including sensitivities
in relation to credit and market risk. In addition, further details on
managing the related climate change risks are provided in the Task Force for
Climate-related Financial Disclosures ('TCFD') on page 44 of the Annual Report
and Accounts.
Insurance and investment contract liabilities with DPF use economic
assumptions taking into account market conditions at the valuation date as
well as non-economic assumptions such as future expenses, longevity and
mortality, which are set based on past experience, market practice,
regulations and expectations about future trends. Due to the level of
annuities written by the Group, it is particularly exposed to longevity risk.
At 31 December 2023 there are no adjustments made to the longevity
assumptions to specifically allow for the impact of climate change on
annuitant mortality. Further details as to how assumptions are set and of the
sensitivity of the Group's results to annuitant longevity and other key
insurance risks are set out in note F11.
The assessment of impairment for goodwill and intangible assets is based on
value in use calculations. Value in use represents the value of future cash
flows and uses the Group's three-year annual operating plan and the
expectation of long-term economic growth beyond this period. The three-year
annual operating plan reflects management's current expectations on
competitiveness and profitability and reflects the expected impacts of the
process of moving towards a low carbon economy. Note G2 provides further
details on goodwill and other intangible assets and on impairment testing
performed.
A5. New accounting pronouncements not yet effective
The IASB has issued the following standards or amended standards and
interpretations which apply from the dates shown. The Group has decided not to
early adopt any of these standards, amendments or interpretations where this
is permitted.
Classification of Liabilities as Current and Non-current Liabilities with
Covenants (Amendments to IAS 1 Presentation of Financial Statements) (1
January 2024)
The initial amendments clarify rather than change existing requirements and
aim to assist entities in determining whether debt and other liabilities with
an uncertain settlement date should be classed as current or non-current. It
is currently not expected that there will be any reclassifications as a result
of this clarification.
Non-current Liabilities with Covenants (Amendments to IAS 1 Presentation of
Financial Statements) (1 January 2024)
Further amendments were then made which specify that covenants of loan
arrangements which an entity must comply with only after the reporting date
would not affect classification of a liability as current or non-current at
the reporting date. However, those covenants that an entity is required to
comply with on or before the reporting date would affect classification as
current or non-current, even if the covenant is only assessed after the
entity's reporting date. The amendments also introduce additional disclosure
requirements. When an entity classifies a liability arising from a loan
arrangement as non-current and that liability is subject to the covenants
which an entity is required to comply with within 12 months of the reporting
date, the entity shall disclose information in the notes that enables users of
financial statements to understand the risk that the liability could become
repayable within 12 months of the reporting period. These amendments are not
expected to have any impact on the Group.
Lease Liability in a Sale and Leaseback (Amendments to IFRS 16 Leases) (1
January 2024)
The amendments relate to how a seller-lessee accounts for variable lease
payments that arise in a sale and leaseback transaction. On initial
recognition, the seller-lessee is required to include variable lease payments
when measuring a lease liability arising from a sale-and-leaseback
transaction. After initial recognition, they are required to apply the general
requirements for subsequent accounting of the lease liability such that no
gain or loss relating to the retained right of use is recognised.
Seller-lessees are required to reassess and potentially restate
sale-and-leaseback transactions entered into since the implementation. These
amendments are not expected to have any impact on the Group.
Supplier Finance Arrangements (Amendments to IAS 7 Statement of Cash Flows and
IFRS 7 Financial Instruments: Disclosures) (1 January 2024)
The amendments add a disclosure objective to IAS 7 stating that an entity is
required to disclose information about its supplier finance arrangements that
enables users of financial statements to assess the effects of those
arrangements on the entity's liabilities and cash flows. In addition, IFRS 7
was amended to add supplier finance arrangements as an example within the
requirements to disclose information about an entity's exposure to
concentration of liquidity risk These amendments are not expected to have any
impact on the Group.
Lack of Exchangeability (Amendments to IAS 21 The Effects of Changes in
Foreign Exchange Rates) (1 January 2025)
The amendments clarify how an entity should assess whether a currency is
exchangeable and how it should determine a spot exchange rate when
exchangeability is lacking, as well as require the disclosure of information
that enables users of financial statements to understand the impact of a
currency not being exchangeable. These amendments are not expected to have any
impact on the Group.
Sale or Contribution of Assets between an Investor and its Associate or Joint
Venture (Amendments to IFRS 10 and IAS 28) (Effective date deferred)
The amendments address the conflict between IFRS 10 and IAS 28 in dealing with
the loss of control of a subsidiary that is sold or contributed to an
associate or joint venture. These amendments are not expected to have any
impact on the Group.
The following amendments to standards listed above have been endorsed for use
in the UK by the UK Endorsement Board:
• Classification of Liabilities as Current and Non-current (Amendments to
IAS 1);
• Non-current Liabilities with Covenants (Amendments to IAS 1);
• Lease Liability in a Sale and Leaseback (Amendments to IFRS 16 Leases);
and
• Supplier Finance Arrangements (Amendments to IAS 7 Statement of Cash
Flows and IFRS 7 Financial Instruments: Disclosures).
B. Earnings performance
B1. Segmental analysis
The Group defines and presents operating segments in accordance with IFRS 8
'Operating Segments' which requires such segments to be based on the
information which is provided to the Board, and therefore segmental
information in this note is presented on a different basis from profit or loss
in the consolidated financial statements.
An operating segment is a component of the Group that engages in business
activities from which it may earn revenues and incur expenses, including
revenues and expenses relating to transactions with other components of the
Group.
For management purposes the Group is organised into value centres. During the
period the Group reassessed its reportable segments to reflect its transition
to a purpose-led retirement specialist and the commencement of the grow,
optimise and enhance stage of our strategic journey. The Group now has five
operating segments comprising Retirement Solutions, Pensions & Savings,
With-Profits, SunLife & Protection, and Europe & Other. The
comparative information has been restated to reflect this change. For
reporting purposes, operating segments are aggregated where they share similar
economic characteristics including the nature of products and services, types
of customers and the nature of the regulatory environment. The SunLife &
Protection operating segment has been aggregated with the Europe operating
segment into the Europe & Other reportable segment.
The Retirement Solutions segment includes new and in-force individual annuity
and Bulk Purchase Annuity contracts written within shareholder funds, with the
exception of individual annuity contracts written as a result of Guaranteed
Annuity Options on with-profit contracts. Such contracts remain in the
With-Profits segment following the transition to IFRS 17, as they fall within
the contract boundary of the original savings or pension contract. The
Retirement Solutions segment also includes UK individual annuity business
written within the Standard Life Heritage With-Profit Fund as the profits are
primarily attributable to the shareholder through the Recourse Cash Flow
mechanism established on demutualisation.
The Pensions & Savings segment includes new and in-force life insurance
and investment unit-linked policies in respect of pensions and savings
products that the Group continues to actively market to new and existing
policyholders. This includes products such as workplace pensions and
Self-Invested Personal Pension ('SIPPs') distributed through the Group's
Strategic Partnership with abrdn plc. In addition, it includes in-force
insurance and investment unit-linked products from legacy businesses which no
longer actively sell products to policyholders and which therefore run-off
gradually over time. The Pensions & Savings segment also includes UK
unitised business written in the Standard Life Heritage With-Profit funds, as
profits are primarily attributable to the shareholder through the Recourse
Cash Flow mechanism.
The With-Profits segment includes all policies written by the Group's
with-profit funds, with the exception of Standard Life Heritage With-Profit
Fund contracts reflected in other segments as noted above for Retirement
Solutions and Pensions & Savings where profits are primarily attributable
to the shareholder through the Recourse Cash Flow mechanism.
The Europe & Other segment includes business written in Ireland and
Germany. This includes products that are actively being marketed to new
policyholders and legacy in-force products that are no longer being sold to
new customers. The segment also includes protection products and products sold
under the SunLife brand.
The Corporate Centre segment, which is not a reportable segment, principally
comprises central head office costs that are not directly attributable to the
Group's insurance or investment contracts. Management services costs are now
allocated to the four reportable segments.
Inter-segment transactions are set on an arm's length basis in a manner
similar to transactions with third parties. Segmental results include those
transfers between business segments which are then eliminated on
consolidation.
Segmental measure of performance: Adjusted operating profit
The Group uses a non-GAAP measure of performance, being adjusted operating
profit, to evaluate segmental performance. Adjusted operating profit is
considered to provide a comparable measure of the underlying performance of
the business as it excludes the impact of short-term economic volatility and
other one-off items.
The Group's adjusted operating profit methodology has been updated since it
was disclosed in the 2022 consolidated financial statements following the
transition to IFRS 17 Insurance Contracts.
The following sets out the adjusted operating profit methodology:
For unit-linked business accounted for under IFRS 9, adjusted operating profit
reflects the fees collected from customers less operating expenses including
overheads.
For unit-linked and With-Profits business accounted for under IFRS 17,
adjusted operating profit reflects the release of the risk adjustment,
amortisation of CSM, and demographic experience variances in the period.
For shareholder annuity, other non-profit business and With-Profits funds
receiving shareholder support accounted for under IFRS 17, adjusted operating
profit includes the release of the risk adjustment, amortisation of CSM, and
demographic experience variances in the period. Adjusted operating profit also
incorporates an expected return on the financial investments backing this
business and any surplus assets, with allowance for the corresponding movement
in liabilities.
Adjusted operating profit excludes the above items for non-profit business
written in a With-Profits fund where these amounts do not accrue directly to
the shareholder.
Adjusted operating profit includes the effect of experience variances relating
to the current period for non-economic items, such as mortality and expenses.
It also incorporates the impacts of asset trading and portfolio rebalancing
where not reflected in the discount rate used in calculating expected return.
Adjusted operating profit is reported net of policyholder finance charges and
policyholder tax.
Adjusted operating profit excludes the impacts of the following items:
Economic variances
• the difference between actual and expected experience for economic items
recognised in the income statement, impacts of economic assumptions on the
valuation of liabilities measured under the General Model and the change in
value of loss components on Variable Fee Approach business resulting from
market movements on underlying items;
• economic volatility arising from the Group's hedging strategy which is
calibrated to protect the Solvency II capital position and cash generation
capability of the operating companies;
• the accounting mismatch resulting from the application of IFRS 17
between the measurement of non-profit business in a with-profit fund (noted
above) and the change in fair value of this business included within the
measurement of the with-profit contracts under the Variable Fee Approach;
• the accounting mismatch resulting from buy-in contracts between the
Group's pension schemes and Phoenix Life Limited, the Group's main insurance
subsidiary. The mismatch represents the difference between the unwind of the
IAS 19 discount rate calculated with reference to a AA-rated corporate bond
and the expected investment returns on the backing assets; and
• the effect of the mismatch between changes in estimates of future cash
flows on General Model contracts measured at current discount rates and the
corresponding adjustment to the CSM measured at the discount rate locked-in at
inception.
Other
• amortisation and impairment of intangible assets (net of policyholder
tax);
• finance costs attributable to owners;
• gains or losses on the acquisition or disposal of subsidiaries (net of
related costs);
• the financial impacts of mandatory regulatory change;
• the profit or loss attributable to non-controlling interests;
• integration, restructuring or other significant one-off projects
impacting the income statement; and
• any other items which, in the Director's view, should be disclosed
separately by virtue of their nature or incidence to enable a full
understanding of the Group's financial performance. This is typically the case
where the nature of the item is not reflective of the underlying performance
of the operating companies.
The items excluded from adjusted operating profit are referred to as
'non-operating items'. Whilst the excluded items are important to an
assessment of the consolidated financial performance of the Group, management
considers that the presentation of adjusted operating profit provides a good
indicator of the underlying performance of the Group's operating segments and
the Group uses this, as part of a suite of measures, for decision-making and
monitoring performance. The Group's adjusted operating profit should be read
in conjunction with the IFRS profit before tax.
Revisions to methodology
The methodology to determine adjusted operating profit has been revised,
compared to that disclosed in the Interim Financial Report 2023, for the
following items:
• A 1-year (rather than a 15-year) risk-free rate has been used to derive
the expected investment return assumption on assets backing insurance contract
liabilities to reduce unintended economic volatility (see note B2.1);
• an adjustment to remove mismatches between the discount rate used within
the valuation of the Group's pension scheme liabilities and the returns on the
underlying assets, as noted within Economic Variances above; and
• a refinement to the approach used to quantify the level of trading
profits.
The segmental result for the year ended 31 December 2022 presented in note
B1.1 incorporates these revisions. The impact of these revisions is to reduce
total segmental adjusted operating profit by £26 million, and correspondingly
to increase economic variances by £26 million. There is no impact on the loss
before the tax attributable to owners of the parent.
B1.1 Segmental result
Notes 2023 2022
£m restated1
£m
Adjusted operating profit
Retirement Solutions 378 349
Pensions & Savings 190 150
With-Profits 10 54
Europe & Other 132 60
Corporate Centre (93) (69)
Total segmental adjusted operating profit 617 544
Economic variances B2.2 147 (3,309)
Amortisation and impairment of acquired in-force business (316) (347)
Amortisation and impairment of other intangibles and goodwill G2 (6) (6)
Other non-operating items (439) (262)
Finance costs on borrowing attributable to owners (195) (199)
Loss before the tax attributable to owners of the parent (192) (3,579)
Profit before tax attributable to non-controlling interests 28 67
Loss before the tax attributable to owners (164) (3,512)
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
Other non-operating items in respect of the year ended 31 December 2023
include:
• a gain on acquisition of £66 million reflecting the excess of the fair
value of the net assets acquired over the consideration paid for the
acquisition of SLF of Canada UK Limited (see note H2 for further details);
• £169 million of costs associated with strategic growth initiatives,
including investment in digital and direct asset sourcing capabilities,
establishment of the Group's Bermudan reinsurance operations, and
transformation of the Group's operating model to support efficient growth;
• £79 million of costs associated with the delivery of the Group Target
Operating Model for IT and Operations, including the migration of policyholder
administration onto the Tata Consultancy Services ('TCS') platform. Under IFRS
17, the expected costs in respect of this activity that are directly
attributable to insurance contracts have been included within insurance
contract liabilities;
• costs of £65 million associated with the implementation of IFRS 17;
• costs of £52 million associated with finance transformation activities,
including the migration to cloud-based systems and enhancements to actuarial
modelling capabilities and the related control environment;
• costs of £49 million associated with the consolidation by Part VII
transfer of four of the Group's Life Companies into a single entity, completed
in the second half of 2023;
• a £36 million adverse impact from the strengthening of actuarial
reserves associated with the Part VII transfer of certain European business
from the Group's UK Life Companies to a newly established European subsidiary;
• £32 million of costs associated with ongoing integration programmes;
• £12 million of past service costs in relation to a Group pension scheme
(see note G1 for further details); and
• Corporate project costs and net other one-off items totalling a cost of
£11 million.
Other non-operating items in respect of the year ended 31 December 2022
include:
• £73 million of costs associated with a strategic initiative to enhance
capabilities to support the move towards the Group's strategic asset
allocation alongside growth delivered through bulk purchase annuity
transactions, investment in digital capability and transformation of operating
model to support efficient growth;
• £47 million related to the increase in expected costs associated with
the delivery of the Group Target Operating Model for IT and Operations,
following a strategic decision to re-phase the programme, together with the
costs of migrating policyholder administration onto the TCS platform
for certain legacy portfolios of business;
• costs of £31 million associated with the ongoing ReAssure integration
programme;
• costs of £15 million associated with the implementation of IFRS 17;
• £15 million of past service costs in relation to a Group pension
scheme. Further details are included in note G1.1;
• £14 million relating to a support package to help colleagues navigate
cost of living challenges, which included giving all colleagues, except the
most senior staff, a one-off net of tax payment of £1,000 in August 2022;
• £12 million costs associated with the acquisition of SLF of Canada UK
Limited; and
• Corporate project costs and net other one-off items totalling a cost of
£55 million.
Further details of the investment return variances and economic assumption
changes on long-term business, and the variance on owners' funds are included
in note B2.
B1.2 Segmental revenue
2023 Retirement Solutions Pensions & Savings With-Profits Europe & Other Total
£m £m £m £m £m
Revenue from external customers:
Insurance revenue 3,751 272 267 571 4,861
Fees and commissions - 828 52 87 967
Total segmental revenue 3,751 1,100 319 658 5,828
2022 restated1 Retirement Solutions Pensions & Savings With-Profits Europe & Other Total
£m £m £m £m £m
Revenue from external customers:
Insurance revenue 3,544 307 636 655 5,142
Fees and commissions - 733 35 90 858
Total segmental revenue 3,544 1,040 671 745 6,000
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
Of the revenue from external customers presented in the table above, £5,583
million (2022: £5,792 million) is attributable to customers in the United
Kingdom ('UK') and £245 million (2022: £208 million) to the rest of the
world. No revenue transaction with a single customer external to the Group
amounts to greater than 10% of the Group's revenue.
The Group has total non-current assets (other than financial assets, deferred
tax assets, pension schemes and rights arising under insurance contracts)
of £3,622 million (2022: £3,622 million) located in the UK and £299
million (2022: £352 million) located in the rest of the world.
B2. Investment return variances and economic assumption changes
The long-term nature of much of the Group's operations means that, for
internal performance management, the effects of short-term economic volatility
are treated as non-operating items. The Group focuses instead on an adjusted
operating profit measure that incorporates an expected return on investments
supporting its long-term business. The accounting policy adopted in the
calculation of adjusted operating profit is detailed in note B1. The
methodology for the determination of the expected investment return is
explained below together with an analysis of investment return variances and
economic assumption changes recognised outside of adjusted operating profit.
B2.1 Calculation of the long-term investment return
Adjusted operating profit for life assurance business is based on expected
investment returns on financial investments backing shareholder, annuity,
other non-profit business, With-Profit funds receiving shareholder support and
surplus assets, with allowance for the corresponding movements in liabilities.
The methodology to determine the expected investment returns on financial
investments has been revised, compared to that disclosed in the Interim
Financial Report 2023, to use the 1-year (rather than 15-year) risk-free rate
for deriving the expected investment return assumption on assets backing the
insurance contract liabilities to reduce unintended economic volatility as set
out in note B1. The information below for the year ended 31 December 2022
includes these revisions and is presented on a consistent basis to that at 31
December 2023.
The long-term risk-free rate used as the basis for deriving the long-term
investment return is consistent with that set out in note F11.2.1 at the
1-year duration for assets backing the insurance contract liabilities and
surplus cash assets, and at the 15-year duration for surplus non-cash assets.
A risk premium of 380 bps is added to the risk-free yield for equities (31
December 2022: 370 bps), 50 bps for properties (31 December 2022: 280 bps) and
130bps for debt securities (31 December 2022: 80 bps).
The principal assumptions, determined as at 1 January of each reporting
period, underlying the calculation of the long-term investment return for
surplus assets are:
2023 2022
%
%
Equities 7.4 4.6
Properties 4.1 3.7
Debt securities 4.9 1.7
During 2022 UK interest rates increased significantly, this had the impact of
increasing the risk-free yield at the 15-year point by 271bps from 0.91% to
3.62%.
B2.2 Life assurance business
The economic variances excluded from the long-term business operating profit
are as follows:
2023 2022
£m £m
Economic variances 147 (3,309)
The net favourable economic variances of £147 million (2022: adverse £3,309
million) have primarily arisen as a result of a more stable market environment
compared with the significant volatility experience during 2022. The impact of
positive changes to discount rates, primarily on annuities and including the
impact of methodology refinements (see note B2.1), more than offsets the
losses arising from the impact of positive equity market movements on the
hedges the Group holds to protect the Solvency II position. As the full value
of future profits impacted by equity markets is not held on the IFRS balance
sheet, this results in volatility in the Group's IFRS results .
B3. Earnings per share
The Group calculates its basic earnings per share based on the present shares
in issue using the earnings attributable to ordinary equity holders of the
parent, divided by the weighted average number of ordinary shares in issue
during the year.
Diluted earnings per share are calculated based on the potential future shares
in issue assuming the conversion of all potentially dilutive ordinary shares.
The weighted average number of ordinary shares in issue is adjusted to assume
conversion of dilutive share awards granted to employees.
The basic and diluted earnings per share calculations are also presented based
on the Group's adjusted operating earnings net of financing costs. Adjusted
operating profit is a non-GAAP performance measure that is considered to
provide a comparable measure of the underlying performance of the business as
it excludes the impact of short-term economic volatility and other one-off
items.
The result attributable to ordinary equity holders of the parent for the
purposes of determining earnings per share has been calculated as set out
below.
2023 Adjusted operating profit Financing costs Adjusted operating earnings net of financing costs Other non-operating items Total
£m £m £m £m £m
Profit/(loss) before the tax attributable to owners 617 (195) 422 (586) (164)
Tax (charge)/credit attributable to owners (119) 46 (73) 149 76
Profit/(loss) for the year attributable to owners 498 (149) 349 (437) (88)
Coupon paid on Tier 1 notes, net of tax relief - (22) (22) - (22)
Deduct: Share of result attributable to non-controlling interests - - - (28) (28)
Profit/(loss) for the year attributable to ordinary equity holders of the 498 (171) 327 (465) (138)
parent
2022 (restated)(1) Adjusted operating profit Financing costs Adjusted operating earnings net of financing costs Other non-operating items Total
£m £m £m £m £m
Profit/(loss) before the tax attributable to owners 544 (199) 345 (3,857) (3,512)
Tax (charge)/credit attributable to owners (119) 43 (76) 931 855
Profit/(loss) for the year attributable to owners 425 (156) 269 (2,926) (2,657)
Coupon paid on Tier 1 notes, net of tax relief - (22) (22) - (22)
Deduct: Share of result attributable to non-controlling interests - - - (67) (67)
Profit/(loss) for the year attributable to ordinary equity holders of the 425 (178) 247 (2,993) (2,746)
parent
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
The weighted average number of ordinary shares outstanding during the period
is calculated as follows:
2023 2022
Number Number
million million
Issued ordinary shares at beginning of the year 1,000 1,000
Effect of ordinary shares issued 1 -
Effect of non-contingently issuable shares in respect of Group's long-term 2 1
incentive plan
Own shares held by the employee benefit trust (2) (2)
Weighted average number of ordinary shares 1,001 999
The diluted weighted average number of ordinary shares outstanding during the
period is 1,003 million (2022: 1,001 million). The Group's long-term incentive
plan, deferred bonus share scheme and sharesave schemes increased the weighted
average number of shares on a diluted basis by 2,259,377 shares for the year
ended 31 December 2023 (2022: 1,841,988 shares). As losses have an
anti-dilutive effect, none of the share-based awards had a dilutive effect in
the calculation of basic earnings per share for either of the years ended 31
December 2022 or 31 December 2023.
Earnings per share disclosures are as follows:
2023 2022
pence restated
pence
Basic earnings per share (13.8) (274.9)
Diluted earnings per share (13.8) (274.9)
Basic adjusted operating earnings net of financing costs per share 32.7 24.7
Diluted adjusted operating earnings net of financing costs per share 32.6 24.7
B4. Dividends
Final dividends on ordinary shares are recognised as a liability and deducted
from equity when they are approved by the Group's owners. Interim dividends
are deducted from equity when they are paid.
Dividends for the year that are approved after the reporting period are dealt
with as an event after the reporting period. Declared dividends are those that
are appropriately authorised and are no longer at the discretion of the
entity.
2023 2022
£m £m
Dividends declared and paid in the year 520 496
On 10 March 2023, the Board recommended a final dividend of 26.0p per share in
respect of the year ended 31 December 2022. The dividend was approved at the
Group's Annual General Meeting, which was held on 4 May 2023. The dividend
amounted to £260 million and was paid on 10 May 2023.
On 15 September 2023, the Board declared an interim dividend of 26.0p per
share for the half year ended 30 June 2023. The dividend amounted to £260
million and was paid on 23 October 2023.
C. Other Income Statement notes
C1. Insurance Revenue
The Group's insurance revenue reflects the provision of services arising from
a group of insurance contracts at an amount that reflects the consideration to
which the Group expects to be entitled in exchange for those services.
Insurance revenue from a group of insurance contracts is therefore the
relevant portion for the period of the total consideration for the contracts,
(i.e. the amount of premiums paid to the Group adjusted for financing effect
(the time value of money) and excluding any investment components). The total
consideration for a group of contracts covers amounts related to the provision
of services and is comprised of:
• the release of the CSM;
• changes in the risk adjustment for non-financial risk relating to
current services;
• claims and other insurance service expenses incurred in the period,
generally measured at the amounts expected at the beginning of the period;
• experience adjustments arising from premiums received in the period
other than those that relate to future service;
• insurance acquisition cash flows recovery which is determined by
allocating the portion of premiums related to the recovery of those cash flows
on the basis of the passage of time over the expected coverage of a group of
contracts; and
• other amounts, including any other pre-recognition cash flow assets
derecognised at the date of initial recognition.
The amount of the CSM of a group of insurance contracts that is recognised as
insurance revenue in each year is determined by identifying the coverage units
in the group, allocating the CSM remaining at the end of the year equally to
each coverage unit provided in the year and expected to be provided in future
years, and recognising in profit or loss the amount of the CSM allocated to
coverage units provided in the year.
The number of coverage units in a group is the quantity of service provided by
the contracts in the group, determined by considering for each contract the
quantity of benefits provided under a contract and its expected coverage
period. The coverage units are reviewed and updated at each reporting date.
The Group consider the following when determining coverage units:
• the quantity of benefits provided by contracts in the group;
• the expected coverage period of contracts in the group;
• the likelihood of insured events occurring, only to the extent that they
affect the expected coverage period of contracts in the group;
• for insurance contracts without direct participation features, the
generation of an investment return for the policyholder, if applicable
(investment-return service); and
• for insurance contracts with direct participation features, the
management of underlying items on behalf of the policyholder
(investment-related service).
The coverage units for groups of reinsurance contracts held are determined
based on the quantity of coverage provided by the reinsurance contracts held
in the group but not the coverage provided by the insurer to its policyholders
through the underlying insurance contracts. However, where the reinsurance
held is a 100% quota share arrangement, it is expected that the coverage units
would be consistent with the underlying insurance contracts. Where there is a
change to the fulfilment cash flows of the group of underlying policies that
does not adjust the CSM, it also would not adjust the CSM of the group of
reinsurance contracts.
2023 Retirement Solutions Pensions & Savings With-Profits Europe & Other Total
£m £m £m £m £m
Amounts relating to changes in liabilities for remaining coverage:
CSM recognised in period for services provided 260 25 77 47 409
Change in risk adjustment for non-financial risk 39 8 4 12 63
Expected incurred claims and other insurance service expenses 3,450 233 169 497 4,349
Policyholder tax charges 1 6 17 1 25
Amounts relating to recovery of insurance acquisition cash flows 1 - - 14 15
Insurance revenue 3,751 272 267 571 4,861
Comprising contracts measured using:
Fair value approach at transition 1,887 262 257 420 2,826
Fully retrospective approach at transition and new contracts 1,864 10 10 151 2,035
2022 Retirement Solutions Pensions & Savings With-Profits Europe & Other Total
£m £m £m £m £m
Amounts relating to changes in liabilities for remaining coverage:
CSM recognised in period for services provided 207 13 99 67 386
Change in risk adjustment for non-financial risk 76 11 8 7 102
Expected incurred claims and other insurance service expenses 3,260 300 546 564 4,670
Policyholder tax charges - (17) (17) 1 (33)
Amounts relating to recovery of insurance acquisition cash flows 1 - - 16 17
Insurance revenue 3,544 307 636 655 5,142
Comprising contracts measured using:
Fair value approach at transition 1,828 307 602 479 3,216
Fully retrospective approach at transition and new contracts 1,716 - 34 176 1,926
C2. Fees and commissions
Fees related to the provision of investment management services and
administration services are recognised as services are provided. Front end
fees, which are charged at the inception of service contracts, are deferred as
a liability and recognised over the life of the contract. No significant
judgements are required in determining the timing or amount of fee income or
the costs incurred to obtain or fulfil a contract.
The table below disaggregates fees and commissions by segment.
2023 Retirement Solutions Pensions & Savings With-Profits Europe & Other Total
£m £m £m £m £m
Fee income from investment contracts without DPF - 814 52 60 926
Initial fees deferred during the year - - - (9) (9)
Revenue from investment contracts without DPF - 814 52 51 917
Other revenue from contracts with customers - 14 - 36 50
Fees and commissions - 828 52 87 967
2022 restated(1) Retirement Solutions Pensions & Savings With-Profits Europe & Other Total
£m £m £m £m £m
Fee income from investment contracts without DPF - 727 35 72 834
Initial fees deferred during the year - - - (9) (9)
Revenue from investment contracts without DPF - 727 35 63 825
Other revenue from contracts with customers - 6 - 27 33
Fees and commissions - 733 35 90 858
(1)Prior period comparatives have been restated on transition to IFRS17
Insurance Contracts (see note A2.1 for further details).
Remaining performance obligations
The practical expedient under IFRS 15 has been applied and remaining
performance obligations are not disclosed as the Group has the right to
consideration from customers in amounts that correspond with the performance
completed to date. Specifically management charges become due over time in
proportion to the Group's provision of investment management services.
In the period no amortisation or impairment losses from contracts with
customers were recognised in the statement of comprehensive income.
C3. Net investment income
Net investment income comprises interest, dividends, rents receivable, net
interest income/(expense) on the Group defined benefit pension scheme
asset/(liability), fair value gains and losses on financial assets (except for
reinsurers' share of investment contract liabilities without DPF, see note
E1), financial liabilities and investment property at fair value and
impairment losses on loans and receivables.
Interest income is recognised in the consolidated income statement as it
accrues using the effective interest method.
Dividend income is recognised in the consolidated income statement on the date
the right to receive payment is established, which in the case of listed
securities is the ex-dividend date.
Rental income from investment property is recognised in the consolidated
income statement on a straight-line basis over the term of the lease. Lease
incentives granted are recognised as an integral part of the total rental
income.
Fair value gains and losses on financial assets and financial liabilities
designated at fair value through profit or loss are recognised in the
consolidated income statement. Fair value gains and losses includes both
realised and unrealised gains and losses.
2023 2022
£m restated(1)
£m
Investment income
Interest income on financial assets at amortised cost 37 21
Interest income on financial assets at FVTPL 3,901 2,888
Dividend income 5,923 5,409
Rental income 324 343
Net interest expense on Group defined benefit pension scheme (liability)/asset (109) (64)
10,076 8,597
Fair value gains/(losses)
Financial assets and financial liabilities at FVTPL:
Designated upon initial recognition 11,117 (38,539)
Mandatorily held 9 (6,707)
Investment property (362) (1,363)
10,764 (46,609)
Net investment income 20,840 (38,012)
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
C4. Net finance (expense)/income from insurance contracts
Insurance finance income and expenses comprise changes in the carrying amounts
of groups of insurance contracts arising from the effects of the time value of
money, financial risk and changes therein, unless any such changes for groups
of direct participating contracts are allocated to a loss component and
included in insurance service expenses. They include changes in the
measurement of groups of contracts caused by changes in the value of
underlying items. The Group presents insurance finance income or expenses in
profit or loss.
2023 Retirement Solutions Pensions & Savings With-Profits Europe & Other Total
£m £m £m £m £m
Insurance contracts issued
Changes in fair value of underlying items of direct participating contracts - (581) (629) (376) (1,586)
Group's share of changes in fair value of underlying items or fulfilment cash - 10 - - 10
flows that do not adjust the CSM
Unwind of discount on fulfilment cash flows (1,930) (902) (1,320) (1,040) (5,192)
Interest accreted on the CSM (62) - (10) (5) (77)
Effect of changes in interest rates and other financial assumptions 31 (117) 45 (96) (137)
Insurance finance expense (1,961) (1,590) (1,914) (1,517) (6,982)
Reinsurance contracts held
Unwind of discount on fulfilment cash flows 272 - 47 6 325
Interest accreted on the CSM 23 - 3 - 26
Effect of changes in interest rates and other financial assumptions (173) - (5) 6 (172)
Reinsurance finance income 122 - 45 12 179
Net insurance finance expense (1,839) (1,590) (1,869) (1,505) (6,803)
2022 Retirement Solutions Pensions & Savings With-Profits Europe & Other Total
£m £m £m £m £m
Insurance contracts issued
Changes in fair value of underlying items of direct participating contracts - 2,066 3,235 4,402 9,703
Unwind of discount on fulfilment cash flows (698) (9) (144) (8) (859)
Interest accreted on the CSM (44) - (6) (5) (55)
Effect of changes in interest rates and other financial assumptions 10,328 8 2,373 1,182 13,891
Policyholder tax - (42) (15) 256 199
Insurance finance income 9,586 2,023 5,443 5,827 22,879
-
Reinsurance contracts held -
Unwind of discount on fulfilment cash flows 87 - 43 12 142
Interest accreted on the CSM 15 - 3 - 18
Effect of changes in interest rates and other financial assumptions (423) - (439) (351) (1,213)
Reinsurance finance expense (321) - (393) (339) (1,053)
Net insurance finance income 9,265 2,023 5,050 5,488 21,826
There is a close relationship between the net investment income in note C3, as
it relates to assets backing contracts within the scope of IFRS 17, and net
insurance finance (expense)/income. Net investment income includes the results
for all investment assets including those backing investment contracts and
surplus assets.
For Retirement Solutions the principal product is annuities. The insurance
finance (expense)/income primarily reflects the unwind of the discount rate on
the liabilities. This is largely offset by the interest income earned,
included within net investment income, on the assets backing the annuity
contracts which primarily consist of debt securities and equity release
mortgages. Changes in the discount rates used to discount the annuity cash
flows in the measurement of the insurance contract liabilities are largely
offset by changes in the fair value of the backing assets, included in net
investment income, in respect of BEL and risk adjustment.
Mismatches between net investment income and insurance finance expense arises
for the following reason:
• the annuity business within the Retirement Solutions segment uses the
General Model for measurement. As a result, the CSM is measured using discount
rates locked in at inception, whereas the assets backing the CSM are based on
current economic assumptions.
• the discount rate for annuity business uses the Strategic Asset
Allocation as set out in Note F11.2.1, and therefore insurance finance
expenses are impacted by changes to this reference portfolio where the asset
mix is based on the strategic investment objectives of the Group. Net
investment income is determined with reference to the actual assets held by
the Group during the reporting period.
• changes in non-economic assumptions for General Model business impacts
BEL and risk adjustment using current discount rates and CSM using locked in
discount rates. This gives rise to a mismatch for which there is no
corresponding item within net investment income.
For Pensions & Savings the principal products are unit-linked and hybrid
contracts which contain an element of unit-linked and unitised with-profits
within a single contract. These contracts are measured primarily using the
Variable Fee Approach as the amounts payable to policyholders reflect a
substantial share of the fair value returns on the backing assets. As a result
the change in fair value of underlying items within insurance finance
(expense)/income will be closely matched by changes in the backing assets
which are also measured at fair value.
The unwind of discount rate on cash flows within insurance finance
(expenses)/income is offset by the investment income recognised in respect of
backing assets. The discount rate used for BEL and risk adjustment is
determined on a bottom-up basis, as set out in note F11.2.1, based on the
liquidity characteristics of the liabilities rather than with reference to the
backing assets and therefore a mismatch occurs.
For With-Profits business there are differing impacts dependent on the nature
of the liabilities within the fund. For with-profit business without
guarantees the relationship between net investment income and insurance
finance (expense)/income will be consistent with that for the business within
Pensions & Savings. In respect of guarantees, the value of these is
typically influenced by changes in interest rates. The Group hedges its
interest rate risk in respect of these guarantees with derivatives such that
the effect of changes in interest rates on guarantees within insurance finance
(expense)/income are largely offset by changes in the fair value of the
derivatives used for hedging in net investment income.
For non-profit business in a with-profit fund where profits from these
contracts accrue to the with-profit policyholders or to the with-profit fund
estate, the non-profit contracts and their backing assets are considered to be
an underlying item of the with-profit contracts and therefore changes in their
fair value are included within insurance finance (expense)/income.
The non-profit contracts are measured based on their substance. For non-profit
annuities which fall within the scope of IFRS 17, they are measured using the
IFRS 17 General Model and the treatment of the non-profit contract is
consistent with the non-profit annuities within the Retirement Solutions
segment. The effect of these non-profit annuities on the income statement does
not match the change in fair value measurement used to measure their effect on
the with-profit policyholders and therefore a mismatch arises. For unit-linked
business which falls within the scope of IFRS 9 it is measured in line with
the Group's accounting policy for investment contracts with this impact being
taken through 'change in investment contract liabilities' and therefore is not
included in net investment income. The assets backing the non-profit business
in the with-profit fund are typically measured at fair value with investment
income and changes in fair value being included within net investment income.
The Europe & Other segment contains business consistent with that in the
segments noted above and will mirror the relationships between net investment
income and insurance finance (expense)/income as noted above for the relevant
type of business. In addition, this segment contains protection business which
uses a bottom-up discount rate based on the liability characteristics rather
than being based on the backing assets, which leads to mismatches between net
investment income and insurance finance (expenses)/income.
C5. Expenses
Insurance service expenses
Insurance service expenses arising from insurance contracts are recognised in
profit or loss generally as they are incurred. They exclude repayments of
investment components and comprise the following items:
• adjustment to liabilities for incurred claims and benefits, excluding
investment components reduced by loss component allocations;
• other incurred directly attributable expenses, including amounts of any
other pre-recognition cash flows assets (other than insurance acquisition cash
flows) derecognised at the date of initial recognition;
• insurance acquisition cash flows amortisation;
• insurance acquisition cash flows assets impairment; and
• reversal of impairment of assets for insurance acquisition cash flows.
Net income or expense from reinsurance contracts held
Income and expenses from reinsurance contracts are presented separately from
income and expenses from insurance contracts. Income and expenses from
reinsurance contracts, other than insurance finance income or expenses, are
presented on a net basis as 'net expenses from reinsurance contracts' in the
insurance service result.
Net expenses from reinsurance contracts comprise an allocation of reinsurance
premiums paid less amounts recovered from reinsurers.
The Group recognises an allocation of reinsurance premiums paid in profit or
loss as it receives services under groups of reinsurance contracts. The
allocation of reinsurance premiums paid relating to services received for each
period represents the total of the changes in the asset for remaining coverage
that relates to services for which the Group expects to pay consideration.
Administrative expenses
Administrative expenses are recognised in the consolidated income statement as
incurred.
Total expenses are analysed by expenses type as follows:
2023 2022
restated1
£m
£m
Claim and benefits 1,441 2,290
(Reversal of losses)/losses on onerous insurance contracts (22) 531
Cost of retroactive cover on reinsurance contracts held 3 2
Employee costs 664 611
Outsourcer expenses 308 247
Professional fees 571 441
Commission expenses 155 145
Office and IT costs 260 172
Investment management expenses and transaction costs 413 569
Direct costs of collective investment schemes 20 25
Depreciation 21 19
Pension past service costs 13 15
Pension administrative expenses 7 7
Advertising and sponsorship 66 63
Other 78 26
3,998 5,163
Amounts attributed to Insurance acquisition cash flows incurred during the (154) (128)
year
Amortisation of insurance acquisition cash flows 15 17
Total expenses 3,859 5,052
Reported within:
Insurance service expenses 4,354 5,248
Net expenses from reinsurance contracts2 (2,169) (1,617)
Administrative expenses 1,674 1,421
Total expenses 3,859 5,052
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
2 Reported as part of the 'Net expenses from reinsurance contracts' balance
in the consolidated income statement.
Employee costs comprise:
2023 2022
£m £m
Wages and salaries 603 554
Social security contributions 61 57
664 611
2023 2022
Number Number
Average number of persons employed 7,512 8,165
C6. Auditor's remuneration
During the year the Group obtained the following services from its auditor at
costs as detailed in the table below.
2023 2022
£m £m
Audit of the consolidated financial statements 12.7 4.8
Audit of the Company's subsidiaries 12.9 10.7
25.6 15.5
Audit-related assurance services 2.8 2.4
Total fee for assurance services 28.4 17.9
Total auditor's remuneration 28.4 17.9
No services were provided by the Company's auditors to the Group's pension
schemes in either 2023 or 2022.
The increase in the audit fee during 2023 principally reflects the additional
work undertaken in connection with the transition to IFRS 17.
Audit-related assurance services includes fees payable for services where the
reporting is required by law or regulation to be provided by the auditor, such
as reporting on regulatory returns. It also includes fees payable in respect
of reviews of interim financial information and services where the work is
integrated with the audit itself.
There were no other non-audit services provided during the year (2022: £nil).
Further information on auditor's remuneration and the assessment of the
independence of the external auditor is set out in the Audit Committee report
on pages 92 to 99.
C7. Finance costs
Interest payable is recognised in the consolidated income statement as it
accrues and is calculated using the effective interest method.
2023 2022
£m £m
Interest expense
On financial liabilities at amortised cost 256 227
On leases 2 3
258 230
Attributable to:
- policyholders 8 3
- owners 250 227
258 230
C8. Tax charge/(credit)
Income tax comprises current and deferred tax. Income tax is recognised in the
consolidated income statement except to the extent that it relates to items
recognised in the statement of consolidated comprehensive income or the
statement of consolidated changes in equity, in which case it is recognised in
these statements.
Current tax is the expected tax payable on the taxable income for the year,
using tax rates and laws enacted or substantively enacted at the date of the
statement of consolidated financial position together with adjustments to tax
payable in respect of previous years.
The tax charge is analysed between tax that is payable in respect of
policyholders' returns and tax that is payable on owners' returns.
This allocation is calculated based on an assessment of the effective rate of
tax that is applicable to owners for the year.
C8.1 Current year tax charge/(credit)
2023 2022
£m restated1
£m
Current tax:
UK corporation tax 28 36
Overseas tax 110 86
138 122
Adjustment in respect of prior years (16) (23)
Total current tax charge 122 99
Deferred tax:
Origination and reversal of temporary differences (14) (1,348)
Change in the rate of UK corporation tax (6) (206)
Write down/(up) of deferred tax assets 6 23
Total deferred tax credit (14) (1,531)
Total tax charge/(credit) 108 (1,432)
Attributable to:
- policyholders 184 (577)
- owners (76) (855)
Total tax charge/(credit) 108 (1,432)
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
The Group, as a proxy for policyholders in the UK, is required to pay taxes on
investment income and gains each year. Accordingly, the tax credit or expense
attributable to UK life assurance policyholder earnings is included in income
tax expense. The tax charge attributable to policyholder earnings was £184
million (2022: £577 million credit).
The 2023 current tax prior year adjustment arises principally from the carry
back of tax losses arising from adverse market movements in 2022. The carry
back of losses reduces the tax charge relating to prior periods and is broadly
offset by a reduction in tax losses carried forward to future periods, on
which a deferred tax asset is recognised. This is partially offset by true-ups
from the tax reporting provisions in various entities within the group.
The 2022 current tax prior year adjustment relates principally to a tax
dispute with HMRC in relation to the tax treatment of an asset formerly held
by Guardian Assurance Limited (before the business was transferred to ReAssure
Limited) was resolved in the period in favour of the Group. The 2021 current
tax liability included an accrual for the total tax under dispute. The matter
was heard before the First Tier Tribunal in May 2022 and the Court found in
favour of ReAssure Limited. HMRC did not appeal against this decision and so
the accrual for the potential tax liability was released.
C8.2 Tax (credited)/charged to other comprehensive income
2023 2022
£m £m
Current tax credit (8) -
Deferred tax (credit)/charge on defined benefit schemes (13) 283
(21) 283
C8.3 Tax credited to equity
2023 2022
£m restated
£m
Current and deferred tax credit on Tier 1 Notes (7) (7)
Deferred tax credit on unrealised gains and other items (1) (10)
Deferred tax charge on share schemes - 2
Total tax credit (8) (15)
C8.4 Reconciliation of tax charge/(credit)
2023 2022
£m restated
£m
Profit/(loss) for the year before tax 20 (4,089)
Policyholder tax (charge)/credit (184) 577
Loss before the tax attributable to owners (164) (3,512)
Tax credit at standard UK rate of 23.5% (2022:19%)1 (39) (668)
Non-taxable gains(2) (16) (4)
Disallowable expenses 1 3
Prior year tax charge/(credit) for shareholders3 12 (7)
Movement on acquired in-force amortisation at rates other than 23.5% (2022: 12 20
19%)
Profits taxed at rates other than 23.5% (2022: 19%)4 (25) 12
Derecognition of previously recognised deferred tax assets5 (39) 10
Deferred tax rate change6 (6) (206)
Current year losses not valued7 18 (17)
Other 6 2
Owners' tax charge/(credit) (76) (855)
Policyholder tax charge/(credit) 184 (577)
Total tax charge/(credit) for the year 108 (1,432)
1 The Phoenix operating segments are predominantly in the UK. The
reconciliation of tax charge has therefore, been completed by reference to the
standard rate of UK tax.
2 Relates principally to a profit arising on consolidation due to the
purchase of the SLF of Canada UK Limited, not subject to deferred tax.
3 The 2023 prior year tax charge relates to true-ups from the tax reporting
provisions in various entities within the group.
4 Profits taxed at rates other than 23.5% relates to overseas profits,
consolidated fund investments and UK life company profits subject to marginal
shareholder tax rates
5 Relates principally to increases in the recognised value of tax attributes
in SLIDAC offset by a reduction in the future value of capital losses in
ReAssure Limited.
6 Deferred tax rate change relates primarily to movements in deferred tax
liabilities which are expected to unwind at rates in excess of the current
year rate of 23.5%.
7 Relates to losses accruing in Phoenix Life Assurance Europe DAC in
relation to which a deferred tax asset cannot be recognised.
D. Equity
D1. Share Capital
The Group has issued ordinary shares which are classified as equity.
Incremental external costs that are directly attributable to the issue
of these shares are recognised in equity, net of tax.
2023 2022
£m £m
Issued and fully paid:
1,001.5 million ordinary shares of £0.10 each (2022: 1,000.4 million) 100 100
The holders of ordinary shares are entitled to one vote per share on matters
to be voted on by owners and to receive such dividends, if any, as may be
declared by the Board of Directors in its discretion out of legally available
profits.
Movements in issued share capital during the year:
2023 2023 2022 2022
Number £ Number £
Shares in issue at 1 January 1,000,352,477 100,035,247 999,536,058 99,953,605
Ordinary shares issued in the year 1,185,942 118,594 816,419 81,642
Shares in issue at 31 December 1,001,538,419 100,153,841 1,000,352,477 100,035,247
During the year, 1,185,942 shares (2022: 816,419) were issued at a premium of
£6 million (2022: £4 million) in order to satisfy obligations to employees
under the Group's sharesave schemes (see note I1).
The balance in the merger reserve arose upon the issuance of equity shares in
2020 as part consideration for the acquisition of the entire share capital of
ReAssure Group plc. The Group has applied the relief in section 612 of the
Companies Act 2006 to present the difference between the consideration
received and the nominal value of the shares issued of £1,819 million in a
merger reserve as opposed to in share premium.
D2. Shares held by the employee benefit trust
Where the Phoenix Group Employee Benefit Trust ('EBT') acquires shares in the
Company or obtains rights to purchase its shares, the consideration paid
(including any attributable transaction costs, net of tax) is shown as a
deduction from owners' equity. Gains and losses on sales of shares held by the
EBT are charged or credited to the own shares account in equity.
The EBT holds shares to satisfy awards granted to employees under the Group's
share-based payment schemes.
2023 2022
£m £m
At 1 January 13 12
Shares acquired by the EBT 14 13
Shares awarded to employees by the EBT (12) (12)
At 31 December 15 13
During the year 1,942,979 (2022: 1,764,660) shares were awarded to employees
by the EBT and 2,477,897 (2022: 1,970,764) shares were purchased. The number
of shares held by the EBT at 31 December 2023 was 2,626,940 (2022: 2,092,022).
The Company provided the EBT with an interest-free non-recourse facility
arrangement to enable it to purchase the shares.
D3. Other Reserves
The other reserves comprise the owner-occupied property revaluation reserve
and the cash flow hedging reserve.
Owner-occupied property revaluation reserve
This reserve comprises the revaluation surplus arising on revaluation of
owner-occupied property. When a revaluation loss arises on a previously
revalued asset it should be deducted first against the previous revaluation
gain. Any excess impairment will then be recorded as an impairment expense in
the consolidated income statement.
Cash flow hedging reserve
Where a cash flow hedging relationship exists, the effective portion of
changes in the fair value of derivatives that are designated and qualify as
cash flow hedges is recognised in other comprehensive income and accumulated
under the heading of cash flow hedging reserve. The gain or loss relating to
the ineffective portion is recognised immediately in the consolidated income
statement, and is reported in net investment income.
Amounts previously recognised in other comprehensive income and accumulated in
equity are reclassified to profit or loss in the periods when the hedged item
affects profit or loss, in the same line as the recognised hedged item.
Hedge accounting is discontinued when the Group revokes the hedging
relationship, when the hedging instrument expires or is sold, terminated, or
exercised, or when it no longer qualifies for hedge accounting. Any gain or
loss recognised in other comprehensive income and accumulated in equity at
that time is recycled to profit or loss over the period the hedged item
impacts profit or loss.
Further details of the Group's hedge accounting policy are included in note
E1.
Owner-occupied property revaluation reserve Cash flow hedging reserve Total other reserves
2023 £m £m £m
At 1 January 2023 - 46 46
Other comprehensive income/(expense) for the year 2 (32) (30)
At 31 December 2023 2 14 16
Owner-occupied property revaluation reserve Cash flow hedging reserve Total other reserves
2022 £m £m £m
At 1 January 2022 5 51 56
Other comprehensive expense for the year (5) (5) (10)
At 31 December 2022 - 46 46
In June 2021, the Group entered into four cross currency swaps which were
designated as hedging instruments in order to effect cash flow hedges of the
Group's Euro and US Dollar denominated borrowings (see note E5). Hedge
accounting has been adopted effective from the date of designation of the
hedging relationship. The objective of the hedging relationships is to hedge
the risk of variability in functional currency equivalent cash flows with the
foreign currency denominated borrowings due to changes in forward rates. The
hedge ratio (i.e. the relationship between the quantity of the hedging
instrument and the quantity of the hedged item in terms of their relative
weighting) is such that there is an exact match in the relative weightings of
the hedged items and hedging instruments within each of the hedging
relationships.
D4. Tier 1 notes
The Fixed Rate Reset Perpetual Restricted Tier 1 Contingent Convertible Notes
('Tier 1 Notes') meet the definition of equity and accordingly are shown as a
separate category within equity at the proceeds of issue. The coupons on the
instruments are recognised as distributions on the date of payment and are
charged directly to the statement of consolidated changes in equity.
2023 2022
£m £m
Tier 1 Notes 494 494
On 26 April 2018, Old PGH (the Group's ultimate parent company up to December
2018) issued £500 million of Tier 1 Notes, the proceeds of which were used to
fund a portion of the cash consideration for the acquisition of the Standard
Life Assurance businesses. The Tier 1 Notes bear interest on their principal
amount at a fixed rate of 5.75% per annum up to the 'First Call Date' of 26
April 2028. Thereafter the fixed rate of interest will be reset on the First
Call Date and on each fifth anniversary of this date by reference to a 5 year
gilt yield plus a margin of 4.169%. Interest is payable on the Tier 1 Notes
semi-annually in arrears on 26 October and 26 April. The coupon paid in the
year was £29 million (2022: £29 million).
At the issue date, the Tier 1 Notes were unsecured and subordinated
obligations of Old PGH. On 12 December 2018, the Company was substituted in
place of Old PGH as issuer.
The Tier 1 Notes have no fixed maturity date and interest is payable only at
the sole and absolute discretion of the Company; accordingly the Tier 1 Notes
meet the definition of equity for financial reporting purposes and are
disclosed as such in the consolidated financial statements. If an interest
payment is not made, it is cancelled and it shall not accumulate or be payable
at any time thereafter.
The Tier 1 Notes may be redeemed at par on the First Call Date or on any
interest payment date thereafter at the option of the Company and also in
other limited circumstances. If such redemption occurs prior to the fifth
anniversary of the Issue Date, such redemption must be funded out of the
proceeds of a new issuance of, or exchanged into, Tier 1 Own Funds of the same
or a higher quality than the Tier 1 Notes. In respect of any redemption or
purchase of the Tier 1 Notes, such redemption or purchase is subject to the
receipt of permission to do so from the PRA.
On 27 October 2020, the terms of the Tier 1 Notes were amended and the
consequence of a trigger event, linked to the Solvency II capital position,
was changed. Previously, the Tier 1 Notes were subject to a permanent
write-down in value to zero. The amended terms require that the Tier 1 Notes
would automatically be subject to conversion to ordinary shares of the Company
at the conversion price of £1,000 per share, subject to adjustment in
accordance with the terms and conditions of the notes and all accrued and
unpaid interest would be cancelled. Following any such conversion there would
be no reinstatement of any part of the principal amount of, or interest on,
the Tier 1 Notes at any time.
D5. Non-controlling interests
Non-controlling interests are stated at the share of net assets attributed to
the non-controlling interest holder at the time of acquisition, adjusted for
the relevant share of subsequent changes in equity.
APEOT APEOT
2023 2022
£m £m
At 1 January 532 460
Profit for the year 28 67
Dividends paid (11) (10)
Increase in non-controlling interests - 15
At 31 December 549 532
The non-controlling interests of £549 million (2022: £532 million) reflects
third party ownership of abrdn Private Equity Opportunities Trust plc
('APEOT') determined at the proportionate value of the third party interest in
the underlying assets and liabilities. APEOT is a UK Investment Trust listed
and traded on the London Stock Exchange. As at 31 December 2023, the Group
held 53.6% (2022: 53.6%) of the issued share capital of APEOT.
The Group's interest in APEOT is held in the With-Profit and unit-linked funds
of the Group's life companies. Therefore, the shareholder exposure to the
results of APEOT is limited to the impact of those results on the shareholder
share of distributed profits of the relevant fund.
Summary financial information showing the interest that non-controlling
interests have in the Group's activities and cash flows is shown below:
APEOT 2023 2022
£m £m
Statement of financial position:
Financial assets 586 554
Other assets 10 12
Total assets 596 566
Total liabilities 47 34
Income statement:
Net income 37 74
Profit after tax 28 67
Comprehensive income 28 67
Cash flows:
Net decrease in cash and cash equivalents (1) (7)
E. Financial assets & liabilities
E1. Fair values
Financial assets
Financial assets are to be classified into one of the following measurement
categories: Fair value through profit or loss ('FVTPL'), fair value through
other comprehensive income ('FVOCI') and amortised cost. Classification is
made based on the objectives of the entity's business model for managing its
financial assets and the contractual cash flow characteristics of the
instruments.
Financial assets are measured at amortised cost where they have:
• contractual terms that give rise to cash flows on specified dates, that
represent solely payments of principal and interest on the principal amount
outstanding; and
• are held within a business model whose objective is achieved by holding
to collect contractual cash flows.
These financial assets are initially recognised at cost, being the fair value
of the consideration paid for the acquisition of the financial asset. All
transaction costs directly attributable to the acquisition are also included
in the cost of the financial asset. Subsequent to initial recognition, these
financial assets are carried at amortised cost, using the effective interest
method.
Equities, debt securities, collective investment schemes, derivatives and
certain loans and deposits and cash and cash equivalents are measured at FVTPL
as they are managed and evaluated on a fair value basis.
Purchases and sales of financial assets are recognised on the trade date,
which is the date that the Group commits to purchase or sell the asset.
Where derivative financial instruments are held to hedge the Group's Euro and
US Dollar borrowings, the effective portion of any gain or loss that arises on
remeasurement to fair value is initially recognised in other comprehensive
income and is recycled to profit or loss as the hedged item impacts the profit
or loss. For such instruments, the timing of the recognition of any gain or
loss that arises on remeasurement to fair value in profit or loss depends on
the nature of the hedge relationship.
The Group has treaties in place with third party insurance companies to
provide reinsurance in respect of liabilities that are linked to the
performance of funds maintained by those companies. The contracts in question
do not transfer significant insurance risk and therefore are classified as
financial instruments and are valued at fair value through profit and loss.
These contracts are disclosed under Reinsurers' share of investment contract
liabilities in the statement of consolidated financial position.
Impairment of financial assets
The Group assesses the expected credit losses associated with its loans and
deposits, receivables, cash and cash equivalents and other financial assets
carried at amortised cost. The measurement of credit impairment is based on an
Expected Credit Loss (' ECL') model and depends upon whether there has been a
significant increase in credit risk.
For those credit exposures for which credit risk has not increased
significantly since initial recognition, the Group measures loss allowances at
an amount equal to the total expected credit losses resulting from default
events that are possible within 12 months after the reporting date ('12-month
ECL'). For those credit exposures for which there has been a significant
increase in credit risk since initial recognition, the Group measures and
recognises an allowance at an amount equal to the expected credit losses over
the remaining life of the exposure, irrespective of the timing of the default
('Lifetime ECL'). If the financial asset becomes 'credit-impaired' (following
significant financial difficulty of issuer/borrower, or a default/breach of a
covenant), the Group will recognise a Lifetime ECL. ECLs are derived from
unbiased and probability-weighted estimates of expected loss.
The loss allowance reduces the carrying value of the financial asset and is
reassessed at each reporting date. ECLs and subsequent remeasurements of the
ECL, are recognised in the consolidated income statement.
Fair value estimation
The fair values of financial instruments traded in active markets such as
publicly traded securities and derivatives are based on quoted market prices
at the period end. The quoted market price used for financial assets is the
applicable bid price on the period end date. The fair value of investments
that are not traded in an active market is determined using valuation
techniques such as broker quotes, pricing models or discounted cash flow
techniques. Where pricing models are used, inputs are based on market related
data at the period end. Where discounted cash flow techniques are used,
estimated future cash flows are based on contractual cash flows using current
market conditions and market calibrated discount rates and interest rate
assumptions for similar instruments.
For units in unit trusts and shares in open-ended investment companies, fair
value is determined by reference to published bid values. The fair value of
receivables and floating rate and overnight deposits with credit institutions
is their carrying value. The fair value of fixed interest-bearing deposits is
estimated using discounted cash flow techniques.
Associates
Investments in associates that are held for investment purposes are accounted
for under IFRS 9 Financial Instruments for the current period (2022: IAS 39
Financial Instruments: Recognition and Measurement) as permitted by IAS 28
Investments in Associates and Joint Ventures. These are measured at fair value
through profit or loss. There are no investments in associates which are of a
strategic nature.
Derecognition of financial assets
A financial asset (or part of a group of similar financial assets) is
derecognised where:
• the rights to receive cash flows from the asset have expired;
• the Group retains the right to receive cash flows from the assets, but
has assumed an obligation to pay them in full without material delay to a
third party under a 'pass-through' arrangement; or
• the Group has transferred its rights to receive cash flows from the
asset and has either transferred substantially all the risks and rewards of
the asset, or has neither transferred nor retained substantially all the risks
and rewards of the asset, but has transferred control of the asset.
Financial liabilities
On initial recognition, financial liabilities are recognised when due and
measured at the fair value of the consideration received less directly
attributable transaction costs (with the exception of liabilities at FVTPL for
which all transaction costs are expensed).
Subsequent to initial recognition, financial liabilities (except for
liabilities under investment contracts without DPF and other liabilities
designated at FVTPL) are measured at amortised cost using the effective
interest method.
Financial liabilities are designated upon initial recognition at FVTPL where
doing so results in more meaningful information because either:
• it eliminates or significantly reduces accounting mismatches that would
otherwise arise from measuring assets or liabilities or recognising the gains
and losses on them on different bases; or
• a group of financial assets, financial liabilities or both is managed
and its performance is evaluated and managed on a fair value basis, in
accordance with a documented risk management or investment strategy, and
information about the investments is provided internally on that basis to the
Group's key management personnel.
Investment contracts without DPF
Contracts under which the transfer of insurance risk to the Group from the
policyholder is not significant are classified as investment contracts and
accounted for as financial liabilities.
Receipts and payments on investment contracts without DPF are accounted for
using deposit accounting, under which the amounts collected and paid out are
recognised in the statement of consolidated financial position as an
adjustment to the liability to the policyholder.
Investment contracts without DPF are measured at fair value which is
determined using a valuation technique to provide a reliable estimate of the
amount for which the liability could be transferred in an orderly transaction
between market participants at the measurement date, subject to a minimum
equal to the surrender value. The valuation of liabilities on unit-linked
contracts are held at the fair value of the related assets and liabilities.
The liability is the sum of the unit-linked liabilities plus an additional
amount to cover the present value of the excess of future policy costs over
future charges.
Movements in the fair value of investment contracts without DPF and
reinsurers' share of investment contract liabilities are included in Change in
investment contract liabilities in the consolidated income statement.
Investment contract policyholders are charged for policy administration
services, investment management services, surrenders and other contract fees.
These fees are recognised as revenue over the period in which the related
services are performed. If the fees are for services provided in future
periods, they are deferred and recognised over those periods. 'Front end' fees
are charged on some non-participating investment contracts. Where the
non-participating investment contract is measured at fair value, such fees
which relate to the provision of future investment management services are
deferred and recognised as the services are provided.
Net asset value attributable to unitholders
The net asset value attributable to unitholders represents the non-controlling
interest in collective investment schemes which are consolidated by the
Group. This interest is classified at FVTPL and measured at fair value, which
is equal to the bid value of the number of units of the collective investment
scheme not owned by the Group.
Obligations for repayment of collateral received
It is the Group's practice to obtain collateral in stock lending and
derivative transactions, usually in the form of cash or marketable securities.
Where cash collateral received is available to the Group for investment
purposes, it is recognised as a 'financial asset' and the collateral repayable
is recognised as 'obligations for repayment of collateral received' in the
statement of consolidated financial position. The 'obligations for repayment
of collateral received' are measured at amortised cost, which in the case of
cash is equivalent to the fair value of the consideration received. Further
details of the Group's collateral arrangements are included in note E4.
Derecognition of financial liabilities
A financial liability is derecognised when the obligation under the liability
is discharged, cancelled or expires.
Offsetting financial assets and financial liabilities
Financial assets and liabilities are offset and the net amount reported in the
statement of financial position only when there is a legally enforceable right
to offset the recognised amounts and there is an intention to settle on a net
basis, or to realise the asset and settle the liability simultaneously. When
financial assets and liabilities are offset any related interest income and
expense is offset in the income statement.
Hedge accounting
The Group designates certain derivatives as hedging instruments in order to
effect cash flow hedges. At the inception of the hedge relationship, the Group
documents the relationship between the hedging instrument and the hedged item,
along with its risk management objectives and its strategy for undertaking
various hedge transactions. Furthermore, at the inception of the hedge and on
an ongoing basis, the Group documents whether the hedging instrument is highly
effective in offsetting changes in fair values or cash flows of the hedged
item attributable to the hedged risk.
Where a cash flow hedging relationship exists, the effective portion of
changes in the fair value of derivatives that are designated and qualify as
cash flow hedges is recognised in other comprehensive income and accumulated
under the heading of cash flow hedging reserve. The gain or loss relating to
the ineffective portion is recognised immediately in profit or loss, and is
included in net investment income.
Amounts previously recognised in other comprehensive income and accumulated in
equity are reclassified to profit or loss in the periods when the hedged item
affects profit or loss, in the same line as the recognised hedged item.
Hedge accounting is discontinued if: the Group's hedging objective has changed
(can result in a partial discontinuance); the hedged item or hedging
instrument no longer exists or is sold; there is no longer an economic
relationship between the hedged item and the hedging instrument; or the effect
of credit risk starts to dominate the value changes that result from the
economic relationship. Any gain or loss recognised in other comprehensive
income and accumulated in equity at that time is recycled to profit or loss
over the period the hedged item impacts profit or loss.
E1.1 Fair value analysis
The table below sets out a comparison of the carrying amounts and fair values
of financial instruments as at 31 December 2023:
Carrying value
2023 Total Amounts due for settlement after 12 months Fair value
£m £m £m
Financial assets
Financial assets mandatorily held at fair value through profit or loss
('FVTPL'):
Loans and deposits 231 4 231
Derivatives 2,769 2,338 2,769
Equities1 87,656 - 87,656
Investment in associate (see note H4)1 349 - 349
Debt securities 94,785 79,994 94,785
Collective investment schemes1 79,937 - 79,937
Reinsurers' share of investment contract liabilities1 9,700 - 9,700
Financial assets measured at amortised cost:
Loans and deposits 17 17 17
Total financial assets 275,444 275,444
Less amounts classified as financial assets held for sale (see note H3)2 (2,498) (2,498)
Total financial assets less financial assets classified as held for sale 272,946 272,946
Carrying value
2023 Total Amounts due for settlement after 12 months Fair value
£m £m £m
Financial liabilities
Financial liabilities mandatorily held at FVTPL:
Derivatives 3,344 2,976 3,344
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings 45 45 45
Net asset value attributable to unitholders1 2,921 - 2,921
Investment contract liabilities1 162,784 - 162,784
Financial liabilities measured at amortised cost:
Borrowings 3,847 3,757 3,739
Obligations for repayment of collateral received 1,005 - 1,005
Total financial liabilities 173,946 173,838
Less amounts classified as financial liabilities held for sale (see note H3)3 (4,782) (4,782)
Total financial liabilities less financial liabilities held for sale 169,164 169,056
1 These assets and liabilities have no specified settlement date.
2 Amounts classified as financial assets held for sale include
derivatives of £3 million, equities of £28 million, debt securities of
£1,411 million, collective investment schemes of £1,028 million and
reinsurers' share of investment contract liabilities of £28 million.
3 Amounts classified as financial liabilities held for sale include
derivative liabilities of £2 million and investment contract liabilities of
£4,780 million.
Carrying value
2022 restated1 Total Amounts due for settlement after 12 months Fair value
£m £m £m
Financial assets
Financial assets mandatorily held at FVTPL:
Held for trading - derivatives 4,071 3,353 4,071
Financial assets designated at FVTPL upon initial recognition:
Equities2 76,780 - 76,780
Investment in associate (see note H4)2 329 - 329
Debt securities 84,710 70,115 84,710
Collective investment schemes2 78,353 - 78,353
Reinsurers' share of investment contract liabilities2 9,090 - 9,090
Financial assets measured at amortised cost:
Loans and deposits 268 89 268
Total financial assets 253,601 253,601
Less amounts classified as financial assets held for sale (see note H3)3 (4,629) (4,629)
Total financial assets less financial assets classified as held for sale 248,972 248,972
Carrying value
2022 restated1 Total Amounts Fair value
£m due for settlement £m
after 12 months
£m
Financial liabilities
Financial liabilities mandatorily held at FVTPL:
Held for trading - derivatives 5,879 5,118 5,879
Financial liabilities designated upon initial recognition:
Borrowings 64 64 64
Net asset value attributable to unitholders2 3,042 - 3,042
Investment contract liabilities2 149,481 - 149,481
Financial liabilities measured at amortised cost:
Borrowings 3,916 3,648 3,644
Obligations for repayment of collateral received 1,706 - 1,706
Total financial liabilities 164,088 163,816
Less amounts classified as financial liabilities held for sale(see note H3)4 (8,316) (8,316)
Total financial liabilities less financial liabilities held for sale 155,772 155,500
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
2 These assets and liabilities have no specified settlement date.
3 Amounts classified as financial assets held for sale include
derivatives of £3 million, equities of £43 million, debt securities of
£1,594 million, collective investment schemes of £2,964 million and
reinsurers' share of investment contract liabilities of £25 million.
4 Amounts classified as financial liabilities held for sale include
derivative liabilities of £4 million and investment contract liabilities of
£8,312 million.
E1.2 impairment of financial assets held at amortised cost
The adoption of IFRS 9 has changed the Group's accounting for impairment
losses for financial assets held at amortised cost by replacing IAS 39's
incurred loss approach with a forward-looking expected credit loss ('ECL')
approach. The new impairment model applies to the Group's financial assets
carried at amortised cost.
A significant portion of the Group's financial assets are carried at FVTPL
under IFRS 9 and are therefore not subject to ECL assessment. The financial
assets classified as amortised cost and subject to ECL mainly relate to
certain loan assets, other receivables and certain cash and cash equivalents
balances.
For the in-scope financial assets at the reporting date either the lifetime
expected credit loss or a 12-month expected credit loss is provided for,
depending on the Group's assessment of whether the credit risk associated with
the specific asset has increased significantly since initial recognition. The
Group's current credit risk grading framework comprises the following
categories:
Category Description Basis for recognising ECL
Performing The counterparty has a low risk of default and does not have any past-due 12 month ECL
amounts
Doubtful There has been a significant increase in credit risk since initial recognition Lifetime ECL - not credit impaired
In default There is evidence indicating the asset is credit impaired Lifetime ECL - credit impaired
Write-off There is evidence indicating that the counterparty is in severe financial Amount is written off
difficulty and the Group has no realistic prospect of recovery
The financial assets held at amortised cost are assessed at transition as
'performing' and this assessment is summarised below.
Loans and deposits - the Group has assessed the estimated credit losses of
these loans and deposits as low due to the external credit ratings of the
counterparties resulting in low credit risk and there being no past-due
amounts.
Other receivables - these balances relate to investment broker balances and
other regular receivables due to the Group in the normal course of business.
Expected credit losses are assessed as being immaterial given the typically
short-term nature of these balances.
Cash and cash equivalents - the Group's cash and cash equivalents are held
with banks and financial institutions, which have investment grade credit
ratings of 'BBB' or above. The Group considers that its cash and cash
equivalents have low credit risk based on the external credit ratings of the
counterparties and, there being no history of default. The impact to the net
carrying amount stated in the table above is therefore not considered to be
material.
Based on the above assessment, an immaterial credit loss balance has been
determined due to these financial assets being predominantly short-term and
having low credit risk.
E2. Fair value hierarchy
E2.1 Determination of fair value and fair value hierarchy of financial
instruments
Level 1 financial instruments
The fair value of financial instruments traded in active markets (such as
exchange traded securities and derivatives) is based on quoted market prices
at the period end provided by recognised pricing services. Market depth and
bid-ask spreads are used to corroborate whether an active market exists for an
instrument. Greater depth and narrower bid-ask spread indicate higher
liquidity in the instrument and are classed as Level 1 inputs. For collective
investment schemes and reinsurers' share of investment contract liabilities,
fair value is by reference to published bid prices.
Level 2 financial instruments
Financial instruments traded in active markets with less depth, or wider
bid-ask spreads, which do not meet the classification as Level 1 inputs, are
classified as Level 2. The fair values of financial instruments not traded in
active markets are determined using broker quotes or valuation techniques with
observable market inputs. Financial instruments valued using broker quotes are
classified as Level 2, only where there is a sufficient range of available
quotes. The fair value of over-the-counter derivatives is estimated using
pricing models or discounted cash flow techniques. Collective investment
schemes where the underlying assets are not priced using active market prices
are determined to be Level 2 instruments. Where pricing models are used,
inputs are based on market related data at the period end. Where discounted
cash flows are used, estimated future cash flows are based on management's
best estimates and the discount rate used is a market related rate
for a similar instrument. The fair value of investment contract liabilities
reflects the fair value of the underlying assets and liabilities in the funds
plus an additional amount to cover the present value of the excess of future
policy costs over future charges. The liabilities are consequently determined
to be Level 2 instruments.
Level 3 financial instruments
The Group's financial instruments determined by valuation techniques using
non-observable market inputs are based on a combination of independent third
party evidence and internally developed models. In relation to investments in
hedge funds and private equity investments, non-observable third party
evidence in the form of net asset valuation statements is used as the basis
for the valuation. Adjustments may be made to the net asset valuation where
other evidence, for example recent sales of the underlying investments in
the fund, indicates this is required. Securities that are valued using broker
quotes which could not be corroborated across a sufficient range of quotes
are considered as Level 3. For a small number of investment vehicles and debt
securities, standard valuation models are used, as due to their nature and
complexity they have no external market. Inputs into such models are based on
observable market data where applicable. The fair value of loans, derivatives
and some borrowings with no external market is determined by internally
developed discounted cash flow models using appropriate assumptions
corroborated with external market data where possible.
For financial instruments that are recognised at fair value on a recurring
basis, the Group determines whether transfers have occurred between levels in
the hierarchy by re-assessing categorisation (based on the lowest level input
that is significant to the fair value measurement as a whole) during each
reporting period.
Fair value hierarchy information for non-financial assets measured at fair
value is included in note G3 for owner-occupied property and in note G4 for
investment property.
E2.2 Fair value hierarchy of financial instruments
The tables below separately identify financial instruments carried at fair
value from those measured on another basis but for which fair value is
disclosed.
2023 Level 1 Level 2 Level 3 Total fair value
£m £m £m £m
Financial assets measured at fair value
Financial assets mandatorily held at FVTPL
Loans and deposits - 231 - 231
Derivatives 139 2,398 232 2,769
Equities 85,029 132 2,495 87,656
Investment in associate 349 - - 349
Debt securities 45,529 35,438 13,818 94,785
Collective investment schemes 76,343 3,193 401 79,937
Reinsurers' share of investment contract liabilities 9,700 - - 9,700
Total financial assets measured at fair value 217,089 41,392 16,946 275,427
Less amounts classified as held for sale (1,639) (181) (678) (2,498)
Total financial assets measured at fair value, excluding amounts classified as 215,450 41,211 16,268 272,929
held for sale
Financial assets measured at amortised cost for which fair values are
disclosed
Loans and deposits - 17 - 17
215,450 41,228 16,268 272,946
2023 Level 1 Level 2 Level 3 Total fair value
£m £m £m £m
Financial liabilities measured at fair value
Financial liabilities designated at FVTPL
Derivatives 152 2,986 206 3,344
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings - - 45 45
Net asset value attributable to unitholders 2,921 - - 2,921
Investment contract liabilities - 162,784 - 162,784
2,921 162,784 45 165,750
Total financial liabilities measured at fair value 3,073 165,770 251 169,094
Less amounts classified as held for sale - (4,782) - (4,782)
Total financial liabilities measured at fair value, excluding amounts 3,073 160,988 251 164,312
classified as held for sale
Financial liabilities measured at amortised cost for which fair values are
disclosed
Borrowings - 3,739 - 3,739
Obligations for repayment of collateral received - 1,005 - 1,005
Total financial liabilities measured at amortised cost for which fair values - 4,744 - 4,744
are disclosed
3,073 165,732 251 169,056
2022 restated1 Level 1 Level 2 Level 3 Total fair value
£m £m £m £m
Financial assets measured at fair value
Financial assets mandatorily held at FVTPL
Derivatives 165 3,754 152 4,071
Financial assets designated at FVTPL upon initial recognition:
Equities 74,464 124 2,192 76,780
Investment in associate 329 - - 329
Debt securities 48,151 25,094 11,465 84,710
Collective investment schemes 75,962 2,079 312 78,353
Reinsurers' share of investment contract liabilities 9,090 - - 9,090
207,996 27,297 13,969 249,262
Total financial assets measured at fair value 208,161 31,051 14,121 253,333
Less amounts classified as held for sale (3,661) (179) (789) (4,629)
Total financial assets measured at fair value, excluding amounts classified as 204,500 30,872 13,332 248,704
held for sale
Financial assets measured at amortised cost for which fair values are
disclosed
Loans and deposits - 261 7 268
204,500 31,133 13,339 248,972
2022 restated1 Level 1 Level 2 Level 3 Total fair value
£m £m £m £m
Financial liabilities measured at fair value
Financial liabilities mandatorily at FVTPL
Derivatives 98 5,538 243 5,879
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings - - 64 64
Net asset value attributable to unitholders 3,042 - - 3,042
Investment contract liabilities - 149,481 - 149,481
3,042 149,481 64 152,587
Total financial liabilities measured at fair value 3,140 155,019 307 158,466
Less amounts classified as held for sale - (8,316) - (8,316)
Total financial liabilities measured at fair value, excluding amounts 3,140 146,703 307 150,150
classified as held for sale
Financial liabilities measured at amortised cost for which fair values are
disclosed
Borrowings - 3,644 - 3,644
Obligations for repayment of collateral received - 1,706 - 1,706
Total financial liabilities measured at amortised cost for which fair values - 5,350 - 5,350
are disclosed
3,140 152,053 307 155,500
1. Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
E2.3 Significant inputs and input values for Level 3 financial instruments
Key unobservable input value
Description Valuation technique Significant inputs 2023 2022
Equities Single broker1 and net asset value2 Single broker indicative price N/A N/A
Debt securities (see E2.3.1 for further details)
Loans guaranteed by export credit agencies & supranationals DCF model3 Credit spread 78bps 111bps
(weighted average) (weighted average)
Private corporate credit DCF model3 Credit spread 145bps 169bps
(weighted average) (weighted average)
Infrastructure loans DCF model3 Credit spread 160bps 220bps
(weighted average) (weighted average)
Loans to housing associations DCF model3 Credit spread 139bps 164bps
(weighted average) (weighted average)
Local authority loans DCF model3 Credit spread 130bps 137bps
(weighted average) (weighted average)
Equity Release Mortgage loans ('ERM') DCF model and Black-Scholes model4 Spread 256bps over Sonia plus 36bps 260bps over the IFRS reference curve
House price inflation +75bps adjustment to RPI +75bps adjustment to RPI
House prices £280,316 (average) £304,088 (average)
Mortality Average life expectancy of a male and female currently aged 75 is 14.1 years Average life expectancy of a male and female currently aged 75 is 14.5 years
and 15.6 years respectively and 15.9 years respectively
Voluntary redemption rate 190bps to 650bps 150bps to 700bps
Commercial real estate loans DCF model3 Credit spread 253bps 253bps
(weighted average) (weighted average)
Income strips 5 Income capitalisation Credit spread 613bps 661bps
Collective investment schemes Net asset value statements2 N/A N/A N/A
Borrowings
Property reversions loans (see note E5) Internally developed model Mortality rate 130% IFL92C15 (Female) 6 130% IFL92C15 (Female) 6
130% IML92C15 (Male) 6 130% IML92C15 (Male) 6
House price inflation 3-year RPI rate plus 75bps 3-year RPI rate plus 75bps
Discount rate 3-year swap rate plus 170 bps 3-year swap rate plus 170 bps
Deferred possession rate 370bps 370bps
Derivative assets and liabilities
Forward private placements, infrastructure and local authority loans 7 DCF model3 Credit spread 111bps 145bps
(weighted average) (weighted average)
Longevity swaps 8 DCF model3 Swap curve swap curve swap curve + 36bps
Equity Release Income Plan total return swap 9 DCF model3 Credit spread 500bps 500bps
1 Broker indicative prices: Although such valuations are sensitive to
estimates, it is believed that changing one or more of the assumptions to
reasonably possible alternative assumptions would not change the fair value
significantly.
2 Net asset value statements: Net asset statements are provided by
independent third parties, and therefore no significant non-observable input
or sensitivity information has been prepared for those instruments valued on
this basis.
3 Discounted cash flow ('DCF') model: Except where otherwise stated, the
discount rate used is based on a risk-free curve and a credit spread. The
risk-free rate is taken from an appropriate gilt of comparable duration. The
spread is derived from a basket of comparable securities.
4 ERM loans: The loans are valued using a DCF model and a Black-Scholes
model for valuation of the No-Negative Equity Guarantee ('NNEG'). The NNEG
caps the loan repayment in the event of death or entry into long-term care to
be no greater than the sales proceeds from the property. The future cash flows
are estimated based on assumed levels of mortality derived from published
mortality tables, entry into long-term care rates and voluntary redemption
rates. Cash flows include an allowance for the expected cost of providing a
NNEG assessed under a real world approach using a closed form model including
an assumed level of property value volatility. For the NNEG assessment,
property values are indexed from the latest property valuation point and then
assumed to grow in line with an RPI based assumption. Cash flows are
discounted using a risk free curve plus a spread, where the spread is based on
recent originations, with margins to allow for the different risk profiles of
ERM loans.
5 Income strips are transactions where an owner-occupier of a property
has sold a freehold or long leasehold interest to the Group, and has signed a
long lease (typically 30-45 years) or a ground lease (typically 45-175 years)
and retains the right to repurchase the property at the end of the lease for a
nominal sum (usually £1). The income strips are valued using an income
capitalisation approach, where the annual rental income is capitalised using
an appropriate yield. The yield is determined by considering recent
transactions involving similar income strips.
6 IFL92C15 and IML92C15 relate to immediate annuitant female and male
lives and refer to the 92 series mortality tables produced by the Continuous
Mortality Investigation (CMI).
7 Derivative liabilities include forward investments of £54 million
(2022: £146 million) which include a commitment to acquire or provide funding
for fixed rate debt instruments at specified future dates.
8 Included within derivative assets and liabilities are longevity swap
contracts with corporate pension schemes with a fair value of £230 million
(2022: £152 million) and £100 million (2022: £34 million) respectively.
9 Included within derivative liabilities is the Equity Release Income
Plan ('ERIP') total return swap with a value of £50 million (2022: £63
million), under which a share of the disposal proceeds arising on a portfolio
of property reversions is payable to a third party (see note E.3.3 for further
details).
E2.3.1 Debt securities
Analysis of Level 3 debt securities 2023 2022
£m £m
Unquoted corporate bonds:
Loans guaranteed by export credit agencies & supranationals 486 402
Private corporate credit 1,829 1,422
Infrastructure loans - project finance 1,097 882
Infrastructure loans - corporate 1,493 1,175
Loans to housing associations 1,186 691
Local authority loans 932 596
Equity release mortgages 4,486 3,934
Commercial real estate loans 1,147 1,104
Income strips 674 786
Bridging loans to private equity funds 470 462
Other 18 11
Total Level 3 debt securities 13,818 11,465
Less amounts classified as held for sale (674) (786)
Total Level 3 debt securities excluding amounts classified as held for sale 13,144 10,679
E2.4 Sensitivities of Level 3 instruments
2023 2022
£m £m
Debt securities - Loans guaranteed by export credit agencies &
supranationals
65 bps increase in spread (13) (9)
65 bps decrease in spread 14 11
Debt securities - Private corporate credit
65 bps increase in spread (103) (98)
65 bps decrease in spread 116 112
Debt securities - Infrastructure loans
65 bps increase in spread (129) (103)
65 bps decrease in spread 134 107
Debt securities - Loans to housing associations
65 bps increase in spread (93) (54)
65 bps decrease in spread 105 58
Debt securities - Local authority loans
65 bps increase in spread (82) (51)
65 bps decrease in spread 90 55
Debt securities - ERM loans
100bps increase in spread (373) (329)
100bps decrease in spread 410 370
5% increase in mortality 16 13
5% decrease in mortality (18) (14)
15% increase in voluntary redemption rate 44 49
15% decrease in voluntary redemption rate (47) (52)
1% increase in house price inflation 52 27
1% decrease in house price inflation (74) (42)
10% increase in house prices 38 22
10% decrease in house prices (59) (38)
Debt securities - CRELs
65 bps increase in spread (44) (18)
65 bps decrease in spread 48 19
Debt securities - Income strips
65bps increase in spread (2022: 35 bps increase in spread) (89) (76)
65bps decrease in spread (2022: 35 bps decrease in spread) 109 88
Derivatives - Forward private placements, infrastructure and local authority
loans
65 bps increase in spread (6) (30)
65 bps decrease in spread 7 31
Derivatives - Longevity swap contracts
100bps increase in swap curve (20) (17)
100bps decrease in swap curve 25 21
Derivatives - Equity Release Income Plan total return swap
100bps increase in spread 1 2
100bps decrease in spread (1) (2)
For the property reversions loans and bridging loans to private equity funds,
there are no reasonably possible movements in unobservable input values which
would result in a significant movement in the fair value of the financial
instruments.
For those assets valued using net asset value statements (equities and
collective investment schemes) no sensitivity information has been prepared as
the net asset statements are provided by independent third parties.
E2.5 Transfers of financial instruments between Level 1 and Level 2
2023 From Level 1 to Level 2 From Level 2 to Level 1
£m £m
Financial assets measured at fair value
Financial assets mandatorily held at FVTPL
Derivatives - 21
Equities 10 12
Debt securities 1,023 725
Collective investment schemes1 1,188 16
1 As a result of the assessment of the liquidity of the underlying
investments held within collective investment schemes, in accordance with the
Group's fair value hierarchy classification methodology a net £1,172 million
of collective investment schemes has transferred from Level 1 to Level 2.
2022 From Level 1 to Level 2 From Level 2 to Level 1
£m £m
Financial assets measured at fair value
Financial assets mandatorily held at FVTPL
Derivatives 48 -
Financial assets designated at FVTPL upon initial recognition:
Equities 73 5
Debt securities 1,478 1,267
Collective investment schemes 28 -
Consistent with the prior year, all the Group's Level 1 and Level 2 assets
have been valued using standard market pricing sources.
The application of the Group's fair value hierarchy classification methodology
at an individual security level, in particular observations with regard to
measures of market depth and bid-ask spreads, resulted in an overall net
movement of debt securities from Level 1 to Level 2 in both the current and
prior period.
E2.6 Movement in Level 3 financial instruments measured at fair value
2023 At 1 January 2023 Reclassification of balances on transition to IFRS 91 At 1 January 2023 (restated) Net (losses)/gains in income statement Purchases Sales Transfers Transfers to Level 1 and Level 2 At 31 December 20232 Unrealised
£m £m £m £m £m £m from £m £m gains on assets held at end of period
Level 1 £m
and Level 2
£m
Financial assets measured at fair value
Financial assets mandatorily held at FVTPL:
Loans and deposits - 7 7 (1) - (6) - - - -
Derivatives 152 - 152 80 - - - - 232 80
Equities 2,192 - 2,192 163 433 (293) 2 (2) 2,495 14
Debt securities 11,465 - 11,465 416 7,011 (5,224) 150 - 13,818 475
Collective investment schemes 312 - 312 46 47 (5) 1 - 401 46
Total financial assets measured at fair value 14,121 7 14,128 704 7,491 (5,528) 153 (2) 16,946 615
1 See note A2.2.1 for further details.
2 Total financial assets of £16,946 million includes £678 million of
assets classified as held for sale.
2023 At 1 January 2023 Net losses in income statement Purchases Sales/repayments Transfers from Transfers to Level 1 and Level 2 At 31 December 2023 Unrealised losses on liabilities held at end of period
£m £m £m £m Level 1 and Level 2 £m £m £m
£m
Financial liabilities measured at fair value
Financial liabilities mandatorily held at FVTPL:
Derivatives 243 67 - (104) - - 206 59
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings 64 2 - (21) - - 45 2
Total financial liabilities measured at fair value 307 69 - (125) - - 251 61
2022 At 1 January 2022 Net (losses)/gains in income statement Purchases Sales Transfers Transfers to Level 1 and Level 2 At 31 December 20221 Unrealised (losses)/gains on assets held at end of period
£m £m £m £m from £m £m £m
Level 1
and Level 2
£m
Financial assets measured at fair value
Financial assets mandatorily held at FVTPL:
Derivatives 237 (85) - - - - 152 (85)
Financial assets designated at FVTPL upon initial recognition:
Equities 1,899 177 438 (369) 47 - 2,192 12
Debt securities 12,452 (3,544) 6,838 (4,277) 2 (6) 11,465 (3,595)
Collective investment schemes 286 (79) 108 (3) - - 312 (73)
14,637 (3,446) 7,384 (4,649) 49 (6) 13,969 (3,656)
Total financial assets measured at fair value 14,874 (3,531) 7,384 (4,649) 49 (6) 14,121 (3,741)
1 Total financial assets of £14,121 million includes £789 million
classified as held for sale.
2022 At 1 January 2022 Net losses in income statement Purchases Sales/ Transfers from Transfers to Level 1 and Level 2 At 31 December 20221 Unrealised losses on liabilities held at end of period
£m £m £m Repayments Level 1 and Level 2 £m £m £m
£m £m
Financial liabilities measured at fair value
Financial liabilities mandatorily held at FVTPL:
Derivatives 125 130 - (12) - - 243 123
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings 70 9 - (15) - - 64 9
Total financial liabilities measured at fair value 195 139 - (27) - - 307 132
Gains and losses on Level 3 financial instruments are included in net
investment income in the consolidated income statement. There were no gains or
losses recognised in other comprehensive income in either the current or
comparative period.
E3. Derivatives
The Group purchases derivative financial instruments principally in connection
with the management of its insurance contract and investment contract
liabilities based on the principles of reduction of risk and efficient
portfolio management. The Group does not typically hold derivatives for the
purpose of selling and repurchasing in the near term or with the objective of
generating a profit from short-term fluctuations in price or margin. The Group
also holds derivatives which are designated as hedging instruments in order to
hedge the Group's Euro and US Dollar borrowings. These hedging relationships
qualify for hedge accounting under IFRS 9 and are designated as cash flow
hedges.
Derivative financial instruments are recognised initially at fair value and
are subsequently remeasured to fair value. The gain or loss on remeasurement
to fair value is recognised in the consolidated income statement where the
derivatives are held for trading. Where derivative financial instruments are
held to hedge the Group's Euro and US Dollar borrowings, the effective portion
of any gain or loss that arises on remeasurement to fair value is initially
recognised in other comprehensive income and is recycled to profit or loss as
the hedged item impacts the profit or loss. See notes E1 and D3 for further
details of the Group's hedging accounting policy.
E3.1 Summary
The fair values of derivative financial instruments are as follows:
Assets Liabilities Assets Liabilities
2023 2023 2022 2022
£m £m £m £m
Forward currency 265 97 327 221
Credit default swaps 9 2 4 18
Contracts for difference 2 1 3 3
Interest rate swaps 1,456 2,290 2,281 4,313
Swaptions 164 65 187 46
Inflation swaps 187 142 295 104
Equity options 107 106 334 147
Stock index futures 18 87 162 36
Fixed income futures 84 124 95 231
Longevity swap contracts 230 100 152 34
Currency futures 15 5 4 8
Cross currency swaps 232 274 227 653
Equity Release Income Plan total return swap - 50 - 63
Other - 1 - 2
2,769 3,344 4,071 5,879
Less amounts classified as held for sale (3) (2) (3) (4)
2,766 3,342 4,068 5,875
E3.2 Longevity swap contracts
The Group has in place longevity swap arrangements with corporate pension
schemes which do not meet the definition of insurance contracts under the
Group's accounting policies. Under these arrangements the majority of the
longevity risk has been passed to third parties. Derivative assets of £230
million and derivative liabilities of £100 million have been recognised as at
31 December 2023 (2022: £152 million and £34 million respectively).
E3.3 Equity Release Income Plan ('ERIP') total return swap
ERIP contracts are an equity release product under which the Group holds a
reversionary interest in the residential property of policyholders who have
been provided with a lifetime annuity in return for the legal title to their
property (see note G4). The Group is party to an ERIP total return swap under
which a share of the future generated cash flows arising under the ERIP
contracts is payable to a third party. Over time, as the property reversions
are realised, the relevant share of disposal proceeds is transferred to a
third party who also holds a beneficial interest in these residential
properties. The carrying amount of the derivative liability is the present
value of all future cash flows due to the third party under the total return
swap.
E4. Collateral arrangements
The Group receives and pledges collateral in the form of cash or non-cash
assets in respect of stock lending transactions, derivative contracts and
reinsurance arrangements in order to reduce the credit risk of these
transactions. The amount and type of collateral required where the Group
receives collateral depends on an assessment of the credit risk of the
counterparty, but is usually in the form of cash and marketable securities.
Collateral received in the form of cash, where the Group has contractual
rights to receive the cash flows generated and is available to the Group for
investment purposes, is recognised as a financial asset in the statement of
consolidated financial position with a corresponding financial liability for
its repayment. Non-cash collateral received is not recognised in the statement
of consolidated financial position, unless the counterparty defaults on its
obligations under the relevant agreement.
Non-cash collateral pledged where the Group retains the contractual rights to
receive the cash flows generated is not derecognised from the statement of
consolidated financial position, unless the Group defaults on its obligations
under the relevant agreement. Cash collateral pledged, where the counterparty
has contractual rights to receive the cash flows generated, is derecognised
from the statement of consolidated financial position and a corresponding
receivable is recognised for its return.
The Group is also party to reverse repurchase agreements under which
securities are purchased from third parties with an obligation to resell the
securities. The securities are not recognised as financial assets on the
statement of consolidated financial position, unless the counterparty defaults
on its obligations under the relevant agreement. The right to receive the
return of any cash paid as purchase consideration plus interest is recognised
as a financial asset on the statement of financial position.
E4.1 Financial instrument collateral arrangements
The Group has no financial assets and financial liabilities that have been
offset in the statement of consolidated financial position as at 31 December
2023 (2022: none).
The table below contains disclosures related to financial assets and financial
liabilities recognised in the statement of consolidated financial position
that are subject to enforceable master netting arrangements or similar
agreements. Such agreements do not meet the criteria for offsetting in the
statement of consolidated financial position as the Group has no current
legally enforceable right to offset recognised financial instruments.
Furthermore, certain related assets received as collateral under the netting
arrangements will not be recognised in the statement of consolidated
financial position as the Group does not have permission to sell or re-pledge,
except in the case of default. Details of the Group's collateral arrangements
in respect of these recognised assets and liabilities are provided below.
Related amounts not offset
Gross and net amounts of recognised Financial instruments and cash collateral received Derivative liabilities Net
financial assets amount
2023 £m £m £m £m
Financial assets
OTC derivatives 2,629 976 1,459 194
Exchange traded derivatives 137 33 28 76
Stock lending 836 836 - -
Repurchase arrangement 100 100 - -
Total 3,702 1,945 1,487 270
Related amounts not offset
Gross and net amounts of recognised Financial instruments and cash collateral pledged Derivative assets Net
financial liabilities amount
£m £m £m £m
Financial liabilities
OTC derivatives 3,126 1,520 1,459 147
Exchange traded derivatives 216 68 28 120
Total 3,342 1,588 1,487 267
Related amounts not offset
Gross and net amounts of recognised Financial instruments and cash collateral received Derivative liabilities Net
financial assets amount
2022 £m £m £m £m
Financial assets
OTC derivatives 3,747 1,055 2,293 399
Exchange traded derivatives 324 193 28 103
Stock lending 1,451 1,451 - -
Total 5,522 2,699 2,321 502
Related amounts not offset
Gross and net amounts of recognised Financial instruments and cash collateral pledged Derivative assets Net
financial liabilities amount
£m £m £m £m
Financial liabilities
OTC derivatives 5,606 2,206 2,293 1,107
Exchange traded derivatives 273 36 28 209
Total 5,879 2,242 2,321 1,316
E4.2 Derivative collateral arrangements
Assets accepted
It is the Group's practice to obtain collateral to mitigate the counterparty
risk related to over-the-counter ('OTC') derivatives usually in the form of
cash or marketable financial instruments.
The fair value of financial assets accepted as collateral for OTC derivatives
but not recognised in the statement of consolidated financial position amounts
to £505 million (2022: £471 million).
The amounts recognised as financial assets and liabilities from cash
collateral received at 31 December 2023 are set out below.
OTC derivatives
2023 2022
£m £m
Financial assets 971 1,513
Financial liabilities (971) (1,513)
The maximum exposure to credit risk in respect of OTC derivative assets is
£2,629 million (2022: £3,747 million) of which credit risk of £2,434
million (2022: £3,348 million) is mitigated by use of collateral arrangements
(which are settled net after taking account of any OTC derivative liabilities
owed to the counterparty).
Credit risk on exchange traded derivative assets of £137 million (2022: £324
million) is mitigated through regular margining and the protection offered by
the exchange.
Assets pledged
The Group pledges collateral in respect of its OTC derivative liabilities. The
value of assets pledged at 31 December 2023 in respect of OTC derivative
liabilities of £3,126 million (2022: £5,606 million) amounted to £1,936
million (2022: £3,228 million).
E4.3 Stock lending collateral arrangements
The Group lends listed financial assets held in its investment portfolio to
other institutions.
The Group conducts stock lending only with well-established, reputable
institutions in accordance with established market conventions. The financial
assets do not qualify for derecognition as the Group retains all the risks and
rewards of the transferred assets except for the voting rights.
It is the Group's practice to obtain collateral in stock lending transactions,
usually in the form of cash or marketable financial instruments.
The fair value of financial assets accepted as such collateral but not
recognised in the statement of consolidated financial position amounts to
£897 million (2022: £1,586 million).
The maximum exposure to credit risk in respect of stock lending transactions
is £836 million (2022: £1,451 million) of which credit risk of £833
million (2022: £1,451 million) is mitigated through the use of collateral
arrangements.
E4.4 Other collateral arrangements
At 31 December 2023, the Group had entered into reverse repurchase
transactions under which it purchased securities and had taken on the
obligation to resell the securities. The fair value of the financial assets
accepted as collateral in respect of these transactions, but not recognised in
the statement of consolidated financial position, is £100 million (2022:
£nil).
The maximum exposure to credit risk in respect of reverse repurchase
transactions is £100 million (2022: £ nil) of which credit risk of £100
million (2022: £ nil) is mitigated through the use of collateral
arrangements.
Details of collateral received to mitigate the counterparty risk arising from
the Group's reinsurance transactions is given in note F10.
Collateral has also been pledged and charges have been granted in respect of
certain Group borrowings. The details of these arrangements are set out in
note E5.
E5. Borrowings
The Group classifies the majority of its interest-bearing borrowings as
financial liabilities carried at amortised cost and these are recognised
initially at fair value less any directly attributable transaction costs. The
difference between initial cost and the redemption value is amortised through
the consolidated income statement over the period of the borrowing using the
effective interest method.
Certain borrowings are designated upon initial recognition at fair value
through profit or loss and measured at fair value where doing so provides more
meaningful information due to the reasons stated in the financial liabilities
accounting policy (see note E1). Transaction costs relating to borrowings
designated upon initial recognition at fair value through profit or loss are
expensed as incurred.
Borrowings are classified as either policyholder or shareholder borrowings.
Policyholder borrowings are those borrowings where there is either no or
limited shareholder exposure, for example, borrowings attributable to the
Group's with-profit operations.
E5.1 Analysis of borrowings
Carrying value Fair value
2023 2022 2023 2022
£m £m £m £m
£300 million multi-currency revolving credit facility (note a) 90 62 90 62
Property reversions loan (note b) 45 64 45 64
Total policyholder borrowings 135 126 135 126
£428 million Tier 2 subordinated notes (note c) 197 427 202 429
US $500 million Tier 2 notes (note d) 391 413 377 390
€500 million Tier 2 bonds (note e) 430 439 419 416
US $750 million Contingent Convertible Tier 1 notes (note f) 587 618 563 580
£500 million Tier 2 notes (note g) 489 487 476 445
US $500 million Fixed Rate Reset Tier 2 notes (note h) 274 412 262 382
£500 million 5.867% Tier 2 subordinated notes (note i) 536 543 493 465
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes (note j) 254 259 239 244
£250 million 4.016% Tier 3 subordinated notes (note k) 253 256 250 231
£350 million Fixed Rate Reset Callable Tier 2 subordinated notes (note l) 346 - 368 -
Total shareholder borrowings 3,757 3,854 3,649 3,582
Total borrowings 3,892 3,980 3,784 3,708
Amount due for settlement after 12 months 3,802 3,918
a abrdn Private Equity Opportunities Trust plc ('APEOT') has in place a
syndicated multi-currency revolving credit facility, of which £90 million
(2022: £62 million) had been drawn down as at 31 December 2023. During 2022
the amount of the facility was increased from £200 million to £300 million
and its term maturity was extended to December 2025. Interest accrues on this
facility at a margin over the reference rate of the currency drawn.
b The Property Reversions loan from Santander UK plc ('Santander') was
recognised in the consolidated financial statements at fair value. It relates
to the sale of Extra-Income Plan policies that Santander finances to the value
of the associated property reversions. As part of the arrangement Santander
receives an amount calculated by reference to the movement in the Halifax
House Price Index and the Group is required to indemnify Santander against
profits or losses arising from mortality or surrender experience which differs
from the basis used to calculate the reversion amount. During 2023, repayments
totalling £21 million were made (2022: £15 million). Note G4 contains
details of the assets that support this loan.
c On 23 January 2015, PGH Capital plc ('PGHC') issued £428 million of
subordinated notes due 2025 at a coupon of 6.625%. Fees associated with these
notes of £3 million were deferred and are being amortised over the life of
the notes in the statement of consolidated financial position. Upon exchange
£32 million of these notes were held by Group companies. During 2017, the
internal holdings were sold to third parties, thereby increasing external
borrowings by £32 million. On 20 March 2017, Old PGH (the Group's ultimate
parent company up to December 2018) was substituted in place of PGHC as issuer
of the £428 million subordinated notes and then on 12 December 2018 the
Company was substituted in place of Old PGH as issuer. On 7 December 2023, the
Company repurchased £231 million of the principal amount of the notes via a
tender offer. The remaining principal amount of the notes at 31 December 2023
is £197 million.
d On 6 July 2017, Old PGH issued US $500 million Tier 2 bonds due 2027
with a coupon of 5.375%. Fees associated with these notes of £2 million were
deferred and are being amortised over the life of the notes. On 12 December
2018 the Company was substituted in place of Old PGH as issuer.
e On 24 September 2018, Old PGH issued €500 million Tier 2 notes due
2029 with a coupon of 4.375%. Fees associated with these notes of £7 million
were deferred and are being amortised over the life of the notes. On 12
December 2018 the Company was substituted in place of Old PGH as issuer.
f On 29 January 2020, the Company issued US $750 million fixed rate
reset perpetual restricted Tier 1 contingent convertible notes (the
'Contingent Convertible Tier 1 Notes') which are unsecured and subordinated.
The Contingent Convertible Tier 1 Notes have no fixed maturity date and
interest is payable only at the sole and absolute discretion of the Company.
The Contingent Convertible Tier 1 Notes bear interest on their principal
amount at a fixed rate of 5.625% per annum up to the 'First Reset Date' of 26
April 2025. Thereafter the fixed rate of interest will be reset on the First
Reset Date and on each fifth anniversary of this date by reference to the sum
of the yield of the Constant Maturity Treasury ('CMT') rate (based on the
prevailing five-year US Treasury yield) plus a margin of 4.035%, being the
initial credit spread used in pricing the notes. Interest is payable on the
Contingent Convertible Tier 1 Notes semi-annually in arrears on 26 April and
26 October. If an interest payment is not made it is cancelled and it shall
not accumulate or be payable at any time thereafter.
The terms of the Contingent Convertible Tier 1 Notes contain a contingent
settlement provision which is linked to the occurrence of a 'Capital
Disqualification Event'. Such an event is deemed to have taken place where, as
a result of a change to the Solvency II regulations, the Contingent
Convertible Tier 1 Notes are fully excluded from counting as own funds. On the
occurrence of such an event and where the Company has chosen not to use its
corresponding right to redeem the notes the Company shall no longer be able to
exercise its discretion to cancel any interest payments due on such Contingent
Convertible Tier 1 Notes on any interest payment date following the occurrence
of this event. Accordingly the Contingent Convertible Tier 1 Notes are
considered to meet the definition of a financial liability for financial
reporting purposes.
The Contingent Convertible Tier 1 Notes may be redeemed at par on the First
Reset Date or on any interest payment date thereafter at the option of the
Company and also in other limited circumstances. If such redemption occurs
prior to the fifth anniversary of the Issue Date such redemption must be
funded out of the proceeds of a new issuance of, or exchanged into, Tier 1 Own
Funds of the same or a higher quality than the Contingent Convertible Tier 1
Notes. In respect of any redemption or purchase of the Contingent Convertible
Tier 1 Notes, such redemption or purchase is subject to the receipt of
permission to do so from the PRA. Furthermore, on occurrence of a trigger
event, linked to the Solvency II capital position and as documented in the
terms of the Contingent Convertible Tier 1 Notes, the Contingent Convertible
Tier 1 Notes will automatically be subject to conversion to ordinary shares of
the Company at the conversion price of US $1,000 per share, subject to
adjustment in accordance with the terms and conditions of the notes and all
accrued and unpaid interest will be cancelled. Following such conversion there
shall be no reinstatement of any part of the principal amount of, or interest
on, the Contingent Convertible Tier 1 Notes at any time.
g On 28 April 2020, the Company issued £500 million fixed rate Tier 2
Notes (the 'Tier 2 Notes') which are unsecured and subordinated. The Tier 2
Notes have a maturity date of 28 April 2031 and include an issuer par call
right for the three-month period prior to maturity. The Tier 2 Notes bear
interest on the principal amount at a fixed rate of 5.625% per annum payable
annually in arrears on 28 April each year.
h On 4 June 2020, the Company issued US $500 million fixed rate reset
callable Tier 2 notes (the 'Fixed Rate Reset Tier 2 Notes') which are
unsecured and subordinated. The Fixed Rate Reset Tier 2 notes have a maturity
date of 4 September 2031 with an optional issuer par call right on any day in
the three-month period up to and including 4 September 2026. The Fixed Rate
Reset Tier 2 Notes bear interest on the principal amount at a fixed rate of
4.75% per annum up to the interest rate reset date of 4 September 2026. If the
Fixed Rate Reset Tier 2 Notes are not redeemed before that date, the interest
rate resets to the sum of the applicable CMT rate (based on the prevailing
five-year US Treasury yield) plus a margin of 4.276%, being the initial credit
spread used in pricing the notes. Interest is payable on the Fixed Rate Reset
Tier 2 Notes semi-annually in arrears on 4 March and 4 September each year. On
7 December 2023, the Company repurchased US $150 million of the principal
amount of the Fixed Rate Reset Tier 2 Notes via a tender offer. The remaining
principal amount of the notes at 31 December 2023 is US $350 million.
i On 22 July 2020, as part of the acquisition of ReAssure Group plc,
the Group assumed the £500 million 5.867% Tier 2 subordinated notes. On the
same date, the Company was substituted in place of ReAssure Group plc as
issuer of the notes. The £500 million 5.867% Tier 2 subordinated notes have a
maturity date of 13 June 2029 and were initially recognised at their fair
value as at the date of acquisition of £559 million. The fair value
adjustment is being amortised over the remaining life of the notes. Interest
is payable semi-annually in arrears on 13 June and 13 December.
j On 22 July 2020, as part of the acquisition of ReAssure Group plc,
the Group assumed the £250 million fixed rate reset callable Tier 2
subordinated notes. On the same date, the Company was substituted in place of
ReAssure Group plc as issuer of the notes. The £250 million fixed rate reset
callable Tier 2 subordinated notes have a maturity date of 13 June 2029 and
were initially recognised at their fair value as at the date of acquisition of
£275 million. The fair value adjustment is being amortised over the remaining
life of the notes. The notes include an issuer par call right exercisable on
13 June 2024. Interest is payable semi-annually in arrears on 13 June and 13
December. These notes initially bear interest at a rate of 5.766% on the
principal amount and the rate of interest will reset on 13 June 2024, and on
each interest payment date thereafter, to a margin of 5.17% plus the yield of
a UK Treasury Bill of similar term.
k On 22 July 2020, as part of the acquisition of ReAssure Group plc, the
Group assumed the £250 million 4.016% Tier 3 subordinated notes. On the same
date, the Company was substituted in place of ReAssure Group plc as issuer of
the notes. The £250 million 4.016% Tier 3 subordinated notes have a maturity
date of 13 June 2026 and were initially recognised at their fair value as at
the date of acquisition of £259 million. The fair value adjustment is being
amortised over the remaining life of the notes. Interest is payable
semi-annually in arrears on 13 June and 13 December.
l On 6 December 2023, the Company issued £350 million fixed rate
reset callable Tier 2 notes which are unsecured and subordinated. The notes
have a maturity date of 6 December 2053 with an optional issuer par call right
on any day in the six-month period up to and including 6 December 2033. The
notes bear interest on the principal amount at a fixed rate of 7.75% per annum
up to the interest rate reset date of 6 December 2033. If the notes are not
redeemed before that date, the interest rate resets to the sum of the 5 year
benchmark Gilt rate plus a margin of 4.65%, being the sum of the initial
credit spread used in pricing the notes and a 1% margin step-up. Interest is
payable on the notes semi-annually in arrears on 6 June and 6 December each
year.
m The Group has in place a £1.75 billion unsecured revolving credit
facility (the 'revolving facility'), maturing in June 2026. The facility
accrues interest at a margin over SONIA that is based on credit rating. The
facility remains undrawn as at 31 December 2023.
E5.2 Reconciliation of liabilities arising from financing activities
The table below details changes in the Group's liabilities arising from
financing activities, including both cash and non-cash changes (with the
exception of lease liabilities, which have been included in note G9).
Liabilities arising from financing activities are those for which cash flows
were, or future cash flows will be, classified in the Group's consolidated
statement of cash flows as cash flows from financing activities.
Cash movements Non-cash movements
At 1 January 2023 New borrowings, net of costs Repayments Changes in fair value Movement in foreign exchange Other movements1 At 31 December 2023
£m £m £m £m £m £m £m
£300 million multi-currency revolving credit facility 62 64 (37) - - 1 90
Property Reversions loan 64 - (21) 2 - - 45
£428 million Tier 2 subordinated notes 427 - (231) - - 1 197
US $500 million Tier 2 bonds 413 - - - (22) - 391
€500 million Tier 2 notes 439 - - - (10) 1 430
US $750 million Contingent Convertible Tier 1 notes 618 - - - (32) 1 587
£500 million Tier 2 notes 487 - - - - 2 489
US $500 million Fixed Rate Reset Tier 2 notes 412 - (119) - (20) 1 274
£500 million 5.867% Tier 2 subordinated notes 543 - - - - (7) 536
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes 259 - - - - (5) 254
£250 million 4.016% Tier 3 subordinated notes 256 - - - - (3) 253
£350 million Fixed Rate Reset Callable Tier 2 subordinated notes - 346 - - - - 346
Derivative assets2 (225) - - 108 - (1) (118)
3,755 410 (408) 110 (84) (9) 3,774
1 Principally comprises amortisation under the effective interest method
applied to borrowings held at amortised cost. No interest was capitalised in
the year.
2 Cross currency swaps to hedge against adverse currency movements in
respect of Group's Euro and US Dollar denominated borrowings.
Cash movements Non-cash movements
At 1 January 2022 New borrowings, net of costs Repayments Changes in fair value Movement in foreign exchange Other movements1 At 31 December 2022
£m £m £m £m £m £m £m
£300 million multi-currency revolving credit facility 17 61 (17) - 1 - 62
Property Reversions loan 70 - (15) 9 - - 64
£428 million Tier 2 subordinated notes 427 - - - - - 427
£450 million Tier 3 subordinated notes 450 - (450) - - - -
US $500 million Tier 2 bonds 368 - - - 45 - 413
€500 million Tier 2 notes 416 - - - 22 1 439
US $750 million Contingent Convertible Tier 1 notes 551 - - - 66 1 618
£500 million Tier 2 notes 485 - - - - 2 487
US $500 million Fixed Rate Reset Tier 2 notes 368 - - - 44 - 412
£500 million 5.867% Tier 2 subordinated notes 550 - - - - (7) 543
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes 266 - - - - (7) 259
£250 million 4.016% Tier 3 subordinated notes 257 - - - - (1) 256
Derivative assets2 (48) - - (177) - - (225)
Derivative liabilities2 5 - - (5) - - -
4,182 61 (482) (173) 178 (11) 3,755
1 Principally comprises amortisation under the effective interest method
applied to borrowings held at amortised cost. No interest was capitalised in
the year.
2 Cross currency swaps to hedge against adverse currency movements in
respect of Group's Euro and US Dollar denominated borrowings.
E6. Risk management - financial and other risks
This note forms one part of the risk management disclosures in the
consolidated financial statements. An overview of the Group's approach to risk
management is outlined in note I3 and the Group's management of insurance risk
is detailed in note F11.
E6.1 Financial risk and the Asset Liability Management ('ALM') framework
The use of financial instruments naturally exposes the Group to the risks
associated with them, chiefly market risk, credit risk and financial soundness
risk.
Responsibility for agreeing the financial risk profile rests with the Board of
each Life Company, as advised by investment managers, internal committees
and the actuarial function. In setting the risk profile, the Board of each
Life Company will receive advice from the Chief Investment Officer, the
relevant With-profit Actuary and the relevant actuarial function holder/Chief
Actuary as to the potential implications of that risk profile with regard to
the probability of both realistic insolvency and of failing to meet the
regulatory Minimum Capital Requirement. The Chief Actuary will also advise the
extent to which the investment risk taken is consistent with the Group's
commitment to help customers secure a life of possibilities, including meeting
the FCA's expectations under the New Consumer Duty.
Derivatives are used in many of the Group's funds, within policy guidelines
agreed by the Board of each Life Company and overseen by investment committees
of the Boards of each Life Company supported by management oversight
committees. Derivatives are primarily used for risk hedging purposes or for
efficient portfolio management, including the activities of the Group's
Treasury function.
More detail on the Group's exposure to financial risk is provided in note E6.2
below.
The Group is also exposed to insurance risk arising from its Life, Pensions
and Savings business. Life insurance risk in the Group arises through its
exposure to longevity, persistency, mortality and to other variances between
assumed and actual experience. These variances can be in factors such as
administrative expenses and new business pricing. More detail on the Group's
exposure to insurance risk is provided in note F11.
The Group's overall exposure to market and credit risk is monitored by
appropriate committees, which agree policies for managing each type of risk on
an ongoing basis, in line with the investment strategy developed to achieve
investment returns in excess of amounts due in respect of insurance contracts.
The effectiveness of the Group's ALM framework relies on the matching of
assets and liabilities arising from insurance and investment contracts, taking
into account the types of benefits payable to policyholders under each type of
contract. Separate portfolios of assets are maintained for with-profit
business funds (which include all of the Group's participating business),
non-linked non-profit funds and unit-linked funds.
E6.2 Financial risk analysis
Transactions in financial instruments result in the Group assuming financial
risks. These include credit risk, market risk and financial soundness risk.
Each of these are described below, together with a summary of how the Group
manages the risk, along with sensitivity analysis where appropriate. The
sensitivity analysis does not take into account the impact on the Group's
pension schemes, including any impact arising as a result of the elimination
of intra-group buy-in transactions between the life companies and the Group's
pension schemes. It also does not include second order impacts of market
movements, for example, where a market movement may give rise to potential
indicators of impairment for the Group's intangible balances.
Climate risk
The Group is exposed to financial risks (in particular market and credit risk)
related to the transition to a low carbon economy, and the physical impacts
resulting from climate change which could result in long-term market, credit,
insurance, reputation, proposition and operational implications. As such,
this risk is treated as a component of the cross-cutting Sustainability risk
in the Group's Risk Universe.
Identification of climate related risks has been embedded into the Group's
Risk Management Framework. Significant progress has been made in recent years
in developing risk metrics and establishing appropriate governance and risk
management processes. The Group has adopted a proactive approach towards
combatting climate change, with key net zero targets. Further details on these
targets and on managing the related climate change risks are provided in the
Climate Report and Task Force for Climate-related Financial Disclosures
('TCFD').
E6.2.1 Credit risk
Credit risk is defined as the risk of reductions in earnings and/or value,
through financial or reputational loss, as a result of the default of a
counterparty or an associate of such a counterparty to a financial transaction
(i.e. failure to honour their financial obligations, or failing to perform
them in a timely manner), whether on or off balance sheet.
There are two principal sources of credit risk for the Group:
• credit risk which results from direct investment activities, including
investments in debt securities, derivatives counterparties, collective
investment schemes, hedge funds and the placing of cash deposits; and
• credit risk which results indirectly from activities undertaken in the
normal course of business. Such activities include premium payments,
outsourcing contracts, reinsurance agreements, exposure from material
suppliers and the lending of securities.
The amount disclosed in the statement of consolidated financial position in
respect of all financial assets, together with rights secured under off
balance sheet collateral arrangements, but excluding the minority interest in
consolidated collective investment schemes and those assets that back
policyholder liabilities, represents the Group's maximum exposure to credit
risk. The credit risk borne by the shareholder on with-profit policies is
dependent on the extent to which the underlying insurance fund is relying on
shareholder support.
The impact of non-government debt securities and, inter alia, the change in
market credit spreads during the year is fully reflected in the values shown
in these consolidated financial statements. Credit spreads are the excess of
corporate bond yields over gilt yields to reflect the higher level of risk.
Similarly, the value of derivatives that the Group holds takes into account
fully the changes in swap rates.
There is an exposure to spread changes affecting the prices of corporate bonds
and derivatives. This exposure applies to supported with-profit funds (where
risks and rewards fall wholly to shareholders), non-profit funds and
shareholders' funds.
The Group holds £18,479 million (2022: £15,977 million) of corporate bonds
which are used to back annuity liabilities in non-profit funds. These annuity
liabilities include an aggregate credit default provision of £388 million
(2022: £305 million) to fund against the risk of default.
A 100bps widening of credit spreads, with all other variables held constant
and no change in assumed expected defaults, would result in a decrease in the
profit after tax in respect of a full financial year, and in equity, of £357
million (2022: £480 million), and a decrease in CSM of £5 million (2022: £6
million).
A 100bps narrowing of credit spreads, with all other variables held constant
and no change in assumed expected defaults, would result in an increase in the
profit after tax in respect of a full financial year, and in equity, of £485
million (2022: £626 million), and an increase in CSM of £6 million (2022:
£10 million).
Credit risk is managed by the monitoring of aggregate Group exposures to
individual counterparties and by appropriate credit risk diversification.
The Group manages the level of credit risk it accepts through credit risk
tolerances and limits (including asset class, industry and geography limits).
Additional controls for illiquid asset concentration risk are set out via
specific risk limits within the risk appetite framework. Credit risk on
derivatives and securities lending is mitigated through the use of collateral
with appropriate haircuts.
Credit quality of assets
An indication of the Group's exposure to credit risk is the quality of the
investments and counterparties with which it transacts. The following table
provides information regarding the aggregate credit exposure split by credit
rating.
2023 AAA AA A BBB BB and below Non-rated Unit-linked Total Less amounts classified as held for sale Total
£m £m £m £m £m £m £m £m £m £m
Loans and deposits - 3 - - - 245 - 248 - 248
Derivatives - 1,314 736 - - 662 57 2,769 (3) 2,766
Debt securities1,2 7,427 34,133 21,170 14,769 2,933 7,332 7,021 94,785 (1,411) 93,374
Reinsurance contract assets - 2,690 2,163 - - 23 - 4,876 - 4,876
Reinsurers' share of investment contract liabilities - - - - - - 9,700 9,700 (28) 9,672
Cash and cash equivalents - 1,254 4,383 88 - - 1,495 7,220 (52) 7,168
7,427 39,394 28,452 14,857 2,933 8,262 18,273 119,598 (1,494) 118,104
1 For financial assets that do not have credit ratings assigned by external
ratings agencies, the Group assigns internal ratings for use in management and
monitoring of credit risk. £169 million of AAA, £1,435 million of AA,
£2,470 million of A, £1,819 million of BBB and £247 million of BB and below
debt securities are internally rated. If a financial asset is neither rated by
an external agency nor internally rated, it is classified as 'non-rated'.
2 Non-rated debt securities includes equity release mortgages with a value
of £4,486 million (further details are set out in note E2.3) and non-rated
bonds.
2022 restated AAA AA A BBB BB and below Non-rated Unit-linked Total Less amounts classified as held for sale Total
£m £m £m £m £m £m £m £m £m £m
Loans and deposits - 4 - - - 193 71 268 - 268
Derivatives - 1,500 1,060 28 - 1,370 113 4,071 (3) 4,068
Debt securities2,3 6,834 26,095 19,045 16,238 1,929 7,182 7,387 84,710 (1,594) 83,116
Reinsurance contract assets - 2,418 1,579 - - 74 - 4,071 - 4,071
Reinsurers' share of investment contract liabilities - - - - - - 9,090 9,090 (25) 9,065
Cash and cash equivalents 339 1,160 5,749 63 - 5 1,556 8,872 (33) 8,839
7,173 31,177 27,433 16,329 1,929 8,824 18,217 111,082 (1,655) 109,427
1 Prior period comparatives have been restated on transition of IFRS17
Insurance Contracts (see note A2.1 for further details).
2 For financial assets that do not have credit ratings assigned by external
ratings agencies, the Group assigns internal ratings for use in management and
monitoring of credit risk. £149 million of AAA, £1,083 million of AA,
£1,742 million of A, £2,766 million of BBB and £367 million of BB and below
debt securities are internally rated. If a financial asset is neither rated by
an external agency nor internally rated, it is classified as 'non-rated'.
3 Non-rated debt securities includes equity release mortgages with a value
of £3,934 million (further details are set out in note E2.3) and non-rated
bonds.
Credit ratings have not been disclosed in the above tables for the assets of
the unit-linked funds since the shareholder is not directly exposed to credit
risks from these assets. Included in unit-linked funds are assets which are
held as reinsured external fund links. Under certain circumstances,
the shareholder may be exposed to losses relating to the default of the
reinsured external fund link.
Credit ratings have not been disclosed in the above tables for holdings in
unconsolidated collective investment schemes and investments in associates.
The credit quality of the underlying debt securities within these vehicles is
managed by the safeguards built into the investment mandates for these
vehicles.
The Group maintains accurate and consistent risk ratings across its asset
portfolio. This enables management to focus on the applicable risks and
to compare credit exposures across all lines of business, geographical
regions and products. The rating system is supported by a variety of financial
analytics combined with market information to provide the main inputs for the
measurement of counterparty risk. All risk ratings are tailored to the various
categories of assets and are assessed and updated regularly.
The Group operates an Asset Management Risk Committee, a Rating Committee and
a Portfolio Credit Committee to monitor and perform oversight of internal
credit ratings for externally rated and internally rated assets. A variety of
methods are used to validate the appropriateness of credit assessments from
external institutions and fund managers. Internally rated assets do not have a
public rating from an external credit assessment institution or from external
asset managers. Instead internal credit ratings are used by the Group which
are provided by fund managers or for certain assets (in particular, equity
release mortgages and illiquid assets) are determined by the Life Companies.
The Committees review the policies, processes and practices to ensure the
appropriateness of the internal ratings, and to ensure they are in line with
regulatory requirements.
Throughout 2023, the Group has taken de-risking action to increase the overall
credit quality of its asset portfolio and mitigate the impact of future
downgrades on risk capital. Further details are included in the Risk
Management section of the Strategic Report.
The Group has increased exposure to an array of illiquid credit assets such as
equity release mortgages, local authority loans, social housing,
infrastructure and commercial real estate loans with the aim of achieving
greater diversification and investment returns, consistent with the Strategic
Asset Allocation approved by the Board.
A further indicator of the quality of the Group's financial assets is the
extent to which they are neither past due nor impaired. All of the amounts in
the table above for the current and prior year are neither past due nor
impaired.
Additional life company asset disclosures are included on page 306 and include
information on the Group's market exposure analysed by credit rating, sector
and country of exposure for the shareholder debt portfolio.
Credit risk of financial liabilities designated at FVTPL
The fair value of investment contracts and net asset value attributable to
unitholders liabilities are determined based upon the performance of the
assets backing those liabilities. This has the effect that the fair value of
the liability primarily reflects asset-specific performance risk rather than
credit risk. As a result, the value of credit risk associated with financial
liabilities designated at FVTPL is not considered to be significant.
Concentration of credit risk
Concentration of credit risk might exist where the Group has significant
exposure to an individual counterparty or a group of counterparties with
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic and
other conditions. The Group has most of its counterparty risk within its life
business and is monitored by the Group Counterparty Credit Risk Framework
contained within the Group Credit Risk Policy. It is further provided for in
investment management agreements, overlaid by regulatory requirements and the
monitoring of aggregate counterparty exposures across the Group against
additional Group counterparty limits. Counterparty risk in respect of OTC
derivative counterparties is monitored using a Potential Future Exposure
('PFE') value metric.
The Group is also exposed to concentration risk with outsource partners. The
Group operates a policy to manage outsourcer service counterparty exposures
and the impact from default is reviewed regularly by executive committees and
measured through stress and scenario testing.
Reinsurance
The Group is exposed to credit risk as a result of insurance risk transfer
contracts with reinsurers. The Group's policy is to place reinsurance only
with highly rated counterparties (minimum rating requirement of A-). The Group
restricts concentration with individual external reinsurers by specifying
limits on ceding and minimum conditions for acceptance and retention of
reinsurers. In recent years the Group has made progress in increasing the
number of reinsurers it transacts with, however, an element of concentration
remains due to the nature of the reinsurance market and the restricted range
of reinsurers available. The Group manages its exposure to reinsurance credit
risk through the operation of a credit policy, collateralisation, and regular
monitoring of exposures at the Reinsurance Management Committee and other
credit focused committees.
Collateral
The credit risk of the Group is mitigated, in certain circumstances, by
entering into collateral agreements. The amount and type of collateral
required depends on an assessment of the credit risk of the counterparty.
Guidelines are implemented regarding the acceptability of types of collateral
and the valuation parameters. Collateral is mainly obtained in respect of
stock lending, certain reinsurance arrangements and to provide security
against the daily mark to model value of derivative financial instruments.
Management monitors the market value of the collateral received, requests
additional collateral when needed, and performs an impairment valuation when
impairment indicators exist and the asset is not fully secured and is not
carried at fair value. See note E4 for further information on collateral
arrangements.
E6.2.2 Market risk
Market risk is defined as the risk of reductions in earnings and/or value,
through financial or reputational loss, from unfavourable market movements.
The risk typically arises from exposure to equity, property and fixed income
asset classes and the impact of changes in interest rates, inflation rates and
currency exchange rates.
The Group is mainly exposed to market risk as a result of:
• the mismatch between liability profiles and the related asset investment
portfolios;
• the investment of surplus assets including shareholder reserves yet to
be distributed, surplus assets within the with-profit funds and assets held to
meet regulatory capital and solvency requirements; and
• the income flow of management charges derived from the value of invested
assets of the business.
The Group manages the levels of market risk that it accepts through the
operation of a market risk policy using a number of controls and techniques
including:
• defined lists of permitted securities and/or application of investment
constraints and portfolio limits;
• clearly defined investment benchmarks for policyholder and shareholder
funds;
• stochastic and deterministic asset/liability modelling;
• active use of derivatives to improve the matching characteristics of
assets and liabilities and to reduce the risk exposure of a portfolio; and
• setting risk limits for main market risks and managing exposures against
these appetites.
All operations comply with regulatory requirements relating to the taking of
market risk.
Assets in the shareholder funds are managed against benchmarks that ensure
they are diversified across a range of asset classes, instruments and
geographies that are appropriate to the liabilities of the funds or are held
to match the cash flows anticipated to arise in the business. A combination
of limits by name of issuer, sector, geographical region and credit rating
are used where relevant to reduce concentration risk among the assets held.
The assets of the participating business are principally managed to support
the liabilities of the participating business and are appropriately
diversified by both asset class and geography, considering:
• the economic liability and how this varies with market conditions;
• the need to invest assets supporting participating business in a manner
consistent with the participating policyholders' reasonable expectations and
Principles and Practices of Financial Management ('PPFM'); and
• the need to ensure that regulatory and capital requirements are met.
In practice, an element of market risk arises as a consequence of the need to
balance these considerations, for example, in certain instances participating
policyholders may expect that equity market risk will be taken on their
behalf, and derivative instruments may be used to manage these risks.
Markets remain volatile particularly given geopolitical tensions, heightened
inflation, and action by central banks to reduce inflationary pressures on
economies whilst balancing the need to aid post-pandemic recovery. This is
noted in the Strategic Report principal risk section.
Interest rate and inflation risk
Interest rate risk is the risk that the fair value of future cash flows of a
financial instrument will fluctuate relative to the respective liability due
to the impact of changes in market interest rates on the value of
interest-bearing assets and on the value of future guarantees provided under
certain contracts of insurance. The paragraphs in this section also apply to
inflation risk, but references to fixed rate assets and liabilities would be
replaced with index-linked assets and liabilities.
The Group is required to manage its interest rate exposures in line with
qualitative risk appetite statements, quantitative risk metrics and any
additional hedging benchmarks. Interest rate risk is managed by matching
assets and liabilities where practicable and by entering into derivative
arrangements for hedging purposes where appropriate. This is particularly the
case for the non-participating funds and supported participating funds. For
unsupported participating business, some element of investment mismatching is
permitted where it is consistent with the principles of treating customers
fairly. The with-profit funds of the Group provide capital to allow such
mismatching to be effected. In practice, the life companies of the Group
maintain an appropriate mix of fixed and variable rate instruments according
to the underlying insurance or investment contracts and will review this at
regular intervals to ensure that overall exposure is kept within the risk
profile agreed for each particular fund. This also requires the maturity
profile of these assets to be managed in line with the liabilities to
policyholders.
The sensitivity analysis for interest rate and inflation risk indicates how
changes in the fair value or future cash flows of a financial instrument
arising from changes in market interest and inflation rates at the reporting
date result in a change in profit after tax, equity and CSM. It takes into
account the effect of such changes in market interest and inflation rates on
all assets and liabilities that contribute to the Group's reported profit
after tax and in equity. Changes in the value of the Group's holdings in
swaptions as a result of time decay or changes to interest rate volatility are
not captured in the sensitivity analysis.
With-profit business and non-participating business within the with-profit
funds are exposed to interest rate risk as guaranteed liabilities are valued
relative to market interest rates and investments include fixed interest
securities and derivatives. For unsupported with-profit business the profit or
loss arising from mismatches between such assets and liabilities is largely
offset by increased or reduced discretionary policyholder benefits dependent
on the existence of policyholder guarantees. The contribution of unsupported
participating business to the Group result is largely limited to the
shareholders' share of bonuses. The contribution of the supported
participating business to the Group result is determined in line with IFRS 17,
which exposes the shareholder to changes in the value of the liabilities
backed by shareholder assets and the value of capital advanced to the
with-profit funds.
In the non-participating funds, policy liabilities' sensitivity to interest
rates are matched primarily with debt securities and hedging if necessary to
match duration on a regulatory basis for the Group's Solvency II position,
with the result that sensitivity to changes in interest rates is very low. The
Group's exposure to interest rates on an IFRS basis principally arises from
the Group's hedging strategy to protect the regulatory capital position, which
results in an adverse impact on profit on an increase in interest rates.
The Group is exposed to inflation risk through certain contracts, such as
annuities, which may provide for future benefits to be paid taking account of
changes in the level of experienced and implied inflation, and also through
the Group's cost base. The Group seeks to manage inflation risk within the ALM
framework through the holding of derivatives, such as inflation swaps, or
physical positions in relevant assets, such as index-linked gilts, where
appropriate.
The sensitivity analysis results for IFRS are based on a combination of
modelled results and Solvency II adjusted sensitivity results. Sensitivity
results include an allowance for estate distribution absorption on with-profit
business and the second-order impact on Risk Adjustment but excludes the
impact on the Group's pension schemes.
2023 2022 restated1
Change in interest rate Impact on Impact Impact on Impact
profit after tax and equity
on CSM profit after tax and equity on CSM
£m
£m £m £m
Insurance contract and reinsurance contract balances +1% 3,682 (51) 3,321 (52)
Investment contract without DPF balances +1% 1,551 - 1,451 -
Financial assets subject to interest rate risk backing insurance and +1% (3,988) - (3,599) -
reinsurance contract balances
Financial assets subject to interest rate risk backing investment contract +1% (1,550) - (1,451) -
without DPF balances
Other financial assets subject to interest rate risk +1% (222) - (317) -
Insurance contract and reinsurance contract balances -1% (4,873) 103 (4,503) 123
Investment contract without DPF balances -1% (2,051) - (1,921) -
Financial assets subject to interest rate risk backing insurance and -1% 5,253 - 4,927 -
reinsurance contract balances
Financial assets subject to interest rate risk backing investment contract -1% 2,049 - 1,921 -
without DPF balances
Other financial assets subject to interest rate risk -1% 222 - 317 -
2023 2022 restated1
Change in inflation Impact on Impact Impact on Impact
profit after tax and equity
on CSM profit after tax and equity on CSM
£m
£m £m £m
Insurance contract and reinsurance contract balances +1% (944) (7) (683) (7)
Investment contract without DPF balances +1% (173) - (165) -
Financial assets subject to inflation risk backing insurance and reinsurance +1% 983 - 692 -
contract balances
Financial assets subject to inflation risk backing investment contract without +1% 173 - 165 -
DPF balances
Other financial assets subject to inflation risk +1% 9 - 22 -
Insurance contract and reinsurance contract balances -1% 840 37 598 35
Investment contract without DPF balances -1% 145 - 135 -
Financial assets subject inflation risk backing insurance and reinsurance -1% (868) - (597) -
contract balances
Financial assets subject to inflation risk backing investment contract without -1% (145) - (135) -
DPF balances
Other financial assets subject to inflation risk -1% (7) - (18) -
1 Prior period comparatives have been restated on transition to IFRS17
Insurance Contracts (see note A2.1 for further details).
Equity and property risk
The Group is exposed to the risk of reductions in the valuation of equities
(or changes in the volatility) or property investments which could result in
reductions in asset values and losses for policyholders or shareholders. In
this context, equity assets should be taken to include shares, equity
derivatives, equity collectives and unlisted equities. Property assets include
direct property investment, shares in property companies, property collectives
and structured property assets.
The portfolio of marketable equity securities and property investments which
is carried in the statement of consolidated financial position at fair value
has exposure to price risk. The Group's objective in holding these assets is
to earn higher long-term returns by investing in a diverse portfolio of
equities and properties. Portfolio characteristics are analysed regularly and
price risks are actively managed in line with investment mandates. The Group's
holdings are diversified across industries and concentrations in any one
company or industry are limited.
Equity and property price risk is primarily borne in respect of assets held in
with-profit funds, unit-linked funds or equity release mortgages in the
non-profit funds. For unit-linked funds this risk is borne by policyholders
and asset movements directly impact unit prices and hence policy values. For
with-profit funds policyholders' future bonuses will be impacted by the
investment returns achieved and hence the price risk, whilst the Group also
has exposure to the value of guarantees provided to with-profit policyholders.
In addition some equity investments are held in respect of shareholders'
funds. For the non-profit fund property price risk from equity release
mortgages is borne by the Group with the aim of achieving greater
diversification and investment returns, consistent with the Strategic Asset
Allocation approved by the Board. The Group as a whole is exposed to price
risk fluctuations impacting the income flow of management charges from the
invested assets of all funds; this is primarily managed through the use of
derivatives.
Equity and property price risk is managed through the agreement and monitoring
of financial risk profiles that are appropriate for each of the Group's life
funds in respect of maintaining adequate regulatory capital and treating
customers fairly. This is largely achieved through asset class diversification
and within the Group's ALM framework through the holding of derivatives or
physical positions in relevant assets where appropriate.
The shareholders' exposure to equity risk principally arises from the Group's
hedging strategy to protect the regulatory capital position, which results in
an adverse impact on profit on an increase in equity prices.
The sensitivity analysis for equity and property price risk illustrates how a
change in the fair value of equities and properties affects the Group result.
It takes into account the effect of such changes in equity and property prices
on all assets and liabilities that contribute to the Group's reported profit
after tax and in equity but excludes the impact on the Group's pension
schemes.
2023 2022 restated1
Change in Impact on Impact Impact on Impact
equity prices
profit after tax and equity
profit after tax and equity
on CSM
on CSM
£m
£m
£m £m
Insurance contract and reinsurance contract balances +10% (2,079) 117 (2,082) 124
Investment contract without DPF balances +10% (7,636) - (7,031) -
Financial assets subject to equity price risk backing insurance and +10% 2,159 - 2,205 -
reinsurance contract balances
Financial assets subject to equity price risk backing Investment contract +10% 7,636 - 7,031 -
without DPF balances
Other financial assets subject to equity price risk +10% (335) - (299) -
Insurance contract and reinsurance contract balances -10% 2,039 (30) 2,040 (31)
Investment contract without DPF balances -10% 7,740 - 7,121 -
Financial assets subject to equity price risk backing insurance and -10% (2,128) - (2,169) -
reinsurance contract balances
Financial assets subject to equity price risk backing Investment contract -10% (7,740) - (7,121) -
without DPF balances
Other financial assets subject to equity price risk -10% 335 - 299 -
2023 2022 restated1
Change in property prices Impact on Impact Impact on Impact
profit after tax and equity
profit after tax and equity
on CSM
on CSM
£m
£m
£m £m
Insurance contract and reinsurance contract balances +10% (199) 5 (201) 3
Investment contract without DPF balances +10% (431) - (410) -
Financial assets subject to property price risk backing insurance and +10% 205 - 199 -
reinsurance contract balances
Financial assets subject to property price risk backing Investment contract +10% 431 - 410 -
without DPF balances
Other financial assets subject to property price risk +10% 3 - 11 -
Insurance contract and reinsurance contract balances -10% 191 (3) 194 (2)
Investment contract without DPF balances -10% 407 - 388 -
Financial assets subject to property price risk backing insurance and -10% 197 - (192) -
reinsurance contract balances
Financial assets subject to property price risk backing Investment contract -10% (407) - (388) -
without DPF balances
Other financial assets subject to property price risk -10% (2) - (10) -
1 Prior period comparatives have been restated on transition to IFRS17
Insurance Contracts (see note A2.1 for further details).
The sensitivity to changes in equity prices is primarily driven by the Group's
equity hedging arrangements over the value of future management charges that
are linked to asset values.
Currency risk
Currency risk is the risk that changes in the value of currencies could lead
to reductions in asset values which may result in losses for policyholders and
shareholders. With the exception of Standard Life International business sold
in Germany and the Republic of Ireland and some historic business written
in the Republic of Ireland, the Group's principal transactions are carried
out in sterling. The assets for these books of business are generally held in
the same currency denomination as their liabilities, therefore, any foreign
currency mismatch is largely mitigated. Consequently, the foreign currency
risk relating to this business mainly arises when the assets and liabilities
are translated into sterling.
The Group's financial assets are primarily denominated in the same currencies
as its insurance and investment liabilities. Thus, the main foreign exchange
risk arises from recognised assets and liabilities denominated in currencies
other than those in which insurance and investment liabilities are expected to
be settled and, indirectly, from the non-UK earnings of UK companies.
Some of the Group's with-profit funds have an exposure to overseas assets
which is not driven by liability considerations. The purpose of this exposure
is to reduce overall risk whilst maximising returns by diversification. This
exposure is limited and managed through investment mandates which are subject
to the oversight of the investment committees of the Boards of each life
company. Fluctuations in exchange rates from certain holdings in overseas
assets are hedged against currency risks.
During 2021, the Group entered into four hedging relationships to hedge the
currency risk on its Euro and US dollar denominated hybrid debt (US $500
million Tier 2 bonds, €500 million Tier 2 notes, US $750 million contingent
convertible Tier 1 notes and US $500 million Fixed Rate Reset Tier 2 notes as
set out in note E5) through cross currency rate swaps.
E6.2.3 Financial soundness risk
Financial soundness risk is a broad risk category encompassing capital
management risk, tax risk and liquidity and funding risk.
Capital management risk is defined as the failure of the Group, or one of its
separately regulated subsidiaries, to maintain sufficient capital to provide
appropriate security for policyholders and meet all regulatory capital
requirements whilst not retaining unnecessary capital. The Group has exposure
to capital management risk through the requirements of the Solvency II capital
regime, as implemented by the PRA, to calculate regulatory capital adequacy at
a Group level. The Group's UK life subsidiaries have exposure to capital
management risk through the Solvency II regulatory capital requirements
mandated by the PRA at the solo level. The Group's approach to managing
capital management risk is described in detail in note I3.
Tax risk
Tax risk is defined as the risk of reductions in earnings and/or value,
through financial or reputational loss, due to an unforeseen tax cost, or by
the inappropriate reporting and disclosure of information in relation to
taxation. Tax risk can be caused by:
• the Group, or one of its subsidiaries, making a material error in its
tax reporting;
• incorrect calculation of tax provisions;
• failure to implement the optimum financial arrangements to underpin a
commercial transaction; and
• incorrect operation of policyholder tax requirements.
Tax risk is managed by maintaining an appropriately-staffed tax team who have
the qualifications and experience to make judgements on tax issues, augmented
by advice from external specialists where required. In addition, the Group has
a formal tax risk policy, which sets out its risk appetite in relation to
specific aspects of tax risk, and which details the controls the Group has in
place to manage those risks.
Liquidity risk
Liquidity risk is defined as failure to maintain adequate levels of financial
resources to meet obligations as they fall due. Funding risk relates to the
potential inability to raise additional capital or liquidity when required in
order to maintain the resilience of the balance sheet. The Group has exposure
to liquidity risk as a result of servicing its external debt and equity
investors, and from the operating requirements of its subsidiaries. The
Group's subsidiaries have exposure to liquidity risk as a result of normal
business activities, specifically the risk arising from an inability to meet
short-term cash flow requirements and to meet obligations to policy
liabilities. The Board of Phoenix Group Holdings plc has defined a number of
governance objectives and principles and the liquidity risk frameworks of
each subsidiary are designed to ensure that:
• liquidity risk is managed in a manner consistent with the subsidiary
company Boards' strategic objectives, risk appetite and PPFM;
• cash flows are appropriately managed and the reputation of the Group is
safeguarded; and
• appropriate information on liquidity risk is available to those making
decisions.
The Group's liquidity risk management strategy is based on a risk appetite of
less than a 1 in 200 chance of having insufficient liquid or tangible assets
to meet financial obligations as they fall due and is supported by:
• holding appropriate assets to meet liquidity buffers;
• holding high quality liquid assets to support day to day operations;
• an effective stress testing framework to ensure survival horizons are
met under different severe, but plausible scenarios;
• effective liquidity portfolio management including Early Warning
Indicators; and
• liquidity risk contingency planning.
The Group's funding strategy aims to maintain the appropriate level of debt
and equity in order to support the Group's organic and inorganic growth
ambitions, while maintaining sufficient headroom for hybrid capital under
Solvency II rules.
Liquidity forecasts showing headroom against liquidity buffers are prepared
regularly to predict required liquidity levels over both the short and
medium-term allowing management to respond appropriately to changes in
circumstances. In the event of a liquidity shortfall, either current or
projected, this would be managed in line with the Group's Contingency
Liquidity Plan where the latest available contingency management actions would
be considered.
In extreme circumstances, the Group could be exposed to liquidity risk in its
unit-linked funds. This could occur where a high volume of surrenders
coincides with a tightening of liquidity in a unit-linked fund to the point
where assets of that fund have to be sold to meet those withdrawals. Where the
fund affected consists of less liquid assets such as property, it can take
several months to complete a sale and this would impede the proper operation
of the fund. In these situations, the Group considers its risk to be low since
there are steps that can be taken first within the funds themselves both to
ensure the fair treatment of all investors in those funds and to protect the
Group's own risk exposure.
The vast majority of the Group's derivative contracts are traded OTC and have
a two-day collateral settlement period. The Group's derivative contracts
are monitored daily, via an end-of-day valuation process, to assess the need
for additional funds to cover margin or collateral calls.
Some of the Group's commercial property investments, cash and cash equivalents
are held through collective investment schemes. The collective investment
schemes have the power to restrict and/or suspend withdrawals, which would, in
turn, affect liquidity.
The following table provides a maturity analysis showing the remaining
contractual maturities of the Group's undiscounted financial liabilities
and associated interest.
2023 1 year or less or on demand 1-5 years Greater than 5 years No fixed term Total Less amounts classified as held for sale Total
£m £m £m £m £m (see note H3) £m
£m
Investment contracts 162,784 - - - 162,784 (4,780) 158,004
Borrowings1 298 2,065 2,563 45 4,971 - 4,971
Derivatives1 366 403 5,718 - 6,487 (2) 6,485
Net asset value attributable to unitholders 2,921 - - - 2,921 - 2,921
Obligations for repayment of collateral received 1,005 - - - 1,005 - 1,005
Lease liabilities1 9 35 63 - 107 - 107
Accruals and deferred income 536 29 14 - 579 - 579
Other payables 2,272 - - - 2,272 - 2,272
2022 restated2 1 year or less or on demand 1-5 years Greater than 5 years No fixed term Total Less amounts classified as held for sale (see note H3) Total
£m £m £m £m £m £m £m
Investment contracts 149,481 - - - 149,481 (8,312) 141,169
Borrowings1 268 1,326 2,357 64 4,015 - 4,015
Derivatives1 757 794 9,335 - 10,886 (4) 10,882
Net asset value attributable to unitholders 3,042 - - - 3,042 - 3,042
Obligations for repayment of collateral received 1,706 - - - 1,706 - 1,706
Lease liabilities1 11 37 95 - 143 - 143
Accruals and deferred income 527 42 12 - 581 (37) 544
Other payables 1,373 - - - 1,373 - 1,373
1 These financial liabilities are disclosed at their undiscounted value and
therefore differ from amounts included in the statement of consolidated
financial position which discloses the discounted value.
2 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
Investment contract policyholders have the option to terminate or transfer
their contracts at any time and to receive the surrender or transfer value of
their policies. Although these liabilities are payable on demand, and are
therefore included in the contractual maturity analysis as due within one
year, the Group does not expect all these amounts to be paid out within one
year of the reporting date.
The following tables present the estimated amount and timing of the remaining
contractual discounted cash flows arising from insurance contract liabilities.
2023 Up to 1 year 1-2 years 2-3 years 3-4 years 4-5 years >5 years Total
£m £m £m £m £m £m £m
Insurance contract liabilities 8,468 4,987 4,959 5,292 5,633 80,447 109,786
2022 restated1 Up to 1 year 1-2 years 2-3 years 3-4 years 4-5 years >5 years Total
£m £m £m £m £m £m £m
Insurance contract liabilities 7,381 4,470 4,486 4,720 5,956 75,551 102,564
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
The following table sets out the amounts that are payable on demand and the
carrying value of the related portfolios of contracts.
2023 2022 restated1
Amounts payable on demand Carrying value of portfolio Amounts payable on demand Carrying value of portfolio
£m £m £m £m
With-profits (44,076) (51,709) (44,319) (52,026)
Annuities (5,163) (34,217) (2,094) (29,277)
Unit-linked (15,820) (16,431) (13,442) (13,740)
Protection (612) (1,947) (330) (1,474)
Other - 225 - 297
Short-term payables and receivables (including deposits from reinsurers) (3,541) (3,541) (4,067) (4,067)
(69,212) (107,620) (64,252) (100,287)
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
A significant proportion of the Group's financial assets are held in gilts,
cash, supranationals and investment grade securities which the Group considers
sufficient to meet the liabilities as they fall due. The vast majority of
these investments are readily realisable immediately since most of them are
quoted in an active market.
The Group has a set of established policies and processes to manage its
exposure to liquidity risk, including impacts arising from the economic
environment, business developments and funding changes. Where liquidity risk
is heightened, such as during periods of significant market volatility,
triggers are in place to enhance the frequency of liquidity monitoring and to
implement available contingency actions to ensure sufficient liquidity is
maintained.
E6.2.4 Strategic risk
Strategic risks threaten the achievement of the Group strategy through poor
strategic decision-making, implementation or response to changing
circumstances. The Group recognises that core strategic activity brings with
it exposure to strategic risk. However, the Group seeks to proactively review,
manage and control these exposures.
The Group's strategy and business plan are exposed to external events that
could prevent or impact the achievement of the strategy; events relating to
how the strategy and business plan are executed; and events that arise as a
consequence of following the specific strategy chosen. The identification and
assessment of strategic risks is an integrated part of the Risk Management
Framework. Strategic risk should be considered in parallel with the Risk
Universe as each of the risks within the Risk Universe can impact the Group's
strategy.
A Strategic Risk Policy is maintained and reported against regularly, with a
particular focus on risk management, stakeholder management, corporate
activity and overall reporting against the Group's strategic ambitions.
E6.2.5 Operational risk
Operational risk is the risk of reductions in earnings and/or value, through
financial or reputational loss, from inadequate or failed internal processes
and systems, or from people-related or external events. Operational risk
arises due to failures in one or more of the following aspects of our
business:
• indirect exposures through outsourcing service providers and suppliers;
• direct exposures through internal practices, actions or omissions;
• external threats from individuals or groups focused on malicious or
criminal activities, or on external events occurring which are not within the
Group's control; and
• negligence, mal-practice or failure of employees, or suppliers to follow
good practice in delivering operational processes and practices.
It is accepted that it is neither possible, appropriate nor cost effective to
eliminate all operational risks from the business as operational risk is
inherent in any operating environment particularly given the regulatory
framework under which the Group operates. As such the Group will tolerate a
degree of operational risk subject to appropriate and proportionate levels of
control around the identification, management and reporting of such risks. A
set of operational risk policies are maintained that set out the nature of the
operational risk exposure and key controls in place to control the risk.
E6.2.6 Customer risk
Customer risk is the risk of financial failure, reputational loss, loss of
earnings and/or value through inappropriate or poor customer treatment
(including poor advice). It can arise as a result of:
• Customer Outcomes: The risk that our decisions, actions or behaviors
individually or collectively result in a failure to act to deliver good
outcomes for our customers, including in the following areas: Product Design
& Development, Communication & Guidance, Customer Support &
Understanding, Monitoring & Oversight, Customer Feedback, and Culture
& standards.
• Customer Transformation: The design, governance and oversight of
Strategic Customer Transformation Activity in retained functions and service
providers, fails to deliver on reasonable customer expectations, taking
account of the Phoenix Group customer treatment risk appetites and
regulatory requirements.
The Group has both a Conduct Risk appetite to focus on behaviours within the
business, and a Customer Risk appetite to focus on achieving good customer
outcomes (both of which apply to the Company). The behaviours and standards
all colleagues are expected to achieve are detailed in our Group Code of
Conduct. For our customers, what represents a good outcome is articulated in
our Customer Standards and supporting Business Unit processes. In addition,
the Group Conduct Strategy, which overarches our Risk Universe and all risk
policies is designed to detect where our customers are at risk of poor
outcomes, minimise conduct risks, and respond with timely and appropriate
mitigating actions.
The Group also has a suite of customer polices which set out the key customer
risks and control objectives in place to mitigate them. The customer risks
for the Group are regularly reported to management oversight committees.
F. Insurance contracts, investment contracts with DPF and reinsurance
F1. Liabilities under insurance contracts
Classification
Contracts under which the Group accepts significant insurance risk are
classified as insurance contracts. Contracts held by the Group under which it
transfers significant insurance risk related to underlying insurance contracts
are classified as reinsurance contracts. Some contracts entered into by the
Group have the legal form of insurance contracts but do not transfer
significant insurance risk and expose the Group to financial risk. These
contracts are classified as financial liabilities and are referred to as
investment contracts.
All references in these accounting policies to insurance contracts and
reinsurance contracts include contracts issued, initiated or acquired by the
Group, unless otherwise stated.
Insurance contracts are classified as direct participating contracts or
contracts without direct participation features. Direct participating
contracts are contracts for which, at inception:
• the contractual terms specify that the policyholder participates in a
share of a clearly identified pool of underlying items;
• the Group expects to pay to the policyholder an amount equal to a
substantial share of the fair value returns on the underlying items; and
• the Group expects a substantial proportion of any change in the amounts
to be paid to the policyholder to vary with the change in fair value of the
underlying items.
All other insurance contracts and all reinsurance contracts are classified as
contracts without direct participation features.
Some investment contracts issued by the Group contain discretionary
participation features ('DPF'), whereby the investor has the right and is
expected to receive, as a supplement to the amount not subject to the Group's
discretion, potentially significant additional benefits based on the return of
specified pools of investment assets. The Group accounts for these contracts
under IFRS 17 consistent with insurance contracts.
The classification assessment is made at the date of inception or for business
combinations or portfolio transfers, as at the date of acquisition. Once a
contract is assessed as insurance, investment with DPF or reinsurance, the
classification continues until the contract is derecognised or modified.
When considering classification, and applying the provisions of IFRS 17, the
Group identifies a contract as the smallest unit of account. The Group also
makes an evaluation of whether a series of contracts can be treated together
in applying IFRS 17 based on reasonable and supportable information, or
whether a single contract contains components that need to be separated and
treated as if they were stand-alone contracts.
Accounting treatment
Separating components from insurance and reinsurance contracts
The Group assesses its insurance products to determine whether they contain
components, which must be accounted for under accounting standards other than
IFRS 17 (distinct non-insurance components).
Where an insurance contract has a distinct investment component and meets the
separation criteria established under IFRS 17, the investment component is
separated from the host contract and accounted for under IFRS 9. The
assessment of whether a contract has a distinct investment component is
carried out at inception of the contract, or the date of acquisition in the
case of a business combination.
When assessing whether the investment component is distinct, the Group
considers the following, which may indicate that the insurance and investment
component are highly interrelated:
• the value of one component varies with the other component;
• existence of an option to switch between the different components;
• discounts that span both elements e.g. a reduced asset management charge
based on total size of contract; and
• other interacting features e.g. insurance risk from premium waivers and
return of premium covering both elements of the policy.
After separating any distinct components, the Group applies the requirements
of IFRS 17 to all remaining components of the insurance contract or where
distinct criteria are not met, the whole contract is accounted for within IFRS
17.
Level of aggregation
The Group is required to divide its business into groups for the purposes of
recognition and measurement. The Group's business is firstly split into
portfolios. Portfolios contain groups of contracts with similar risks, which
are managed together. Portfolios are further divided based on expected
profitability at inception into three categories: onerous contracts, contracts
that are profitable at initial recognition and have no significant risk of
becoming onerous, and the remaining profitable contracts. For reinsurance
contracts the same three groups would be identified with 'onerous' being
replaced with 'net gain' and 'profitable' being replaced with 'net cost'.
Contracts which are issued more than one year apart are not permitted to be
included within the same group. However as permitted by IFRS 17, the groups of
contracts for which the FVA has been adopted on transition include contracts
issued more than one year apart.
The Group has defined portfolios of insurance and reinsurance contracts issued
broadly based on the predominant risks inherent in the products/contracts, for
example, longevity, persistency, mortality, and by considering whether groups
of products are managed together. These portfolios are further split by legal
entity, with-profit fund and contracts subject to different IFRS 17
measurement models are grouped separately. The portfolios are allocated to
cohorts based on whether they are onerous at inception or based on their
expected level of profitability using information available at inception.
For reinsurance contracts held, portfolios are based upon similar risks to
those of the underlying contracts. The reinsurance contracts held are assessed
for aggregation requirements on an individual contract basis.
The grouping of the insurance contracts are determined at initial recognition
and are not subsequently reassessed. Therefore, a contract will remain within
the assigned aggregation group until it is derecognised, either by expiry or
modification.
Recognition
The Group recognises groups of insurance contracts that it issues from the
earliest of the following:
• the beginning of the coverage period of the group of contracts;
• the date when the first payment from the policyholder in the group is
due or actually received if there is no due date; or
• for a group of onerous contracts, as soon as facts and circumstances
indicate that the group is onerous.
Investment contracts with DPF are initially recognised at the date when the
Group becomes a party to the contract.
Insurance contracts acquired in a business combination within the scope of
IFRS 3 Business Combinations or a portfolio transfer are accounted for as if
they were entered into at the date of acquisition or transfer.
Reinsurance contracts held are recognised from the earliest of the following:
• the beginning of the coverage period of the group of reinsurance
contracts held. However, the Group delays the recognition of a group of
reinsurance contracts held that provide proportionate coverage (for example,
through a quota share arrangement) until the date when any underlying
insurance contract is initially recognised, if that date is later than the
beginning of the coverage period of the group of reinsurance contracts held;
and
• the date the Group recognises an onerous group of underlying insurance
contracts if the Group entered into the related reinsurance contract held in
the group of reinsurance contracts held at or before that date.
The Group adds new contracts to the group in the reporting period in which
that contract meets one of the criteria set out above.
Contract boundaries
The Group includes in the measurement of a group of insurance contracts all
the future cash flows within the boundary of each contract in the group. Cash
flows are within the boundary of an insurance contract if they arise from the
rights and obligations that exist during the period in which the policyholder
is obligated to pay premiums or the Group has a substantive obligation to
provide the policyholder with insurance contract services. A substantive
obligation to provide insurance contract services ends when:
• the Group has the practical ability to reprice the risks of the
particular policyholder or change the level of benefits so that the price
fully reflects those risks; or
• both of the following criteria are satisfied:
- the Group has the practical ability to reprice the contract or a portfolio
of contracts so that the price fully reflects the reassessed risk of that
portfolio; and
- the pricing of premiums up to the date when risks are reassessed does not
reflect the risks related to periods beyond the reassessment date.
Where an expected premium or expected claim is not within the contract
boundary, it is not recognised as a cash flow of the contract and is instead
considered to relate to a future insurance contract and recognised when those
contracts meet the recognition criteria.
The contract boundary is reassessed at each reporting date to include the
effect of changes in circumstances on the Group's substantive rights and
obligations and, therefore, may change over time.
The contract boundary for a reinsurance contract is dependent on the terms and
conditions of the reinsurance contract and therefore may not necessarily be
the same as for the underlying contracts. Where the reinsurance contract is
open to new business on agreed terms for a period of time, the contract
boundary may include estimates of reinsurance on insurance contracts that have
not yet been issued or reported.
Measurement
The Group's insurance contracts issued without direct participation features
are grouped together under annuity, protection and other non-linked insurance
business. These groups of insurance contract are measured under the General
Model ('GM').
Direct participating contracts issued by the Group are contracts with DPF
where the Group holds the pool of underlying assets. Direct participating
insurance contracts are grouped together and reported primarily as either
unit-linked or with-profit business although some protection contracts are
considered to have direct participation features. These groups of contracts
are measured using the variable fee approach ('VFA'), unless they fail the
eligibility test to be treated under this approach, in such circumstances they
are measured under the GM.
Reinsurance contracts held are measured under the GM irrespective of the
measurement model used for the underlying contracts. Certain with-profit funds
within the Group hold non-profit insurance business such as annuities. This
business will also be measured under the GM.
Initial measurement - Insurance contracts
On initial recognition, the Group measures a group of insurance contracts as
the total of (a) the fulfilment cash flows, which comprise estimates of future
cash flows, adjusted to reflect the time value of money and the associated
financial risks, and a risk adjustment for non-financial risk; and (b) the
contractual service margin ('CSM'). The fulfilment cash flows of a group of
insurance contracts do not reflect the Group's non-performance risk.
The fulfilment cash flows comprise:
• unbiased and probability-weighted estimates of future cash flows that
are within the contract boundary plus an adjustment to reflect the time value
of money and the financial risks related to future cash flows, to the extent
that the financial risks are not included in the estimates of future cash
flows ('BEL'); and
• a risk adjustment for non-financial risk.
The measurement of fulfilment cash flows includes insurance acquisition cash
flows which are allocated as a portion of premium to profit or loss (through
insurance revenue) over the period of the contract in a systematic and
rational way based on the passage of time.
The risk adjustment for non-financial risk for a group of insurance contracts,
determined separately from the other estimates, is the compensation required
for bearing uncertainty about the amount and timing of the cash flows that
arises from non-financial risk. The Group applies a confidence level
technique. The risk adjustment is allocated to groups of contracts based on an
analysis of the risk profiles of the groups, reflecting the effects of the
diversification benefits between Group entities to the extent that the Group
includes it when determining the compensation required to bear that risk. The
Group includes diversification between Group entities which use the Group
Internal Model for management decision-making. Where a Standard Formula
approach is used, no diversification with other entities within the Group is
allowed for. The Group determines the risk adjustment using a one-year time
horizon, consistent with the time horizon used for Solvency II, a key metric
underlying how the Group is managed.
The CSM of a group of insurance contracts represents the unearned profit that
the Group will recognise over the life of the contract as insurance and
investment-related services are provided. For profitable groups of insurance
contracts the CSM is established to ensure that no profit or loss is
recognised at inception and consequently it offsets the net present value of
the expected cash flows (including initial premium and insurance acquisition
cash flows) and the risk adjustment. For a group of insurance contracts that
are onerous, the CSM is set to nil and a loss is immediately recognised in
profit or loss. A loss component of the liability for remaining coverage
('LRC') is established for the amount of loss recognised.
The initial recognition of the CSM is consistent for insurance contracts
applying the GM and VFA measurement approaches, however there are key
differences for subsequent measurement of the CSM under these measurement
models.
For groups of contracts acquired in a transfer of contracts or a business
combination, the consideration received for the contracts is included in the
fulfilment cash flows as a proxy for the premiums received at the date of
acquisition. In a business combination, the consideration received is the fair
value of the contracts at that date.
With-profit estate
The Group has a number of with-profit funds where surpluses are shared between
policyholders and shareholders. All such funds are closed to new business.
These funds typically have an estate, being a surplus of assets over those
needed to meet the liabilities of current policyholders. As these funds are
closed to new business, the surplus is expected to be distributed to existing
policyholders over time and the Group has determined it appropriate to
allocate the expected future policyholder payments from the estate to specific
groups of contracts within the measurement of the best estimate cash flows.
Subsequent measurement - Insurance contracts
The carrying amount of a group of insurance contracts at each reporting date
is the sum of the LRC and the liability for incurred claims ('LIC'). The LRC
comprises the BEL, risk adjustment and any remaining CSM at that date. The LIC
includes the BEL and risk adjustment (the fulfilment cash flows for incurred
claims and expenses that have not yet been paid, including claims that have
been incurred but not yet reported). There is no CSM associated with the LIC,
and as a result, any changes in the LIC are taken directly to profit or loss.
The fulfilment cash flows of groups of insurance contracts are measured at the
reporting date using current estimates of future cash flows, current discount
rates and current estimates of the risk adjustment for non-financial risk.
Changes in fulfilment cash flows are recognised as follows.
Changes relating to future services insurance Adjusted against the CSM (or recognised in the insurance service result in
profit or loss if the group is onerous)
Changes relating to current or past services Recognised in the insurance service result in profit or loss
Effects of the time value of money, financial risk and changes Recognised in insurance finance income or expenses therein on estimated future
cash flows
Where, during the coverage period, a group of insurance contracts becomes
onerous, the Group recognises a loss in profit or loss for the net outflow,
resulting in the carrying amount of the liability for the group being equal to
the fulfilment cash flows. A loss component is established by the Group for
the liability for remaining coverage for such groups of onerous contracts
representing the losses recognised.
The CSM of each group of contracts is calculated at each reporting date as
follows:
Insurance contracts measured under GM
For insurance contracts measured under the GM approach, the CSM is adjusted by
applying locked-in discount rates, while the BEL and risk adjustment are
adjusted using current discount rates.
The carrying amount of the CSM at each reporting date is the carrying amount
at the start of the year, adjusted for:
• the CSM of any new contracts that are added to the group in the year;
• interest accreted on the carrying amount of the CSM during the year;
• changes in fulfilment cash flows that relate to future services, except
to the extent that:
- any increases in the fulfilment cash flows exceed the carrying amount of
the CSM, in which case the excess is recognised as a loss in profit or loss
and creates a loss component; or
- any decreases in the fulfilment cash flows are allocated to the loss
component, reversing losses previously recognised in profit or loss;
• the effect of any currency exchange differences on the CSM; and
• the amount recognised as insurance revenue because of the services
provided in the year (see the 'Insurance revenue' accounting policy in note C1
for further details).
Changes in fulfilment cash flows relating to future service that adjust the
CSM comprise:
• experience adjustments arising from the difference between premiums
received and the expected amounts estimated at the beginning of the period,
that relate to future service, along with any associated acquisition costs;
• changes in estimates of the present value of future cash flows in the
BEL and risk adjustment;
• differences between any investment component expected to become payable
in the period and the actual investment component that becomes payable; and
• changes in the risk adjustment for non-financial risk that relate to
future service.
The impact of discounting the risk adjustment for business measured under GM
is disaggregated and recognised within Net finance income or expenses from
insurance contracts within the income statement.
Insurance contracts measured under VFA model
The Group's unit-linked and with-profit business that meets the VFA
eligibility criteria are direct participating contracts under which the
Group's obligation to the policyholder is the net of:
• the obligation to pay the policyholder an amount equal to the fair value
of the underlying items; and
• a variable fee in exchange for future services provided by the
contracts, being the amount of the Group's share of the fair value of the
underlying items less fulfilment cash flows that do not vary based on the
returns on underlying items. The Group provides investment services under
these contracts by giving a return based on underlying items, in addition to
insurance coverage.
For unit-linked and with-profit contracts that are measured under the VFA,
interest is not accreted on the CSM using a locked-in discount rate, instead
it is determined with reference to the underlying items, reflecting that on
these types of insurance contracts the Group fees for providing
investment-related services are determined with reference to the value of the
investments associated with the policyholder's policy. For example, annual
management charges ('AMC') are determined by reference to the value of the
policyholder's fund value and the shareholder's share of bonuses on a
with-profit policy in a 90:10 fund is determined based on the performance of
the with-profit fund.
The variable fee earned by the Group is consequently the Group's share of the
fair value of underlying items less fulfilment cash flows that do not vary
based on returns of the underlying items.
For unit-linked contracts, the underlying items are funds that the unit price
of the investment chosen by the policyholder varies with.
For with-profits contracts, the underlying items are typically the net assets
of the relevant with-profit fund, including the estate and the fair value of
non-profit contracts within the fund. With-profit funds can vary in their
nature and operation, therefore will be dependent on facts and circumstances.
When measuring a group of unit-linked and with-profit contracts using the VFA,
the Group adjusts the fulfilment cash flows for the whole of the changes in
the obligation to pay policyholders an amount equal to the fair value of the
underlying items. These changes do not relate to future services and are
recognised in profit or loss. The Group then adjusts any CSM for changes in
the amount of the Group's share of the fair value of the underlying items,
which relate to future services, as explained below.
The carrying amount of the CSM at each reporting date is the carrying amount
at the start of the year, adjusted for:
• the CSM of any new contracts that are added to the group in the year;
• the change in the amount of the Group's share of the fair value of the
underlying items and changes in fulfilment cash flows that relate to future
services, except to the extent that:
- the Group has applied the risk mitigation option to exclude from the CSM
changes in the effect of financial risk on the amount of its share of the
underlying items or fulfilment cash flows;
- a decrease in the amount of the Group's share of the fair value of the
underlying items, or an increase in the fulfilment cash flows that relate to
future services, exceeds the carrying amount of the CSM, giving rise to a loss
in profit or loss (included in insurance service expenses) and creating a loss
component; or
- an increase in the amount of the Group's share of the fair value of the
underlying items, or a decrease in the fulfilment cash flows that relate to
future services, is allocated to the loss component, reversing losses
previously recognised in profit or loss (included in insurance service
expenses);
• the effect of any currency exchange differences on the CSM; and
• the amount recognised as insurance revenue because of the services
provided in the year (see the 'Insurance revenue' accounting policy in note C1
for further details).
Changes in fulfilment cash flows that relate to future service include the
changes relating to future services specified above for contracts without
direct participation features (measured at current discount rates) and changes
in the effect of the time value of money and financial risks that do not arise
from underlying items.
The Group does not currently apply the risk mitigation option to any material
extent.
Loss components
A loss component represents a notional record of the losses attributable to
each group of onerous insurance contracts. The loss component is released
based on a systematic allocation of the subsequent changes relating to future
service in the fulfilment cash flows to (i) the loss component; and (ii) the
liability for remaining coverage excluding the loss component. The loss
component is also updated for subsequent changes in estimates of the
fulfilment cash flows and the risk adjustment relating to future service. The
systematic allocation of subsequent changes to the loss component results in
the total amounts allocated to the loss component being equal to zero by the
end of the coverage period of a group of insurance contracts. The Group uses
coverage units as the method of systematic allocation.
Reinsurance contracts held - measurement
The carrying amount of a group of reinsurance contracts at each reporting date
is the sum of the asset/liability for remaining coverage and the
asset/liability for incurred claims. The asset/liability for remaining
coverage comprises (a) the fulfilment cash flows that relate to services that
will be received under the contracts in future periods and (b) any remaining
CSM at that date.
The measurement of reinsurance contracts held at initial recognition follows
the same principles as those for insurance contracts issued, with the
exception of the following:
• measurement of the cash flows include an allowance on a
probability-weighted basis for the effect of any non-performance by the
reinsurers, including the effects of collateral;
• the risk adjustment for non-financial risk is determined so that it
represents the amount of risk being transferred to the reinsurer; and
• the Group recognises both gains and losses at initial recognition in the
statement of consolidated financial position as CSM and releases this to
profit or loss as the reinsurer renders services, except for any portion of a
loss that relates to events before initial recognition. Where the Group
recognises a loss on initial recognition of an onerous group of underlying
contracts, it establishes a loss-recovery component of the asset for remaining
coverage depicting the recovery of losses recognised.
To determine the risk adjustment for reinsurance contracts held, the Group
will apply the approach set out above for insurance contracts both gross and
net of reinsurance and determine the amount of risk being transferred to the
reinsurer as the difference between the two results.
The loss-recovery component determines the amounts that are subsequently
presented in profit or loss as reversals of recoveries of losses from
reinsurance contracts and are excluded from the allocation of reinsurance
premiums paid. It is adjusted to reflect changes in the loss component of the
onerous group of underlying contracts, but it cannot exceed the portion of the
loss component of the onerous group of underlying contracts that the Group
expects to recover from the reinsurance contracts.
The Group adjusts the CSM of the group to which a reinsurance contract belongs
and as a result recognises income when it recognises a loss on initial
recognition of onerous underlying contracts, if the reinsurance contract is
entered into before or at the same time as the onerous underlying contracts
are recognised. The adjustment to the CSM is determined by multiplying:
• the amount of the loss that relates to the underlying contracts; and
• the percentage of claims on the underlying contracts that the Group
expects to recover from the reinsurance contracts.
The subsequent measurement of reinsurance contracts held follows the same
principles as those for insurance contracts issued, with the exception of the
following:
• changes in the fulfilment cash flows are recognised in profit or loss if
the related changes arising from the underlying ceded contracts have been
recognised in profit or loss. Alternatively, changes in the fulfilment cash
flows adjust the CSM; and
• changes in the fulfilment cash flows that result from changes in the
risk of non-performance by the issuer of a reinsurance contract held do not
adjust the CSM as they do not relate to future service. The effect of the
non-performance risk of the reinsurer is assessed at each reporting date and
the effect of changes in the non-performance risk is recognised in profit or
loss.
Modification and derecognition
The Group derecognises insurance and reinsurance contracts when:
• the rights and obligations relating to the contract are extinguished
(i.e. discharged, cancelled or expired); or
• the contract is modified such that the modification results in a change
in the measurement model, or the applicable standard for measuring a component
of the contract. In such cases, the Group derecognises the initial contract
and recognises the modified contract as a new contract.
Disclosure Groups
The Group disaggregates information for the purposes of making the disclosures
required by IFRS 17 into the following disclosure groups:
• Retirement Solutions;
• Pensions & Savings;
• With-Profits; and
• Europe & Other
The disclosure groups are aligned to the segments used for segmental reporting
in note B1.
The table below shows a summary of the carrying amount of insurance contracts
and the related reinsurance contracts in the statement of consolidated
financial position.
2023 Retirement Solutions Pensions & Savings With-Profits Europe & Other Total
£m £m £m £m £m
Insurance contracts issued
Estimates of present value of future cash flows (35,036) (22,041) (29,880) (22,829) (109,786)
Risk adjustment (767) (84) (104) (217) (1,172)
CSM (3,741) (201) (597) (244) (4,783)
Net insurance contract liabilities issued (39,544) (22,326) (30,581) (23,290) (115,741)
Insurance contract liabilities (39,544) (22,326) (30,581) (23,290) (115,741)
Insurance contract assets - - - - -
Net insurance contract liabilities issued (39,544) (22,326) (30,581) (23,290) (115,741)
Reinsurance contracts held
Estimates of present value of future cash flows 935 20 820 391 2,166
Risk adjustment 537 2 46 48 633
CSM 1,604 - 147 179 1,930
Net reinsurance contract assets held 3,076 22 1,013 618 4,729
Reinsurance contract assets 3,223 22 1,013 618 4,876
Reinsurance contract liabilities (147) - - - (147)
Net reinsurance contract assets held 3,076 22 1,013 618 4,729
2022 Retirement Solutions Pensions & Savings With-Profits Europe & Other Total
£m £m £m £m £m
Insurance contracts issued
Estimates of present value of future cash flows (30,779) (21,302) (28,282) (22,201) (102,564)
Risk adjustment (681) (89) (158) (169) (1,097)
CSM (2,821) (94) (565) (419) (3,899)
Net insurance contract liabilities issued (34,281) (21,485) (29,005) (22,789) (107,560)
Insurance contract liabilities (34,281) (21,533) (29,005) (22,789) (107,608)
Insurance contract assets - 48 - - 48
Net insurance contract liabilities issued (34,281) (21,485) (29,005) (22,789) (107,560)
Reinsurance contracts held
Estimates of present value of future cash flows 1,132 - 869 276 2,277
Risk adjustment 379 - 38 61 478
CSM 952 - 142 215 1,309
Net reinsurance contract assets held 2,463 - 1,049 552 4,064
Reinsurance contract assets 2,463 - 1,056 552 4,071
Reinsurance contract liabilities - - (7) - (7)
Net reinsurance contract assets held 2,463 - 1,049 552 4,064
F2. Movements in present value of future cash flows, risk adjustment and CSM
of insurance contracts
The reconciliations below provide a roll-forward of the net asset or liability
for insurance contracts issued by measurement component showing estimates of
the present value of future cash flows, the risk adjustment for non-financial
risk and the CSM.
Retirement Solutions 2023 2022
Estimates of the present value of future cash flows Risk Contractual service margin Total Estimates of the present value of future cash flows Risk Contractual service margin Total
£m adjustment £m £m £m adjustment £m £m
£m £m
Insurance contract liabilities as at 1 January 30,779 681 2,821 34,281 39,028 1,161 2,671 42,860
Insurance contract assets as at 1 January - - - - - - - -
Net insurance contract liabilities as at 1 January 30,779 681 2,821 34,281 39,028 1,161 2,671 42,860
Changes in profit or loss:
CSM recognised for services provided - - (260) (260) - - (207) (207)
Risk adjustment for the risk expired - (39) - (39) - (76) - (76)
Experience adjustments (8) - - (8) (13) - - (13)
Policyholder tax charges (1) - - (1) - - - -
Total change relating to current service (9) (39) (260) (308) (13) (76) (207) (296)
Contracts initially recognised in the period (602) 167 435 - (357) 128 232 3
Changes in estimates that adjust the CSM (566) (92) 658 - (88) 7 81 -
Changes in estimates that do not adjust the CSM 1 - - 1 4 (1) - 3
Total change relating to future service (1,167) 75 1,093 1 (441) 134 313 6
Adjustments to liabilities for incurred claims (past service) 106 - - 106 - - - -
Impairment of assets for insurance acquisition cash flows (1) - - (1) - - - -
Insurance service result (1,071) 36 833 (202) (454) 58 106 (290)
Insurance finance expense/(income) 1,895 4 62 1,961 (9,096) (534) 44 (9,586)
Total changes in profit or loss 824 40 895 1,759 (9,550) (476) 150 (9,876)
Cash flows:
Premiums received 6,421 - - 6,421 4,596 - - 4,596
Claims and other expenses paid (4,380) - - (4,380) (3,272) - - (3,272)
Insurance acquisition cash flows (38) - - (38) (26) - - (26)
Total cash flows 2,003 - - 2,003 1,298 - - 1,298
Other movements1 1,430 46 25 1,501 3 (4) - (1)
Net insurance contract liabilities as at 31 December 35,036 767 3,741 39,544 30,779 681 2,821 34,281
Insurance contract liabilities as at 31 December 35,036 767 3,741 39,544 30,779 681 2,821 34,281
Insurance contract assets as at 31 December - - - - - - - -
Net insurance contract liabilities as at 31 December 35,036 767 3,741 39,544 30,779 681 2,821 34,281
1 £1,514 million included in 'estimates of the present value of future cash
flows' relates to the fair value of insurance contracts acquired as part of
the acquisition of SLF of Canada UK Limited in the period (see note H2).
Pensions & Savings 2023 2022
Estimates of the present value of future cash flows Risk Contractual service margin Total Estimates of the present value of future cash flows Risk Contractual service margin Total
£m adjustment £m £m £m adjustment £m £m
£m £m
Insurance contract liabilities as at 1 January 21,350 89 94 21,533 25,059 88 96 25,243
Insurance contract assets as at 1 January (48) - - (48) (65) - - (65)
Net insurance contract liabilities as at 1 January 21,302 89 94 21,485 24,994 88 96 25,178
Changes in profit or loss:
CSM recognised for services provided - - (25) (25) - - (13) (13)
Risk adjustment for the risk expired - (8) - (8) - (11) - (11)
Experience adjustments 10 - - 10 33 - - 33
Policyholder tax charges (6) - - (6) 18 - - 18
Total change relating to current service 4 (8) (25) (29) 51 (11) (13) 27
Contracts initially recognised in the period (67) 33 34 - - - - -
Changes in estimates that adjust the CSM (103) (1) 104 - (9) (2) 11 -
Changes in estimates that do not adjust the CSM (10) 2 - (8) 119 13 - 132
Total change relating to future service (180) 34 138 (8) 110 11 11 132
Adjustments to liabilities for incurred claims (past service) 14 - - 14 5 - - 5
Insurance service result (162) 26 113 (23) 166 - (2) 164
Insurance finance expense/(income) 1,593 1 (4) 1,590 (2,024) 1 - (2,023)
Total changes in profit or loss 1,431 27 109 1,567 (1,858) 1 (2) (1,859)
Cash flows:
Premiums received 389 - - 389 443 - - 443
Claims and other expenses paid (3,488) - - (3,488) (2,277) - - (2,277)
Total cash flows (3,099) - - (3,099) (1,834) - - (1,834)
Other movements(1) 2,407 (32) (2) 2,373 - - - -
Net insurance contract liabilities as at 31 December 22,041 84 201 22,326 21,302 89 94 21,485
Insurance contract liabilities as at 31 December 22,041 84 201 22,326 21,350 89 94 21,533
Insurance contract assets as at 31 December - - - - (48) - - (48)
Net insurance contract liabilities as at 31 December 22,041 84 201 22,326 21,302 89 94 21,485
1 £2,411 million included in 'estimates of the present value of future cash
flows' relates to the fair value of insurance contracts acquired as part of
the acquisition of SLF of Canda UK Limited (see note H2).
With-Profits 2023 2022
Estimates of the present value of future cash flows Risk Contractual service margin Total Estimates of the present value of future cash flows Risk Contractual service margin Total
£m adjustment £m £m £m adjustment £m £m
£m £m
Insurance contract liabilities as at 1 January 28,282 158 565 29,005 35,838 252 433 36,523
Insurance contract assets as at 1 January - - - - - - - -
Net insurance contract liabilities as at 1 January 28,282 158 565 29,005 35,838 252 433 36,523
Changes in profit or loss:
CSM recognised for services provided - - (77) (77) - - (99) (99)
Risk adjustment for the risk expired - (4) - (4) - (8) - (8)
Experience adjustments 23 - - 23 4 - - 4
Policyholder tax charges (17) - - (17) 17 - - 17
Total change relating to current service 6 (4) (77) (75) 21 (8) (99) (86)
Changes in estimates that adjust the CSM (99) (20) 119 - (182) (43) 225 -
Changes in estimates that do not adjust the CSM (52) (12) - (64) 354 27 - 381
Total change relating to future service (151) (32) 119 (64) 172 (16) 225 381
Adjustments to liabilities for incurred claims (past service) (33) - - (33) (41) - - (41)
Insurance service result (178) (36) 42 (172) 152 (24) 126 254
Insurance finance expense/(income) 1,891 13 10 1,914 (5,379) (70) 6 (5,443)
Total changes in profit or loss 1,713 (23) 52 1,742 (5,227) (94) 132 (5,189)
Cash flows:
Premiums received 121 - - 121 136 - - 136
Claims and other expenses paid (694) - - (694) (2,468) - - (2,468)
Total cash flows (573) - - (573) (2,332) - - (2,332)
Other movements(1) 458 (31) (20) 407 3 - - 3
Net insurance contract liabilities as at 31 December 29,880 104 597 30,581 28,282 158 565 29,005
Insurance contract liabilities as at 31 December 29,880 104 597 30,581 28,282 158 565 29,005
Insurance contract assets as at 31 December - - - - - - - -
Net insurance contract liabilities as at 31 December 29,880 104 597 30,581 28,282 158 565 29,005
1 £349 million included in 'estimates of the present value of future cash
flows' relates to the fair value of insurance contracts acquired as part of
the acquisition of SLF of Canada UK Limited (see note H2).
Europe & Other 2023 2022
Estimates of the present value of future cash flows Risk Contractual service margin Total Estimates of the present value of future cash flows Risk Contractual service margin Total
adjustment adjustment
£m £m £m £m £m £m £m £m
Insurance contract liabilities as at 1 January 22,201 169 419 22,789 27,394 220 257 27,871
Insurance contract assets as at 1 January - - - - - - - -
Net insurance contract liabilities as at 1 January 22,201 169 419 22,789 27,394 220 257 27,871
Changes in profit or loss:
CSM recognised for services provided - - (47) (47) - - (67) (67)
Risk adjustment for the risk expired - (12) - (12) - (7) - (7)
Experience adjustments 18 - - 18 36 - - 36
Policyholder tax charges (1) - - (1) (1) - - (1)
Total change relating to current service 17 (12) (47) (42) 35 (7) (67) (39)
Contracts initially recognised in the period (57) 8 53 4 (47) 4 46 3
Changes in estimates that adjust the CSM 116 27 (143) - (134) (21) 155 -
Changes in estimates that do not adjust the CSM 10 25 - 35 21 (15) - 6
Total change relating to future service 69 60 (90) 39 (160) (32) 201 9
Adjustments to liabilities for incurred claims (past service) (104) - - (104) 8 - - 8
Impairment of assets for insurance acquisition cash flows (3) - - (3) - - - -
Insurance service result (21) 48 (137) (110) (117) (39) 134 (22)
Insurance finance expense/(income) 1,550 (13) (20) 1,517 (5,820) (12) 5 (5,827)
Total changes in profit or loss 1,529 35 (157) 1,407 (5,937) (51) 139 (5,849)
Cash flows:
Premiums received 1,673 - - 1,673 1,731 - - 1,731
Claims and other expenses paid (2,259) - - (2,259) (1,666) - - (1,666)
Insurance acquisition cash flows (116) - - (116) (102) - - (102)
Total cash flows (702) - - (702) (37) - - (37)
Other movements(1) (199) 13 (18) (204) 781 - 23 804
Net insurance contract liabilities as at 31 December 22,829 217 244 23,290 22,201 169 419 22,789
Insurance contract liabilities as at 31 December 22,829 217 244 23,290 22,201 169 419 22,789
Insurance contract assets as at 31 December - - - - - - - -
Net insurance contract liabilities as at 31 December 22,829 217 244 23,290 22,201 169 419 22,789
1 £112 million included in 'estimates of the present value of future cash
flows' relates to the fair value of insurance contracts acquired as part of
the acquisition of SLF of Canada UK Limited (see note H2).
F3. Movements in liabilities for remaining coverage and liabilities for
incurred claims for insurance contracts
The following reconciliations show how the net carrying amounts of insurance
contracts issued changed over the year as a result of cash flows, amounts
recognised in the consolidated income statement and other movements, analysed
by remaining coverage and incurred claims.
Retirement Solutions 2023 2022
Liabilities for remaining coverage Liabilities for remaining coverage
Excluding loss component Loss component Liabilities for incurred claims Total Excluding loss component Loss component Liabilities for incurred claims Total
£m £m £m £m £m £m £m £m
Insurance contract liabilities as at 1 January 34,189 56 36 34,281 42,742 54 64 42,860
Insurance contract assets as at 1 January - - - - - - - -
Net insurance contract liabilities as at 1 January 34,189 56 36 34,281 42,742 54 64 42,860
Insurance revenue (note C1) (3,751) - - (3,751) (3,544) - - (3,544)
Insurance service expenses
Incurred claims and other expenses - (4) 3,446 3,442 - (3) 3,252 3,249
Amortisation of insurance acquisition cash flows 1 - - 1 1 - - 1
Losses on onerous contracts and reversals of those losses - 1 - 1 - 4 - 4
Changes to liabilities for incurred claims (past service) - - 106 106 - - - -
Impairment of assets for insurance acquisition cash flows (1) - - (1) - - - -
Insurance service result (3,751) (3) 3,552 (202) (3,543) 1 3,252 (290)
Insurance finance expense/(income) 1,960 1 - 1,961 (9,587) 1 - (9,586)
Total changes in the consolidated income statement (1,791) (2) 3,552 1,759 (13,130) 2 3,252 (9,876)
Investment components (160) - 160 - 7 - (7) -
Cash flows:
Premiums received 6,421 - - 6,421 4,596 - - 4,596
Claims and other expenses paid - - (4,380) (4,380) - - (3,272) (3,272)
Insurance acquisition cash flows (38) - - (38) (26) - - (26)
Total cash flows 6,383 - (4,380) 2,003 4,570 - (3,272) 1,298
Other movements1 1,429 - 72 1,501 - - (1) (1)
Net insurance contract liabilities as at 31 December 40,050 54 (560) 39,544 34,189 56 36 34,281
Insurance contract liabilities as at 31 December 40,050 54 (560) 39,544 34,189 56 36 34,281
Insurance contract assets as at 31 December - - - - - - - -
Net insurance contract liabilities as at 31 December 40,050 54 (560) 39,544 34,189 56 36 34,281
1 £1,514 million relates to the fair value of insurance contracts acquired
as part of the acquisition of SLF Canada UK Limited (see note H2)
Pensions & Savings 2023 2022
Liabilities for remaining coverage Liabilities for remaining coverage
Excluding loss component Loss component Liabilities for incurred claims Total Excluding loss component Loss component Liabilities for incurred claims Total
£m £m £m £m £m £m £m £m
Insurance contract liabilities as at 1 January 21,359 131 43 21,533 25,117 - 126 25,243
Insurance contract assets as at 1 January (50) 2 - (48) (65) - - (65)
Net insurance contract liabilities as at 1 January 21,309 133 43 21,485 25,052 - 126 25,178
Insurance revenue (note C1) (272) - - (272) (307) - - (307)
Insurance service expenses
Incurred claims and other expenses - (14) 257 243 - - 333 333
Amortisation of insurance acquisition cash flows - - - - - - - -
Losses on onerous contracts and reversals of those losses - (8) - (8) - 133 - 133
Changes to liabilities for incurred claims (past service) - - 14 14 - - 5 5
Insurance service result (272) (22) 271 (23) (307) 133 338 164
Insurance finance expense/(income) 1,576 5 9 1,590 (2,025) - 2 (2,023)
Total changes in the consolidated income statement 1,304 (17) 280 1,567 (2,332) 133 340 (1,859)
Investment components (2,207) - 2,207 - (1,854) - 1,854 -
Cash flows:
Premiums received 389 - - 389 443 - - 443
Claims and other expenses paid - - (3,488) (3,488) - - (2,277) (2,277)
Total cash flows 389 - (3,488) (3,099) 443 - (2,277) (1,834)
Other movements1 2,097 (1) 277 2,373 - - - -
Net insurance contract liabilities as at 31 December 22,892 115 (681) 22,326 21,309 133 43 21,485
Insurance contract liabilities as at 31 December 22,892 115 (681) 22,326 21,359 131 43 21,533
Insurance contract assets as at 31 December - - - - (50) 2 - (48)
Net insurance contract liabilities as at 31 December 22,892 115 (681) 22,326 21,309 133 43 21,485
1 £2,411 million relates to the fair value of insurance contracts acquired
as part of the acquisition of SLF Canada UK Limited (see note H2).
With-Profits 2023 2022
Liabilities for remaining coverage Liabilities for remaining coverage
Excluding loss component Loss component Liabilities for incurred claims Total Excluding loss component Loss component Liabilities for incurred claims Total
£m £m £m £m £m £m £m £m
Insurance contract liabilities as at 1 January 27,812 397 796 29,005 35,908 17 598 36,523
Insurance contract assets as at 1 January - - - - - - - -
Net insurance contract liabilities as at 1 January 27,812 397 796 29,005 35,908 17 598 36,523
Insurance revenue (note C1) (267) - - (267) (636) - - (636)
Insurance service expenses
Incurred claims and other expenses - (61) 253 192 - (1) 551 550
Losses on onerous contracts and reversals of those losses - (64) - (64) - 381 - 381
Changes to liabilities for incurred claims (past service) - - (33) (33) - - (41) (41)
Insurance service result (267) (125) 220 (172) (636) 380 510 254
Insurance finance expense/(income) 1,883 14 17 1,914 (5,447) - 4 (5,443)
Total changes in the consolidated income statement 1,616 (111) 237 1,742 (6,083) 380 514 (5,189)
Investment components (2,360) - 2,360 - (2,148) - 2,148 -
Cash flows:
Premiums received 121 - - 121 136 - - 136
Claims and other expenses paid - - (694) (694) - - (2,468) (2,468)
Total cash flows 121 - (694) (573) 136 - (2,468) (2,332)
Other movements1 402 26 (21) 407 (1) - 4 3
Net insurance contract liabilities as at 31 December 27,591 312 2,678 30,581 27,812 397 796 29,005
Insurance contract liabilities as at 31 December 27,591 312 2,678 30,581 27,812 397 796 29,005
Insurance contract assets as at 31 December - - - - - - - -
Net insurance contract liabilities as at 31 December 27,591 312 2,678 30,581 27,812 397 796 29,005
1 £349 million relates to the fair value of insurance contracts acquired as
part of the acquisition of SLF Canada UK Limited (see note H2).
Europe & Other 2023 2022
Liabilities for remaining coverage Liabilities for remaining coverage
Excluding loss component Loss component Liabilities for incurred claims Total Excluding loss component Loss component Liabilities for incurred claims Total
£m £m £m £m £m £m £m £m
Insurance contract liabilities as at 1 January 22,271 72 446 22,789 27,488 64 319 27,871
Insurance contract assets as at 1 January - - - - - - - -
Net insurance contract liabilities as at 1 January 22,271 72 446 22,789 27,488 64 319 27,871
Insurance revenue (note C1) (571) - - (571) (655) - - (655)
Insurance service expenses
Incurred claims and other expenses - (11) 526 515 - (3) 603 600
Amortisation of insurance acquisition cash flows 14 - - 14 16 - - 16
Losses on onerous contracts and reversals of those losses - 39 - 39 - 9 - 9
Changes to liabilities for incurred claims (past service) - - (104) (104) - - 8 8
Impairment of assets for insurance acquisition cash flows (3) - - (3) - - - -
Insurance service result (560) 28 422 (110) (639) 6 611 (22)
Insurance finance income/expense 1,488 14 15 1,517 (5,830) 2 1 (5,827)
Total changes in the consolidated income statement 928 42 437 1,407 (6,469) 8 612 (5,849)
Investment components (1,483) - 1,483 - (1,172) - 1,172 -
Cash flows:
Premiums received 1,673 - - 1,673 1,731 - - 1,731
Claims and other expenses paid - - (2,259) (2,259) - - (1,666) (1,666)
Insurance acquisition cash flows (116) - - (116) (102) - - (102)
Total cash flows 1,557 - (2,259) (702) 1,629 - (1,666) (37)
Other movements1 (218) 28 (14) (204) 795 - 9 804
Net insurance contract liabilities as at 31 December 23,055 142 93 23,290 22,271 72 446 22,789
Insurance contract liabilities as at 31 December 23,055 142 93 23,290 22,271 72 446 22,789
Insurance contract assets as at 31 December - - - - - - - -
Net insurance contract liabilities as at 31 December 23,055 142 93 23,290 22,271 72 446 22,789
1 £112 million relates to the fair value of insurance contracts acquired as
part of the acquisition of SLF Canada UK Limited (see note H2).
F4. Movements in present value of future cash flows, risk adjustment and CSM
of reinsurance contracts held
The reconciliations below provide a roll-forward of the net asset or liability
for reinsurance contracts held by measurement component, showing estimates of
the present value of future cash flows, the risk adjustment for non-financial
risk and the CSM.
2023 2022
Estimates of the present value of future cash flows Risk Contractual service margin Total Estimates of the present value of future cash flows Risk Contractual service margin Total
£m adjustment £m £m £m adjustment £m £m
£m £m
Reinsurance contract liabilities as at 1 January (8) - 1 (7) - - - -
Reinsurance contract assets as at 1 January 2,285 478 1,308 4,071 3,032 659 1,028 4,719
Net reinsurance contract assets as at 1 January 2,277 478 1,309 4,064 3,032 659 1,028 4,719
Changes in profit or loss:
CSM recognised for services received - - (168) (168) - - (113) (113)
Risk adjustment for the risk expired - (30) - (30) (42) (42)
Experience adjustments 27 - - 27 (13) - (13)
Total change relating to current service 27 (30) (168) (171) (13) (42) (113) (168)
Contracts initially recognised in the period (351) 229 122 - (193) 120 73 -
Changes in estimates that adjust the CSM (610) (49) 659 - (285) 9 276 -
Changes in estimates that do not adjust the CSM (17) 7 - (10) - (5) - (5)
Reversal of impairment of assets for reinsurance acquisition cash flows 2 - - 2 - - - -
Total change relating to future service (976) 187 781 (8) (478) 124 349 (5)
Changes in amounts recoverable arising from changes in liabilities for (1) - - (1) 11 - - 11
incurred claims (past service)
Net expenses from reinsurance contracts (950) 157 613 (180) (480) 82 236 (162)
-
Reinsurance finance (expense)/income 156 (3) 26 179 (808) (263) 18 (1,053)
Total changes in the profit or loss (794) 154 639 (1) (1,288) (181) 254 (1,215)
Cash flows:
Premiums paid 3,085 - - 3,085 1,656 - - 1,656
Claims recovered and other expenses paid (2,280) - - (2,280) (1,090) - - (1,090)
Total cash flows 805 - - 805 566 - - 566
Other movements1 (122) 1 (18) (139) (33) - 27 (6)
Net reinsurance contract assets as at 31 December 2,166 633 1,930 4,729 2,277 478 1,309 4,064
Reinsurance contract liabilities as at 31 December (244) 37 60 (147) (8) 1 (7)
Reinsurance contract assets as at 31 December 2,410 596 1,870 4,876 2,285 478 1,308 4,071
Net reinsurance contract assets as at 31 December 2,166 633 1,930 4,729 2,277 478 1,309 4,064
Analysed by segment as follows:
Retirement Solutions 935 537 1,604 3,076 1,132 379 952 2,463
Pensions & Savings 20 2 - 22 - - - -
With-profits 820 46 147 1,013 869 38 142 1,049
Europe & Other 391 48 179 618 276 61 215 552
Net reinsurance contract assets as at 31 December 2,166 633 1,930 4,729 2,277 478 1,309 4,064
1 £(153) million included in 'estimates of the present value of future cash
flows' relates to the fair value of reinsurance contracts acquired as part of
the acquisition of SLF of Canada UK Limited (see note H2).
F5. Movements in liabilities for remaining coverage and liabilities for
incurred claims for reinsurance contracts held
The following reconciliations show how the net carrying amounts of reinsurance
contracts held changed over the year as a result of cash flows, amounts
recognised in the consolidated income statement and other movements, analysed
by remaining coverage and incurred claims.
2023 2022
Assets for remaining coverage Assets for remaining coverage
Excluding loss recovery component Loss recovery component Assets for incurred claims Total Excluding loss recovery component Loss recovery component Assets for incurred claims Total
£m £m £m £m £m £m £m £m
Reinsurance contract liabilities as at 1 January (7) - - (7) - - - -
Reinsurance contract assets as at 1 January 6,705 47 (2,681) 4,071 7,915 52 (3,248) 4,719
Net reinsurance contract assets as at 1 January 6,698 47 (2,681) 4,064 7,915 52 (3,248) 4,719
-
Reinsurance expenses (2,349) - - (2,349) (1,779) - - (1,779)
Claims recoverable and other expenses incurred - - 2,181 2,181 - - 1,612 1,612
Changes in the CSM due to recognition and reversal of a loss-recovery - (10) - (10) - (4) - (4)
component from onerous underlying contracts
Changes to assets for incurred claims (past service) - - (1) (1) - - 11 11
Cost of retroactive cover on reinsurance contracts held - (3) - (3) - (2) - (2)
Reversal of impairment of assets for insurance acquisition cash flows 2 - - 2 - - - -
Net income/(expenses) from reinsurance contracts held (2,347) (13) 2,180 (180) (1,779) (6) 1,623 (162)
Reinsurance finance income/expense 179 - - 179 (1,054) 1 - (1,053)
Total changes in the consolidated income statement (2,168) (13) 2,180 (1) (2,833) (5) 1,623 (1,215)
Investment components (35) - 35 - (32) - 32 -
Cash flows: -
Premiums paid 3,085 - - 3,085 1,656 - - 1,656
Claims recovered and other expenses paid - - (2,280) (2,280) - - (1,090) (1,090)
Reinsurance acquisition cash flows - - - - - - - -
Total cash flows 3,085 - (2,280) 805 1,656 - (1,090) 566
Other movements1 (585) 3 443 (139) (8) - 2 (6)
Net reinsurance contract assets as at 31 December 6,995 37 (2,303) 4,729 6,698 47 (2,681) 4,064
Reinsurance contract liabilities as at 31 December (152) - 5 (147) (7) - - (7)
Reinsurance contract assets as at 31 December 7,147 37 (2,308) 4,876 6,705 47 (2,681) 4,071
Net reinsurance contract assets as at 31 December 6,995 37 (2,303) 4,729 6,698 47 (2,681) 4,064
Analysed by segment as follows:
Retirement Solutions 5,421 36 (2,381) 3,076 5,148 46 (2,731) 2,463
Pensions & Savings 6 - 16 22 - - - -
With-Profits 984 - 29 1,013 1,025 - 24 1,049
Europe & Other 584 1 33 618 525 1 26 552
Net reinsurance contract assets as at 31 December 6,995 37 (2,303) 4,729 6,698 47 (2,681) 4,064
1 £(153) million relates to the fair value of insurance contracts acquired
as part of the acquisition of SLF of Canada UK Limited (see note H2).
F6. The impact on the current period of transition approaches adopted in
establishing CSMs
The impact on the current period of the transition approaches adopted in
establishing CSMs for insurance contracts issued and reinsurance contracts
held is shown in the tables below. For further details of the transition
approaches applied see note A2.1.1.
F6.1 Insurance contracts
Retirement Solutions 2023 2022
Fair value approach at transition Fully retrospective approach at transition and new contracts Total Fair value approach at transition Fully retrospective approach at transition and new contracts Total
£m £m £m £m £m £m
CSM as at 1 January 784 2,037 2,821 817 1,854 2,671
Changes that relate to current service:
CSM recognised for services provided (103) (157) (260) (77) (130) (207)
Changes that relate to future service:
Contracts initially recognised in the period - 435 435 - 232 232
Changes in estimates that adjust the CSM 438 220 658 30 51 81
Insurance service result 335 498 833 (47) 153 106
Insurance finance expenses 18 44 62 14 30 44
Total changes in profit or loss 353 542 895 (33) 183 150
Other movements 25 - 25 - - -
CSM as at 31 December 1,162 2,579 3,741 784 2,037 2,821
Pensions & Savings 2023 2022
Fair value approach at transition Fully retrospective approach at transition and new contracts Total Fair value approach at transition Fully retrospective approach at transition and new contracts Total
£m £m £m £m £m £m
CSM as at 1 January 94 - 94 96 - 96
Changes that relate to current service:
CSM recognised for services provided (17) (8) (25) (13) - (13)
Changes that relate to future service:
Contracts initially recognised in the period - 34 34 - - -
Changes in estimates that adjust the CSM 54 50 104 11 - 11
Insurance service result 37 76 113 (2) - (2)
Insurance finance income - (4) (4) - - -
Total changes in profit or loss 37 72 109 (2) - (2)
Other movements (2) - (2) - - -
CSM as at 31 December 129 72 201 94 - 94
With-Profits 2023 2022
Fair value approach at transition Fully retrospective approach at transition and new contracts Total Fair value approach at transition Fully retrospective approach at transition and new contracts Total
£m £m £m £m £m £m
CSM as at 1 January 514 51 565 417 16 433
Changes that relate to current service:
CSM recognised for services provided (69) (8) (77) (89) (10) (99)
Changes that relate to future service:
Contracts initially recognised in the period - - - - - -
Changes in estimates that adjust the CSM 90 29 119 180 45 225
Insurance service result 21 21 42 91 35 126
Insurance finance expenses 9 1 10 6 - 6
Total changes in profit or loss 30 22 52 97 35 132
Other movements (19) (1) (20) - - -
CSM as at 31 December 525 72 597 514 51 565
Europe & Other 2023 2022
Fair value approach at transition Fully retrospective approach at transition and new contracts Total Fair value approach at transition Fully retrospective approach at transition and new contracts Total
£m £m £m £m £m £m
CSM as at 1 January 306 113 419 214 43 257
Changes that relate to current service:
CSM recognised for services provided (27) (20) (47) (56) (11) (67)
Changes that relate to future service:
Contracts initially recognised in the period - 53 53 5 41 46
Changes in estimates that adjust the CSM (85) (58) (143) 130 25 155
Insurance service result (112) (25) (137) 79 55 134
Insurance finance (income)/expenses (22) 2 (20) (3) 8 5
Total changes in profit or loss (134) (23) (157) 76 63 139
Other movements (3) (15) (18) 16 7 23
CSM as at 31 December 169 75 244 306 113 419
F6.2 Reinsurance contracts held
2023 2022
Fair value approach at transition Fully retrospective approach at transition and new contracts Total Fair value approach at transition Fully retrospective approach at transition and new contracts Total
£m £m £m £m £m £m
CSM as at 1 January 697 612 1,309 498 530 1,028
Changes that relate to current service:
CSM recognised for services received (99) (69) (168) (67) (46) (113)
Changes that relate to future service:
Contracts initially recognised in the period - 122 122 - 73 73
Changes in estimates that adjust the CSM 254 405 659 219 56 275
Net expenses from reinsurance contracts 155 458 613 152 83 235
Reinsurance finance income 10 16 26 9 9 18
Total changes in profit or loss 165 474 639 161 92 253
Other movements (39) 21 (18) 38 (10) 28
CSM as at 31 December 823 1,107 1,930 697 612 1,309
Analysed by segment as follows:
Retirement Solutions 497 1,107 1,604 339 613 952
With-Profits 147 - 147 143 (1) 142
Europe & Other 179 - 179 215 - 215
CSM as at 31 December 823 1,107 1,930 697 612 1,309
F7. Recognition of CSM in profit or loss
The following tables set out when the Group expects to recognise the carrying
value of the CSM in the consolidated income statement for insurance contracts
issued and reinsurance contracts held. For General Model business this is
shown after allowing for future accretion of interest on the CSM at the locked
in rate. The amounts presented represent the net impact in each period of
expected release of the CSM recognised in revenue less the accretion of
interest on the CSM on General Model business recognised in insurance finance
expenses.
2023 Less than 1 year 1-2 years 2-3 years 3-4 years 4-5 years 5-10 years More than 10 years Total
£m £m £m £m £m £m £m £m
Insurance contracts issued
Retirement Solutions 243 236 225 214 205 877 1,741 3,741
Pensions & Savings 26 21 18 16 14 49 57 201
With-Profits 66 56 50 44 37 126 218 597
Europe & Other 33 25 23 20 18 64 61 244
Total CSM 368 338 316 294 274 1,116 2,077 4,783
Reinsurance contracts held
Retirement Solutions (116) (111) (105) (99) (93) (383) (697) (1,604)
Pensions & Savings - - - - - - - -
With-Profits (14) (13) (12) (11) (9) (32) (56) (147)
Europe & Other (16) (15) (14) (13) (13) (51) (57) (179)
Total CSM (146) (139) (131) (123) (115) (466) (810) (1,930)
Less than 1 year 1-2 years 2-3 years 3-4 years 4-5 years 5-10 years More than 10 years Total
2022 £m £m £m £m £m £m £m £m
Insurance contracts issued
Retirement Solutions 216 200 186 173 162 668 1,216 2,821
Pensions & Savings 10 9 8 7 7 24 29 94
With-profits 81 63 54 46 39 123 159 565
Europe & Other 52 41 32 29 26 97 142 419
Total CSM 359 313 280 255 234 912 1,546 3,899
Reinsurance contracts held
Retirement Solutions (73) (68) (63) (59) (55) (225) (409) (952)
Pensions & Savings - - - - - - - -
With-profits (17) (15) (14) (12) (11) (35) (38) (142)
Europe & Other (14) (14) (14) (15) (15) (67) (76) (215)
Total CSM (104) (97) (91) (86) (81) (327) (523) (1,309)
F8. Effect of contracts initially recognised in the year
The effect on the measurement components arising from the initial recognition
of insurance and reinsurance contracts in the year is disclosed in the tables
below. Contracts issued mainly comprise of bulk purchase annuity transactions
completed in the year and protection business. Contracts acquired in the year
relate to the acquisition of SLF of Canada UK Limited (see note H2).
F8.1 Insurance contracts
Retirement Solutions 2023 2022
Contracts issued Contracts acquired Contracts issued Contracts acquired
Profitable Onerous Profitable Onerous Total Profitable Onerous Profitable Onerous Total
£m £m £m £m £m £m £m £m £m £m
Estimate of present value of future cash outflows:
Insurance acquisition cash flows 39 - - - 39 2 1 - - 3
Claims and other directly attributable expenses 5,710 - 1,443 - 7,153 3,881 106 - - 3,987
Estimates of present value of future cash outflows 5,749 - 1,443 - 7,192 3,883 107 - - 3,990
Estimates of present value of future cash inflows (6,280) - (1,514) - (7,794) (4,238) (109) - - (4,347)
Risk adjustment incurred 132 - 35 - 167 123 5 - - 128
CSM 399 - 36 - 435 232 - - - 232
Losses on onerous contracts at initial recognition - - - - - - 3 - - 3
Pension & Savings 2023 2022
Contracts issued Contracts acquired Contracts issued Contracts acquired
Profitable Onerous Profitable Onerous Total Profitable Onerous Profitable Onerous Total
£m £m £m £m £m £m £m £m £m £m
Estimate of present value of future cash outflows:
Claims and other directly attributable expenses - - 2,344 - 2,344 - - - - -
Estimates of present value of future cash outflows - - 2,344 - 2,344 - - - - -
Estimates of present value of future cash inflows - - (2,411) - (2,411) - - - - -
Risk adjustment - - 33 - 33 - - - - -
CSM - - 34 - 34 - - - - -
Losses on onerous contracts at initial recognition - - - - - - - - - -
With-Profits 2023 2022
Contracts issued Contracts acquired Contracts issued Contracts acquired
Profitable Onerous Profitable Onerous Total Profitable Onerous Profitable Onerous Total
£m £m £m £m £m £m £m £m £m £m
Estimate of present value of future cash outflows:
Claims and other directly attributable expenses - - 349 - 349 - - - - -
Estimates of present value of future cash outflows - - 349 - 349 - - - - -
Estimates of present value of future cash inflows - - (349) - (349) - - - - -
Risk adjustment - - - - - - - - - -
CSM - - - - - - - - - -
Losses on onerous contracts at initial recognition - - - - - - - - - -
Europe & Other 2023 2022
Contracts issued Contracts acquired Contracts issued Contracts acquired
Profitable Onerous Profitable Onerous Total Profitable Onerous Profitable Onerous Total
£m £m £m £m £m £m £m £m £m £m
Estimate of present value of future cash outflows:
Insurance acquisition cash flows 80 - - - 80 86 - - - 86
Claims and other directly attributable expenses 172 270 109 - 551 423 215 - - 638
Estimates of present value of future cash outflows 252 270 109 - 631 509 215 - - 724
Estimates of present value of future cash inflows (308) (268) (112) - (688) (559) (212) - - (771)
Risk adjustment 5 2 1 - 8 4 - - - 4
CSM 51 - 2 - 53 46 - - - 46
Losses on onerous contracts at initial recognition - 4 - - 4 - 3 - - 3
F8.2 Reinsurance contracts
2023 2022
Contracts originated Contracts acquired Contracts originated Contracts acquired
Without a loss recovery component With a loss recovery component Without a loss recovery component With a loss recovery component Total Without a loss recovery component With a loss recovery component Without a loss recovery component With a loss recovery component Total
£m £m £m £m £m £m £m £m £m £m
Estimates of present value of future cash inflows 8,287 - 153 - 8,440 3,650 - - - 3,650
Estimates of present value of future cash outflows (8,584) - (207) - (8,791) (3,843) - - - (3,843)
Risk adjustment incurred 195 - 34 - 229 120 - - - 120
CSM 102 - 20 - 122 73 - - - 73
Income recognised on initial recognition - - - - - - - - - -
All contracts originated, and the majority of contracts acquired, relate to
the Retirement Solutions segment.
F9. Underlying items
The following table sets out the composition and the fair value of underlying
items of the Group's participating contracts which are measured using the
variable fee approach.
2023 2022
Pensions & Savings With-Profits Europe & Other Total Pensions & Savings With-Profits Europe & Other Total
£m £m £m £m £m £m £m £m
Collective investment schemes 17,572 17,027 15,549 50,148 17,068 17,442 14,268 48,778
Debt securities 2,860 8,095 3,910 14,865 2,711 7,956 3,605 14,272
Equities 2,390 5,846 966 9,202 1,562 5,824 942 8,328
Investment property 319 798 18 1,135 277 872 19 1,168
Derivative assets 3 263 1,019 1,285 5 295 1,287 1,587
Cash and cash equivalents 47 81 329 457 48 122 365 535
Loans and deposits - 3 199 202 - 2 238 240
Other assets 81 633 174 888 67 1,026 382 1,475
Derivative liabilities (1) (459) (430) (890) (6) (613) (536) (1,155)
Obligation for repayment of collateral received (1) (125) (231) (357) (3) (127) (254) (384)
Insurance contract liabilities - (2,034) (4) (2,038) - (2,148) - (2,148)
Investment contract liabilities - (6,628) - (6,628) - (6,907) - (6,907)
Other liabilities (31) (703) (550) (1,284) (12) (617) (186) (815)
23,239 22,797 20,949 66,985 21,717 23,127 20,130 64,974
F10. Collateral arrangements
It is the Group's practice to obtain collateral to mitigate the counterparty
risk related to reinsurance transactions usually in the form of cash
or marketable financial instruments.
Where the Group receives collateral in the form of marketable financial
instruments which it is not permitted to sell or re-pledge except in the case
of default, it is not recognised in the statement of consolidated financial
position. The fair value of financial assets accepted as collateral for
reinsurance transactions but not recognised in the statement of consolidated
financial position amounts to £4,880 million (2022: £4,002 million).
Where the Group receives collateral on reinsurance transactions in the form of
cash it is recognised in the statement of consolidated financial position
along with a corresponding liability to repay the amount of collateral
received, disclosed as part of 'Reinsurance contract assets'. Where there is
interest payable on such collateral, it is recognised within Net finance
income/(expense) from reinsurance contracts. The amounts recognised as
financial assets and liabilities from cash collateral received at 31 December
2023 are set out below.
Reinsurance transactions
2023 2022
£m £m
Financial assets 208 267
Financial liabilities 208 267
F11. Risk management - insurance risk
This note forms one part of the risk management disclosures in the
consolidated financial statements. An overview of the Group's approach to risk
management is outlined in note I3 and the Group's management of financial and
other risks is detailed in note E6.
Insurance risk refers to the risk of reductions in earnings and/or value,
through financial or reputational loss, due to fluctuations in the timing,
frequency and severity of insured/underwritten events and to fluctuations in
the timing and amount of claim settlements. This includes fluctuations in
profits due to customer behaviour. The Life businesses are exposed to the
following elements of insurance risk:
Mortality higher than expected death claims on assurance products, lower than expected
improvements in mortality or adverse movement in mortality rates on Equity
Release Mortgages;
Longevity lower than expected number of deaths experienced on annuity products or
greater than expected improvements in annuitant mortality;
Morbidity/Disability higher than expected number of inceptions on critical illness or income
protection policies and lower than expected termination rates on income
protection policies or adverse movements in morbidity rates on Equity Release
Mortgages;
Expenses unexpected timing or value of expenses incurred;
Persistency adverse movement in surrender rates, premium paying rates, premium indexation
rates, cash withdrawal/drawdown rates, GAO surrender rates, GAO take-up rates,
policyholder retirement dates, propensity to commute benefits, transfer out
rates or the occurrence of a mass lapse event or adverse change in mortgage
prepayment rates leading to losses;
New business pricing inappropriate pricing of new business that is not in line with the underlying
risk factors for that business.
Concentration of risk concentration of risk arising from insurance contracts might exist where the
Group has significant exposure to specific demographic factors such as age,
smoker status, geographical location. The Group's exposure to insurance risk
is spread across a diversified portfolio of products and approximately 12
million policyholders. Concentration risk might also arise from insurance
contracts that expose the Group to financial risk as a result of options and
guarantees contained within the product. Details of the Group's approach to
managing these features are contained in F11.3 Managing Product Risk.
The Group sets individual risk limits as a key control within its Risk
Appetite Framework. Risk limits are reviewed as part of approving the
Group's Annual Operating Plan and permit concentrations of certain risks only
where the strategy can be demonstrated as affordable within risk appetite.
The Group sets individual risk limits as a key control within its Risk
Appetite Framework. Risk limits are reviewed as part of approving the Group's
Annual Operating Plan and permit concentrations of certain risks only where
the strategy can be demonstrated as affordable within risk appetite.
Objectives and policies for mitigating insurance risk
Insurance risks are managed by monitoring risk exposure against pre-defined
appetite limits. If a risk is moving out of appetite, the Group can choose to
mitigate it via reinsurance in the case of longevity, mortality and morbidity
risks, or by taking other risk reducing actions.
This is supported by additional methods to assess and monitor insurance risk
exposures for both individual types of risks insured and overall risks. These
methods include internal risk measurement models, experience analyses,
external data comparisons, sensitivity analyses, scenario analyses and stress
testing. Assumptions that are deemed to be financially significant are
reviewed at least annually for pricing and reporting purposes.
The profitability of the run-off of the closed book of business within the
Group depends, to a significant extent, on the values of claims paid in the
future relative to the assets accumulated to the date of claim. Typically,
over the lifetime of a contract, premiums and investment returns exceed claim
costs in the early years and it is necessary to set aside these amounts to
meet future obligations. The amount of such future obligations is assessed on
actuarial principles by reference to assumptions about the development of
financial and insurance risks.
It is therefore necessary for the Directors of each life company to make
decisions, based on actuarial advice, which ensure an appropriate accumulation
of assets relative to liabilities. These decisions include investment policy,
bonus policy and, where discretion exists, the level of payments on early
termination.
In the Retirement Solutions operating segment, longevity risk exposures
continue to increase as a result of the Bulk Purchase Annuity deals it has
successfully acquired, however the vast majority of these exposures are
reinsured to third parties. New business growth driven by product segments
such as Workplace unit-linked pensions, within the Pensions and Savings
business, exposes the Group to persistency and expense risks.
F11.1 Sensitivities
Insurance liabilities are sensitive to changes in risk variables, such as
prevailing market interest rates, currency rates and equity prices, since
these variations alter the value of the financial assets held to meet
obligations arising from insurance contracts and changes in investment
conditions also have an impact on the value of insurance liabilities
themselves. Additionally, insurance liabilities are sensitive to the
assumptions which have been applied in their calculation, such as mortality
and lapse rates. Sometimes allowance must also be made for the effect on
future assumptions of management or policyholder actions in certain economic
scenarios. This could lead to changes in assumed asset mix or future bonus
rates. The most significant non-economic sensitivities arise from mortality,
longevity and lapse risk. The table below analyses how the CSM, profit after
tax and equity would have increased or (decreased) if changes in underwriting
risk variables that were reasonably possible at the reporting date had
occurred. This analysis presents the sensitivities both before and after risk
mitigation by reinsurance and assumes that all other variables remain
constant.
Impact on profit after tax and equity Impact on CSM
Gross of reinsurance Net of reinsurance Gross of reinsurance Net of reinsurance
2023 Change in risk variable £m £m £m £m
Assurance mortality +5% (33) (49) (112) (54)
-5% (24) (6) 211 149
Annuitant longevity +5% 91 (30) (946) (230)
-5% (101) 10 896 236
Lapse rates +10% (5) - 33 20
-10% (8) (13) (11) 4
Expenses +10% (68) (67) (302) (302)
-10% 32 32 349 349
Impact on profit after tax and equity Impact on CSM
Gross of reinsurance Net of reinsurance Gross of reinsurance Net of reinsurance
2022 Change in risk variable £m £m £m £m
Assurance mortality +5% 9 (13) (180) (118)
-5% (16) 6 216 147
Annuitant longevity +5% 54 (62) (835) (250)
-5% (108) - 845 304
Lapse rates +10% 1 5 20 8
-10% (12) (16) - 12
Expenses +10% (57) (57) (275) (274)
-10% 27 27 315 314
F11.2 Assumptions
The assumptions used to determine the liabilities are updated at each
reporting date to reflect recent experience, unless IFRS17 requires otherwise.
Material judgement is required in calculating these liabilities and, in
particular, in the choice of assumptions about which there is uncertainty over
future experience. The principal assumptions are as follows:
F11.2.1 Discount rates
All cash flows are discounted using risk-free yield curves adjusted to reflect
the timing and liquidity characteristics of those cash flows. For the
risk-free yield curve the Group uses those published by the PRA and EIOPA for
regulatory reporting. Where necessary, yield curves are interpolated between
the last available market data point and the ultimate forward rate.
The Group uses a top-down approach primarily for annuities and a bottom-up
discount rate for all other business. Under the top-down approach, the
discount rate is determined from the yield implicit in the fair value of an
appropriate reference portfolio of assets that reflects the characteristics of
the liabilities. For annuity business, the Group determines the reference
portfolio based on the strategic asset allocation ('SAA') which aligns to the
strategic investment objectives of the Group. The SAA sets out the target
level of investment in a range of asset classes and the yield for these asset
classes is determined based on the fair value of assets in that class held at
the valuation date.
Adjustments are made for differences between the reference portfolio and the
insurance contract liability cash flows, including an allowance for credit
defaults. The credit default deduction comprises an allowance for both
expected and unexpected defaults and takes into consideration long-term
historical data on actual defaults and an allowance for variability around
these defaults. The credit default deduction is determined based on the assets
held at the valuation date.
The approach to determining unexpected defaults is based on a percentage of
spread less the expected default allowance. The percentage of spread was set
using a top-down view that took into consideration management's best estimate
as to the allocation of the spread between illiquidity factors and the risk of
default. Given the widening of spreads during 2022 resulting from
macro-economic conditions driven by the war in Ukraine and resulting food and
energy crises, surging inflation and the Mini Budget, this judgement became
more material. Since the beginning of 2022, the Group has been developing a
credit model for use in the Phoenix Solvency II Internal Model (subject to PRA
approval), which also provides a best estimate view of credit defaults. The
new model applies a stress to long-term historical actual default data to
determine the variability of defaults. From 30 June 2022, the new model has
been used as an input in determining the assumption for unexpected credit
defaults as it is considered to provide a more refined view of the variability
of defaults, particularly in volatile market conditions.
The top-down approach was further refined as at 31 December 2023. This
refinement related to the determination of the yield used in relation to the
Equity Release Mortgages asset class. The previous approach calculated the
yield by reference to the internal securitisation structure established for
this asset class for Solvency II purposes. This was amended as at the
reporting date to determine the yield based on the underlying Equity Release
Mortgage loans themselves. This refinement had the impact of increasing the
liquidity premium applied at 31 December 2023 for GBP Annuities by circa
19bps.
Under the bottom-up approach, the discount rate is determined as the risk-free
yield curve, adjusted for differences in liquidity characteristics by adding
an illiquidity premium. For with-profits business a single illiquidity premium
is determined for each fund based on the cash flow characteristics of the
contracts within the fund and applied to all contracts within the fund.
The tables below set out the yield curves used to discount the cash flows of
insurance contracts for major currencies.
Risk-free rate (bps)
2023 1 year 5 years 10 years 20 years 30 years
GBP 474 336 328 343 336
Euro 336 232 239 240 218
Risk-free rate (bps)
2022 1 year 5 years 10 years 20 years 30 years
GBP 446 406 371 354 335
Euro 318 313 309 276 229
Liquidity premium over risk-free rate
2023 2022
bps bps
Annuities GBP 173 151
Annuities Euro 49 44
With-Profits GBP - liquid liabilities 20 10
With-Profits Euro - liquid liabilities 20 10
With-Profits GBP - illiquid liabilities 107 - 173 100 - 151
F11.2.2 Risk adjustment
The Group has used the confidence level technique to derive the risk
adjustment for non-financial risk. The risk adjustment percentile is
determined based on the Group's view of the compensation required in respect
of non-financial risk. The diversification benefit included in the risk
adjustment reflects diversification between contracts within the perimeter of
the Group's Internal Model. There is no diversification allowed for between
contracts measured under standard formula and the internal model. The
confidence level percentile is calculated on a one year basis. The risk
adjustment calibration is set at least annually, off-cycle, based on the
Group's current view of risk. The risk adjustment calculation is reassessed at
each reporting date, i.e. the risk adjustment is not locked-in at initial
recognition.
For with-profit business, the shareholder's portion of non-financial risks
(including an allowance for burn-through costs to the shareholder) is allowed
for in the derivation of the risk adjustment. For non-profit business held
within a with-profit fund, the risk adjustment takes into account the
compensation required by both the shareholder and the participating
policyholders.
Confidence level techniques are used to derive the overall risk adjustment for
non-financial risk and this is allocated down to each group of contracts in
accordance with their risk profiles. The confidence level percentile input
used to determine the risk adjustment is as follows:
2023 2022
Insurance contracts (gross of reinsurance) 80th 80th
The one year confidence level used to determine the risk adjustment has been
converted to an approximate lifetime confidence level using an approach which
involves dividing by the square root of the lifetime duration of the insurance
business.
Lifetime confidence level 2023 2022
Insurance contracts (gross of reinsurance) 61st 61st
F11.2.3 Other assumptions
Other assumptions such as policyholder behaviours (lapses and surrender
rates), expense inflation and demographic assumptions (i.e. longevity,
mortality) are a key component of determining the cash flows related to the
insurance contract liabilities. The underwriting risk variables and
assumptions are set based on past experience and/or relevant industry data,
market practice, regulations and expectations about future trends. Economic
assumptions used in the measurement of fulfilment cash flows are market
consistent.
Expenses and expense inflation
Insurance contract liabilities include an allowance for the best estimate of
future expenses associated with the administration of in-force policies. This
requires the allocation of the Group's future expenses between those that
relate to the administration of in-force policies, those attributable to the
acquisition of new business and other costs, such as corporate costs. There is
a level of judgement applied in the analysis that supports this allocation.
Additionally, judgement is applied in the determination of the projected costs
of the Group, in particular where those projections include the impact of
transition and integration activity.
Expenses are assumed to increase at either the rate of increase in the Retail
Price Index ('RPI'), or a rate derived from the UK inflation swaps curve, plus
fixed margins in accordance with the various management service agreements
('MSAs') the Group has in place with outsource partners. For with-profit
business the rate of RPI inflation is determined within each stochastic
scenario. For other business it is based on the Bank of England inflation spot
curve. For MSAs with contractual increases set by reference to national
average earnings inflation, this is approximated as RPI inflation or RPI
inflation plus 1%. In instances in which inflation risk is not mitigated,
appropriate margins are applied to reflect central expectations of earnings
inflation in excess of RPI.
Mortality and longevity rates
Mortality rates are based on company experience and published tables, adjusted
appropriately to take account of changes in the underlying population
mortality since the table was published, company experience and forecast
changes in future mortality. Where appropriate, a margin is added to assurance
mortality rates to allow for adverse future deviations. Annuitant mortality
rates are adjusted to make allowance for future improvements in pensioner
longevity.
Lapse and surrender rates (persistency)
The assumed rates for surrender and voluntary premium discontinuance depend on
the length of time a policy has been in force and the relevant company
experience. Surrender or voluntary premium discontinuances are only assumed
for realistic basis funds. Withdrawal rates used in the valuation of
with-profit policies are based on observed experience and adjusted when it is
considered that future policyholder behaviour will be influenced by different
considerations than in the past. In particular, it is assumed that withdrawal
rates for unitised with-profit contracts will be higher on policy
anniversaries on which Market Value Adjustments do not apply.
Discretionary participating bonus rate
The regular bonus rates assumed in each scenario are determined in accordance
with each company's Principles and Practices of Financial Management ('PPFM').
Final bonuses are assumed at a level such that maturity payments will equal
asset shares subject to smoothing rules set out in the PPFM and the value of
guaranteed benefits.
Policyholder options and guarantees
Some of the Group's products give potentially valuable guarantees, or give
options to change policy benefits which can be exercised at the policyholders'
discretion. These products are described below:
Most with-profit contracts give a guaranteed minimum payment on a specified
date or range of dates or on death if before that date or dates. For pensions
contracts, the specified date is the policyholder's chosen retirement date or
a range of dates around that date. For endowment contracts, it is the maturity
date of the contract. For with-profit bonds it is often a specified
anniversary of commencement, in some cases with further dates thereafter.
Annual bonuses when added to with-profit contracts usually increase the
guaranteed amount.
There are guaranteed surrender values on a small number of older contracts.
Some pensions contracts include guaranteed annuity options. The total amounts
provided in the with-profit and non-profit funds in respect of the future
costs of guaranteed annuity options are £860 million (2022: £922 million)
and £61 million (2022: £61 million) respectively.
In common with other life companies in the UK which have written pension
transfer and opt-out business, the Group has set up provisions for the review
and possible redress relating to personal pension policies. These provisions,
which have been calculated from data derived from detailed file reviews of
specific cases and using a certainty equivalent approach, which give a result
very similar to a market consistent valuation, are included in liabilities
arising under insurance contracts. The total amount provided in the
with-profit funds and non-profit funds in respect of the review and possible
redress relating to pension policies, including associated costs, are £191
million (2022: £195 million) and £2 million (2022: £2 million)
respectively.
With-profit deferred annuities participate in profits only up to the date of
retirement. At retirement, a guaranteed cash option allows the policyholder to
commute the annuity benefit into cash on guaranteed terms.
Assumption changes
During the year a number of changes were made to assumptions to reflect
changes in expected experience. The impact of material changes during the year
was as follows:
Increase/(decrease) in CSM (Decrease)/increase in loss component Increase/ (Decrease)/
(decrease) in CSM increase in loss component
For insurance contracts:
Change in longevity assumptions 918 (1) 239 (17)
Change in persistency assumptions (6) 17 - 5
Change in mortality assumptions (102) 12 127 (1)
Change in expenses assumptions (170) (35) (172) 59
For reinsurance contracts:
Change in longevity assumptions (598) - (122) -
Change in persistency assumptions - - (10) -
Change in mortality assumptions 15 - (40) -
Change in expenses assumptions (13) - (33) -
2023:
The £320 million net of reinsurance increase in CSM due to changes in
longevity assumptions reflects updates to base and improvement assumptions to
reflect latest experience analyses, including moving to the latest CMI model.
As well as annual persistency updates to reflect latest experience, assumption
changes were made for late retirements and GAO take-up rates during the year.
The £(87) million net of reinsurance decrease in CSM due to change in
mortality assumptions is driven by changes in Europe & Other base
mortality valuation assumptions.
The £(183) million net of reinsurance decrease in CSM and £(35) million
net of reinsurance decrease in loss component are due to changes in expense
assumptions is driven by an increase in reserves principally in respect of
delivery of the Group Target Operating Model for IT and Operations included
the migration of policyholder administration onto the Tata Consultancy
Services ('TCS') platform together with Group expense provisions and an
increase in modelled maintenance expenses assumptions. This is partly offset
due to changes in modelled investment expenses and release of an investment
manual.
2022:
The £117 million net of reinsurance increase in CSM due to changes in
longevity assumptions reflects updates to base and improvement assumptions to
reflect latest experience analyses. The £17 million gross increase in loss
component is driven by longevity assumption changes on Phoenix BPA business.
Persistency assumptions have been updated to reflect latest experience
analyses, leading to a £17 million impact on loss component.
The £87 million net of reinsurance increase in CSM due to changes in
mortality assumptions is driven by changes in morbidity assumption for German
morbidity riders.
The £(205) million net of reinsurance decrease in CSM and £59 million net of
reinsurance increase in loss component due to changes in expense assumptions
primarily reflects an increase in the anticipated costs associated with the
implementation of IFRS 17 and the delivery of the Group Target Operating Model
for IT and Operations.
F11.3 Managing product risk
The following sections give an assessment of the risks associated with the
Group's main life assurance products and the ways in which the Group manages
those risks.
Product Primary segment Main insurance risks
With-Profit:
Unitised & Traditional - without guarantees With-Profits Longevity & Lapse
Unitised & Traditional - with guarantees With-Profits Lapse
Annuities With-Profits Longevity
Non-profit:
Deferred annuities - with guarantees Retirement Solutions Longevity
Deferred annuities - without guarantees Retirement Solutions Longevity
Immediate annuities Retirement Solutions Longevity
Protection Europe & Other Mortality, Morbidity & Lapse
Unit-linked - with guarantees Pensions & Savings Longevity & Lapse
Unit-linked - without guarantees Pensions & Savings Mortality, Morbidity & Lapse
The above products will also be exposed to market risk and further details are
included in note E6.2.
£12,966 million (2022: £11,753 million) of liabilities are subject to
longevity swap arrangements.
With-profit fund (unitised and traditional)
The Group operates a number of with-profit funds in which the with-profit
policyholders benefit from a discretionary annual bonus (guaranteed once added
in most cases) and a discretionary final bonus. Non-participating business is
also written in some of the with-profit funds and some of the funds may
include immediate annuities and deferred annuities with Guaranteed Annuity
Rates ('GAR').
The investment strategy of each fund differs, but is broadly to invest in a
mixture of fixed interest investments and equities and/or property and other
asset classes in such proportions as is appropriate to the investment risk
exposure of the fund and its capital resources.
The Group has significant discretion regarding investment policy, bonus policy
and early termination values. The process for exercising discretion in the
management of the with-profit funds is set out in the PPFM for each
with-profit fund and is overseen by with-profit committees. Advice is also
taken from the with-profit actuary of each with-profit fund. Compliance with
the PPFM is reviewed annually and reported to the PRA, Financial Conduct
Authority ('FCA') and policyholders.
The bonuses are designed to distribute to policyholders a fair share of the
return on the assets in the with-profit funds together with other elements of
the experience of the fund. The shareholders of the Group are entitled to
receive one-ninth of the cost of bonuses declared for some funds and £nil for
others. For the Heritage With Profits Fund ('HWPF'), under the Scheme of
Demutualisation, shareholders are entitled to receive certain defined cash
flows arising on specified blocks of UK and Irish business.
Unitised and traditional with-profit policies are exposed to equivalent risks,
the main difference being that unitised with-profit policies purchase notional
units in a with-profit fund whereas traditional with-profit policies do not.
Benefit payments for unitised policies are then dependent on unit prices at
the time of a claim, although charges may be applied. A unitised with-profit
fund price is typically guaranteed not to fall and increases in line with any
discretionary bonus payments over the course of one year.
Deferred annuities
Deferred annuity policies are written to provide either a cash benefit at
retirement, which the policyholder can use to buy an annuity on the terms then
applicable, or an annuity payable from retirement. The policies contain an
element of guarantee expressed in the form that the contract is written in,
i.e. to provide cash or an annuity. Deferred annuity policies written to
provide a cash benefit may also contain an option to convert the cash benefit
to an annuity benefit on guaranteed terms; these are known as GAR policies.
Deferred annuity policies written to provide an annuity benefit may also
contain an option to convert the annuity benefit into cash benefits on
guaranteed terms; these are known as Guaranteed Cash Option ('GCO') policies.
In addition, certain unit prices in the HWPF are guaranteed not to decrease.
Long-term interest rates remain relatively low compared to historical levels
and life expectancy has increased more rapidly than originally anticipated.
The guaranteed terms on GAR policies are more favourable than the annuity
rates currently available in the market available for cash benefits. The
guaranteed terms on GCO policies are currently not valuable. Deferred annuity
policies which are written to provide annuity benefits are managed in a
similar manner to immediate annuities and are exposed to the same risks.
The option provisions on GAR policies are particularly sensitive to downward
movements in interest rates, increasing life expectancy and the proportion of
customers exercising their option. Adverse movements in these factors could
lead to a requirement to increase reserves which could adversely impact profit
and potentially require additional capital. In order to address the interest
rate risk (but not the risk of increasing life expectancy or changing customer
behaviour with regard to exercise of the option), insurance subsidiaries
within the Group have purchased derivatives that provide protection against an
increase in liabilities and have thus reduced the sensitivity of profit to
movements in interest rates (see note E6.2.2).
The Group seeks to manage this risk in accordance with both the terms of the
issued policies and the interests of customers, and has obtained external
advice supporting the manner in which it operates the long-term funds in this
respect.
Immediate annuities
This type of annuity is purchased with a single premium at the outset, and is
paid to the policyholder for the remainder of their lifetime. Payments may
also continue for the benefit of a surviving spouse or partner after the
annuitant's death. Annuities may be level, or escalate at a fixed rate, or may
escalate in line with a price index and may be payable for a minimum period
irrespective of whether the policyholder remains alive.
The main risks associated with this product are longevity and investment
risks. Longevity risk arises where the annuities are paid for the lifetime of
the policyholder, and is managed through the initial pricing of the annuity
and through reinsurance (appropriately collateralised) or transfer of
existing liabilities. Annuities may also be a partial 'natural hedge' against
losses incurred in protection business in the event of increased mortality
(and vice versa) although the extent to which this occurs will depend on the
similarity of the demographic profile of each book of business. In addition,
the Group has in place longevity swaps that provide downside protection over
longevity risk.
The pricing assumption for mortality risk is based on both historic internal
information and externally-generated information on mortality experience,
including allowances for future mortality improvements. Pricing will also
include a contingency margin for adverse deviations in assumptions.
Market and credit risk is influenced by the extent to which the cash flows
under the contracts have been matched by suitable assets which is managed
under the ALM framework. Asset/liability modelling is used to monitor this
position on a regular basis.
Protection
These contracts are typically secured by the payment of a regular premium
payable for a period of years providing benefits payable on certain events
occurring within the period. The benefits may be a single lump sum or a series
of payments and may be payable on death, serious illness or sickness.
The main risk associated with this product is the claims experience and this
risk is managed through the initial pricing of the policy (based on actuarial
principles), the use of reinsurance and a clear process for administering
claims.
Market and credit risk is influenced by the extent to which the cash flows
under the contracts have been matched by suitable assets which is managed
under the ALM framework. Asset/liability modelling is used to monitor this
position on a regular basis.
G. Other statement of consolidated financial position notes
G1. Pension schemes
Defined contribution pension schemes
Obligations for contributions to defined contribution pension schemes are
recognised as an expense in the consolidated income statement as incurred.
Defined benefit pension schemes
The net surplus or deficit (the economic surplus or deficit) in respect of the
defined benefit pension schemes is calculated by estimating the amount of
future benefit that employees have earned in return for their service in the
current and prior years; that benefit is discounted to determine its present
value and the fair value of any scheme assets is deducted.
The economic surplus or deficit is subsequently adjusted to eliminate on
consolidation the carrying value of insurance policies issued by Group
entities to the defined benefit pension schemes (the reported surplus or
deficit). A corresponding adjustment is made to the carrying values of
insurance contract liabilities and investment contract liabilities.
As required by IFRIC 14, IAS 19 -'The limit on a Defined Benefit Asset,
Minimum Funding Requirements and their Interaction', to the extent that the
economic surplus (prior to the elimination of the insurance policies issued by
Group entities) will be available as a refund, the economic surplus is stated
after a provision for tax that would be borne by the scheme administrators
when the refund is made. The Group recognises a pension surplus on the basis
that it is entitled to the surplus of each scheme in the event of a gradual
settlement of the liabilities, due to its ability to order a winding up of the
Trust.
Additionally under IFRIC 14 pension funding contributions are considered to be
a minimum funding requirement and, to the extent that the contributions
payable will not be available to the Group after they are paid into the
Scheme, a liability is recognised when the obligation arises. The net pension
scheme asset/liability represents the economic surplus net of all adjustments
noted above.
The Group determines the net interest expense or income on the net pension
scheme asset/liability for the period by applying the discount rate used to
measure the defined benefit obligation at the beginning of the annual period
to the opening net pension scheme asset/liability. The discount rate is the
yield at the period end on AA credit rated bonds that have maturity dates
approximating to the terms of the Group's obligations. The calculation is
performed by a qualified actuary using the projected unit credit method.
The movement in the net pension scheme asset/liability is analysed between the
service cost, past service cost, curtailments and settlements (all recognised
within administrative expenses in the consolidated income statement), the net
interest cost on the net pension scheme asset/liability, including any
reimbursement assets (recognised within net investment income in the
consolidated income statement), remeasurements of the net pension scheme
asset/liability (recognised in other comprehensive income) and employer
contributions.
This note describes the Group's five main defined benefit pension schemes for
its employees, the Pearl Group Staff Pension Scheme ('Pearl Scheme'), the PGL
Pension Scheme, the Abbey Life Staff Pension Scheme ('Abbey Life Scheme') the
ReAssure Staff Pension Scheme ('ReAssure Scheme') and from 3 April 2023, the
Sun Life Assurance Company of Canada 1988 UK and Irish Employee Benefits
Scheme ('Sun Life of Canada Scheme'), and explains how the pension scheme
asset/liability is calculated.
An analysis of the pension scheme (liability)/asset for each pension scheme is
set out in the table below:
2023 2022
£m £m
Pearl Group Staff Pension Scheme
Economic surplus 50 46
Adjustment for insurance policies eliminated on consolidation (1,507) (1,501)
Net pension scheme liability, as reported (1,457) (1,455)
Reimbursement right in respect of reinsurance, as reported 202 205
Add: value attributed to assets held by PLL within financial assets1 1,506 1,576
Adjusted net pension scheme liabilities 251 326
PGL Pension Scheme
Economic surplus 20 23
Adjustment for insurance policies eliminated on consolidation (1,093) (1,079)
Amounts due from subsidiary eliminated on consolidation (18) -
Net pension scheme liability, as reported (1,091) (1,056)
Add: assets held by PLL within financial assets1 1,206 1,246
Adjusted net pension scheme asset 115 190
Abbey Life Staff Pension Scheme
Economic deficit (7) (5)
Minimum funding requirement obligation (2) (3)
Net pension scheme liability (9) (8)
ReAssure Staff Pension Scheme
Economic surplus 14 22
Provision for tax on that part of the economic surplus available as a refund (5) (8)
on a winding-up of the Scheme
Net pension scheme asset 9 14
Sun Life of Canada Scheme
Net pension scheme asset 17 -
Reimbursement right 2 -
1 The Pearl Scheme and the PGL Pension Scheme have both executed buy-in
transactions with a Group life company and subsequently assets supporting the
Group's actuarial liabilities are recognised on a line-by-line basis within
financial assets in the statement of consolidated financial position. Further
details are included in notes G1.1 and G1.2 below.
In the current and prior periods an adjusted net pension scheme asset
has been presented in relation to both these pension schemes. The value of the
assets held by PLL within financial assets in respect of the PGL Pension
Scheme buy-ins is equal to the assets posted to a ring-fenced collateral
account. For the Pearl Scheme the assets held by PLL supporting the buy-ins
are not ring-fenced and the value has been determined as the value of the
insurance contract liability within the PLL financial statements less the
value of the associated reinsurance asset.
Movements in these financial assets are reflected in the consolidated
income statement within net investment income, however as noted in the
accounting policy, the movement in the net pension scheme liability (as shown
in notes G1.1 and G1.2) is primarily reflected in other comprehensive income.
Risks
The Group's defined benefit schemes typically expose the Group to a number of
risks, the most significant of which are:
Asset volatility - the value of the schemes' assets will vary as market
conditions change and as such is subject to considerable volatility. The
liabilities are calculated using a discount rate set with reference to
corporate bond yields; if assets underperform this yield, this will create a
deficit. The majority of the assets are held within a liability driven
investment strategy which is linked to the funding basis of the schemes (set
with reference to government bond yields). As such, to the extent that
movements in corporate bond yields are out of line with movements in
government bond yields, volatility will arise.
Inflation risk - a significant proportion of the schemes' benefit obligations
are linked to inflation, and higher inflation will lead to higher liabilities
(although in most cases, caps on the level of inflationary increases are in
place to protect against extreme inflation). The majority of the assets are
held within a liability driven investment strategy which allows for movements
in inflation, meaning that changes in inflation should not materially affect
the surplus.
Life expectancy - the majority of the schemes' obligations are to provide
benefits for the life of the member therefore increases in life expectancy
will result in an increase in the liabilities. For the Pearl and PGL schemes,
this is largely offset by the buy-in policies that move in line with the
liabilities. These buy-in policies are eliminated on consolidation (see notes
G1.1 and G1.2 for further details).
A High Court legal ruling in June 2023 (Virgin Media Limited v NTL Pension
Trustees II Limited) decided that certain rule amendments were invalid if they
were not accompanied by the correct actuarial confirmation. While the ruling
only applied to the specific pension scheme in question, if it stands it will
form part of case law and can therefore be expected to apply across other
pension schemes. The ruling is subject to appeal and it may take some time for
the outcome of the appeal to be known. The Group has not assessed the extent
of any likely impacts from this ruling and considers that there is sufficient
uncertainty not to warrant recognition of any potential obligation in respect
of this in the consolidated statement of financial position at 31 December
2023. Any subsequent developments following this ruling will be monitored by
the Group.
Information on each of the Group's pension schemes is set out below.
G1.1 Pearl Group Staff Pension Scheme
Scheme details
The Pearl Scheme comprises a final salary section, a money purchase section
and a hybrid section (a mix of final salary and money purchase). The Pearl
Scheme is closed to new members and has no active members.
Defined benefit scheme
The Pearl Scheme is established under, and governed by, the trust deeds and
rules and has been funded by payment of contributions to a separately
administered trust fund. A Group company, Pearl Life Holdings Limited
('PeLHL'), is from 1 October 2023 the principal employer of the Pearl Scheme
(previously Pearl Group Holdings No.2 Limited ('PGH2')). PeLHL assumed the
Scheme covenant together with all obligations of the Scheme following the
transfer.
The principal employer meets the administration expenses of the Pearl Scheme.
The Pearl Scheme is administered by a separate trustee company, P.A.T.
(Pensions) Limited, which is separate from PeLHL. The trustee company is
comprised of three representatives from the Group, three member nominated
representatives and one independent trustee in accordance with the trustee
company's articles of association. The trustee is required by law to act in
the interest of all relevant beneficiaries and is responsible for the
investment policy with regard to the assets.
The valuation has been based on an assessment of the liabilities of the Pearl
Scheme as at 31 December 2023, undertaken by independent qualified actuaries.
The present values of the defined benefit obligation and the related interest
costs have been measured using the projected unit credit method.
A triennial funding valuation of the Pearl Scheme as at 30 June 2021 was
completed in 2022 by a qualified actuary. This showed a surplus as at 30 June
2021 of £67 million, on the agreed technical provisions basis. The funding
and IFRS accounting bases of valuation can give rise to different results for
a number of reasons. The funding basis of valuation is based on general
principles of prudence whereas the accounting valuation is based on best
estimates. Discount rates are gilt-based for the funding valuation whereas the
rate used for IFRS valuation purposes is based on a yield curve for high
quality AA-rated corporate bonds. In addition the values are prepared at
different dates which will result in differences arising from changes in
market conditions and employer contributions made in the subsequent period.
Pension Scheme Commitment Agreement and buy-in transactions
On 17 November 2020, the Pearl Scheme entered into a Commitment Agreement with
PGH2 to complete a series of buy-ins. At the same time, the Pearl Scheme
completed the first buy-in with Phoenix Life Limited ('PLL') covering 25% of
the Scheme's pensioner and deferred member liabilities, transferring the
associated risks, including longevity improvement risk, to PLL effective from
30 September 2020.
Two further buy-in transactions were completed in July 2021 and October 2021
covering 35% and 15% respectively of the Scheme's pensioner and deferred
member liabilities and the final buy-in transaction was completed in November
2022. Risks, including longevity improvement risk, were transferred to PLL
effective from 28 May 2021 and 31 August 2021 and 30 September 2022
respectively.
Upon completion of each buy-in transaction the Scheme transferred the
following plan assets to PLL:
• In November 2020, £731 million of plan assets were transferred to PLL
in satisfaction of the premium of £735 million and was net of a £4 million
payment by PLL to the Scheme in respect of members' benefits for October and
November 2020.
• In July 2021, £1,049 million of plan assets were transferred to PLL in
satisfaction of the premium and a further £12 million cash payment was paid
by the Scheme in August 2021. PLL paid £5 million to the Scheme in respect of
members' benefits for June and July 2021; and
• In October 2021, £433 million of plan assets were transferred to PLL in
satisfaction of the premium of £435 million and was net of a £2 million
payment by PLL to the Scheme in respect of members' benefits for September and
October 2021. A further £1 million cash payment in respect of the premium was
paid by the Scheme in December 2021.
• In November 2022, £556 million of plan assets were transferred to PLL
in satisfaction of the premium of £560 million and was net of a £4 million
payment by PLL to the Scheme in respect of members' benefits for October and
November 2022.
The assets transferred to PLL are recognised in the relevant line within
financial assets in the consolidated statement of financial position. The
economic effect of the buy-in transactions in the Scheme is to replace the
plan assets transferred with a single line insurance policy reimbursement
right asset which is subsequently eliminated on consolidation. The value of
this insurance policy at 31 December 2023 was £1,507 million (2022: £1,501
million) which includes an amount owed by PLL of £nil million (2022: £2
million).
The Commitment agreement contained provisions under which payments by PGH2 to
the Scheme were required in the event that the Group did not meet the minimum
buy-in completion schedule. Following completion of the last buy-in
transaction in 2022 the Group no longer has an obligation to pay gilts deficit
recovery contributions.
The new agreement also introduced a new form of security provided by PGH2 to
the trustee. The share charges over certain Group entities were replaced by a
new surety bond arrangement, whereby two external third-party insurers, each
provided £100 million of cover payable to the Scheme following certain
trigger events. This cover provided by the surety bond guarantee was fully
released upon completion of the final buy-in transaction in November 2022.
No contributions were paid to the Pearl Scheme in either the current or prior
period. PeLHL meets the administrative and non-investment running expenses of
the Scheme as set out in the schedule of contributions (PGH2 prior to 1
October 2023).
During 2022, the Company reached an agreement for the removal of a trustee
discretion to pay some pension increases in excess of the 5% cap. The trustee
agreed to give up this discretion in exchange for a single 1.6% uplift for
current pensions in payment effective from 1 April 2022 and a 1.3% increase to
eligible benefits of both pension and deferred members effective from 1 April
2023. In the current period, the financial impact of the 1.3% uplift has been
to recognise an increase in the defined benefit obligation of £12 million and
a past service cost in the consolidated income statement (at 31 December 2022,
the financial impact of the 1.6% uplift was £15 million).
Reimbursement right asset in respect of Reinsurance arrangement
In March 2022, PLL entered into a quota share reinsurance arrangement with an
external insurer to reinsure a further 27% of the risks transferred to PLL as
part of the third buy-in transaction with the Pearl Scheme. A total of
approximately 91% of these liabilities have now been reinsured. A premium of
£104 million was paid by PLL to the reinsurer. As PLL expects to use the
claims received to pay for its obligations under the insurance contract
between it and the Pearl Scheme (i.e. to settle the defined benefit
obligation) the reinsurance arrangement is considered to be a non-qualifying
insurance policy and is classified as a reimbursement right. The reinsurance
arrangement is expected to match a proportion of the defined benefit
obligation of the Pearl Scheme therefore the valuation of the reimbursement
right is consistent with the valuation of the associated defined benefit
obligation. The value of the reimbursement right asset amounted to £202
million (31 December 2022: £205 million).
Summary of amounts recognised in the consolidated financial statements
The amounts recognised in the consolidated financial statements are as
follows:
2023 Fair value of scheme assets Defined benefit obligation Pension Scheme Liability Reimburse-ment right
£m £m £m £m
At 1 January 46 (1,501) (1,455) 205
Interest income/(expense) 2 (72) (70) 10
Past service cost - (12) (12) -
Included in profit or loss 2 (84) (82) 10
Remeasurements:
Return on plan assets excluding amounts included in interest income 2 - 2 -
Gain from changes in demographic assumptions - 12 12 -
Loss from changes in financial assumptions - (51) (51) -
Experience gain - 15 15 -
Included in other comprehensive income 2 (24) (22) -
Income received from insurance policies 102 - 102 -
Benefit payments (102) 102 - (13)
At 31 December 50 (1,507) (1,457) 202
2022 Fair value of scheme assets Defined benefit obligation Provision for tax on the economic surplus available as a refund Pension Scheme Liability Reimbursement right asset
£m £m £m £m £m
At 1 January 807 (2,224) (92) (1,509) 212
Interest income/(expense) 16 (52) (2) (38) 4
Past service cost - (15) - (15) -
Included in profit or loss 16 (67) (2) (53) 4
Remeasurements:
Return on plan assets excluding amounts included in interest income (208) - - (208) (101)
Gain from changes in demographic assumptions - 3 - 3 -
Gain from changes in financial assumptions - 805 - 805 -
Experience loss - (116) - (116) -
Change in provision for tax on economic surplus available as a refund - - 94 94 -
Included in other comprehensive income (208) 692 94 578 (101)
Income received from insurance policies 89 - - 89 -
Benefit payments (98) 98 - - (14)
Assets transferred as premium for Scheme buy-in (560) - - (560) -
Assets transferred as premium for reinsurance arrangement - - - - 104
At 31 December 46 (1,501) - (1,455) 205
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
2023 2022
Total Of which not quoted in an active market Total Of which not quoted in an active market
£m £m £m £m
Properties - - 5 5
Private equities 5 5 4 4
Hedge funds 3 3 3 3
Cash and other 42 - 34 -
Obligations for repayment of stock lending collateral received - - - -
Reported scheme assets 50 8 46 12
Add back:
Insurance policies eliminated on consolidation 1,507 1,507 1,501 1,501
Economic value of assets 1,557 1,515 1,547 1,513
Defined benefit obligation
The calculation of the defined benefit obligation can be allocated to the
scheme's members as follows:
• Deferred scheme members: 33% (2022: 40%); and
• Pensioners: 67% (2022: 60%)
The weighted average duration of the defined benefit obligation at 31 December
2023 is 13.5 years (2022: 13.5 years).
Principal assumptions
The principal financial assumptions of the Pearl Scheme are set out in the
table below:
2023 2022
% %
Rate of increase for pensions in payment (5% per annum or RPI if lower) 2.90 3.05
Rate of increase for deferred pensions ('CPI') 2.60 2.70
Discount rate 4.60 4.95
Inflation - RPI 3.10 3.30
Inflation - CPI 2.60 2.70
The discount rate and inflation rate assumptions have been determined by
considering the shape of the appropriate yield curves and the duration of the
Pearl Scheme's liabilities. This method determines an equivalent single rate
for each of the discount and inflation rates, which is derived from the
profile of projected benefit payments.
The post-retirement mortality assumptions are in line with a scheme-specific
table which was derived from the actual mortality experience in recent years
based on the SAPS standard tables for males and for females based on year of
use. Future longevity improvements from 1 January 2021 are based on amended
CMI 2022 Core Projections (2022: From 1 January 2021 based on amended CMI 2021
Core Projections) and a long-term rate of improvement of 1.5% (2022: 1.5%) per
annum for males and 1.2% (2022: 1.2%) per annum for females. Under these
assumptions, the average life expectancy from retirement for a member
currently aged 40 retiring at age 60 is 29.0 years and 30.3 years for male and
female members respectively (2022: 29.2 years and 30.5 years respectively).
A quantitative sensitivity analysis for significant actuarial assumptions is
shown below:
2023 Base Discount rate RPI Life expectancy
Assumptions
Sensitivity level
25bps 25bps 25bps 25bps 1 year 1 year
increase decrease increase decrease increase decrease
Impact on the defined benefit obligation (£m) 1,507 (41) 43 23 (22) 37 (37)
2022 Base Discount rate RPI Life expectancy
Assumptions
Sensitivity level
25bps 25bps 25bps 25bps 1 year 1 year
increase decrease increase decrease increase decrease
Impact on the defined benefit obligation (£m) 1,501 (40) 42 26 (25) 37 (37)
The above sensitivity analyses are based on a change in an assumption while
holding all other assumptions constant. In practice, this is unlikely to
occur, and changes in some of the assumptions may be correlated. When
calculating the sensitivity of the defined benefit obligation to significant
actuarial assumptions the same method has been applied as when calculating the
pension asset recognised within the statement of consolidated financial
position.
G1.2 PGL Pension Scheme
The PGL Pension Scheme comprises a final salary section and a defined
contribution section.
Scheme details
Defined contribution scheme
On 1 July 2020 the Group closed the defined contribution section of the PGL
Scheme and ceased making contributions from this date.
Defined benefit scheme
The defined benefit section of the PGL Pension Scheme is a final salary
arrangement which is closed to new entrants and has no active members.
The PGL Scheme is administered by a separate trustee company, PGL Pension
Trustee Ltd. The trustee company is comprised of two representatives from the
Group, three member nominated representatives and one independent trustee in
accordance with the trustee company's articles of association. The trustee is
required by law to act in the interest of all relevant beneficiaries and is
responsible for the day to day administration of the benefits.
The valuation has been based on an assessment of the liabilities of the PGL
Pension Scheme as at 31 December 2023, undertaken by independent qualified
actuaries.
To the extent that an economic surplus will be available as a refund, the
economic surplus is stated after a provision for tax that would be borne by
the scheme administrators when the refund is made.
A triennial funding valuation of the PGL Pension Scheme as at 30 June 2021 was
completed in 2022 by a qualified actuary. This showed a surplus as at 30 June
2021 of £2 million. The IFRS valuation cash flows reflect the latest
available data and are not limited to being updated following the completion
of each funding valuation.
There are no further committed contributions to pay in respect of the defined
benefit section of the Scheme.
Insurance policies with Group entities
In March 2019, the PGL Pension Scheme entered into a buy-in agreement with PLL
which covered the remaining pensioner and deferred members of the Scheme not
covered by the first such agreement concluded in December 2016. The plan
assets transferred to PLL as premium are held in a collateral account and are
recognised in the relevant line within financial assets in the statement of
consolidated financial position. The economic effect of these transactions in
the Scheme is to replace the plan assets transferred with a single line
insurance policy reimbursement asset which is eliminated on consolidation
along with the relevant insurance contract liabilities in PLL.
The value of the insurance policies with Group entities at 31 December 2023 is
£1,093 million (2022: £1,079 million).
During the year, £18 million of scheme assets were transferred to PLL as
premium for the buy-out transaction which completed in January 2024. A debtor
of £18 million, to reflect the prepayment of this premium at 31 December 2023
(2022: £nil), has been eliminated on consolidation. Further details of this
transaction are included in note I7.
Summary of amounts recognised in the consolidated financial statements
The amounts recognised in the consolidated financial statements are as
follows:
2023 Fair value of scheme assets Defined benefit obligation Total
£m £m £m
At 1 January 27 (1,083) (1,056)
Interest income/(expense) 1 (52) (51)
Administrative expenses (3) - (3)
Included in profit or loss (2) (52) (54)
Remeasurements:
Return on plan assets excluding amounts included in interest income (1) - (1)
Gain from changes in demographic assumptions - 13 13
Loss from changes in financial assumptions - (27) (27)
Experience loss - (17) (17)
Included in other comprehensive income (1) (31) (32)
Income received from insurance policies 69 - 69
Benefit payments (69) 69 -
Assets transferred as premium for scheme buy-out (18) - (18)
At 31 December 6 (1,097) (1,091)
2022 Fair value of scheme assets Defined benefit obligation Total
£m £m £m
At 1 January 31 (1,623) (1,592)
Interest income/(expense) 1 (32) (31)
Administrative expenses (4) - (4)
Included in profit or loss (3) (32) (35)
Remeasurements:
Return on plan assets excluding amounts included in interest income (1) - (1)
Gain from changes in demographic assumptions - 5 5
Gain from changes in financial assumptions - 531 531
Experience loss - (36) (36)
Included in other comprehensive income (1) 500 499
Income received from insurance policies 72 - 72
Benefit payments (72) 72 -
At 31 December 27 (1,083) (1,056)
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
2023 2022
Total Of which not quoted in an active market Total Of which not quoted in an active market
£m £m £m £m
Cash and other 6 - 27 -
Reported scheme assets 6 - 27 -
Add back:
Insurance policies eliminated on consolidation 1,093 1,093 1,079 1,079
Amounts due from subsidiary eliminated on consolidation 18 18 - -
Economic value of assets 1,117 1,111 1,106 1,079
Defined benefit obligation
The calculation of the defined benefit obligation can be allocated to the
scheme's members as follows:
• Deferred scheme members: 36% (2022: 36%); and
• Pensioners: 64% (2022: 64%)
The weighted average duration of the defined benefit obligation at 31 December
2023 is 13.5 years (2022: 13.5 years).
Principal assumptions
The principal financial assumptions of the PGL Pension Scheme are set out in
the table below:
2023 2022
% %
Rate of increase for pensions in payment (7.5% per annum or RPI if lower) 3.10 3.30
Rate of increase for deferred pensions ('CPI') 2.60 2.70
Discount rate 4.60 4.95
Inflation - RPI 3.10 3.30
Inflation - CPI 2.60 2.70
The discount rate and inflation assumptions have been determined by
considering the shape of the appropriate yield curves and the duration of the
PGL Pension Scheme liabilities. This method determines an equivalent single
rate for each of the discount and inflation rates, which is derived from the
profile of projected benefit payments.
The post-retirement mortality assumptions are in line with 86%/94% of S1P
Light base tables for males and females. Future longevity improvements from 1
January 2021 are based on amended CMI 2022 Core Projections (2022: From 1
January 2021 based on amended CMI 2021 Core Projections) with a long-term rate
of improvement of 1.5% (2022: 1.5%) per annum for males and 1.2% (2022: 1.2%)
per annum for females. Under these assumptions, the average life expectancy
from retirement for a member currently aged 40 retiring at age 62 is 27.4
years (2022: 27.7 years) and 28.8 years (2022: 29.1 years) for male and female
members respectively.
A quantitative sensitivity analysis for significant actuarial assumptions is
shown below:
2023 Base Discount rate RPI Life expectancy
Assumptions
Sensitivity level
25bps 25bps 25bps 25bps 1 year 1 year
increase decrease increase decrease increase decrease
Impact on the defined benefit obligation (£m) 1,097 (32) 33 22 (21) 31 (31)
2022 Base Discount rate RPI Life expectancy
Assumptions
Sensitivity level
25bps 25bps 25bps 25bps 1 year 1 year
increase decrease increase decrease increase decrease
Impact on the defined benefit obligation (£m) 1,083 (31) 33 23 (22) 30 (30)
The above sensitivity analyses are based on a change in an assumption while
holding all other assumptions constant. In practice, this is unlikely to
occur, and changes in some of the assumptions may be correlated. When
calculating the sensitivity of the defined benefit obligation to significant
actuarial assumptions the same method has been applied as when calculating the
pension liability recognised within the statement of consolidated financial
position.
G1.3 Abbey Life Staff Pension Scheme
Scheme details
On 30 June 2017, the Abbey Life Scheme was transferred from Abbey Life to
PeLHL, a fellow subsidiary. PeLHL assumed the scheme covenant together with
all obligations of the scheme following implementation of the transfer. The
Abbey Life Scheme is a registered occupational pension scheme, set up under
trust, and legally separate from the employer PeLHL. The scheme is
administered by Abbey Life Trust Securities Limited (the trustee), a corporate
trustee. There are three trustee directors, one of whom is nominated by the
Abbey Life Scheme members and two of whom are appointed by PeLHL. The trustee
is responsible for administering the scheme in accordance with the trust deed
and rules and pensions laws and regulations. The Abbey Life Scheme is closed
to new entrants and has no active members.
The valuation has been based on an assessment of the liabilities of the Abbey
Life Scheme as at 31 December 2023 undertaken by independent qualified
actuaries. The present values of the defined benefit obligation and the
related interest costs have been measured using the projected unit credit
method.
Funding
The last funding valuation of the Abbey Life Scheme was carried out by a
qualified actuary as at 31 March 2021 and showed a deficit of £86 million.
Following completion of the funding valuation a recovery plan was agreed
between the Group and the trustee of the Abbey Life Scheme for PeLHL to pay
monthly contributions of £400,000 into the Scheme until 31 July 2025 to
eliminate the funding shortfall. In addition, the entire balance of the 2013
Charged Account of £42 million was paid to the Scheme in December 2021.
A new schedule of contributions was agreed effective from November 2021, for
PeLHL to pay the following amounts in respect of deficit contributions in
addition to the amounts payable under the recovery plan:
• fixed monthly contributions of £400,000 payable from 1 August 2025 to
30 June 2026;
• monthly contributions in respect of administration expenses of £106,295
payable up to 31 March 2022, then increasing annually in line with the Retail
Prices Index assumption to 30 June 2028; and
• annual payments of £4 million into the New 2016 Charged Account by 31
July each year, with the next payment being made on 31 July 2022, and the last
payment due by 31 July 2025.
The charged account is an Escrow account which was created to provide the
trustees with additional security in light of the funding deficit. The amounts
held in the charged account does not form part of Abbey Life Scheme assets.
Under the terms of the New 2016 Funding Agreement the funding position of the
Abbey Life Scheme will be assessed as at 31 March 2027. A payment will be made
from the New 2016 Charged Account to the Scheme if the results of the
assessment reveal a shortfall calculated in accordance with the terms of the
New 2016 Funding Agreement. The amount of the payment will be the lower of the
amount of the shortfall and the amount held in the New 2016 Charged Account.
An additional liability of £2 million (2022: £3 million) has been recognised
reflecting a charge on any refund of the resultant IAS 19 surplus that arises
after adjustment for discounted future contributions of £11 million (2022:
£15 million) in accordance with the minimum funding requirement. A deferred
tax asset of £3 million (2022: £3 million) has also been recognised to
reflect tax relief at a rate of 25% that is expected to be available on the
contributions once paid into the Scheme.
Summary of amounts recognised in the consolidated financial statements
The amounts recognised in the consolidated financial statements are as
follows:
2023 Fair value of scheme assets Defined benefit obligation Minimum funding requirement obligation Total
£m £m £m £m
At 1 January 206 (211) (3) (8)
Interest income/(expense) 10 (10) - -
Administration expenses (2) - - (2)
Included in profit or loss 8 (10) - (2)
Remeasurements:
Return on plan assets excluding amounts included in interest income 2 - - 2
Experience loss - (4) - (4)
Gain from changes in demographic assumptions - 2 - 2
Loss from changes in financial assumptions - (6) - (6)
Change in minimum funding requirement obligation - - 1 1
Included in other comprehensive income 2 (8) 1 (5)
Employer's contributions 6 - - 6
Benefit payments (11) 11 - -
At 31 December 211 (218) (2) (9)
2022 Fair value of scheme assets Defined benefit obligation Provision for tax on the economic surplus available as a refund Minimum funding requirement obligation Total
£m £m £m £m £m
At 1 January 330 (318) (4) (7) 1
Interest income/(expense) 7 (6) - - 1
Administrative expenses (2) - - - (2)
Included in profit or loss 5 (6) - - (1)
Remeasurements:
Return on plan assets excluding amounts included in interest income (123) - - - (123)
Experience loss - (9) - - (9)
Gain from changes in financial assumptions - 110 - - 110
Change in minimum funding requirement obligation - - - 4 4
Change in provision for tax on economic surplus available as a refund - - 4 - 4
Included in other comprehensive income (123) 101 4 4 (14)
Employer's contributions 6 - - - 6
Benefit payments (12) 12 - - -
At 31 December 206 (211) - (3) (8)
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
2023 2022
Total Of which not quoted in an active market Total Of which not quoted in an active market
£m £m £m £m
Diversified income fund 45 - 44 -
Fixed interest government bonds 148 - 86 -
Corporate bonds 97 - 87 -
Derivatives (85) (85) (15) (15)
Cash and cash equivalents 6 - 4 -
Pension scheme assets 211 (85) 206 (15)
Defined benefit obligation
The calculation of the defined benefit obligation can be allocated to the
Abbey Life Scheme's members as follows:
• Deferred scheme members: 44% (2022: 44%); and
• Pensioners: 56% (2022: 56%)
The weighted average duration of the defined benefit obligation at 31 December
2023 is 13.5 years (2022: 13.5 years).
Principal assumptions
The principal financial assumptions of the Abbey Life Scheme are set out in
the table below:
2023 2022
% %
Rate of increase for pensions in payment (5% per annum or RPI if lower) 2.90 3.05
Rate of increase for deferred pensions ('CPI' subject to caps) 2.60 2.70
Discount rate 4.60 4.95
Inflation - RPI 3.10 3.30
Inflation - CPI 2.60 2.70
The discount rate and inflation assumptions have been determined by
considering the shape of the appropriate yield curves and the duration of the
Abbey Life Scheme liabilities. This method determines an equivalent single
rate for each of the discount and inflation rates, which is derived from the
profile of projected benefit payments.
The post-retirement mortality assumptions are in line with a scheme-specific
table which was derived from the actual mortality experience in recent years,
performed as part of the actuarial funding valuation as at 31 March 2021,
using the SAPS S3 'Light' tables for males and for females based on year of
use. Future longevity improvements from 1 January 2021 are based on amended
CMI 2022 Core Projections (2022: From 1 January 2021 based on amended CMI 2021
Core Projections) and a long-term rate of improvement of 1.5% (2022: 1.5%) per
annum for males and 1.2% (2022: 1.2%) per annum for females. Under these
assumptions the average life expectancy from retirement for a member currently
aged 45 retiring at age 65 is 24.5 years and 25.6 years for male and female
members respectively (2022: 24.8 years and 25.9 years respectively).
A quantitative sensitivity analysis for significant actuarial assumptions is
shown below:
2023 Base Discount rate RPI Life expectancy
Assumptions
Sensitivity level
25bps 25bps 25bps 25bps 1 year 1 year
increase decrease increase decrease increase decrease
Impact on the defined benefit obligation (£m) 218 (7) 7 5 (5) 7 (7)
2022 Base Discount rate RPI Life expectancy
Assumptions
Sensitivity level
25bps 25bps 25bps 25bps 1 year 1 year
increase decrease increase decrease increase decrease
Impact on the defined benefit obligation (£m) 211 (7) 7 4 (4) 7 (7)
The above sensitivity analyses are based on a change in an assumption while
holding all other assumptions constant. In practice, this is unlikely to
occur, and changes in some of the assumptions may be correlated. When
calculating the sensitivity of the defined benefit obligation to significant
actuarial assumptions the same method has been applied as when calculating
the pension liability recognised within the statement of consolidated
financial position.
G1.4 ReAssure Life Staff Pension Scheme
Scheme details
The ReAssure Scheme is a registered occupational pension scheme, set up under
trust, and legally separate from the employer ReAssure Midco Limited ('RML').
The scheme is administered by ReAssure Pension Trustees Limited, a corporate
trustee. There are six trustee directors, two of whom are nominated by the
ReAssure Scheme members and four of whom are appointed by RML. The trustee is
responsible for administering the scheme in accordance with the trust deed and
rules and pensions laws and regulations. The ReAssure Scheme is closed to new
entrants and to future accrual for active members.
The valuation has been based on an assessment of the liabilities of the
ReAssure Scheme as at 31 December 2023 undertaken by independent qualified
actuaries. The present values of the defined benefit obligation and the
related interest costs have been measured using the projected unit credit
method.
Funding
The last funding valuation of the ReAssure Scheme was carried out by a
qualified actuary as at 31 December 2020 and showed a deficit of £77 million.
Following the completion of the 2020 valuation a recovery plan was agreed in
September 2021 between the trustee and RML in order to make good the deficit.
RML agreed to pay contributions of £17.7 million into the existing Custody
Account spread over four annual payments of £4.425 million payable on 1 April
2022, 1 April 2023, 1 April 2024 and 1 April 2025. It is anticipated that
these payments will be sufficient to cover the difference between the funding
shortfall and the balance of the Custody Account at 31 December 2020 and to
remove any remaining deficit at 31 December 2025.
The amounts held in this account do not form part of the Scheme's plan assets
and are instead held in the Custody Account and are included within financial
assets in the statement of consolidated financial position.
The Group agrees to cover those expenses incurred by the ReAssure Scheme and
the cost of the death-in-service benefits for those members of the scheme
entitled to those benefits. Payments of £2 million (2022:£2 million) have
been made during the year to cover these costs.
Summary of amounts recognised in the consolidated financial statements
The amounts recognised in the consolidated financial statements are as
follows:
2023 Fair value of scheme assets Defined benefit obligation Provision for tax on the economic surplus available as a refund Total
£m £m £m £m
At 1 January 288 (266) (8) 14
-
Interest income/(expense) 14 (13) - 1
Administrative expenses (1) - - (1)
Included in profit or loss 13 (13) - -
Remeasurements:
Return on plan assets excluding amounts included in interest income (7) - - (7)
Gain from changes in demographic assumptions - 13 - 13
Loss from changes in financial assumptions - (10) - (10)
Experience loss - (7) - (7)
Change in provision for tax on economic surplus available as a refund - - 3 3
Included in other comprehensive income (7) (4) 3 (8)
Employer's contributions 3 - - 3
Benefit payments (10) 10 - -
At 31 December 287 (273) (5) 9
2022 Fair value of scheme assets Defined benefit obligation Provision for tax on the economic surplus available as a refund Total
£m £m £m £m
At 1 January 492 (438) (19) 35
Interest income/(expense) 9 (9) - -
Administrative expenses (1) - - (1)
Included in profit or loss 8 (9) - (1)
Remeasurements:
Return on plan assets excluding amounts included in interest income (203) - - (203)
Gain from changes in financial assumptions - 188 - 188
Experience loss - (19) - (19)
Change in provision for tax on economic surplus available as a refund - - 11 11
Included in other comprehensive income (203) 169 11 (23)
Employer's contributions 3 - - 3
Benefit payments (12) 12 - -
At 31 December 288 (266) (8) 14
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
2023 2022
Total Of which not quoted in an active market Total Of which not quoted in an active market
£m £m £m £m
Equities 32 - 31 -
Government bonds 118 - 121 -
Corporate bonds 92 - 83 -
Managed funds - - - -
Other quoted securities 41 - 45 -
Cash and cash equivalents 4 - 8 -
Pension scheme assets 287 - 288 -
Defined benefit obligation
The calculation of the defined benefit obligation can be allocated to the
ReAssure Scheme's members as follows:
• Deferred scheme members: 66% (2022: 66%); and
• Pensioners: 34% (2022: 34%)
The weighted average duration of the defined benefit obligation at 31 December
2023 is 17 years (2022: 17 years).
Principal assumptions
The principal assumptions of the ReAssure Scheme are set out in the table
below:
2023 2022
% %
Rate of increase for pensions in payment (5% per annum or RPI if lower) 2.90 3.05
Rate of increase for deferred pensions 2.60 2.70
Rate of increase in salaries 3.60 3.70
Discount rate 4.60 4.95
Inflation - RPI 3.10 3.30
Inflation - CPI 2.60 2.70
The discount rate and inflation assumptions have been determined by
considering the shape of the appropriate yield curves and the duration of the
ReAssure Scheme liabilities. This method determines an equivalent single rate
for each of the discount and inflation rates, which is derived from the
profile of projected benefit payments.
The post-retirement mortality assumptions are in line with SAPS Series 3 light
base tables with a 102% (2022: 102%) multiplier for males and a 95% (2022:
95%) multiplier for females, with CMI 2019 projections in line with a 1.5% pa
long-term trend up to and including 31 December 2020. Future longevity
improvements from 1 January 2021 onwards are in line with amended CMI 2022
Core Projections (2022: from 1 January 2021 in line with amended CMI 2021 Core
Projections) with a long-term trend of 1.5% pa (2022: 1.5%) for males and 1.2%
(2022: 1.2%) for females.
Under these assumptions the average life expectancy from retirement for a
member currently aged 45 retiring at age 60 is 29.7 years and 31.3 years for
male and female members respectively (2022: 30.0 years and 31.6 years for male
and female members respectively).
A quantitative sensitivity analysis for significant actuarial assumptions is
shown below:
2023
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps 25bps 25bps 25bps 1 year 1 year
increase decrease increase decrease increase decrease
Impact on the defined benefit obligation (£m) 273 (11) 11 9 (9) 7 (7)
2022
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps 25bps 25bps 25bps 1 year 1 year
increase decrease increase decrease increase decrease
Impact on the defined benefit obligation (£m) 266 (10) 11 8 (8) 7 (7)
The above sensitivity analyses are based on a change in an assumption while
holding all other assumptions constant. In practice, this is unlikely to
occur, and changes in some of the assumptions may be correlated. When
calculating the sensitivity of the defined benefit obligation to significant
actuarial assumptions the same method has been applied as when calculating
the pension liability recognised within the statement of consolidated
financial position.
G1.5 Sun Life Assurance Company of Canada 1988 UK and Irish Employee Benefits
scheme
Scheme details
The Sun Life Assurance Company of Canada 1988 UK and Irish Employee Benefits
scheme ('Sun Life of Canada Scheme') was consolidated within the Group
financial statements following the acquisition of the Sun Life businesses on 3
April 2023. The Sun Life of Canada Scheme is a registered occupational pension
scheme, set up under trust, and legally separate from the principal employer
Sun Life Assurance Company of Canada (U.K.) Limited. The Scheme is
administered by a specialist third party administrator, Hymans Robertson LLP.
A Trustee Board is responsible for ensuring the Scheme is run in accordance
with the Trust Deed and Rules and for ensuring compliance with legislation
although certain tasks are delegated to third parties. The Trustee Board is
made up of three Trustees; an Independent Trustee who is also the Chair, a
Principal Employer appointed Trustee and a Member-Nominated Trustee. The
Independent Trustee is Capital Cranfield Pension Trustees Limited. The Sun
Life of Canada Scheme is closed to new entrants and to future accrual for
active members.
The valuation has been based on an assessment of the liabilities of the Sun
Life of Canada Scheme as at 31 December 2023 undertaken by independent
qualified actuaries. The present values of the defined benefit obligation and
the related interest costs have been measured using the projected unit credit
method.
The economic surplus of the Scheme is anticipated to be used to cover future
costs of the Scheme and will be fully utilised prior to any winding-up of the
Scheme. As a result, no provision for tax is deducted from the surplus.
Funding
The last funding valuation of the Sun Life of Canada Scheme was carried out by
a qualified actuary as at 31 December 2022 and showed a surplus of £6
million. No contributions are required to be paid by the employer into the
Scheme.
Summary of amounts recognised in the consolidated financial statements
The amounts recognised in the consolidated financial statements are as
follows:
2023 Fair value of scheme assets Defined benefit obligation Total Reimbursement right
£m £m £m £m
On acquisition of SLF of Canada UK Limited (note H2) 302 (286) 16 2
Interest income/(expense) 14 (13) 1 -
Included in profit or loss 14 (13) 1 -
Remeasurements:
Return on plan assets excluding amounts included in interest income (5) - (5) -
Gain from changes in demographic assumptions - 5 5 -
Loss from changes in financial assumptions - (4) (4) -
Experience gain - 4 4 -
Included in other comprehensive income (5) 5 - -
Benefit payments (14) 14 - -
At 31 December 297 (280) 17 2
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
2023
Total Of which not quoted in an active market
£m £m
Debt securities 36 -
Cash and cash equivalents 4 -
Qualifying insurance contracts1 257 257
Pension scheme assets 297 257
1 In 2018 and 2021 the Scheme completed two buy-in transactions with
external parties which cover approximately 90% of the Scheme's liabilities.
Defined benefit obligation
The calculation of the defined benefit obligation can be allocated to the Sun
Life of Canada Scheme's members as follows:
• Deferred scheme members: 40%; and
• Pensioners: 60%.
The weighted average duration of the defined benefit obligation at 31 December
2023 is 12.8 years.
Principal assumptions
The principal assumptions of the Sun Life of Canada Scheme are set out in the
table below:
2023
%
Rate of increase for pensions in payment 3.05
Rate of increase for deferred pensions 2.15
Discount rate 4.60
Inflation - RPI 3.10
Inflation - CPI 2.30
The discount rate and inflation assumptions have been determined by
considering the shape of the appropriate yield curves and the duration of the
Sun Life of Canada Scheme liabilities. This method determines an equivalent
single rate for each of the discount and inflation rates, which is derived
from the profile of projected benefit payments.
The post-retirement mortality assumptions are in line with 2022 VITA Lite
tables. Future longevity improvements are in line with the 2022 CMI model with
no weight on 2020 and 2021 experience and 25% weighting on 2022 experience,
with a long-term trend of 1.5% p.a. for males and 1.5% p.a. for females.
Under these assumptions the average life expectancy from retirement for a
member currently aged 45 retiring at age 65 is 23.1 years and 26.1 years for
male and female members respectively.
A quantitative sensitivity analysis for significant actuarial assumptions is
shown below:
2023 Base Discount rate RPI Life expectancy
Assumptions
Sensitivity level
25bps 25bps 25bps 25bps 1 year 1 year
increase decrease increase decrease increase decrease
Impact on the defined benefit obligation (£m) 280 (9) 9 7 (8) 11 (11)
The above sensitivity analyses are based on a change in an assumption while
holding all other assumptions constant. In practice, this is unlikely to
occur, and changes in some of the assumptions may be correlated. When
calculating the sensitivity of the defined benefit obligation to significant
actuarial assumptions the same method has been applied as when calculating
the pension liability recognised within the statement of consolidated
financial position.
G2. Intangible assets
Goodwill
Business combinations are accounted for by applying the acquisition method.
Goodwill represents the difference between the cost of the acquisition and the
fair value of the net identifiable assets acquired.
Goodwill is measured on initial recognition at cost. Following initial
recognition, goodwill is stated at cost less any accumulated impairment
losses. Goodwill is not amortised but is tested for impairment annually or
when there is evidence of possible impairment. For impairment testing,
goodwill is allocated to relevant cash generating units. Goodwill is impaired
when the recoverable amount is less than the carrying value.
In certain acquisitions an excess of the acquirer's interest in the net fair
value of the acquiree's identifiable assets, liabilities, contingent
liabilities and non-controlling interests over cost may arise. Where this
occurs, the surplus of the fair value of net assets acquired over the fair
value of the consideration is recognised in the consolidated income statement.
Acquired in-force business
Investment contracts without DPF acquired in business combinations and
portfolio transfers are measured at fair value at the time of acquisition. The
difference between the fair value of the contractual rights acquired and
obligations assumed and the liability measured at fair value which is
determined using a valuation technique to provide a reliable estimate of the
amount for which the liability could be transferred in an orderly transaction
between market participants at the measurement date, subject to a minimum
equal to the surrender value. This acquired in-force business is amortised on
a diminishing balance basis.
An impairment review is performed whenever there is an indication of
impairment. When the recoverable amount is less than the carrying value, an
impairment loss is recognised in the consolidated income statement.
The acquired in-force business is allocated to relevant cash generating units
for the purposes of impairment testing.
Brands
Brands are measured on initial recognition at cost. The cost of an intangible
asset acquired in a business combination is the fair value as at the date of
the acquisition. The cost of an intangible asset acquired in exchange for a
non-monetary asset is measured at fair value as at the date of the
transaction. Following initial recognition, the brand and other contractual
arrangement intangible assets are carried at cost less accumulated
amortisation and any accumulated impairment losses.
Amortisation is calculated using the straight-line method to allocate the cost
of brands over their estimated useful lives. They are tested for impairment
whenever there is evidence of possible impairment. For impairment testing,
they are allocated to the relevant cash generating unit. Brands are impaired
when the recoverable amount is less than the carrying value.
2023 Goodwill Acquired in-force business Brands Total
£m £m £m £m
Cost or valuation
At 1 January 57 4,180 131 4,368
Acquisition of SLF of Canada UK Limited - 16 - 16
At 31 December 57 4,196 131 4,384
Amortisation and impairment
At 1 January (47) (1,966) (19) (2,032)
Amortisation charge for the year - (290) (6) (296)
Impairment charge for the year - (28) - (28)
At 31 December (47) (2,284) (25) (2,356)
Carrying amount at 31 December 10 1,912 106 2,028
Amount recoverable after 12 months 10 1,654 100 1,764
2022 restated1 Goodwill Acquired in-force business Brands Total
£m £m £m £m
Cost or valuation at 1 January and 31 December 57 4,180 131 4,368
Amortisation and impairment
At 1 January (47) (1,617) (13) (1,677)
Amortisation charge for the year - (332) (6) (338)
Impairment charge for the year - (17) - (17)
At 31 December (47) (1,966) (19) (2,032)
Carrying amount 10 2,214 112 2,336
Less amounts classified as held for sale (see note H3) - (37) - (37)
Carrying amount at 31 December 10 2,177 112 2,299
Amount recoverable after 12 months 10 1,912 106 2,028
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
G2.1 Goodwill
The carrying value of goodwill has been tested for impairment at the year end
and the results of this exercise are detailed below.
Goodwill with a carrying value of £10 million (2022: £10 million) was
recognised on the acquisition of AXA Wealth during 2016 and has been allocated
to the Pensions & Savings and Europe & Other segments. This represents
the value of the workforce assumed and the potential for future value
creation, which relates to the ability to invest in and grow the SunLife
brand. Value in use has been determined as the present value of certain future
cash flows associated with that business. The cash flows used in the
calculation are consistent with those adopted by management in the Group's
operating plan, and for the period 2028 and beyond, assume a zero growth rate.
The underlying assumptions of these projections include market share, customer
numbers, commission rates and expense inflation. The cash flows have been
valued at a risk adjusted discount rate of 14% (2022: 14%) that makes prudent
allowance for the risk that future cash flows may differ from that assumed.
This test demonstrated that value in use was greater than carrying value.
Given the magnitude of the excess of the value in use over carrying value,
management does not believe that a reasonably foreseeable change in key
assumptions would cause the carrying value to exceed value in use.
G2.2 Acquired in-force business
Acquired in-force business ('AVIF') on investment contracts without DPF
represents the difference between the fair value of the contractual rights
under these contracts and the liability measured at fair value which is
determined using a valuation technique to provide a reliable estimate of the
amount for which the liability could be transferred in an orderly transaction
between market participants at the measurement date, subject to a minimum
equal to the surrender value. AVIF on these investment contracts is amortised
in line with emergence of economic benefits over their expected term. AVIF
balances are assessed for impairment where an indicator of impairment has been
identified.
AVIF of £16 million was recognised during the year upon acquisition of SLF of
Canada UK Limited. Further details are included in note H2.
On 23 February 2021, the Group entered into an agreement with abrdn plc to
simplify the arrangements of their Strategic Partnership. Under the terms of
the transaction, the Group will sell its UK investment and platform related
products, comprising Wrap SIPP, Onshore bond and UK TIP to abrdn plc and this
will be effected through a Part VII transfer. Since 2021, the balances in the
statement of consolidated financial position relating to this business have
been classified as a disposal group held for sale.
The total proceeds of disposal for this business were not expected to exceed
the carrying value of the related net assets and accordingly the disposal
group was recognised at fair value less costs to sell. The value of the AVIF
at 23 February 2021, which relates to the SIPP and Onshore business, was £122
million and an impairment charge of £67 million was recognised in 2021. A
further impairment of £28 million has been recognised during the year (2022:
£17 million). The AVIF balance classified as held for sale has not been
amortised up to 31 December 2023.
As at 31 December 2023, the insured funds element of the Wrap SIPP and Onshore
Bond businesses will no longer transfer to abrdn (see note H3 for further
details). As a result, this business no longer meets the requirements to be
classified as held for sale. Consequently, the AVIF, which has a carrying
value of £9 million at 31 December 2023, will be classified within the AVIF
line in the consolidated statement of financial position. The AVIF will be
amortised in line with the transfer of the economic risk and rewards for this
business to abrdn plc via the profit transfer arrangement.
G2.3 Brands
An intangible asset was recognised at cost on acquisition of AXA Wealth and
represents the value attributable to the SunLife brand as at 1 November 2016.
The intangible asset was valued on a 'multi-period excess earnings' basis and
was recognised at a cost of £20 million. Impairment testing was performed in
a combined test with the AXA goodwill (see section G2.1). The value in use
continues to exceed its carrying value. This brand intangible is being
amortised over a 10 year period. The carrying value of the AXA Wealth brand as
at 31 December 2023 is £6 million (2022: £8 million).
On 23 February 2021, the Group entered into an agreement to acquire ownership
of the Standard Life brand as part of a larger transaction with abrdn plc,
which transferred to the Group in May 2021. The Standard Life brand was
initially recognised at a value of £111 million which represented the fair
value attributable to the brand as at the transaction date. The intangible
asset was valued on a 'multi-period excess earnings' basis and is being
amortised over a period of 30 years. The carrying value of the Standard Life
brand as at 31 December 2023 is £100 million (2022: £104 million).
G3. Property, plant and equipment
Owner-occupied property is stated at its revalued amount, being its
fair value at the date of the revaluation less any subsequent accumulated
depreciation and impairment. Owner-occupied property is depreciated over its
estimated useful life, which is taken as 20 - 50 years. Land is not
depreciated. Accumulated depreciation as at the revaluation date is eliminated
against the gross carrying amount of the owner-occupied property and the net
amount is restated to the revalued amount of the asset. Gains and losses on
owner-occupied property are recognised in other comprehensive income.
The right-of-use assets are initially measured at cost, and subsequently at
cost less any accumulated depreciation and impairments, and adjusted for
certain remeasurements of the lease liability. The right-of-use assets are
depreciated over the remaining lease term which is between 1 and 11 years
(2022: 1 and 11 years).
Equipment consists primarily of computer equipment and fittings. Equipment is
stated at historical cost less deprecation. Where acquired in a business
combination, historical cost equates to the fair value at the acquisition
date. Depreciation on equipment is charged to the consolidated income
statement over its estimated useful life of between 2 and 15 years.
2023 Owner-occupied properties Right-of-use assets - property Equipment Total
£m £m £m £m
Cost or valuation
At 1 January 32 96 67 195
Additions 1 - 8 9
Revaluation losses (5) - - (5)
At 31 December 28 96 75 199
Depreciation
At 1 January - (32) (38) (70)
Depreciation - (10) (13) (23)
At 31 December - (42) (51) (93)
Carrying amount at 31 December 28 54 24 106
2022 Owner-occupied properties Right-of-use assets - property Equipment Total
£m £m £m £m
Cost or valuation
At 1 January 29 94 61 184
Additions 9 3 8 20
Revaluation losses (6) - - (6)
Disposals - (1) (2) (3)
At 31 December 32 96 67 195
Depreciation
At 1 January - (24) (30) (54)
Depreciation - (9) (10) (19)
Disposals - 1 2 3
At 31 December - (32) (38) (70)
Carrying amount at 31 December 32 64 29 125
Owner-occupied properties have been valued by accredited independent valuers
at 31 December 2023 on an open market basis in accordance with the Royal
Institution of Chartered Surveyors' requirements, which is deemed to equate to
fair value. The fair value measurement for the properties of £28 million
(2022: £32 million) has been categorised as Level 3 based on the
non-observable inputs to the valuation technique used. Unrealised loss for the
current year is £5 million (2022: £6 million).
The fair value of the owner-occupied properties was derived using the
investment method supported by comparison with similar market transactions for
similar properties. The significant non-observable inputs used in the
valuations are the expected rental values per square foot and the
capitalisation rates.
The fair value of the owner-occupied properties valuation would increase
(decrease) if the expected rental values per square foot were to be higher
(lower) and the capitalisation rates were to be lower (higher).
G4. Investment property
Investment property, including right of use assets, is initially recognised at
cost, including any directly attributable transaction costs. Subsequently
investment property is measured at fair value. Fair value is the price that
would be received to sell a property in an orderly transaction between market
participants at the measurement date. Fair value is determined without any
deduction for transaction costs that may be incurred on sale or
disposal. Gains and losses arising from the change in fair value are
recognised as income or an expense in the statement of comprehensive income.
Investment property includes right-of-use assets, where the Group acts as
lessee. Leases, where a significant portion of the risks and rewards of
ownership are retained by the lessor, are classified as operating leases.
Where investment property is leased out by the Group, rental income from these
operating leases is recognised as income in the consolidated income statement
on a straight-line basis over the period of the lease.
2023 2022
£m £m
At 1 January 6,233 8,592
Additions 49 104
Acquisition of SLF of Canada UK Limited (note H2) 283 -
Improvements 27 27
Disposals (484) (1,141)
Remeasurement of right-of-use asset - 2
Movement in foreign exchange (4) 12
Losses on adjustments to fair value (recognised in consolidated income (362) (1,363)
statement)
5,742 6,233
Less amounts classified as held for sale (see note H3) (2,044) (2,506)
At 31 December 3,698 3,727
Unrealised losses on properties held at end of year (180) (1,582)
As at 31 December 2023, a property portfolio including amounts classified held
for sale of £5,621 million (2022: £6,070 million) is held by the life
companies in a mix of commercial sectors, spread geographically throughout the
UK and Europe.
Investment properties also includes £42 million (2022: £62 million) of
property reversions arising from sales of the NPI Extra Income Plan (see note
E5 for further details) and £64 million (2022: £80 million) from the Group's
interest in the residential property of policyholders who have previously
entered into an Equity Release Income Plan ('ERIP') policy.
Certain investment properties held by the life companies possess a ground rent
obligation which gives rise to both a right-of-use asset and a lease
liability. The right-of-use asset associated with the ground rent obligation
is valued at fair value and is included within the total investment property
valuation. The value of the ground rent right-of-use asset as at 31 December
2023 was £15 million (2022: £21 million). The remeasurement resulted in no
change in value of the ground rent right-of-use asset (2022: increase of £2
million). There were no additions (2022: £2 million) and £6 million
disposals (2022: £4 million) of ground rent right-of-use assets during the
period.
Commercial investment property is measured at fair value by independent
property valuers having appropriate recognised professional qualifications and
recent experiences in the location and category of the property being valued.
The valuations are carried out in accordance with the Royal Institute of
Chartered Surveyors ('RICS') guidelines with expected income and
capitalisation rate as the key non-observable inputs.
The NPI residential property reversions, an interest in customers' properties
which the Group will realise upon their death, are valued using a discounted
cash flow model based on the Group's proportion of the current open market
value, and discounted for the expected lifetime of the policyholder derived
from published mortality tables, the mortality rates are 130% for both males
and females based on the IFL92C15 table for males and the IML92C15 table for
females. The open market value is measured by independent local property
surveyors having appropriate recognised professional qualifications with
reference to the assumed condition of the property and local market
conditions. The individual properties are valued triennially and indexed using
regional house price indices to the year end date. The discount rate is a 3
year swap rate plus 1.7% margin (2022: 3 year swap rate plus 1.7% margin), and
adjusted for the deferred possession rate of 3.7% (2022: 3.7%). Assumptions
are also made in the valuation for future movements in property prices, based
on a risk free rate. The residential property reversions have been
substantially refinanced under the arrangements with Santander as described in
note E5.
The ERIP residential property reversions, an interest in the residential
property of policyholders who have previously entered into an ERIP policy and
been provided with a lifetime annuity in return for the legal title to their
property, are valued using unobservable inputs and management's best
estimates. As the inward cash flows on these properties will not be received
until the lifetime lease is no longer in force, which is usually upon the
death of the policyholder, these interests are valued on a reversionary basis
which is a discounted current open market value.
The open market values of the properties are independently revalued every two
years by members of the Royal Institution of Chartered Surveyors and in the
intervening period are adjusted by reference to the Nationwide Building
Society regional indices of house prices. The discount period is based on the
best estimates of the likely date the property will become available for sale
and the discount rate applied is determined by the general partner as its best
estimate of the appropriate discount rate. The mortality assumption is based
on the PMLO8HAWP table for males and the PFLO8HAWP table for females, adjusted
to reflect the historic experience of the business concerned. The mortality
rates are projected using future mortality improvements from the CMI Mortality
Projection Model. No explicit allowance is made for house price inflation in
the year through to their realisation. Therefore, the key assumptions used in
the valuation of the reversionary interests are the interest discount rate and
the mortality assumption. The discount rate was 5% (2022: 5%).
The fair value measurement of the investment properties has been categorised
as Level 3 based on the inputs to the valuation techniques used. The following
table shows the valuation techniques used in measuring the fair value of the
investment properties, the significant non-observable inputs used, the
inter-relationship between the key non-observable inputs and the fair value
measurement of the investment properties:
Description Valuation techniques Significant non-observable inputs Weighted average Weighted average
2023 2022
Commercial Investment Property RICS valuation Expected income per sq. ft. £23.41 £22.41
Estimated rental value per hotel room £7,156 £7,043
Estimated rental value per parking space £1,123 £1,115
Capitalisation rate 5.13% 5.01%
The estimated fair value of commercial properties would increase (decrease)
if:
• the expected income were to be higher (lower); or
• the capitalisation rate were to be lower (higher).
The estimated fair value of the NPI residential property reversions would
increase (decrease) if:
• the deferred possession rate were to be lower (higher);
• the mortality rate were to be higher (lower).
The estimated fair value of the ERIP residential property reversions would
increase (decrease) if:
• the discount rate were to be lower (higher);
• the mortality rate were to be higher (lower).
Direct operating expenses (offset against rental income in the consolidated
income statement) in respect of investment properties that generated rental
income during the year amounted to £36 million (2022: £27 million). The
direct operating expenses arising from investment property that did not
generate rental income during the year amounted to £5 million (2022: £5
million).
Future minimum lease rental receivables in respect of non-cancellable
operating leases on investment properties were as follows:
2023 2022
£m £m
Not later than 1 year 278 356
Later than 1 year and not later than 5 years 919 1,131
Later than 5 years 2,903 3,345
G5. Other receivables
Other receivables are recognised when due and measured on initial recognition
at the fair value of the amount receivable. Subsequent to initial recognition,
these receivables are measured at amortised cost using the effective interest
rate method.
2023 2022
£m restated1
£m
Investment broker balances 115 312
Cash collateral pledged and initial margins posted 1,728 3,698
Property related receivables 165 145
Deferred acquisition costs relating to investment contracts without DPF 8 7
Other debtors 562 293
At 31 December 2,578 4,455
Amount recoverable after 12 months 13 6
1 Prior period comparatives have been restated on transition to IFRS
17 Insurance Contracts (see note A2.1 for further details).
G6. Cash and cash equivalents
Cash and cash equivalents comprise cash balances and short-term deposits with
an original maturity term of three months or less at the date of placement.
Bank overdrafts that are repayable on demand and form an integral part of the
Group's cash management are deducted from cash and cash equivalents for the
purpose of the statement of consolidated cash flows.
2023 2022
£m £m
Bank and cash balances 2,751 2,716
Short-term deposits (including notice accounts and term deposits) 4,469 6,156
7,220 8,872
Less amounts classified as held for sale (52) (33)
At 31 December 7,168 8,839
Deposits are subject to a combination of fixed and variable interest rates.
The carrying amounts of balances held at amortised cost approximate to fair
value at the period end. Cash and cash equivalents in long-term business
operations and consolidated collective investment schemes of £6,994 million
(2022: £8,597 million) are primarily held for the benefit of policyholders
and so are not generally available for use by the owners.
G7. Provisions
A provision is recognised when the Group has a present legal or constructive
obligation, as a result of a past event, which is likely to result in an
outflow of resources and where a reliable estimate of the amount of the
obligation can be made. If the effect is material, the provision is determined
by discounting the expected future cash flows at a pre-tax rate that reflects
current market assessments of the time value of money and, where appropriate,
the risks specific to the liability.
A provision is recognised for onerous contracts when the expected benefits to
be derived from the contracts are less than the related unavoidable costs. The
unavoidable costs reflect the net cost of exiting the contract, which is the
lower of the cost of fulfilling it and any compensation or penalties arising
from failure to fulfil it. Costs that meet the requirements to be classified
as a provision but are determined to be directly attributable to insurance
contracts and investment contracts with DPF are classified within the
insurance contract assets and liabilities.
Where it is expected that a part of the expenditure required to settle a
provision will be reimbursed by a third party the reimbursement is recognised
when, and only when, it is virtually certain that the reimbursement will be
received. This reimbursement is recognised as a separate asset within other
receivables and will not exceed the amount of the provision.
Restructuring provisions
2023 Leasehold properties Staff related Known Indirect tax provisions Transition and Transformation provision Transfer of policy administration provision Other Total
incidents
£m £m
£m £m £m £m
£m
£m
At 1 January restated1 9 7 48 29 72 8 11 184
Additions in the year 2 1 9 43 6 1 10 72
Acquisition of SLF of Canada UK Limited (note H2) - 4 - - - - 1 5
Utilised during the year - - (24) (3) (20) (4) (9) (60)
Released during the year (2) (1) (18) (10) (11) - (4) (46)
At 31 December 9 11 15 59 47 5 9 155
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
Leasehold properties
The leasehold properties provision includes a £9 million (2022: £7 million)
dilapidations provision in respect of obligations under operating leases and
£nil (2022: £2 million) in respect of the excess of lease rentals and other
payments on properties that are currently vacant or are expected to become
vacant, over the amounts to be recovered from subletting these properties.
Staff related
Staff related provisions include provisions for unfunded pensions of £8
million (2022: £4 million), and private medical and other insurance costs for
former employees of £3 million (2022: £3 million).
Known incidents
The known incidents provision was created for historical data quality,
administration systems problems and process deficiencies on the policy
administration, financial reconciliations and operational finance aspects of
business outsourced. These balances represent the best estimates of costs
payable to customers. Additional information has been given below in respect
of the more significant balances within this provision.
During 2021, a £15 million provision was recognised in relation to errors in
final encashment calculations for With Profits Trustee Investment Plans and in
2022 it was increased to £29 million. During 2023, £18 million (2022: £nil)
was utilised and £7 million was released. The remaining balance at 31
December 2023 is £4 million (2022: £29 million). An £11 million provision
was also recognised in April 2021 following identification that certain
customers who have a Protected Pension Age or a Protected Tax Free Lump Sum
may not have had their benefits settled correctly. During 2023, £4 million
(2022: £4 million) was released and the remaining balance at 31 December 2023
is £3 million (2022: £7 million). These provisions will be utilised within
one to four years.
In 2020, following completion of the Part VII transfer of the Legal &
General business, a £12 million provision was recognised in respect of
amounts owed to customers due to various system and processing errors
resulting in incorrect rules having been applied to policies. During the year,
the provision was increased by £2 million (2022: £nil) and a further £1
million (2022: £4 million) was released. The remaining balance at 31 December
2023 is £3 million (2022: £2 million). A new provision of £5 million was
created during 2023 in relation to a pricing error within the same business
transfer caused by incorrect static data. During the year, £4 million was
utilised and the remaining balance at 31 December 2023 is £1 million. These
provisions will be utilised within one to two years.
The remaining provisions of £4 million as at 31 December 2023 (2022: £10
million) are expected to be utilised within one to four years. As at 31
December 2023, there are no significant uncertainties which could give rise to
a material change to the value of the provisions held for current known
incidents.
Indirect tax provision
The indirect tax provision relates to various indirect tax matters across
operational taxes, employment taxes and VAT. During the year, the provision
was strengthened by £43 million (2022: £nil). £3 million (2022: £nil) was
utilised and a further £10 million (2022: £nil) was released. The remaining
balance at 31 December 2023, of £59 million (2022: £29 million) represents
the Group's estimate of the maximum exposure as at the reporting date and is
expected to be utilised in one to three years.
Restructuring provisions
Transition and transformation provision
Following the acquisition of the Standard Life Assurance businesses in August
2018, the Group established a transition and transformation programme which
aims to deliver the integration of the Group's operating models via a series
of phases. During 2019, the Group announced its intention to extend its
strategic partnership with TCS to provide customer servicing, to develop a
digital platform and for migration of existing Standard Life policies to this
platform which raised a valid expectation of the impacts in those likely to be
affected.
The initial provision was established in 2019 and included migration costs,
severance costs and other expenses. Migration costs are considered a direct
expenditure necessarily entailed by the restructuring and represent an
obligation arising from arrangements entered into with TCS during 2019. No
costs have been provided for that relate to the ongoing servicing of policies.
Migration costs payable to TCS are subject to limited uncertainty as they are
fixed under the terms of the agreement entered into. There was an increase in
costs during 2022 following on from a strategic decision to re-phase the
programme. The severance costs are subject to uncertainty and will be impacted
by the number of staff that transfer to TCS, and the average salaries and
number of years' service of those affected.
During the year, the provision was increased by £6 million (2022: £33
million), a further £20 million (2022: £19 million) was utilised and £11
million (2022: nil) was released. The remaining £47 million (2022: £72
million) is expected to be utilised within one to three years.
Transfer of policy administration
A significant proportion of the Group's policy administration is outsourced to
Diligenta Limited ('Diligenta'), a UK-based subsidiary of Tata Consultancy
Services ('TCS'). Diligenta provide life and pension business process services
to a large number of the Group's policyholders. During 2018, the Group
announced its intention to move to a single outsourcer platform and to
transfer a further 2 million of the Group's legacy policies to Diligenta.
An initial provision was recognised in 2018 for the expected cost of the
platform migration and for severance and other costs associated with exiting
from the current arrangements. Migration costs are considered a direct
expenditure necessarily entailed by the restructuring and represent an
obligation arising from arrangements entered into with TCS during 2018. No
costs have been provided for that relate to the ongoing servicing of policies.
The migration elements of the provision are subject to limited uncertainty as
a consequence of the signed agreements that are in place. The uncertainty in
relation to the severance and associated exit costs is limited as the
restructuring programme is nearing completion. During the year the provision
was increased by £1 million (2022: £4 million) and a further £4 million
(2022: £4 million) was utilised. The remaining provision of £5 million
(2022: £8 million) is expected to be utilised within one year.
Other provisions
Other provisions includes £3 million (2022: £4 million) of obligations
arising under a gift voucher scheme operated by the SunLife business and a
commission clawback provision which represents the expected future clawback of
commission income earned by the SunLife business as a result of assumed lapses
of policies or associated benefits.
Another provision of £1 million was also recognised during the year upon
acquisition of SLF of Canada UK Limited in relation to restructuring and
litigation.
The remaining other provisions of £5 million (2022: £7 million) consist of a
number of small balances, all of which are less than £3 million in value.
Discounting
The impact of discounting on all provisions during the year from either the
passage of time or from a change in the discount rate is not material.
G8. Tax assets and liabilities
Deferred tax is provided for on temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for taxation purposes. Deferred tax is not provided in respect of
temporary differences arising from the initial recognition of goodwill and the
initial recognition of assets or liabilities in a transaction that is not a
business combination and that, at the time of the transaction, affects neither
accounting nor taxable profit. The amount of deferred tax provided is based on
the expected manner of realisation or settlement of the carrying amount of
assets and liabilities, using tax rates and laws enacted or substantively
enacted at the period end.
A deferred tax asset is recognised only to the extent that it is probable that
future taxable profits will be available against which the asset can be
utilised. Deferred tax assets are reduced to the extent that it is no longer
probable that the related tax benefit will be realised.
2023 2022
£m restated1
£m
Current tax:
Current tax receivable 502 519
Current tax payable (41) (34)
Deferred tax:
Deferred tax assets 143 158
Deferred tax liabilities (257) (309)
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
Movement in deferred tax liabilities
2023 1 January Recognised in consolidated income statement Recognised in other comprehensive income SLF of Canada UK Limited acquisition Other movements Less amounts previously classified as held for sale 31 December
£m £m £m £m £m £m £m
Trading losses 196 132 - 27 - - 355
Capital losses 24 (22) - - - - 2
Expenses and deferred acquisition 397 6 - 19 - - 422
costs carried forward
Provisions and other temporary differences 32 (28) - - - - 4
Non-refundable pension scheme surplus (151) 34 12 (4) 1 - (108)
Committed future pension contributions 9 (5) (1) - - - 3
Transitional adjustment relating to IFRS 17 - (1) 2 9 - - 10
Accelerated capital allowances 17 4 - 1 - 1 23
Intangibles 14 17 - - - - 31
Acquired in-force business (405) 55 - (4) - (7) (361)
Customer relationships (28) 1 - - - - (27)
Unrealised gains (261) (77) - (23) - - (361)
Actuarial liability differences between local GAAP and IFRS 17 2 (110) - (16) 6 - (118)
Other 3 8 - - - - 11
(151) 14 13 9 7 (6) (114)
2022 (restated) 1 January Recognised in consolidated income statement Recognised in other comprehensive income SLF of Canada UK Limited acquisition Other movements Less amounts classified as held for sale 31 December
£m £m £m £m £m £m £m
Trading losses 103 86 - - 7 - 196
Capital losses 32 (8) - - - - 24
Expenses and deferred acquisition 81 318 - - (2) - 397
costs carried forward
Provisions and other temporary differences 28 6 - - (2) - 32
Non-refundable pension scheme surplus (255) 392 (288) - - - (151)
Committed future pension contributions - 5 4 - - - 9
Accelerated capital allowances 16 1 - - - - 17
Intangibles 2 11 - - 1 - 14
Acquired in-force business (445) 43 - - - (3) (405)
Actuarial liability differences between local GAAP and IFRS 17 (341) 339 - - 4 - 2
Customer relationships (30) 2 - - - - (28)
Unrealised gains (593) 333 1 - (2) - (261)
IFRS transitional adjustments (5) 5 - - - - -
Other - 1 - - 2 - 3
(1,407) 1,534 (283) - 8 (3) (151)
The standard rate of UK corporation tax for the year ended 31 December 2023 is
23.5% (2022: 19%).
An increase from the 19% UK corporation tax rate to 25%, effective from 1
April 2023, was announced in the Budget on 3 March 2021, and substantively
enacted on 24 May 2021. Accordingly, shareholder deferred tax assets and
liabilities, where provided, are reflected at 25%. Deferred income tax assets
are recognised for tax losses carried forward only to the extent that
realisation of the related tax benefit is probable.
2023 2022
£m £m
Deferred tax assets have not been recognised in respect of:
Tax losses carried forward 110 82
Excess expenses and deferred acquisition costs 9 116
Actuarial liability differences between local GAAP and IFRS 17 14 27
Intangibles 12 29
Deferred tax assets not recognised on capital losses 312 40
The Group also has £635 million of BLAGAB trading losses carried forward as
at 31 December 2023 in Phoenix Life Limited, ReAssure Limited and Sun Life
Assurance Company of Canada (UK) Limited (2022: £ 456 million of losses
across Phoenix Life Limited, ReAssure Limited and Phoenix Life Assurance
Limited). Of the £635 million, a deferred tax asset was recognised in respect
of £623 million of losses (2022:£164 million of losses). The remaining £12
million of gross losses are projected to be utilised, however no value has
been attributed to these deferred tax assets given the interaction with other
deductible temporary differences (2022: £158 million of losses). In 2022
deferred tax assets were not recognised in respect of the remaining £134
million of losses due to the uncertainty of future trading profits against
which the losses could be offset.
There is a technical matter which is currently being discussed with HMRC in
relation to the L&G insurance business transfer to ReAssure Limited. These
discussions are not sufficiently progressed at this stage for recognition of
any potential tax benefit arising.
A tax dispute with HMRC in relation to the tax treatment of an asset formerly
held by Guardian Assurance Limited (before the business was transferred to
ReAssure Limited) was resolved in the period in favour of the Group. The 2021
current tax liability included an accrual for the total tax under dispute on
the basis that there was sufficient risk that the tax treatment of the Group
would not then be accepted. In 2022 this tax liability was released.
The Group in conjunction with a number of other companies has challenged
HMRC's position on the corporation tax treatment of overseas portfolio
dividends from companies resident in the EU ('EU dividends') using a Group
Litigation Order ('GLO'). The issue relates to whether the UK tax rules, which
taxed EU dividends received prior to 1 July 2009, was contrary to EU law given
that dividends received from UK companies were exempt from tax. In 2009 UK tax
law was changed with both overseas and UK dividends being treated as exempt
from corporation tax.
In July 2018, the Supreme Court concluded in favour of the tax payer and a tax
benefit of £13 million was recognised at the end of 2018 in relation to
enhanced double tax relief claims which the Group is entitled to in accordance
with the Court judgement. As a result of the insurance business transfer from
Legal and General Assurance Society during YE20, the tax refund for the
benefit of the Group's with-profit and unit linked funds increased to £45
million and £23 million respectively. In the case of the with-profit funds
there was an increase in unallocated surplus and for the unit linked funds
there was a corresponding increase in investment contract liabilities as a
result of the recognition of the tax asset.
In January 2020, HMRC issued a communication to taxpayers who are affected by
the dividend GLO but are not direct participants of it, setting out HMRC's
intended approach to settling enquiries into the amount of double tax relief
available for statutory protective or other claims. The Group has been
discussing the claims with HMRC during the course of 2022 and 2023, but due to
the significant number of cases and years affected, no amounts have as yet
been repaid. The level of tax refund expected is currently unchanged as at the
end of 2023.
Some companies of the Group were late joiners or not members of the GLO but
have made statutory protective tax claims totalling circa £14 million for the
benefit of unit linked life funds based on the Supreme Court decision. HMRC
has challenged the validity of such claims and is currently considering
further tax litigation in this area against other third parties. Some progress
through the courts has been made in the course of 2022 and 2023, but it is
expected that the litigation will continue to run. Due to the uncertainty
around the potential success of the claims a tax asset has not been recognised
in respect of these claims.
The Group is continuing to monitor developments in relation to the G20-OECD
Inclusive Framework "Pillar Two" rules, as the Group expects to be within the
scope of the rules from 1 January 2024. Broadly, these rules seek to ensure
that, on a jurisdiction-by-jurisdiction basis, large multinational enterprises
pay a minimum tax rate of 15% on worldwide profits arising after 31 December
2023.
The Group also notes the enactment of legislation in Bermuda in December 2023
which introduced a Corporate Income Tax with a headline rate of 15% effective
from 1 January 2025. This legislation is expected to apply to the Group's
local Bermudian operations. Given the current size of local operations, the
Group does not expect the immediate impact to be material.
As at year end 2023, the main other overseas jurisdictions where we operate
and which have enacted local Pillar Two legislation are Germany, Ireland,
Luxembourg, the Netherlands and the United Kingdom.
The Group is continuing to assess the impact of the Pillar Two income taxes
legislation on its future financial performance. Based on the work completed
to date on most recent historical financial information, the Group does not
expect a material exposure to Pillar Two income taxes. Nonetheless, the Group
notes that the Pillar Two income taxes legislation is expected to continue
developing, the rules are inherently complex and can potentially lead to
arbitrary outcomes. Further that historical financial performance is not
necessarily indicative of future performance, so the actual impact that the
Pillar Two income taxes legislation may have on the Group's future financial
performance may be different from expectations.
G9. Lease Liabilities
The lease liability is initially measured at the present value of the lease
payments that are not paid at the commencement date, discounted using the
Group's incremental borrowing rate as the interest rate implicit in the lease
cannot be readily determined. For ground rent leases, the incremental
borrowing rate of investment funds holding the associated investment
properties is used as the discount rate. The lease liability is subsequently
increased by the interest cost on the lease liability and decreased by lease
payments made. It is remeasured when there is a change in future lease
payments arising from, for example, rent reviews or from changes in the
assessment of whether a termination option is reasonably certain not to be
exercised. The Group has applied judgement to determine the lease term for
some lease contracts with break clauses.
2023 2022
£m £m
At 1 January 92 99
Leases incepted during the year 1 6
Termination of leases following the disposal of associated investment (7) (4)
properties
Interest expense 2 3
Lease payments (14) (14)
Remeasurement of leases - 2
At 31 December 74 92
Amount due within twelve months 9 11
Amount due after twelve months 65 81
Details of the related right-of-use assets are included in notes G3 and G4.
G10. Accruals and deferred income
This note analyses the Group's accruals and deferred income at the end of the
year.
2023 2022
£m restated1
£m
Accruals 545 476
Deferred income 34 105
Accruals and deferred income including amounts classified as held for sale 579 581
Less amounts classified as held for sale - (37)
At 31 December 579 544
Amount due for settlement after 12 months 42 35
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
G11. Other payables
Other payables are recognised when due and are measured on initial recognition
at the fair value of the consideration payable. Subsequent to initial
recognition, these payables are measured at amortised cost using the effective
interest rate method.
2023 2022
£m restated1
£m
Investment broker balances 727 513
Property related payables 51 53
Investment management fees 16 48
Other payables 1,478 759
2,272 1,373
Amount due for settlement after 12 months - -
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
H. Interests in subsidiaries and associates
H1. Subsidiaries
Subsidiaries are consolidated from the date that effective control is obtained
by the Group (see basis of consolidation in note A1) and are excluded from
consolidation from the date they cease to be subsidiary undertakings. For
subsidiaries disposed of during the year, any difference between the net
proceeds, plus the fair value of any retained interest, and the carrying
amount of the subsidiary including non-controlling interests, is recognised in
the consolidated income statement.
The Group uses the acquisition method to account for the acquisition of
subsidiaries. The cost of an acquisition is measured at the fair value of the
consideration. Any excess of the cost of acquisition over the fair value of
the net assets acquired is recognised as goodwill. In certain acquisitions an
excess of the acquirer's interest in the net fair value of the acquiree's
identifiable assets, liabilities, contingent liabilities and non-controlling
interests over cost may arise. Where this occurs, the surplus of the fair
value of net assets acquired over the fair value of the consideration is
recognised in the consolidated income statement.
Directly attributable acquisition costs are included within administrative
expenses, except for acquisitions undertaken prior to 2010 when they are
included within the cost of the acquisition. Costs directly related to the
issuing of debt or equity securities are included within the initial carrying
amount of debt or equity securities where these are not carried at fair value.
Intra-group balances and income and expenses arising from intra-group
transactions are eliminated in preparing the consolidated financial
statements.
The Group has invested in a number of collective investment schemes such as
Open-ended Investment Companies ('OEICs'), unit trusts, Société
d'Investissement à Capital Variable ('SICAVs'), investment trusts and private
equity funds. These invest mainly in equities, bonds, property and cash and
cash equivalents. The Group's percentage ownership in these collective
investment schemes can fluctuate according to the level of Group and third
party participation in the structures.
When assessing control over collective investment schemes, the Group considers
those factors described under the 'Basis of consolidation' in note A1. In
particular, the Group considers the scope of its decision-making authority,
including the existence of substantive rights (such as power of veto,
liquidation rights and the right to remove the fund manager) that give it the
ability to direct the relevant activities of the investee. The assessment of
whether rights are substantive rights, and the circumstances under which the
Group has the practical ability to exercise them, requires the exercise of
judgement. This assessment includes a qualitative consideration of the rights
held by the Group that are attached to its holdings in the collective
investment schemes, rights that arise from contractual arrangements between
the Group and the entity or fund manager and the rights held by third parties.
In addition, consideration is made of whether the Group has de facto power,
for example, where third party investments in the collective investment
schemes are widely dispersed.
Where Group companies are deemed to control such collective investment schemes
they are consolidated in the Group financial statements, with the interests of
external third parties recognised as a liability (see the accounting policy
for 'Net asset value attributable to unitholders' in note E1 for further
details).
Certain of the collective investment schemes have non-coterminous period ends
and are consolidated on the basis of additional financial statements prepared
to the period end.
Portfolio transfers
When completing an acquisition, the Group first considers whether the
acquisition meets the definition of a business combination under IFRS 3
Business Combinations. IFRS 3, and the use of acquisition accounting, does not
apply in circumstances where the acquisition of an asset or a group of assets
does not constitute a business, and is instead a portfolio of assets and
liabilities. In such cases, the Group's policy is to recognise and measure the
assets acquired and liabilities assumed in accordance with the Group's
accounting policies for those assets and liabilities. The difference between
the consideration and the net assets or liabilities acquired is recognised in
the consolidated income statement.
H1.1 Significant restrictions
The ability of subsidiaries to transfer funds to the Group in the form of cash
dividends or to repay loans and advances is subject to local laws, regulations
and solvency requirements.
Each UK life company and the Group must retain sufficient capital at all times
to meet the regulatory capital requirements mandated by or otherwise agreed
with the relevant national supervisory authority. Further information on the
capital requirements applicable to Group entities are set out in the Capital
Management section (note I3). Under UK company law, dividends can only be paid
if a UK company has distributable reserves sufficient to cover the dividend.
In addition, contractual requirements may place restrictions on the transfer
of funds as follows:
• Pearl Life Holdings Limited ('PeLHL') is required to make payments of
contributions into charged accounts on behalf of the Abbey Life Scheme. These
amounts do not form part of the pension scheme assets and at 31 December 2023,
PeLHL held £9 million (2022: £9 million) within debt securities and £24
million (2022: £18 million) within cash and cash equivalents in respect of
these charged accounts. Further details of when the remaining amounts may
become payable to the pensions scheme are included in note G1.3.
• ReAssure Midco Limited ('RML') is required to make payments of
contributions into a ring-fenced account on behalf of the ReAssure Staff
Pension Scheme. These amounts do not form part of the pension scheme assets
and at 31 December 2023, RML held £44 million (2022: £40 million) within
debt securities in respect of this account. Further details of when these
amounts may become payable to the pensions scheme are included in note G1.4.
H2. Acquisition of SLF of Canada UK Limited
On 3 April 2023, the Group acquired 100% of the issued share capital of SLF of
Canada UK Limited from Sun Life Assurance Company of Canada, part of the Sun
Life Financial Inc. Group, for total cash consideration of £250 million.
SLF of Canada UK Limited and its subsidiaries are a closed book life insurance
business that has a portfolio of pension, life and annuity products.
The acquisition is in line with the Group's strategy to undertake mergers and
acquisitions ('M&A') to acquire new customers at scale and deliver better
outcomes for them. The Group also transforms acquired businesses to deliver
significant cost and capital synergies, creating significant shareholder
value. The table below summarises the fair value of identifiable assets and
acquired liabilities assumed as at the date of acquisition.
Notes Fair value
£m
Assets
Acquired in-force business G2 16
Pension scheme asset G1 16
Reimbursement rights G1 2
Investment property G4 283
Financial assets 7,552
Deferred tax assets 12
Prepayments and accrued income 47
Other receivables 64
Cash and cash equivalents 230
Total assets 8,222
Liabilities
Insurance contract liabilities F1 4,386
Reinsurance contract liabilities F1 153
Investment contract liabilities 3,190
Other financial liabilities 75
Provisions G7 5
Deferred tax liabilities 3
Current tax 4
Other payables 90
Total liabilities 7,906
Fair value of net assets acquired 316
Gain arising on acquisition (66)
Purchase consideration transferred 250
Analysis of cash flows on acquisition:
Net cash acquired with the subsidiaries (included in cash flow from investing 230
activities)
Cash paid (250)
Net cash flow on acquisition (20)
Acquired in-force business (AVIF)
An asset of £16 million arises reflecting the present value of future profits
associated with the acquired in-force business. The AVIF has been determined
by reference to the fair value of investment contract rights acquired.
The valuation of AVIF has been determined by reference to the assumptions
expected to be applied by a market participant in an orderly transaction. The
valuation approach uses present value techniques applied to the best estimate
cash flows expected to arise from policies that were in-force at the
acquisition date, adjusted to reflect the price of bearing the uncertainty
inherent in those cash flows. This approach incorporates a number of
judgements and assumptions which have impacted on the resultant valuation, the
most significant of which include expected policy lapses and surrender costs,
and the expenses associated with servicing the policies, together with
economic assumptions such as future investment returns and the discount rate.
The determination of the majority of these assumptions is carried out on a
consistent basis with those used in financial reporting with appropriate
adjustments to reflect a market participant's view. The adjustment for risk
for the uncertainty in the cash flows has been determined using a cost of
capital approach.
The valuation of insurance contract liabilities and associated reinsurance
assets has been carried out on a consistent basis with that applied by the
Group under the fair value approach on the transition to IFRS 17. Further
information on the fair value approach used for the transition to IFRS 17 is
set out in note A4.1 Determination of transition method and its application.
Deferred acquisition costs of £1 million and a deferred income liability of
£2 million have been derecognised on acquisition and replaced as part of the
AVIF balance.
Other receivables
The financial assets acquired include other receivables with a fair value of
£64 million. The gross amount due under the contracts is £64 million, of
which no balances are expected to be uncollectable.
Tax
The tax impact of the fair value adjustments recognised on acquisition has
been reflected in the acquisition balance sheet.
Gain on acquisition
A gain on acquisition of £66 million has been recognised in the Group's
consolidated income statement for the year ended 31 December 2023, reflecting
the excess of the fair value of the net assets acquired over the consideration
paid for the acquisition of the SLF of Canada UK businesses.
The consideration for the acquisition was fixed and determined using a 'locked
box' pricing mechanism as at 31 December 2021. Over the period between 31
December 2021 and the completion date, the value of the net assets acquired
increased. This principally reflects a negative impact on assets from
increasing yields being more than offset by a reduction in liabilities as a
result of favourable assumption changes and demographic experience.
Additionally, in accordance with IFRS 3 Business Combinations, the acquired
defined benefit pension schemes has been measured on acquisition in accordance
with the Group's accounting policies as set out in note G1, as opposed to a
fair value basis.
Transaction costs
Transaction costs of £4 million have been expensed and are included in
administrative expenses in the consolidated income statement. All of these
costs were paid.
Impact of the acquisition on results
From the date of acquisition, the SLF of Canada UK business contributed £199
million to revenue and £24 million of profit after tax attributable to
owners.
It is not possible to provide revenue and profit after tax attributable to
owners for the Group had the acquisition taken place at the beginning of the
year as key income statement items such as the amortisation of the contractual
service margin recognised under IFRS 17 are calculated with reference to the
fair value as at the date of acquisition.
H3. Assets and liabilities classified as held for sale
The Group classifies disposal groups as held for sale if their carrying
amounts will be recovered principally through a sale transaction rather than
through continuing use. Disposal groups classified as held for sale are
measured at the lower of their carrying amount and fair value less costs to
sell. Costs to sell are the incremental costs directly attributable to the
disposal of the disposal group, excluding finance costs and income tax
expense. Assets and liabilities classified as held for sale are presented
separately in the statement of consolidated financial position.
Agreement with abrdn plc
On 23 February 2021, the Group entered into a new agreement with abrdn plc to
simplify the arrangements of their Strategic Partnership, enabling the Group
to control its own distribution, marketing and brands, and focusing the
Strategic Partnership on using abrdn plc's asset management services in
support of Phoenix Group's growth strategy. Under the terms of the
transaction, the Group agreed to sell its UK investment and platform-related
products, comprising Wrap Self Invested Personal Pension ('Wrap SIPP'),
Onshore Bond and UK Trustee Investment Plan ('TIP') to abrdn plc through a
Part VII transfer. The economic risk and rewards for this business transferred
to abrdn plc effective from 1 January 2021 via a profit transfer arrangement.
Consideration received of £62 million in respect of this business was
deferred until completion of the Part VII and the payments to abrdn plc in
respect of the profit transfer arrangement are being offset against the
deferred consideration balance.
Since 2021, the balances in the statement of consolidated financial position
relating to the Wrap SIPP, Onshore Bond and TIP business have been classified
as a disposal group held for sale. The total proceeds of disposal were not
expected to exceed the carrying value of the related net assets and
accordingly the disposal group was measured at fair value less costs to sell,
resulting in an impairment of the acquired in-force business ('AVIF') of £59
million at the date of the transaction. As at 31 December 2023, the expected
completion date for the transfer of the TIP business was March 2025.
Prior to 31 December 2023, a re-scoping exercise was undertaken with abrdn plc
and it was agreed that the insured funds elements of the Wrap SIPP and Onshore
Bond businesses will no longer transfer to abrdn plc, and as a result this
business no longer meets the requirements to be classified as held for sale.
The self-invested elements of the Wrap SIPP business, which are held
off-balance sheet, are still expected to transfer after April 2025. As at 31
December 2023, only the TIP business has been classified as a disposal group
held for sale.
The AVIF, which relates to the Wrap SIPP and Onshore Bond business, has been
further impaired since 2021 and a further impairment charge of £28 million
has been recognised in the year (2022: £17 million) prior to being removed
from its classification as held for sale. As at 31 December 2023, the balances
relating to the Wrap SIPP and Onshore Bond business have been included within
the respective line items in the consolidated statement of financial position,
and assets of £2,410 million and liabilities of £2,412 million have been
removed from the held for sale classification. The major classes of assets and
liabilities classified as held for sale are as follows:
2023 2022
£m £m
Acquired in-force business - 37
Investment property 2,044 2,506
Financial assets 2,498 4,629
Cash and cash equivalents 52 33
Assets classified as held for sale 4,594 7,205
Assets in consolidated funds1 188 1,147
Total assets of the disposal group 4,782 8,352
Investment contract liabilities (4,780) (8,312)
Other financial liabilities (2) (4)
Deferred tax liabilities - (7)
Accruals and deferred income - (37)
Liabilities classified as held for sale (4,782) (8,360)
1 Included in assets of the disposal group are assets in consolidated funds,
which are held to back investment contract liabilities of the Wrap SIPP,
Onshore Bond and TIP business and are disclosed within financial assets in the
consolidated statement of financial position. The Group controls these funds
at 31 December 2023 and therefore consolidates 100% of the assets with any
non-controlling interest recognised as net asset value attributable to
unitholders.
H4. Associates: Investment in UK commercial property REIT ('UKCPR')
UKCPR is a property investment company which is domiciled in Guernsey and is
admitted to the official list of the UK Listing Authority and to trading on
the London Stock Exchange.
The Group's interest in UKCPR is held in the with-profit funds of the Group's
life companies. Therefore, the shareholder exposure to fair value movements in
the Group's investment in UKCPR is limited to the impact of those movements on
the shareholder share of distributed profits of the relevant fund.
As at 31 December 2023, the Group held 43.4% (2022: 44.6%) of the issued share
capital of UKCPR and the value of this investment, measured at fair value and
included within financial assets, was £349 million (2022: £329 million).
Management has concluded that the Group did not control UKCPR in either the
current or comparative periods. The Group does not hold a unilateral power of
veto in general meetings and voting is subject to certain restrictions in
accordance with the terms of an existing relationship agreement it has with
UKCPR.
Summary consolidated financial information (at 100%) for UKCPR group is shown
below:
2023 2022
Non-current assets 1,224 1,276
Current assets 64 83
Non-current liabilities (236) (291)
Current liabilities (28) (32)
1,024 1,036
Revenue 68 71
Profit/(loss) for the year after tax 32 (222)
H5. Structured entities
A structured entity is an entity that has been designed so that voting or
similar rights are not the dominant factor in deciding who controls the
entity, such as when any voting rights relate to administrative tasks only,
and the relevant activities are directed by means of contractual arrangements.
A structured entity often has some or all of the following features or
attributes: (a) restricted activities; (b) a narrow and well-defined
objective, such as to provide investment opportunities for investors by
passing on risks and rewards associated with the assets of the structured
entity to investors; (c) insufficient equity to permit the structured entity
to finance its activities without subordinated financial support; and (d)
financing in the form of multiple contractually linked instruments to
investors that create concentrations of credit or other risks (tranches).
The Group has determined that all of its investments in collective investment
schemes are structured entities. In addition, a number of debt security
structures and private equity funds have been identified as structured
entities. The Group has assessed that it has interests in both consolidated
and unconsolidated structured entities as shown below:
• Unit trusts;
• OEICs;
• SICAVs;
• Private equity funds;
• Asset backed securities;
• Collateralised Debt Obligations ('CDOs');
• Other debt structures; and
• Phoenix Group Employee Benefit Trust ('EBT').
The Group's holdings in the investments listed above are susceptible to market
price risk arising from uncertainties about future values. Holdings in
investment funds are subject to the terms and conditions of the respective
fund's prospectus and the Group holds redeemable shares or units in each of
the funds. The funds are managed by internal and external fund managers who
apply various investment strategies to accomplish their respective investment
objectives. All of the funds are managed by fund managers who are compensated
by the respective funds for their services. Such compensation generally
consists of an asset-based fee and a performance-based incentive fee and is
reflected in the valuation of each fund.
H5.1 Interests in consolidated structured entities
The Group has determined that where it has control over funds, these
investments are consolidated structured entities.
The EBT is a consolidated structured entity that holds shares to satisfy
awards granted to employees under the Group's share-based payment schemes.
During the year, the Group granted further loans to the EBT of £12 million
(2022: £13 million).
As at the reporting date, the Group has no intention to provide financial or
other support to any other consolidated structured entity.
H5.2 Interests in unconsolidated structured entities
The Group has interests in unconsolidated structured entities. These
investments are held as financial assets in the Group's consolidated statement
of financial position held at fair value through profit or loss. Any change in
fair value is included in the consolidated income statement in 'net investment
income'. Dividend and interest income is received from these investments.
A summary of the Group's interest in unconsolidated structured entities is
included below. These are shown according to the financial asset
categorisation in the consolidated statement of financial position.
2023 2022
Carrying value of financial assets Carrying value of financial assets
£m £m
Equities 1,051 968
Collective investment schemes 78,909 75,389
Debt securities 8,264 8,062
88,224 84,419
The Group's maximum exposure to loss with regard to the interests presented
above is the carrying amount of the Group's investments. Once the Group has
disposed of its shares or units in a fund, it ceases to be exposed to any risk
from that fund. The Group's holdings in the above unconsolidated structured
entities are largely less than 50% and as such the size of these structured
entities are likely to be significantly higher than their carrying value.
Details of commitments to subscribe to private equity funds and other unlisted
assets are included in note I5.
H6. Group entities
The table below sets out the Group's subsidiaries (including consolidated
collective investment schemes), associates and significant holdings in
undertakings (including undertakings in which the holding amounts to 20% or
more of the nominal value of the shares or units and they are not classified
as a subsidiary or associate).
Registered address of incorporated entities If unincorporated, address of principal place of business Type of investment (including class of shares held) % of shares /units held
Subsidiaries:
Phoenix Life Limited (life assurance company) Wythall1 Ordinary Shares 100.00%
Phoenix Life Assurance Limited (life assurance company) Wythall1 Ordinary Shares 100.00%
Phoenix Life Assurance Europe DAC (life assurance company) Dublin3 Ordinary Shares 100.00%
Standard Life Assurance Limited (life assurance company - directly owned by Edinburgh2 Ordinary Shares 100.00%
the Company)
Standard Life International Designated Activity Company Dublin3 Ordinary Shares 100.00%
(life assurance company - directly owned by the Company)
Standard Life Pension Funds Limited (life assurance company) Edinburgh2 Limited by Guarantee 100.00%
Sun Life Assurance Company of Canada (U.K.) Limited Hampshire43 Ordinary Shares 100.00%
(life assurance company)
ReAssure Life Limited (life assurance company) Telford4 Ordinary Shares 100.00%
ReAssure Limited (life assurance company) Telford4 Ordinary Shares 100.00%
Phoenix Re Limited (life assurance company) Bermuda41 Ordinary Shares 100.00%
Phoenix Group Management Services Limited (management Wythall1 Ordinary Shares 100.00%
services company)
Pearl Group Services Limited (management services company) Wythall1 Ordinary Shares 100.00%
Standard Life Assets and Employee Services Limited Edinburgh2 Ordinary Shares 100.00%
(management services company)
ReAssure Companies Services Limited (management services company) Telford4 Ordinary Shares 100.00%
PGMS (Ireland) Limited (management services company) Dublin5 Ordinary Shares 100.00%
ReAssure UK Services Limited (management services company) Telford4 Ordinary Shares 100.00%
Phoenix Management Services (Bermuda) Limited (management services company) Bermuda41 Ordinary Shares 100.00%
SLFC Services Company (UK) Limited (management services company) Hampshire43 Ordinary Shares 100.00%
PA (GI) Limited (non-trading company) Wythall1 Ordinary Shares 100.00%
103 Wardour Street Retail Investment Company Limited (investment company) Telford4 Ordinary Shares 100.00%
28 Riberia de Loira SL (property management company) Madrid42 Ordinary Shares 100.00%
3 St Andrew Square Apartments Limited (property management company) Edinburgh6 Ordinary Shares 100.00%
330 Avenida de Aragon SL (property management company) Madrid17 Ordinary Shares 100.00%
Abbey Life Assurance Company Limited (non-trading company) Wythall1 Ordinary Shares 100.00%
Abbey Life Trust Securities Limited (pension trustee company) Wythall1 Ordinary Shares 100.00%
Abbey Life Trustee Services Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Abrdn Private Equity Opportunities Trust plc (investment company) Edinburgh6 Ordinary Shares 56.01%
Alba LAS Pensions Management Limited (dormant company) Edinburgh2 Ordinary Shares 100.00%
Alba Life Trustees Limited (non-trading company) Edinburgh2 Ordinary Shares 100.00%
Axial Fundamental Strategies (US Investments) LLC (investment company) Delaware7 Limited Liability Company 100.00%
BA (FURBS) Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Barnwood Properties Limited (property investment company) Hampshire43 Ordinary Shares 100.00%
BL Telford Limited (dormant company) Telford4 Ordinary Shares 100.00%
Britannic Finance Limited (finance and insurance services company) Wythall1 Ordinary Shares 100.00%
Britannic Group Services Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Britannic Money Investment Services Limited (investment advice company) Wythall1 Ordinary Shares 100.00%
Century Trustee Services Limited (dormant company) Wythall1 Ordinary Shares 100.00%
CGE Management Company Limited (formerly known as Clyde Gateway Management Edinburgh6 Ordinary Shares 100.00%
Company Limited)
CH Management Limited (investment company) Delaware7 Ordinary Shares 100.00%
Cityfourinc (dormant company) Wythall1 Unlimited with Shares 100.00%
ERIP General Partner Limited (General Partner to ERIP Limited Partnership) Telford4 Ordinary Shares 80.00%
ERIP Limited Partnership (Limited Partnership) Telford4 Ordinary Shares 100.00%
G Assurance & Pensions Services Limited (non-trading company) Telford4 Ordinary Shares 100.00%
G Financial Services Limited (dormant company) Telford4 Ordinary Shares 100.00%
G Life H Limited (holding company) Telford4 Ordinary Shares 100.00%
G Park Management Company Limited (property management company) London44 Ordinary Shares 100.00%
G Trustees Limited (trustee company) Telford4 Ordinary Shares 100.00%
Gallions Reach Shopping Park (Nominee) Limited (dormant company) London44 Ordinary Shares 100.00%
Gresham Life Assurance Society Limited (dormant company) Telford4 Ordinary Shares 100.00%
Iceni Nominees (No. 2) Limited (dormant company) London44 Ordinary Shares 100.00%
IH (Jersey) Limited (dormant company) Jersey8 Ordinary Shares 100.00%
Impala Holdings Limited (holding company) Wythall1 Ordinary Shares 100.00%
Impala Loan Company 1 Limited (dormant company) Edinburgh2 Ordinary Shares 100.00%
Inhoco 3107 Limited (dormant company) London44 Ordinary Shares 100.00%
Laurtrust Limited (dormant company) Hampshire43 Ordinary Shares 100.00%
London Life Limited (dormant company) Wythall1 Ordinary Shares 100.00%
London Life Trustees Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Namulas Pension Trustees Limited (trustee company) Telford4 Ordinary Shares 100.00%
National Provident Institution (dormant company) Wythall1 Unlimited without Shares 100.00%
National Provident Life Limited (dormant company) Wythall1 Ordinary Shares 100.00%
NM Life Trustees Limited (dormant company) Telford4 Ordinary Shares 100.00%
NM Pensions Limited (dormant company) Telford4 Ordinary Shares 100.00%
NP Life Holdings Limited (dormant company) Wythall1 Ordinary Shares 100.00%
NPI (Printworks) Limited (dormant company) Wythall1 Ordinary Shares 100.00%
NPI (Westgate) Limited (dormant company) Wythall1 Ordinary Shares 100.00%
PC Management Limited (property management company) Dublin15 Ordinary Shares 69.00%
Pearl (Covent Garden) Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Pearl (Martineau Phase 1) Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Pearl (Martineau Phase 2) Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Pearl (Moor House) Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Pearl (WP) Investments LLC (investment company) Delaware7 Limited Liability Company 100.00%
Pearl AL Limited (dormant company) Edinburgh2 Ordinary Shares 100.00%
Pearl Assurance Group Holdings Limited (investment company) Wythall1 Ordinary Shares 100.00%
Pearl Customer Care Limited (financial services company) Wythall1 Ordinary Shares 100.00%
Pearl Group Holdings (No. 1) Limited (finance company) London10 Ordinary Shares 100.00%
Pearl Group Holdings (No. 2) Limited (holding company) Wythall1 Ordinary Shares 100.00%
Pearl Group Secretariat Services Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Pearl Life Holdings Limited (holding company) Wythall1 Ordinary Shares 100.00%
Pearl MP Birmingham Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Pearl RLG Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Pearl Trustees Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Phoenix Life CA Holdings Limited (formerly known as PG Dormant (No 4) Limited) Wythall1 Ordinary Shares 100.00%
(dormant company)
Phoenix Group CA Services Limited (formerly known as PG Dormant (No 5) Wythall1 Ordinary Shares 100.00%
Limited) (dormant company)
Phoenix Life CA Limited (formerly known as PG Dormant (No 6) Limited) (dormant Wythall1 Ordinary Shares 100.00%
company)
PGMS (Glasgow) Limited (investment company) Edinburgh2 Ordinary Shares 100.00%
PGMS (Ireland) Holdings Unlimited Company (holding company) Dublin5 Unlimited with Shares 100.00%
PGS 2 Limited (investment company) Wythall1 Ordinary Shares 100.00%
Phoenix & London Assurance Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Phoenix (Barwell 2) Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Phoenix (Chiswick House) Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Phoenix (Moor House 1) Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Phoenix (Moor House 2) Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Phoenix (Printworks) Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Phoenix (Stockley Park) Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Phoenix Advisers Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Phoenix AW Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Phoenix Customer Care Limited (financial services company) Wythall1 Ordinary Shares 100.00%
Phoenix ER1 Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Phoenix ER2 Limited (finance company) Wythall1 Ordinary Shares 100.00%
Phoenix ER3 Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Phoenix ER4 Limited (finance company) Wythall1 Ordinary Shares 100.00%
Phoenix ER5 Limited (finance company) Wythall1 Ordinary Shares 100.00%
Phoenix ER6 Limited (finance company) Wythall1 Ordinary Shares 100.00%
Phoenix Group Capital Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Phoenix Group Employee Benefit Trust Jersey16 Trust 100.00%
Phoenix Group Holdings (Bermuda) Limited (holding company - directly owned by Bermuda41 Ordinary Shares 100.00%
the Company)
Phoenix Group Holdings (non-trading company) Cayman Islands10 Private Company 100.00%
Phoenix Group Management Limited (dormant company) Wythall1 Ordinary Shares 100.00%
PGH CA Limited (formerly known as Pearl Group Management Services Limited) London9 Ordinary Shares 100.00%
(dormant company)
Phoenix Holdings (Bermuda) Limited (holding company) Bermuda41 Ordinary Shares 100.00%
Phoenix Life Holdings Limited (holding company - directly owned by the Wythall1 Ordinary Shares 100.00%
Company)
Phoenix Management Services Holdings (Bermuda) Limited (holding company) Bermuda41 Ordinary Shares 100.00%
Phoenix Pension Scheme (Trustees) Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Phoenix Pensions Trustee Services Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Phoenix SCP Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Phoenix SCP Pensions Trustees Limited (trustee company) Wythall1 Ordinary Shares 100.00%
Phoenix SCP Trustees Limited (trustee company) Edinburgh2 Ordinary Shares 100.00%
Phoenix SL Direct Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Phoenix SPV1 Limited (investment company) Wythall1 Ordinary Shares 100.00%
Phoenix SPV2 Limited (investment company) Wythall1 Ordinary Shares 100.00%
Phoenix SPV3 Limited (investment company) Wythall1 Ordinary Shares 100.00%
Phoenix SPV4 Limited (investment company) Wythall1 Ordinary Shares 100.00%
Phoenix ULA Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Phoenix Unit Trust Managers Limited (unit trust manager) Wythall1 Ordinary Shares 100.00%
Phoenix Wealth Holdings Limited (holding company) Wythall1 Ordinary Shares 100.00%
Phoenix Wealth Services Limited (financial services company) Wythall1 Ordinary Shares 100.00%
Phoenix Wealth Trustee Services Limited (trustee company) Wythall1 Ordinary Shares 100.00%
Pilangen Logistik AB (investment company) Stockholm13 Ordinary Shares 100.00%
Pilangen Logistik I AB (investment company) Stockholm13 Ordinary Shares 100.00%
ReAssure FS Limited (dormant company) Telford4 Ordinary Shares 100.00%
ReAssure FSH UK Limited (holding company) Telford4 Ordinary Shares 100.00%
ReAssure Group plc (holding company - directly owned by the Company) Telford4 Ordinary Shares 100.00%
ReAssure Life Pension Trustees Limited (dormant company) Telford4 Ordinary Shares 100.00%
ReAssure LL Limited (dormant company) Telford4 Ordinary Shares 100.00%
ReAssure Midco Limited (holding company) Telford4 Ordinary Shares 100.00%
ReAssure Nominees Limited (dormant company) Telford4 Ordinary Shares 100.00%
ReAssure Pension Trustees Limited (dormant company) Telford4 Ordinary Shares 100.00%
ReAssure PM Limited (dormant company) Telford4 Ordinary Shares 100.00%
ReAssure Trustees Limited (dormant company) Telford4 Ordinary Shares 100.00%
ReAssure Two Limited (dormant company) Telford4 Ordinary Shares 100.00%
ReAssure UK Life Assurance Company Limited (dormant company) Telford4 Ordinary Shares 100.00%
Scottish Mutual Assurance Limited (dormant company) Edinburgh2 Ordinary Shares 100.00%
Scottish Mutual Nominees Limited (dormant company) Edinburgh2 Ordinary Shares 100.00%
Scottish Mutual Pension Funds Investment Limited (trustee company) Edinburgh2 Ordinary Shares 100.00%
SL (NEWCO) Limited (dormant company) Edinburgh2 Ordinary Shares 100.00%
SL Liverpool limited (formerly known as SL Liverpool PLC) (dormant company) Wythall1 Ordinary Shares 100.00%
SLA Belgium No.1 SA (investment company) Brussels11 Société Anonyme 100.00%
SLA Denmark No.1 ApS (investment company) Copenhagen14 Ordinary Shares 100.00%
SLA Denmark No.2 ApS (investment company) Copenhagen14 Ordinary Shares 100.00%
SLA Germany No.1 S.à.r.l. (investment company) Luxembourg20 Ordinary Shares 100.00%
SLA Germany No.2 S.à.r.l. (investment company) Luxembourg20 Ordinary Shares 100.00%
SLA Germany No.3 S.à.r.l. (investment company) Luxembourg20 Ordinary Shares 100.00%
SLA Ireland No.1 S.à.r.l. (investment company) Luxembourg20 Ordinary Shares 100.00%
SLA Netherlands No.1 B.V. (investment company) Amsterdam12 Ordinary Shares 100.00%
SLACOM (No. 10) Limited (dormant company) Edinburgh2 Ordinary Shares 100.00%
SLACOM (No. 8) Limited (dormant company) Edinburgh2 Ordinary Shares 100.00%
SLACOM (No. 9) Limited (dormant company) Edinburgh2 Ordinary Shares 100.00%
SLF of Canada UK Limited (holding company - directly owned by the Company) Hampshire43 Ordinary Shares 100.00%
SLIF Property Investment GP Limited (General Partner to SLIF Property Edinburgh6 Ordinary Shares 100.00%
Investment)
Standard Life Agency Services Limited (dormant company) Edinburgh2 Ordinary Shares 100.00%
Standard Life Assurance (HWPF) Luxembourg S.à.r.l. (investment company) Luxembourg20 Ordinary Shares 100.00%
Standard Life Investment Funds Limited (dormant company) Edinburgh2 Ordinary Shares 100.00%
Standard Life Lifetime Mortgages Limited (mortgage provider company) Edinburgh2 Ordinary Shares 100.00%
Standard Life Master Trust Co. Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Standard Life Mortgages Limited (dormant company) Wythall1 Ordinary Shares 100.00%
Standard Life Property Company Limited (dormant company) Edinburgh2 Ordinary Shares 100.00%
Standard Life Trustee Company Limited (trustee company) Edinburgh2 Ordinary Shares 100.00%
Sun Life of Canada UK Holdings Limited (dormant company) Hampshire43 Ordinary Shares 100.00%
SunLife Limited (financial services distribution company) Wythall1 Ordinary Shares 100.00%
The Heritable Securities and Mortgage Investment Association Ltd (dormant Edinburgh2 Ordinary Shares 100.00%
company)
The London Life Association Limited (dormant company) Wythall1 Limited by Guarantee 100.00%
The Pathe Building Management Company Limited (dormant company) Telford4 Ordinary Shares 100.00%
The Phoenix Life SCP Institution (dormant company) Edinburgh2 Limited by Guarantee 100.00%
The Scottish Mutual Assurance Society (dormant company) Edinburgh2 Limited by Guarantee 100.00%
The Standard Life Assurance Company of Europe B.V. (financial holding company) Amsterdam12 Ordinary Shares 100.00%
Vebnet (Holdings) Limited (holding company) Wythall1 Ordinary Shares 100.00%
Vebnet Limited (services company) Edinburgh2 Ordinary Shares 100.00%
Welbrent Property Investment Company Limited (dormant company) London44 Ordinary Shares 100.00%
SLIF Property Investment LP Edinburgh6 Limited Partnership 100.00%
Pearl Private Equity LP Edinburgh6 Limited Partnership 100.00%
Pearl Strategic Credit LP Edinburgh6 Limited Partnership 100.00%
European Strategic Partners LP Edinburgh6 Limited Partnership 72.70%
ASI Phoenix Global Private Equity III LP Edinburgh6 Limited Partnership 100.00%
Janus Henderson Institutional Short Duration Bond Fund London18 Unit Trust 100.00%
Janus Henderson Institutional Mainstream UK Equity Trust London18 Unit Trust 100.00%
Janus Henderson Institutional UK Equity Tracker Trust London18 Unit Trust 100.00%
Janus Henderson Institutional High Alpha UK Equity Fund London18 Unit Trust 84.56%
Janus Henderson Global Funds - Janus Henderson Institutional Overseas Bond London18 OEIC, sub fund 99.20%
Fund
Janus Henderson Strategic Investment Funds - Janus Henderson Institutional London18 OEIC, sub fund 82.73%
North American Index Opportunities Fund
Janus Henderson Strategic Investment Funds - Janus Henderson Institutional London18 OEIC, sub fund 96.27%
Asia Pacific ex Japan Index Opportunities Fund
Janus Henderson Strategic Investment Funds - Janus Henderson Institutional London18 OEIC, sub fund 86.79%
Japan Index Opportunities Fund
PUTM ACS Asia Pacific ex Japan Fund Wythall1 Unit Trust 99.95%
PUTM ACS Emerging Market Equity Fund Wythall1 Unit Trust 100.00%
PUTM ACS European ex UK Fund Wythall1 Unit Trust 100.00%
PUTM ACS Japan Equity Fund Wythall1 Unit Trust 100.00%
PUTM ACS Lothian European Ex UK Fund Wythall1 Unit Trust 100.00%
PUTM ACS Lothian North American Equity Fund Wythall1 Unit Trust 100.00%
PUTM ACS Lothian UK Gilt Fund Wythall1 Unit Trust 100.00%
PUTM ACS Lothian UK Listed Smaller Companies Fund (formerly known as PUTM ACS Wythall1 Unit Trust 99.90%
UK Smaller Companies Fund)
PUTM ACS North American 2 Fund Wythall1 Unit Trust 100.00%
PUTM ACS North American Fund Wythall1 Unit Trust 100.00%
PUTM ACS Sustainable Index Asia Pacific ex Japan Equity Fund Wythall1 Unit Trust 100.00%
PUTM ACS Sustainable Index Emerging Markets Equity Fund Wythall1 Unit Trust 100.00%
PUTM ACS Sustainable Index European Equity Fund Wythall1 Unit Trust 100.00%
PUTM ACS Sustainable Index Japan Equity Fund Wythall1 Unit Trust 100.00%
PUTM ACS Sustainable Index UK Equity Fund Wythall1 Unit Trust 100.00%
PUTM ACS Sustainable Index US Equity Fund Wythall1 Unit Trust 100.00%
PUTM ACS UK All Share Listed Equity Multi Manager Fund Wythall1 Unit Trust 100.00%
PUTM ACS US Dollar Credit Fund Wythall1 Unit Trust 100.00%
PUTM Bothwell Asia Pacific (Excluding Japan) Fund Wythall1 Unit Trust 100.00%
PUTM Bothwell Emerging Market Debt Unconstrained Fund Wythall1 Unit Trust 100.00%
PUTM Bothwell Emerging Markets Equity Fund Wythall1 Unit Trust 100.00%
PUTM Bothwell Euro Sovereign Fund Wythall1 Unit Trust 100.00%
PUTM Bothwell European Credit Fund Wythall1 Unit Trust 100.00%
PUTM Bothwell Floating Rate ABS Fund Wythall1 Unit Trust 100.00%
PUTM Bothwell Global Bond Fund Wythall1 Unit Trust 100.00%
PUTM Bothwell Global Credit Fund Wythall1 Unit Trust 100.00%
PUTM Bothwell Index-Linked Sterling Hedged Fund Wythall1 Unit Trust 100.00%
PUTM Bothwell Long Gilt Sterling Hedged Fund Wythall1 Unit Trust 100.00%
PUTM Bothwell Short Duration Credit Fund Wythall1 Unit Trust 100.00%
PUTM Bothwell Sterling Credit Fund Wythall1 Unit Trust 100.00%
PUTM Bothwell Sterling Government Bond Fund Wythall1 Unit Trust 100.00%
PUTM Bothwell Sub-Sovereign A Fund Wythall1 Unit Trust 100.00%
PUTM Bothwell Tactical Asset Allocation Fund Wythall1 Unit Trust 100.00%
PUTM Bothwell Uk Equity Income Fund Wythall1 Unit Trust 100.00%
PUTM Bothwell Ultra Short Duration Fund Wythall1 Unit Trust 100.00%
PUTM Far Eastern Unit Trust Wythall1 Unit Trust 99.64%
PUTM UK All-Share Index Unit Trust Wythall1 Unit Trust 100.00%
PUTM UK Stock Market Fund Wythall1 Unit Trust 100.00%
PUTM UK Stock Market Fund (Series 3) Wythall1 Unit Trust 100.00%
abrdn (Lothian) European Trust II (formerly known as abrdn European Trust II) London44 Unit Trust 100.00%
abrdn (Lothian) European Trust (formerly known as abrdn European Trust) London44 Unit Trust 95.65%
abrdn (Lothian) International Trust (formerly known as abrdn International London44 Unit Trust 100.00%
Trust)
abrdn (Lothian) Japan Trust (formerly known as Abrdn Japan Trust) London44 Unit Trust 78.05%
abrdn (Lothian) North American Trust (formerly known as abrdn North American London44 Unit Trust 99.47%
Trust)
abrdn (Lothian) Pacific Basin Trust (formerly known as abrdn Pacific Basin London44 Unit Trust 98.51%
Trust)
abrdn (Lothian) UK Corporate Bond Trust (formerly known as abrdn UK Corporate London44 Unit Trust 100.00%
Bond Trust)
abrdn (Lothian) UK Equity General Trust (formerly known as abrdn UK Equity London44 Unit Trust 99.67%
General Trust)
abrdn Emerging Markets Income Equity Fund London44 OEIC, sub fund 74.36%
abrdn Europe ex UK Ethical Equity Fund London44 OEIC, sub fund 78.61%
abrdn MT American Equity Unconstrained Fund (formerly known as ASIMT American London44 Unit Trust 78.13%
Equity Unconstrained Fund)
abrdn MT Global REIT Fund (formerly known as ASIMT Global REIT Fund) London44 Unit Trust 80.49%
abrdn MT Japan Fund (formerly known as ASIMT Japan Fund) London44 Unit Trust 77.55%
abrdn MT Sterling Intermediate Credit Fund (formerly known as ASIMT Sterling London44 Unit Trust 93.63%
Intermediate Credit Fund Launch Fund)
abrdn MyFolio Managed I Fund London44 OEIC, sub fund 77.50%
abrdn MyFolio Managed II Fund London44 OEIC, sub fund 76.92%
abrdn MyFolio Managed III Fund London44 OEIC, sub fund 84.49%
abrdn MyFolio Managed V Fund London44 OEIC, sub fund 76.75%
abrdn Short Dated Global Corporate Bond Tracker Fund London44 OEIC, sub fund 95.85%
abrdn Short Dated Sterling Corporate Bond Tracker Fund London44 OEIC, sub fund 91.26%
abrdn SICAV I - Europe ex UK Sustainable Equity Fund Luxembourg20 SICAV, sub fund 68.91%
abrdn SICAV I - GDP Weighted Global Government Bond Fund Luxembourg20 SICAV, sub fund 73.21%
abrdn SICAV I - Global Bond Fund Luxembourg20 SICAV, sub fund 99.60%
abrdn SICAV I - Global Government Bond Fund Luxembourg20 SICAV, sub fund 80.21%
abrdn SICAV II - Global Equity Impact Fund Luxembourg20 SICAV, sub fund 61.26%
abrdn SICAV II - Global Inflation-linked Bond Fund Luxembourg20 SICAV, sub fund 51.42%
abrdn SICAV II - Global Short Duration Corporate Bond Fund Luxembourg20 SICAV, sub fund 98.25%
abrdn SICAV II - Absolute Return Global Bond Strategies Fund Luxembourg20 SICAV, sub fund 92.46%
abrdn SICAV II - European Government All Stocks Fund Luxembourg20 SICAV, sub fund 100.00%
abrdn SICAV II - Global Emerging Markets Local Currency Debt Fund Luxembourg20 SICAV, sub fund 89.59%
abrdn SICAV II - Global High Yield Bond Fund Luxembourg20 SICAV, sub fund 54.75%
abrdn SICAV II Global Real Estate Securities Sustainable Fund (formerly known Luxembourg20 SICAV, sub fund 97.10%
as abrdn SICAV II Global REIT Focus Fund)
abrdn Standard Liquidity Fund (Lux) - Seabury Euro Liquidity 1 Fund Luxembourg20 UCITS, sub fund 100.00%
abrdn Standard Liquidity Fund (Lux) - Seabury Sterling Liquidity 2 Fund Luxembourg20 UCITS, sub fund 100.00%
abrdn Standard Liquidity Fund (Lux) - Seabury Sterling Liquidity 3 Fund Luxembourg20 UCITS, sub fund 99.45%
abrdn Standard SICAV I - China Onshore Bond Fund Luxembourg20 SICAV, sub fund 60.75%
abrdn Sustainable Index World Equity Fund London44 Unit Trust 90.61%
abrdn Sustainable Index American Equity Fund London44 OEIC, sub fund 60.53%
abrdn Phoenix Fund Financing SCSP (formerly known as ASI Phoenix Fund Luxembourg20 Special Limited Partnership 100.00%
Financing SCSP (PLFF))
Ignis Private Equity Fund LP Cayman Islands10 Limited Partnership 100.00%
Ignis Strategic Credit Fund LP Cayman Islands10 Limited Partnership 100.00%
North American Strategic Partners (Feeder) 2008 Limited Partnership Edinburgh6 Limited Partnership 100.00%
North American Strategic Partners 2008 L.P. Delaware7 Limited Partnership 100.00%
Ignis Strategic Solutions Funds plc - Fundamental Strategies Fund Dublin22 OEIC, sub fund 100.00%
Ignis Strategic Solutions Funds plc - Systematic Strategies Fund Dublin22 OEIC, sub fund 100.00%
Phoenix Highvista Venture Capital Partners LP (formerly known as ASI Phoenix USA56 Limited Partnership 100.00%
Venture Capital Partners LP)
BNY Mellon 50/50 Global Equity Fund London40 UCITS, sub fund 73.99%
HSBC Investment Funds - Balanced Fund London23 OEIC, sub fund 81.64%
IFSL AMR OEIC - IFSL AMR Diversified Portfolio Bolton24 OEIC, sub fund 72.83%
iShares 350 UK Equity Index Fund UK London25 OEIC, sub fund 99.46%
Legal & General European Equity Income Fund London26 Unit Trust 86.50%
Legal & General Growth Trust London26 Unit Trust 84.77%
Quilter Investors Global Dynamic Equity Fund London27 OEIC, sub fund 87.03%
UBS Global Optimal Fund London50 OEIC, sub fund 78.77%
Amundi MSCI World Climate Transition CTB Luxembourg28 SICAV, sub fund 51.95%
Stonepeak Core Fund (Lux) SCSp Luxembourg51 Special Limited Partnership 83.30%
Partners Group Phoenix, L.P. Inc. Guernsey55 Limited Partnership 100.00%
ESP General Partner Limited Partnership Edinburgh6 Limited Partnership 100.00%
Aviva Investors UK Property Feeder Trust London59 Unit Trust 100.00%
Associates:
UK Commercial Property REIT Limited (property investment company) Guernsey29 Ordinary Shares 43.39%
UK Commercial Property Estates Holdings Limited (property investment company) Guernsey29 Ordinary Shares 43.39%
UK Commercial Property Estates Limited (property investment company) Guernsey29 Ordinary Shares 43.39%
UK Commercial Property Finance Holdings Limited (property investment company) Guernsey29 Ordinary Shares 43.39%
Duke Distribution Centres S.à.r.l. (investment company) Luxembourg31 Ordinary Shares 43.39%
Duke Offices & Developments S.à.r.l. (investment company) Luxembourg31 Ordinary Shares 43.39%
Significant holdings:
Janus Henderson Institutional Global Responsible Managed Fund London18 OEIC, sub fund 31.10%
Janus Henderson Institutional UK Index Opportunities Fund London18 OEIC, sub fund 58.64%
aberdeen Standard Liquidity Fund (Lux) - Sterling Fund Luxembourg20 UCITS, sub fund 30.05%
abrdn American Equity Enhanced Index Fund London44 OEIC, sub fund 48.23%
abrdn American Income Equity Fund London44 OEIC, sub fund 65.26%
abrdn Asia Pacific Equity Enhanced Index Fund London44 OEIC, sub fund 35.99%
abrdn Asia Pacific Equity Fund London44 OEIC, sub fund 22.83%
abrdn Dynamic Distribution Fund London44 Unit Trust 63.23%
abrdn Emerging Markets Equity Enhanced Index Fund London44 OEIC, sub fund 25.45%
abrdn Emerging Markets Equity Fund London44 OEIC, sub fund 22.06%
abrdn Emerging Markets Local Currency Bond Tracker Fund London44 OEIC, sub fund 42.19%
abrdn Ethical Corporate Bond Fund London44 OEIC, sub fund 57.34%
abrdn Europe ex UK Income Equity Fund London44 OEIC, sub fund 26.24%
abrdn Europe Equity Enhanced Index Fund London44 OEIC, sub fund 25.37%
abrdn European Equity Tracker Fund London44 OEIC, sub fund 23.14%
abrdn Global Equity Fund London44 OEIC, sub fund 22.99%
abrdn Global Inflation-Linked Bond Fund London44 OEIC, sub fund 24.13%
abrdn Global Inflation-Linked Bond Tracker Fund London44 OEIC, sub fund 52.87%
abrdn Global Government Bond Tracker Fund London44 OEIC, sub fund 31.90%
abrdn Global Real Estate Fund London44 Unit Trust 36.57%
abrdn Global Smaller Company Fund London44 OEIC, sub fund 25.59%
abrdn High Yield Bond Fund London44 OEIC, sub fund 20.37%
abrdn Investment Grade Corporate Bond Fund London44 OEIC, sub fund 42.52%
abrdn Japan Equity Enhanced Index Fund London44 OEIC, sub fund 51.85%
abrdn MyFolio Managed IV Fund London44 OEIC, sub fund 68.36%
abrdn MyFolio Market I Fund London44 OEIC, sub fund 42.30%
abrdn MyFolio Market II Fund London44 OEIC, sub fund 50.36%
abrdn MyFolio Market III Fund London44 OEIC, sub fund 56.77%
abrdn MyFolio Market IV Fund London44 OEIC, sub fund 54.08%
abrdn MyFolio Market V Fund London44 OEIC, sub fund 58.47%
abrdn MyFolio Multi-Manager II Fund London44 OEIC, sub fund 48.78%
abrdn MyFolio Multi-Manager III Fund London44 OEIC, sub fund 56.50%
abrdn MyFolio Multi-Manager IV Fund London44 OEIC, sub fund 59.86%
abrdn MyFolio Multi-Manager V Fund London44 OEIC, sub fund 37.59%
abrdn Short Dated Corporate Bond Fund London44 OEIC, sub fund 26.77%
abrdn Short Duration Global Inflation-Linked Bond Fund London44 OEIC, sub fund 22.07%
abrdn SICAV I - Diversified Income Fund Luxembourg20 SICAV, sub fund 36.27%
abrdn SICAV I - Global Corporate Sustainable Bond Fund Luxembourg20 SICAV, sub fund 36.02%
abrdn SICAV I - Japanese Sustainable Equity Fund Luxembourg20 SICAV, sub fund 22.52%
abrdn SICAV I - North American Smaller Companies Fund Luxembourg20 SICAV, sub fund 24.34%
abrdn SICAV I - Short Dated Enhanced Income Fund Luxembourg20 SICAV, sub fund 39.94%
abrdn SICAV II European Corporate Bond Fund Luxembourg20 SICAV, sub fund 31.46%
abrdn SICAV II European Smaller Companies Fund Luxembourg20 SICAV, sub fund 27.33%
abrdn SICAV II Global Corporate Bond Fund Luxembourg20 SICAV, sub fund 53.05%
abrdn Standard Liquidity Fund (Lux) - Seabury Euro Liquidity 1 Fund (formerly Luxembourg20 UCITS, sub fund 39.38%
known as Abrdn Liquidity Fund (Lux) Euro Fund)
abrdn Sterling Corporate Bond Fund (formerly known as ASI (SLI) Corporate Bond London44 OEIC, sub fund 26.45%
Fund)
abrdn Strategic Bond Fund London44 OEIC, sub fund 54.16%
abrdn UK Equity Enhanced Index Fund London44 OEIC, sub fund 47.25%
abrdn UK Government Bond Fund London44 OEIC, sub fund 38.10%
abrdn UK Income Equity Fund London44 OEIC, sub fund 28.14%
abrdn UK Income Unconstrained Equity Fund London44 OEIC, sub fund 61.71%
abrdn UK Mid-Cap Equity Fund London44 OEIC, sub fund 31.44%
abrdn UK Real Estate Feeder Fund (formerly known as Standard Life Investments London44 Unit Trust 63.85%
UK Real Estate Accumulation Feeder Fund)
abrdn UK Smaller Companies Fund London44 OEIC, sub fund 30.89%
abrdn UK Value Sustainable and Responsible Investment Equity Fund London44 OEIC, sub fund 40.54%
abrdn UK Value Equity Fund (formerly known as abrdn UK Unconstrained Equity London44 OEIC, sub fund 58.68%
Fund)
Brent Cross Partnership London30 Limited Partnership 23.83%
Gallions Reach Shopping Park Limited Partnership London44 Unit Trust 100.00%
Gallions Reach Shopping Park Unit Trust Jersey21 Unit Trust 100.00%
Standard Life Investments Brent Cross LP Edinburgh6 Unit Trust 40.13%
Standard Life Investments UK Shopping Centre Trust Jersey32 Unit Trust 40.13%
AB SICAV I - Diversified Yield Plus Portfolio Luxembourg19 SICAV, sub fund 39.21%
Abrdn SICAV I - Emerging Markets Low Volatility Equity Portfolio Luxembourg19 SICAV, sub fund 88.22%
ACS World Multifactor Equity Tracker Fund London25 OEIC, sub fund 22.21%
Amundi Index Solutions - Amundi Global Corp SRI 1-5Y Luxembourg28 SICAV, sub fund 22.22%
Amundi Index Solutions - Amundi MSCI China ESG Leaders Select Luxembourg28 SICAV, sub fund 47.25%
Amundi Index Solutions - Amundi MSCI Emerging Ex China ESG Leaders Select Luxembourg28 SICAV, sub fund 50.67%
Amundi UCITS Funds - Amundi Global Multi-Factor Equity Fund Luxembourg28 UCITS, sub fund 22.13%
AQR Global Risk Premium UCITS Fund Luxembourg49 UCITS, sub fund 100.00%
Baillie Gifford Emerging Markets Leading Companies Fund Edinburgh39 OEIC, sub fund 28.44%
Baillie Gifford Investment Funds II ICVC - Baillie Gifford UK Equity Core Fund Edinburgh39 OEIC, sub fund 39.42%
Baillie Gifford UK & Balanced Funds ICVC - Baillie Gifford UK and Edinburgh39 OEIC, sub fund 26.78%
Worldwide Equity Fund
Barings Emerging Markets Debt Short Duration Fund Dublin34 OEIC, sub fund 30.89%
BlackRock Global Funds - Sustainable World Bond Fund Luxembourg19 SICAV, sub fund 24.75%
BlackRock Market Advantage Fund London25 UCITS, sub fund 50.74%
iShares Bloomberg Roll Select Commodity Strategy ETF USA57 OEIC, sub fund 36.12%
BNY Mellon Global Equity Fund London40 OEIC, sub fund 26.96%
BNY Mellon Multi-Asset Global Balanced Fund London40 UCITS, sub fund 30.09%
CF Macquaries Global Infrastructure Securities Fund London47 OEIC, sub fund 26.98%
Fidelity Multi Asset Open Adventurous Fund Surrey35 OEIC, sub fund 46.63%
Goldman Sachs SICAV - Emerging Markets Total Return Bond Portfolio Luxembourg36 SICAV, sub fund 85.06%
Goldman Sachs SICAV - Goldman Sachs Emerging Markets Debt Portfolio Luxembourg36 SICAV, sub fund 23.94%
Invesco Global Targeted Returns Fund Luxembourg19 OEIC, sub fund 44.27%
Invesco Managed Growth Fund Oxfordshire37 OEIC, sub fund 52.21%
Janus Henderson Diversified Growth Fund London18 OEIC, sub fund 66.93%
L&G Absolute Return Bond Plus Fund Luxembourg38 SICAV, sub fund 66.30%
L&G Emerging Markets Bond Fund Luxembourg38 SICAV, sub fund 74.79%
L&G Multi-Asset Target Return Fund Luxembourg46 SICAV, sub fund 40.13%
Legal & General Strategic Bond Fund London26 Unit Trust 31.04%
Legal & General Emerging Markets Government Bond (Local Currency) Index London26 Unit Trust 20.86%
Fund
Legal & General Emerging Markets Government Bond USD Index Fund London26 Unit Trust 34.11%
Legal & General European Index Trust London26 Unit Trust 22.28%
Legal & General Future World Sustainable UK Equity Fund London26 Unit Trust 29.75%
Legal & General High Income Trust London26 Unit Trust 46.29%
Legal & General UK Smaller Companies Trust London26 Unit Trust 31.25%
LGIM Sterling Liquidity Plus Fund Dublin34 UCITS, sub fund 41.02%
Nomura American Century Concentrated Global Growth Equity Fund Dublin54 UCITS, sub fund 22.79%
Quilter Investors Cirilium Balanced Blend Portfolio London27 OEIC, sub fund 37.72%
Quilter Investors Ethical Equity Fund London27 Unit Trust 42.63%
Quilter Investors Global Equity Growth Fund London27 OEIC, sub fund 49.63%
Robeco - Phoenix Customized Multi Asset Fund Rotterdam48 SICAV, sub fund 100.00%
Robeco QI Emerging Markets Sustainable Enhanced Index Equities Luxembourg45 SICAV, sub fund 100.00%
Schroder European Fund London52 Unit Trust 44.40%
Schroder Global Emerging Markets Fund London52 SICAV, sub fund 20.33%
Schroder International Selection Fund - Global Bond Luxembourg53 SICAV, sub fund 29.67%
Schroder International Selection Fund - Global Diversified Growth Luxembourg53 SICAV, sub fund 22.20%
Schroder UK Mid 250 Fund London52 Unit Trust 20.22%
The Marks and Spencer Worldwide Managed Fund Chester58 Unit Trust 41.96%
Threadneedle Investment Funds ICVC - American Select Fund London33 OEIC, sub fund 22.10%
Vanguard Common Contractual Fund - Vanguard U.S. Equity Index Common Dublin34 UCITS, sub fund 75.02%
Contractual Fund
Vanguard Investment Series plc - Vanguard Global Corporate Bond Index Fund Dublin34 UCITS, sub fund 35.55%
Vanguard Investment Series plc - Vanguard Global Short-Term Corporate Bond Dublin34 UCITS, sub fund 38.35%
Index Fund
Vanguard Investment Series plc - Vanguard U.K. Short-Term Investment Grade Dublin34 UCITS, sub fund 50.14%
Bond Index Fund
Vanguard Investments Common Contractual Fund - Vanguard FTSE Developed Europe Dublin34 UCITS, sub fund 100.00%
ex UK Common Contractual Fund
Vanguard Investments Common Contractual Fund - Vanguard FTSE Developed World Dublin34 UCITS, sub fund 43.74%
Common Contractual Fund
Vanguard Investments Common Contractual Fund - Vanguard FTSE Developed World Dublin34 UCITS, sub fund 100.00%
ex UK Common Contractual Fund
1 1 Wythall Green Way, Wythall, Birmingham, West Midlands, B47 6WG,
United Kingdom
2 Standard Life House, 30 Lothian Road, Edinburgh, EH1 2DH, United
Kingdom
3 90 St. Stephen's Green, Dublin, D2, Ireland
4 Windsor House, Telford Centre, Telford, Shropshire, TF3 4NB, United
Kingdom
5 Goodbody Secretarial Limited, International Financial Services
Centre, 25/28 North Wall Quay, Dublin 1, Ireland
6 1 George Street, Edinburgh, EH2 2LL, United Kingdom
7 Corporation Service Company, 2711 Centerville Rd Suite 400,
Wilmington, DE 19808, United States
8 22-24 New Street, St Pauls Gate, 4th Floor, JE1 4TR, Jersey
9 20 Old Bailey, London, England, EC4M 7AN, United Kingdom
10 Ugland House, Grand Cayman, KY1-1104, Cayman Islands
11 Avenue Louise 326, bte 33 1050 Brussels, Belgium
12 Telestone 8, Teleport, Naritaweg 165, 1043 BW, Amsterdam, Netherlands
13 Citco (Sweden) Ab, Stureplan 4c, 4 Tr, 114 35 Stockholm, Sweden
14 c/o Citco (Denmark) ApS, Holbergsgade 14, 2 .tv, 1057 København K
Denmark
15 5th Floor Beaux Lane House, Mercer Street Lower, Dublin 2, Dublin,
Ireland
16 32 Commercial Street, St Helier, Jersey, Channel Islands, JE2 3RU,
Jersey
17 Avenida de Aragon 330 - Building 5, 3rd Floor, Parque Empresarial Las
Mercedes, 28022 - Madrid, Spain
18 201 Bishopsgate, London, EC2M 3AE, United Kingdom
19 88 2-4, Rue Eugène Ruppert, L-2453 Luxembourg, Luxembourg
20 35a Avenue J.F. Kennedy, L-1855, Luxembourg
21 Ogier House, The Esplanade, St Helier, JE4 9WG, Jersey
22 32 Molesworth Street, Dublin 2, Dublin, D02 Y512, Ireland
23 8 Canada Square, London, E14 5HQ, United Kingdom
24 Marlborough House, 59 Chorley New Road, Bolton, BL1 4QP, United
Kingdom
25 12 Throgmorton Avenue, London EC2N 2DL, United Kingdom
26 One Coleman Street, London, EC2R 5AA, United Kingdom
27 Senator House, 85 Queen Victoria Street, London, EC4V 4AB, United
Kingdom
28 5, Allée Scheffer, L-2520 Luxembourg, Luxembourg
29 Trafalgar Court, Les Banques, St Peter Port, GY1 3QL, Guernsey
30 Kings Place, 90 York Way, London, N1 9GE, United Kingdom
31 1, Allée Scheffer, L-2520 Luxembourg, Luxembourg
32 Elizabeth House, 9 Castle Street, St Helier, JE4 2QP, Jersey
33 Cannon Place, 78 Cannon Street, London, EC4N 6AG, United Kingdom
34 70 Sir John Rogerson's Quay, Dublin 2, Ireland
35 Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey, KT20
6RP, United Kingdom
36 49, Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg
37 Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire,
RG9 1HH, United Kingdom
38 10, Château d'Eau, L-3364 Leudelange, Grand Duchy of Luxembourg
39 Calton Square, 1 Greenside Row, Edinburgh, EH1 3AN, United Kingdom
40 160 Queen Victoria Street, London, EC4V 4LA, United Kingdom
41 Canon's Court, 22 Victoria Street, Hamilton, HM12, Bermuda
42 Calle Nanclares de Oca, 1B, 28022 Madrid
43 Matrix House, Basing View, Basingstoke, Hampshire, RG21 4DZ, England
44 280 Bishopsgate, London, EC2M 4AG, United Kingdom
45 Senningerberg, 6, Route De Trèves, L-2633, Luxembourg
46 Senningerberg, 6, Lou Hemmer Street, L-1748, Luxembourg
47 2nd Floor, 20-22 Bedford Row, London, WC1R 4EB, United Kingdom
48 Weena 850, 3014 DA, Rotterdam, Netherlands
49 Hesperange, 33, rue de Gasperich, L-5826, Luxembourg
50 5 Broadgate, London, EC2M 2QS, United Kingdom
51 20, rue de la Poste, Grand Duchy of Luxembourg, L-2346, Luxembourg
52 1 London Wall Place, London, EC2Y 5AU, United Kingdom
53 Senningerberg, 5, Hohenhof, L-1736, Luxembourg
54 33 Sir John Rogersons Quay, Dublin, D02 XK09, Ireland
55 St. Peter Port, Tudor House, Le Bordage, GY1 6BD, Guernsey
56 Highvista Strategies LLC, 200 Clarendon Street 50th Floor, Boston,
02116, United States
57 Corporation Trust Centre, 1290 Orange Street, Wilmington, 19801,
United States
58 c/o Marks and Spencer Unit Trust Management Limited, Kings Meadow,
Chester Business Park, Chester, CH99 9FB, United Kingdom
59 St. Helens, 1 Undershaft, London, EC3P 3DQ, United Kingdom
The following subsidiaries have been granted an audit exemption by parental
guarantee by virtue of s.479A of the Companies Act 2006:
• Britannic Finance Limited
• Britannic Money Investment Services Limited
• G Life H Limited
• G Assurance & Pensions Services Limited
• Pearl Assurance Group Holdings Limited
• Pearl Customer Care Limited
• PGMS (Glasgow) Limited
• PGS 2 Limited
• Phoenix Customer Care Limited
• Phoenix SPV 1 Limited
• Phoenix SPV 2 Limited
• Phoenix SPV 3 Limited
• Phoenix SPV 4 Limited
• Phoenix Wealth Holdings Limited
• ReAssure Companies Services Limited
• ReAssure FSH UK Limited
• Vebnet Limited
• Vebnet (Holdings) Limited
The following subsidiaries were dissolved during the period. The subsidiaries
were deconsolidated from the date of dissolution:
• Crawley Unit Trust
• Inesia SA
• PUTM ACS Lothian UK Listed Equity Fund
• PUTM ACS UK All Share Listed Equity Fund
• PUTM Bothwell UK All Share Listed Equity Fund
• PUTM UK Equity Unit Trust
• abrdn Active Plus Bond Trust
• abrdn Dynamic Multi Asset Growth Fund
• abrdn Emerging Markets Equity Fund
• abrdn Short Dated UK Government Bond Trust
• abrdn Standard SICAV II China Equities Fund
• abrdn Standard SICAV II Emerging Market Debt Fund
• abrdn Standard SICAV II European Equities Fund
• abrdn Standard SICAV II Global Equities Fund
• abrdn Standard SICAV II Japanese Equities Fund
• abrdn Strategic Bond Fund
• abrdn UK Government Bond Trust
The following subsidiaries were either fully disposed of or the Group was no
longer deemed to control the subsidiary. The subsidiaries were deconsolidated
from either the date of disposal or from the date when the Group was deemed to
no longer control the subsidiary:
• abrdn Short Dated Corporate Bond Fund
• abrdn American Income Equity Fund
• abrdn Sustainable Index UK Equity Fund
• CF Macquaries Global Infrastructure Securities Fund
• Quilter Investors Global Equity Index Fund
• Quilter Investors UK Equity Index Fund
The following associate was dissolved during the period. The investment in
associate was derecognised from the date of dissolution:
• UK Commercial Property Estates (Reading) Limited
• UKCPT Limited Partnership
The Group no longer has significant holdings in the following undertakings:
• Aberdeen Japan Equity Fund
• abrdn American Unconstrained Equity Fund
• abrdn Diversified Growth Fund
• abrdn Global Absolute Return Strategies Retail Acc
• abrdn Global Focused Equity Fund
• abrdn Multi-Asset Fund
• abrdn Standard SICAV II Global Absolute Return Strategies Fund
• abrdn UK High Income Equity Fund
• abrdn UK Opportunities Equity Fund
• AXA Fixed Interest Investment ICVC - Sterling Strategic Bond Fund
• L&G Euro High Alpha Corporate Bond Fund
• Legal & General European Trust
• MI Somerset Global Emerging Markets Fund
• Performance Retail Unit Trust
• Quilter Investors China Equity Fund
• Standard Life Capital Infrastructure I LP
I. Other notes
I1. Share-based payment
Equity-settled share-based payments to employees and others providing services
are measured at the fair value of the equity instruments at the grant date.
The fair value excludes the effect of non-market-based vesting conditions.
Further details regarding the determination of the fair value of
equity-settled share-based transactions are set out below.
The fair value determined at the grant date of the equity-settled share-based
payments is expensed on a straight-line basis over the vesting period, based
on the Group's estimate of equity instruments that will eventually vest. At
each period end, the Group revises its estimate of the number of equity
instruments expected to vest as a result of the effect of non-market-based
vesting conditions. The impact of the revision of the original estimates, if
any, is recognised in the consolidated income statement such that the
cumulative expense reflects the revised estimate with a corresponding
adjustment to equity.
I1.1 Share-based payment expense
The expense recognised for employee services receivable during the year is as
follows:
2023 2022
£m £m
Expense arising from equity-settled share-based payment transactions 22 16
I1.2 Share-based payment expense
Long-Term Incentive Plan ('LTIP')
The Group implemented a Long-Term Incentive Plan to retain and motivate its
senior management group. The awards under this plan are in the form of
nil-cost options to acquire an allocated number of ordinary shares.
Assuming no good leavers or other events which would trigger early vesting
rights, the 2021, 2022 and 2023 LTIP awards are subject to performance
conditions tied to the Group's performance in respect of net operating cash
receipts, return on shareholder value, persistency and total shareholder
return ('TSR'). The 2022 and 2023 LTIP awards also include a performance
condition tied to the Group's performance on decarbonisation. See the
Directors' Remuneration Report for further details of the performance
conditions.
For all LTIP awards, a holding period applies so that any LTIP awards to
Executive Committee members for which the performance vesting requirements are
satisfied will not be released for a further two years from the third
anniversary of the original award date. Dividends will accrue on LTIP awards
until the end of the holding period. There are no cash settlement
alternatives.
2023 LTIP awards were granted on 17 March 2023 and are expected to vest on 17
March 2026. The 2020 LTIP awards vested on 13 March 2023. The 2021 awards will
vest on 12 March 2024 and the 2022 awards will vest on 18 March 2025.
The fair value of these awards is estimated at the average share price in the
three days preceding the date of grant, taking into account the terms and
conditions upon which the instruments were granted. The fair value of the LTIP
awards is adjusted in respect of the TSR performance condition which is deemed
to be a 'market condition'. The fair value of the 2020, 2021 and 2022 TSR
elements of the LTIP awards has been calculated using a Monte Carlo model. The
inputs to this model are shown below:
2023 2022 2021
TSR performance condition TSR performance condition TSR performance condition
Share price (p) 559 639 738.6
Expected term (years) 2.8 2.8 3.0
Expected volatility (%) 23 31 30
Risk-free interest rate (%) 3.31 1.21 0.14
Expected dividend yield (%) Dividends are received by holders of the awards therefore no adjustment to
fair value is required
On 4 October 2023, 19 August 2022 and 17 August 2021, LTIP awards were granted
to certain senior management employees. The vesting periods and performance
conditions for these awards are linked to the core 2021, 2022 and 2023 LTIP
awards respectively.
On 17 March 2023 and 4 October 2023 LTIP Buy-out awards were granted to
certain senior management employees. There are discrete vesting periods for
these awards and these grants of shares are conditional on the employees
remaining in employment with the Group for the vesting period. Similar awards
were also issued on 18 March 2022, 19 August 2022, 12 March 2021 and 17 August
2021.
Each year, the Group issues a Chairman's share award under the terms of the
LTIP which is granted to a small number of employees in recognition of their
outstanding contribution in the previous year. The awards are granted on the
same dates as the core 2021, 2022 and 2023 LTIP awards. These grants of shares
are conditional on the employees remaining in employment with the Group for
the vesting period and achieving an established minimum good/good performance
grading. Good leavers will be able to, at the discretion of the Remuneration
Committee, exercise their full award at vesting.
Deferred Bonus Share Scheme ('DBSS')
Each year, part of the annual incentive for certain executives is deferred
into shares of the parent company. The grant of these shares is conditional on
the employee remaining in employment with the Group for a period of three
years from the date of grant. Good leavers will be able to, at the discretion
of the Remuneration Committee, exercise their full award at vesting. Dividends
will accrue for DBSS awards over the three-year deferral period.
The 2023 DBSS was granted on 17 March 2023 and is expected to vest on 17 March
2026. The 2020 DBSS awards vested on 13 March 2023. The 2021 awards are
expected to vest on 12 March 2024 and the 2022 awards are expected to vest on
18 March 2025.
The fair value of these awards is estimated at the average share price in the
three days preceding the date of the grant, taking into account the terms and
conditions upon which the options were granted.
Sharesave scheme
The sharesave scheme allows participating employees to save up to £500 each
month for the UK scheme and up to €500 per month for the Irish scheme over a
period of either three or five years. The 2023 sharesave options were granted
on 25 October 2023. Irish Sharesave options are no longer granted.
Under the sharesave arrangement, participants remaining in the Group's
employment at the end of the three or five year saving period are entitled to
use their savings to purchase shares at an exercise price at a discount to the
share price on the date of grant. Employees leaving the Group for certain
reasons are able to use their savings to purchase shares if they leave prior
to the end of their three or five year period.
The fair value of the options has been determined using a Black-Scholes
valuation model. Key assumptions within this valuation model include expected
share price volatility and expected dividend yield.
The following information was relevant in the determination of the fair value
of the 2019 to 2023 UK sharesave options:
2023 2022 2021 2020 2019
sharesave sharesave sharesave sharesave sharesave
Share price (£) 4.448 6.142 7.486 5.664 6.800
Exercise price (£) 3.78 5.09 5.89 4.97 5.61
Expected life (years) 3.1 and 5,1 3.25 and 5.25 3.25 and 5.25 3.25 and 5.25 3.25 and 5.25
Risk-free rate (%) - based on UK government gilts commensurate with 4.7 (for 3.1 year scheme) and 4.5 (for 5.25 year scheme) 2.0 (for 3.25 year scheme) and 1.9 (for 5.25 year scheme) 0.5 (for 3.25 year scheme) and 0.7 (for 5.25 year scheme) 0.5 (for 3.25 year scheme) and 0.5 (for 5.25 year scheme) 1.0 (for 3.25 year scheme) and 1.1 (for 5.25 year scheme)
the expected term of the award
Expected volatility (%) based on the Company's share price volatility to date 23.0 30.0 30.0 30.0 30.0
Dividend yield (%) 11.5 8.0 6.3 8.2 6.8
The information for determining the fair value of the 2021 Irish sharesave
options differed from that included in the table above as follows:
- Share price (€): 8.618
- Exercise price (€): 6.880
- Risk-free rate (%): (0.4) (for 3.25 year scheme) and (0.3) (for 5.25 year
scheme)
- No Sharesave awards were granted to Irish employees during either 2022 or
2023.
Share Incentive Plan
The Group operates two Share Incentive Plans ('SIP') open to UK and Irish
employees which allows participating employees to purchase 'Partnership
shares' in the Company through monthly contributions. In respect of the UK
SIP, the contributions are limited to the lower of £150 per month and 10%
gross monthly salary. In 2019 the matching element of the UK SIP was amended
to give the employee one 'Matching share' for each 'Partnership share'
purchased limited to £50. Contributions above £50 are not matched. The Irish
SIP, which was launched in 2019, gives the employee 1.4 'Matching shares' for
each 'Partnership share' purchased. For this plan monthly contributions are
limited to the lower of €40 per month and 7.5% of gross monthly salary.
The fair value of the Matching shares granted is estimated as the share price
at date of grant, taking into account terms and conditions upon which the
instruments were granted. At 31 December 2023, 546,430 matching shares
(excluding unrestricted shares) were conditionally awarded to employees (2022:
543,995).
I1.3 Movements in the year
The following tables illustrate the number of, and movements in, LTIP,
Sharesave and DBSS share options during the year:
2023
Number of share options
LTIP Sharesave DBSS
Outstanding at the beginning of the year, including dividend shares 9,387,235 5,001,906 2,301,801
Granted during the year 4,202,695 5,038,820 1,675,548
Forfeited during the year (1,750,509) (223,565) (29,932)
Cancelled during the year - (1,371,617) -
Exercised during the year (1,217,227) (1,184,132) (701,644)
Expired during the year (13,908) (416,547) (11,227)
Dividends on vested awards 503,119 - 133,420
Outstanding at the end of the year 11,111,405 6,844,865 3,367,966
2022
Number of share options
LTIP Sharesave DBSS
Outstanding at the beginning of the year 7,613,036 4,750,822 1,551,935
Granted during the year 3,350,169 1,827,291 1,121,085
Forfeited during the year (523,125) (252,992) (4,917)
Cancelled during the year - (506,796) -
Exercised during the year (1,328,703) (816,419) (443,747)
Dividends on vested awards 275,858 - 77,445
Outstanding at the end of the year 9,387,235 5,001,906 2,301,801
The weighted average fair value of options granted during the year was £2.92
(2022: £4.34).
The weighted average share price at the date of exercise for the rewards
exercised is £5.46 (2022: £6.13).
The weighted average remaining contractual life for the awards outstanding as
at 31 December 2023 is 5.3 years (2022: 5.7 years).
I2. Cash flows from operating activities
Operating cash flows include purchases and sales of investment property and
financial investments as the purchases are funded from cash flows associated
with the origination of insurance and investment contracts, net of payments of
related benefits and claims.
The following analysis gives further detail behind the 'cash
(utilised)/generated by operations' figure in the statement of consolidated
cash flows.
Notes 2023 2022
£m restated1
£m
Profit/(loss) for the year before tax 20 (4,089)
Adjustments for non-cash movements in profit/(loss) before tax for the year:
Gain on acquisition of SLF of Canada UK Limited H2 (66) -
Fair value losses/(gains) on:
Investment property G4 362 1,363
Financial assets and derivative liabilities (11,045) 45,197
Change in fair value of borrowings E5.2 (82) 186
Amortisation and impairment of intangible assets G2 324 355
Share-based payment charge I1.1 22 16
Finance costs C7 258 230
Net interest expense on Group defined benefit pension scheme liability/asset G1 109 64
Pension past service costs G1 12 15
Other costs of pension schemes G1 6 7
Movement in assets and liabilities relating to operations:
(Increase)/decrease in investment assets (7,986) 3,974
(Increase)/decrease in reinsurers' share of investment contract liabilities (621) 896
(Increase)/decrease in reinsurance contract assets/liabilities (818) 657
Decrease in assets classified as held for sale 2,593 2,741
Increase/(decrease) in insurance contract liabilities/assets 3,980 (25,597)
Increase/(decrease) in investment contract liabilities 13,673 (16,549)
Decrease in obligation for repayment of collateral received (703) (1,740)
Decrease in liabilities classified as held for sale (3,571) (3,386)
Net decrease/(increase) in working capital 2,772 (3,312)
Other cash movements relating to operations:
Contributions to defined benefit pension schemes G1 (9) (9)
Cash (utilised)/generated by operations (770) 1,019
1 Prior period comparatives have been restated on transition to IFRS 17
Insurance Contracts (see note A2.1 for further details).
I3. Capital management
The Group's capital management is based on the Solvency II framework as
implemented in the UK. This involves a valuation in line with Solvency II
principles of the Group's Own Funds and risk-based assessment of the Group's
Solvency Capital Requirement ('SCR').
This note sets out the Group's approach to managing capital and provides an
analysis of Own Funds and SCR.
Risk and capital management objectives
The risk management objectives and policies of the Group are based on the
requirement to protect the Group's regulatory capital position, thereby
safeguarding policyholders' guaranteed benefits whilst also ensuring the Group
can meet its various cash flow requirements. Subject to this, the Group seeks
to use available capital to achieve increased returns, balancing risk and
reward, to generate additional value for policyholders and shareholders.
In pursuing these objectives, the Group deploys financial and other assets and
incurs insurance contract liabilities and financial and other liabilities.
Financial and other assets principally comprise investments in equity
securities, debt securities, collective investment schemes, property,
derivatives, reinsurance, trade and other receivables, and banking deposits.
Financial liabilities principally comprise investment contracts, borrowings
for financing purposes, derivative liabilities and net asset value
attributable to unitholders.
The Group's Risk Management Framework is described in the risk management
commentary on pages 46 to 57 of the Annual Report and Accounts and the Risk
Universe component of this framework summarises the comprehensive set of risks
to which the Group is exposed. The major risks ('Level 1' risks) that the
Group's businesses are exposed to and the Group's approach to managing those
risks are outlined in the following notes:
• note E6: Credit risk, market risk, financial soundness risk, strategic
risk, customer risk and operational risk; and
• note F11: Insurance risk.
The section on risk and capital management objectives is included below.
Capital Management Framework
The Group's Capital Management Framework is designed to achieve the following
objectives:
• to provide appropriate security for policyholders and meet all
regulatory capital requirements under the Solvency II regime while not
retaining unnecessary excess capital, operating within a Solvency II
Shareholder Capital Coverage ratio of 140-180%;
• to ensure sufficient liquidity to meet obligations to policyholders and
other creditors;
• to manage our leverage position, including optimisation of the Solvency
II leverage ratio and the Fitch leverage ratio to maintain an
investment grade credit rating; and
• to maintain a dividend policy to pay an ordinary dividend that is
progressive and sustainable.
The framework comprises a suite of capital management policies that govern the
allocation of capital throughout the Group to achieve the framework
objectives under a range of stress conditions. The policy suite is defined
with reference to policyholder security, creditor obligations, owner dividend
policy and regulatory capital requirements.
Group capital
Group capital is managed on a Solvency II basis. Under the Solvency II
framework, the primary sources of capital managed by the Group comprises the
Group's Own Funds as measured under the Solvency II principles adjusted to
exclude surplus funds attributable to the Group's unsupported with-profit
funds and unsupported pension schemes.
A Solvency II capital assessment involves valuation in line with Solvency II
principles of the Group's Own Funds and a risk-based assessment of the Group's
Solvency Capital Requirement ('SCR'). Solvency II surplus is the excess of Own
Funds over the SCR.
The Group aims to maintain a Solvency II surplus at least equal to its
Board-approved capital policy, which reflects Board risk appetite for meeting
prevailing solvency requirements.
The capital policy of each Life Company is set and monitored by each Life
Company Board. These policies ensure there is sufficient capital within each
Life Company to meet regulatory capital requirements under a range of stress
conditions. The capital policy of each Life Company varies according to the
risk profile and financial strength of the company.
The capital policy of each Group Holding Company is designed to ensure that
there is sufficient liquidity to meet creditor obligations through the
combination of cash buffers and cash flows from the Group's operating
companies.
Own Funds and SCR
Basic Own Funds represents the excess of assets over liabilities from the
Solvency II balance sheet adjusted to add back any relevant subordinated
liabilities that meet the criteria to be treated as capital items.
The Basic Own Funds are classified into three Tiers based on permanency and
loss absorbency (Tier 1 being the highest quality and Tier 3 the lowest). The
Group's Own Funds are assessed for their eligibility to cover the Group SCR
with reference to both the quality of capital and its availability and
transferability. Surplus funds in with-profit funds of the Life companies and
in the pension schemes are restricted and can only be included in Eligible Own
Funds up to the value of the SCR they are used to support.
Eligible Own Funds to cover the SCR are obtained after applying the prescribed
Tiering limits and availability restrictions to the Basic Own Funds.
The SCR is calibrated so that the likelihood of a loss exceeding the SCR is
less than 0.5% over one year. This ensures that capital is sufficient to
withstand a broadly '1 in 200 year event'.
The Group operates an Internal Model to calculate Group SCR, all Group
companies are within the scope of the single internal model, with the
exception of acquired ReAssure businesses, the Irish life entities, Standard
Life International Designated Activity Company and Phoenix Life Assurance
Europe Designated Activity Company, and Sun Life Assurance Company of Canada
(U.K.) Limited, which determine their capital requirements in accordance with
the Standard Formula.
Group capital resources - unaudited
The Group capital resources, presented on a shareholder basis, are based on
the Group's Eligible Own Funds adjusted to remove amounts pertaining to
unsupported with-profit funds and Group pension schemes:
Unaudited 2023 2022
£bn £bn
PGH plc Eligible Own Funds 11.1 11.1
Remove Own Funds pertaining to unsupported with-profit funds and pension (2.2) (1.8)
schemes
Group capital resources 8.9 9.3
Solvency II surplus - unaudited
An analysis of the PGH plc Solvency II surplus as at 31 December 2023 is
provided in the business review section on page 34 to 35. The Group has
complied with all externally imposed capital requirements during the year.
I4. Related party transactions
In the ordinary course of business, the Group and its subsidiaries carry out
transactions with related parties as defined by IAS 24 Related Party
Disclosures, which comprise a Group pension scheme, an associate and key
management personnel.
I4.1 Related party transactions
During the year, the Group entered into the following related party
transactions with a Group pension scheme and an associate:
Transactions Transactions
2023 2022
£m £m
Pearl Group Staff Pension Scheme
Payment of administrative expenses (4) (4)
UK Commercial Property REIT
Dividend income 19 29
I4.2 Transactions with key management personnel
The total compensation of key management personnel, being those having
authority and responsibility for planning, directing and controlling the
activities of the Group, including the Executive, Non-Executive Directors and,
effective from 1 January 2023, members of the Group's Executive Committee is
as follows:
2023 2022
£m £m
Salary and other short-term benefits 15 5
Equity compensation plans 8 3
Details of the shareholdings and emoluments of individual Directors are
provided in the Remuneration report on pages 111 to 140.
During the year to 31 December 2023 key management personnel and their close
family members contributed £203,234 (2022: £183,933) to Pensions and Savings
products sold by the Group and transferred out £110,074 (2022: £nil) of
investments. At 31 December 2023, the total value of key management
personnel's investments in Group Pensions and Savings products was £1,989,979
(2022: £525,781).
I5. Commitments
This note analyses the Group's other commitments.
2023 2022
£m £m
To subscribe to private equity funds and other unlisted assets 1,738 1,132
To purchase, construct or develop investment property and income strips 23 62
For repairs, maintenance or enhancements of investment property 15 13
I6. Contingent liabilities
Where the Group has a possible future obligation as a result of a past event,
or a present legal or constructive obligation but it is not probable that
there will be an outflow of resources to settle the obligation or the amount
cannot be reliably estimated, this is disclosed as a contingent liability.
Legal proceedings
In the normal course of business, the Group is exposed to certain legal
issues, which can involve litigation and arbitration. At the year end, the
Group has a number of contingent liabilities in this regard, none of which are
considered by the Directors to be material.
I7. Events after the reporting period
The financial statements are adjusted to reflect significant events that have
a material effect on the financial results and that have occurred between the
period end and the date when the financial statements are authorised for
issue, provided they give evidence of conditions that existed at the period
end. Events that are indicative of conditions that arise after the period end
that do not result in an adjustment to the financial statements are
disclosed.
On 19 January 2024, the Group completed a buy-out transaction with the PGL
Pension Scheme, one of the Group's defined benefit schemes. The impact of this
transaction is being determined and will be included in the Group's results
for 2024.
On 6 February 2024, the Board approved the redemption of the £250 million
5.766% Fixed Rate Reset Callable Tier 2 Subordinated Notes due 2029 on the
first call date of 13 June 2024 (subject to regulatory approval).
On 21 March 2024, UK Commercial Property REIT Limited ('UKCPR'), an associate
of the Group, and Tritax Big Box REIT plc ('BBOX') announced a recommended
all-share combination whereby BBOX will acquire the entire share capital of
UKCPR for consideration of 0.444 new shares of BBOX for each share of UKCPR
held. The transaction is expected to complete in May 2024, subject to the
approval of both UKCPR and BBOX shareholders, and Court sanction of the scheme
of arrangement under Part VIII of the Companies Law of Guernsey. On the date
of announcement, Phoenix Life Limited ('PLL'), a subsidiary of the Group, held
43.3% of UKCPR's issued ordinary share capital and had irrevocably undertaken
to vote in favour of the transaction. Upon completion, PLL is expected to hold
shares representing 10.1% of BBOX's total issued share capital. It is
anticipated that this transaction, on completion, will result in the Group
accounting for its ownership in BBOX as an investment, rather than the current
associate treatment of UKCPR, as the Group will not have significant influence
over BBOX.
On 21 March 2024, the Board recommended a final dividend of 26.65p per share
for the year ended 31 December 2023 (2022: 26.0p). Payment of the final
dividend is subject to shareholder approval at the AGM. The cost of this
dividend has not been recognised as a liability in the consolidated financial
statements for 2023 and will be charged to the statement of consolidated
changes in equity in 2024.
N Lyons
A Briggs
R Thakrar
K Green
H Iioka
K Murray
E Bucks
M Gregory
J Pollock
B Richards
D Scott
M Semple
N Shott
21 March 2024
Parent company financial statements
Statement of financial position
As at 31 December 2023
2023 2022
Notes £m £m
ASSETS
Property, plant and equipment 10 17 19
Investments in Group entities 11 10,536 10,231
Financial assets
Loans and deposits 12 1,302 2,550
Derivatives 6 119 257
Debt securities 13 1 1
Collective investment schemes 13 1,017 775
Deferred tax 14 159 113
Prepayments and accrued income 50 54
Other amounts due from Group entities 20 25 19
Cash and cash equivalents 15 1 -
Total assets 13,227 14,019
EQUITY AND LIABILITIES
Equity attributable to ordinary shareholders
Share capital 3 100 100
Share premium 3 16 10
Merger relief reserve 3 1,819 1,819
Other reserve 3 (4) (4)
Retained earnings 4,621 5,062
Total equity attributable to ordinary shareholders 6,552 6,987
Tier 1 Notes 4 411 411
Total equity 6,963 7,398
Liabilities
Financial liabilities
Borrowings 5 5,813 6,229
Derivatives 6 1 22
Obligations for repayment of collateral received 6 30 86
Other amounts due to Group entities 20 62 43
Provisions 7 222 97
Lease liabilities 8 18 20
Accruals and deferred income 9 118 124
Total liabilities 6,264 6,621
Total equity and liabilities 13,227 14,019
The notes identified numerically on pages 294 to 305 are an integral part of
these separate financial statements. Where items also appear in the
consolidated financial statements, reference is made to the notes (identified
alphanumerically) on pages 171 to 290.
Approved by the Board on 21 March 2024.
Andy Briggs
Rakesh Thakrar
Chief Executive
Officer
Chief Financial Officer
Company registration number 11606773.
Statement of changes in equity
For the year ended 31 December 2023
Share capital (note 3) Share premium (note 3) Merger relief reserve (note 3) Other reserve (note 3) Retained earnings Total Tier 1 Notes (note 4) Total
equity
£m £m £m £m £m £m £m £m
At 1 January 2023 100 10 1,819 (4) 5,062 6,987 411 7,398
Total comprehensive income for the year attributable to owners - - - - 79 79 - 79
Issue of ordinary share capital, net of associated commissions and expenses - 6 - - - 6 - 6
Dividends paid on ordinary shares (note B4) - - - - (520) (520) - (520)
Coupon paid on Tier 1 Notes, net of tax relief - - - - (22) (22) - (22)
Credit to equity for equity-settled share-based payments (note I1) - - - - 22 22 - 22
At 31 December 2023 100 16 1,819 (4) 4,621 6,552 411 6,963
For the year ended 31 December 2022
Share capital (note 3) Share premium (note 3) Merger relief reserve (note 3) Other reserve (note 3) Retained earnings Total Tier 1 Notes (note 4) Total
equity
£m £m £m £m £m £m £m
At 1 January 2022 100 6 1,819 (4) 5,448 7,369 411 7,780
Total comprehensive income for the period attributable to owners - - - - 116 116 - 116
Issue of ordinary share capital, net of associated commissions and expenses - 4 - - - 4 - 4
Dividends paid on ordinary shares (note B4) - - - - (496) (496) - (496)
Coupon paid on Tier 1 Notes, net of tax relief - - - - (22) (22) - (22)
Credit to equity for equity-settled share-based payments (note I1) - - - - 16 16 - 16
At 31 December 2022 100 10 1,819 (4) 5,062 6,987 411 7,398
Statement of cash flows
For the year ended 31 December 2023
Notes 2023 2022
£m £m
Cash flows from operating activities
Cash utilised by operations 16 (589) (417)
Net cash flows from operating activities (589) (417)
Cash flows from investing activities
Acquisition of SLF of Canada UK Limited (250) -
Advances to Group entities (129) (852)
Dividends received from Group entities 103 455
Interest received from Group entities 219 162
Capital contribution to subsidiary (note 11) (55) (200)
Repayment of amounts due from Group entities 1,425 2
Derivative settlements 72 (70)
Net cash flows from investing activities 1,385 (503)
Cash flows from financing activities
Proceeds from issuing ordinary shares 3 6 4
Proceeds from new shareholder borrowings, net of associated expenses 5 1,450 2,274
Repayment of shareholder borrowings 5 (1,362) (616)
Ordinary share dividends paid (520) (496)
Interest paid on borrowings (338) (311)
Lease payments (2) (1)
Coupon paid on Tier 1 Notes (29) (29)
Net cash flows from financing activities (795) 825
Net increase/(decrease) in cash and cash equivalents 1 (95)
Cash and cash equivalents at the beginning of the year - 95
Cash and cash equivalents at the end of the year 1 -
Notes to the parent company financial statements
1. Accounting policies
(a) Basis of preparation
The financial statements have been prepared on a going concern basis and under
the historical cost convention, except for those financial assets and
financial liabilities (including derivative instruments) that have been
measured at fair value.
The Company has taken advantage of the exemption in section 408 of the
Companies Act 2006 not to present its own income statement in these financial
statements. Profit attributable to owners for the year ended 31 December 2023
was £79 million (2022: £116 million).
Statement of Compliance
The Company's financial statements have been prepared in accordance with UK -
adopted international accounting standards as applied in accordance with
section 408 of the Companies Act 2006.
The financial statements are presented in sterling (£) rounded to the nearest
million except where otherwise stated.
Assets and liabilities are offset and the net amount reported in the statement
of financial position only when there is a legally enforceable right to offset
the recognised amounts and there is an intention to settle on a net basis, or
to realise the assets and settle the liability simultaneously.
(b) Accounting policies
Where applicable, the accounting policies in the separate financial statements
are the same as those presented in the consolidated financial statements on
pages 171 to 290 with the exception of the one policy whereby the Company has
not adopted the Group's policy of hedge accounting.
Where an accounting policy can be directly attributed to a specific note to
the consolidated financial statements, the policy is presented within that
note. Each note within the Company financial statements makes reference to the
note to the consolidated financial statements containing the applicable
accounting policy. The accounting policy in relation to foreign currency
transactions is included within note A3.1 to the consolidated financial
statements.
Investments in Group entities
Investments in Group entities are carried in the statement of financial
position at cost less impairment.
The Company assesses at each reporting date whether an investment is impaired
by assessing whether any indicators of impairment exist. If objective evidence
of impairment exists, the Company calculates the amount of impairment as the
difference between the recoverable amount of the Group entity and its carrying
value and recognises the amount as an expense in the income statement.
The recoverable amount is determined based on the cash flow projections of the
underlying entities.
(c) Critical accounting estimates and judgements
Critical accounting estimates are those which involve the most complex or
subjective judgements or assessments. The area of the Company's business that
typically requires such estimates and judgement is the impairment assessment
for investments in Group entities.
Impairment of investments in Group entities
The Company conducts impairment reviews of investments in subsidiaries
whenever events or changes in circumstances indicate that their carrying
amounts may not be recoverable. Determining whether an asset is impaired
requires an estimation of the recoverable amount, which requires the Company
to estimate the value in use. The value in use uses future cash flows and a
suitable discount rate in order to calculate the present value. Where the
actual future cash flows are less than expected, an impairment loss may arise.
Further details are included in note 11.
2. Financial information
New accounting pronouncements not yet effective
Details of the standards, interpretations and amendments to be adopted in
future periods are detailed in note A5 to the consolidated financial
statements, none of which are expected to have a significant impact on the
Company's financial statements.
3. Share capital, share premium, merger relief reserve and other reserve
2023 2022
£m £m
Issued and fully paid:
1,001.5 million ordinary shares of £0.10 each (2022: 1,000.4 million) 100 100
2023 2023 2022 2022
Number £ Number £
Shares in issue at 1 January 1,000,352,477 100,035,247 999,536,058 99,953,605
Ordinary shares issued in the period 1,185,942 118,594 816,419 81,642
Shares in issue at 31 December 1,001,538,419 100,153,841 1,000,352,477 100,035,247
During 2023, the Company issued 1,185,942 shares (2022: 816,419 shares) with a
premium of £6 million (2022: £4 million) in order to satisfy its obligations
to employees under the Group's sharesave schemes.
The Company has applied the relief in section 612 of the Companies Act 2006 to
present the difference between the consideration received and the nominal
value of the shares issued of £1,819 million in a merger reserve as opposed
to in share premium. A merger reserve is required to be used as a result of
the Company having issued equity shares in 2020 as part consideration for the
shares of the ReAssure Group plc and securing at least a 90% holding in that
entity.
On 12 December 2018, the Company became the ultimate parent undertaking of the
Group by acquiring the entire share capital of 'Old PGH' (the Group's ultimate
parent company until December 2018) via a share for share exchange. The cost
of investment in Old PGH was determined as the carrying amount of the
Company's share of the equity of Old PGH on the date of the transaction. The
difference between the cost of investment and the market capitalisation of Old
PGH immediately before the share for share exchange of £4 million has been
recognised as an Other reserve, and is shown as a separate component of
equity.
4. Tier 1 notes
The accounting policy and details of the terms for the Tier 1 Notes are
included in note D4 to the consolidated financial statements.
2023 2022
£m £m
Tier 1 Notes 411 411
On 12 December 2018, the Company was substituted in place of Old PGH as issuer
of the Tier 1 Notes and these were recognised at the fair value of £411
million in the form of an intragroup loan which was received as consideration.
On 27 October 2020, the terms of the Tier 1 Notes were amended and the
consequence of a trigger event, linked to the Solvency II capital position,
was changed. Previously, the Tier 1 Notes were subject to a permanent
write-down in value to zero. The amended terms require that the Tier 1 Notes
would automatically be subject to conversion to ordinary shares of the Company
at the conversion price of £1,000 per share, subject to adjustment in
accordance with the terms and conditions of the notes and all accrued and
unpaid interest would be cancelled. Following any such conversion there would
be no reinstatement of any part of the principal amount of, or interest on,
the Tier 1 Notes at any time.
5. Borrowings
The accounting policy for borrowings is included in note E5 to the
consolidated financial statements.
Carrying value Fair value
2023 2022 2023 2022
£m £m £m £m
Loans due to third-parties:
£428 million subordinated loans (note a) 199 433 202 429
US $500 million Tier 2 bonds (note b) 368 383 377 390
€500 million Tier 2 notes (note c) 409 414 419 416
US $750 million Contingent Convertible Tier 1 notes (note d) 587 618 563 580
£500 million Tier 2 notes (note e) 489 487 476 445
US $500 million Fixed Rate Reset Tier 2 notes (note f) 274 412 262 382
£500 million 5.867% Tier 2 subordinated notes (note g) 536 543 493 465
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes (note h) 254 259 239 244
£250 million 4.016% Tier 3 subordinated notes (note i) 253 256 250 231
£350 million Fixed Rate Reset Callable Tier 2 subordinated notes (note j) 346 - 368 -
3,715 3,805 3,649 3,582
Loans due to Group companies:
Loan due to Standard Life Assurance Limited (note k) - 309 - 309
Senior loan due to ReAssure Limited (note l) - 718 - 718
€100 million loan due to Standard Life International DAC (note m) 90 89 90 89
£130 million floating term loan due to ReAssure Life Limited (note n) 138 130 138 130
£250 million loan due to ReAssure Limited (note o) 261 - 261 -
£250 million remittance loan due to ReAssure Limited (note p) 257 - 257 -
€50 million loan due to Standard Life International DAC (note q) 44 - 44 -
Cash-pooling with other Group entities (note t) 1,308 1,178 1,308 1,178
2,098 2,424 2,098 2,424
Total borrowings 5,813 6,229 5,747 6,006
Amount due for settlement after 12 months 4,505 5,051
a On 12 December 2018, the Company was substituted in place of Old PGH
as issuer of the £428 million Tier 2 subordinated notes due 2025 at a coupon
of 6.625%, which were initially recognised at fair value of £439 million. On
7 December 2023, the Company repurchased £231 million of the principal amount
of the notes via a tender offer. The remaining principal amount of the notes
at 31 December 2023 is £199 million.
b On 12 December 2018, the Company was substituted in place of Old PGH
as issuer of the US $500 million Tier 2 bonds due 2027 with a coupon of
5.375%, which were initially recognised at fair value of £349 million.
c On 12 December 2018, the Company was substituted in place of Old PGH
as issuer of the €500 million Tier 2 notes due 2029 with a coupon of 4.375%,
which were initially recognised at fair value of £407 million.
d On 29 January 2020, the Company issued US $750 million fixed rate
reset perpetual restricted Tier 1 contingent convertible notes (the
'contingent convertible Tier 1 Notes') which are unsecured and subordinated.
The contingent convertible Tier 1 Notes have no fixed maturity date and
interest is payable only at the sole and absolute discretion of the Company.
The contingent convertible Tier 1 Notes bear interest on their principal
amount at a fixed rate of 5.625% per annum up to the 'First Reset Date' of 26
April 2025. Thereafter the fixed rate of interest will be reset on the First
Reset Date and on each fifth anniversary of this date by reference to the sum
of the yield of the Constant Maturity Treasury ('CMT') rate (based on the
prevailing five year US Treasury yield) plus a margin of 4.035%, being the
initial credit spread used in pricing the notes. Interest is payable on the
contingent convertible Tier 1 Notes semi-annually in arrears on 26 April and
26 October. If an interest payment is not made it is cancelled and it shall
not accumulate or be payable at any time thereafter.
e On 28 April 2020, the Company issued £500 million fixed rate Tier 2
notes (the 'Tier 2 notes') which are unsecured and subordinated. The Tier 2
notes have a maturity date of 28 April 2031 and include an issuer par call
right for the three month period prior to maturity. The Tier 2 notes bear
interest on the principal amount at a fixed rate of 5.625% per annum payable
annually in arrears on 28 April.
f On 4 June 2020, the Company issued US $500 million fixed rate reset
callable Tier 2 notes (the 'Fixed Rate Reset Tier 2 notes') which are
unsecured and subordinated. The Fixed Rate Reset Tier 2 notes have a maturity
date of 4 September 2031 with an optional issuer par call right on any day in
the three month period up to and including 4 September 2026. The Fixed Rate
Reset Tier 2 notes bear interest on the principal amount at a fixed rate of
4.75% per annum up to the interest rate reset date of 4 September 2026. If the
Fixed Rate Reset Tier 2 notes are not redeemed before that date, the interest
rate resets to the sum of the applicable CMT rate (based on the prevailing
five year US Treasury yield) plus a margin of 4.276%, being the initial credit
spread used in pricing the notes. Interest is payable on the Fixed Rate Reset
Tier 2 notes semi-annually in arrears on 4 March and 4 September. On 7
December 2023, the Company repurchased US $150 million of the principal amount
of the Fixed Rate Reset Tier 2 notes via a tender offer. The remaining
principal amount of the notes at 31 December 2023 is US $350 million.
g On 22 July 2020, the Company was substituted in place of ReAssure
Group plc as issuer of the £500 million 5.867% Tier 2 subordinated notes.
These notes have a maturity date of 13 June 2029 and were initially recognised
at their fair value of £559 million. The fair value adjustment are being
amortised over the remaining life of the notes. Interest is payable
semi-annually in arrears on 13 June and 13 December.
h On 22 July 2020, the Company was substituted in place of ReAssure
Group plc as issuer of the £250 million fixed rate reset callable Tier 2
subordinated notes. The £250 million fixed rate reset callable Tier 2
subordinated notes have a maturity date of 13 June 2029 and were initially
recognised at their fair value of £275 million. The fair value adjustment are
being amortised over the remaining life of the notes. The notes include an
issuer par call right exercisable on 13 June 2024. Interest is payable
semi-annually in arrears on 13 June and 13 December. These notes initially
bear interest at a rate of 5.766% on the principal amount and the rate of
interest will reset on 13 June 2024, and on each interest payment date
thereafter, to a margin of 5.17% plus the yield of a UK Treasury Bill of
similar term.
i On 22 July 2020, the Company was substituted in place of ReAssure
Group plc as issuer of the £250 million 4.016% Tier 3 subordinated notes. The
notes have a maturity date of 13 June 2026 and were initially recognised at
their fair value of £259 million. The fair value adjustment is being
amortised over the remaining life of the notes. Interest is payable
semi-annually in arrears on 13 June and 13 December.
j On 6 December 2023, the Company issued £350 million fixed rate
reset callable Tier 2 notes which are unsecured and subordinated. The notes
have a maturity date of 6 December 2053 with an optional issuer par call right
on any day in the six-month period up to and including 6 December 2033. The
notes bear interest on the principal amount at a fixed rate of 7.75% per annum
up to the interest rate reset date of 6 December 2033. If the notes are not
redeemed before that date, the interest rate resets to the sum of the 5 year
benchmark Gilt rate plus a margin of 4.65%, being the sum of the initial
credit spread used in pricing the notes and a 1% margin step-up. Interest is
payable on the notes semi-annually in arrears on 6 June and 6 December each
year.
k On 22 February 2019, the Company recognised a loan due in 2024 to
Standard Life Assurance Limited ('SLAL'), a subsidiary undertaking, for £162
million. This loan was the initial consideration for the acquisition from SLAL
of its investment in Standard Life International Designated Activity Company
('SLIDAC'). On 28 March 2019 the purchase price was adjusted by £120 million,
which resulted in an increase in the loan principal. Interest accrues at SONIA
plus 1.9366% and is capitalised. During the year interest of £9 million
(2022: £6 million) was capitalised. On 21 December 2023, the Company received
a distribution of the loan, extinguishing the Company's obligations under the
loan.
l On 31 December 2022, ReAssure Limited ('RAL') issued a £718 million
term loan of £718 million to the Company, maturing on 31 December 2027. At
the same time, the Company issued a contingent loan to RAL for the same amount
(see note 12 (d) for further details). Interest accrues on the term loan asset
at a rate of SONIA plus 1.49%. If the Company fails to make payments of
principal or interest in accordance with the terms of the loan, a
corresponding amount of RAL's obligations under the contingent loan would be
offset. The Company made the quarterly loan repayments due on 30 June and 30
September 2023, and repaid the loan in full on 21 December 2023.
m On 20 December 2022, SLIDAC issued a €100 million floating term loan
to the Company with a maturity date of 31 March 2024. Interest accrues on the
term loan at a rate of EURIBOR plus 0.78%. As at 31 December 2023, the
interest rate was 4.67%.
n On 16 December 2022, ReAssure Life Limited ('RLL') issued a £130
million floating term loan to the Company for a term of 5 years. Interest
accrues on the term loan at a rate of SONIA plus 1.49%. As at 31 December
2023, the interest rate was 4.95%.
o On 5 May 2023, RAL issued a £250 million floating term loan to the
Company for a term of 5 years. Interest accrues on the term loan at a rate of
SONIA plus 1.62%. As at 31 December 2023, the interest rate was 5.08%.
p On 21 July 2023, RAL issued a £250 million remittance loan to the
Company for a term of 5 years. Interest accrues on the term loan at a rate of
SONIA plus 1.51%. As at 31 December 2023, the interest rate was 6.69%.
q On 21 July 2023, SLIDAC issued a €50 million floating term loan to
the Company with a maturity date of 31 March 2025. Interest accrues on the
term loan at a rate of EURIBOR plus 0.79%. As at 31 December 2023, the
interest rate was 4.68%.
r On 21 July 2023, Phoenix Life Assurance Limited issued a £150
million floating term loan to the Company at an interest rate of 6.68% for a
term of 5 years. On 21 December 2023, the Company received a distribution of
the loan, extinguishing the Company's obligations under the loan.
s On 21 July 2023, SLAL issued a £50 million floating term loan to the
Company at an interest rate of 6.68% for a term of 5 years. On 21 December
2023, the Company received a distribution of the loan, extinguishing the
Company's obligations under the loan.
t On 13 September 2022, the Company entered into an uncommitted
intra-group cash-pooling facility with certain subsidiaries, under which the
Company will either borrow funds from, or lend funds to, the relevant
subsidiary. All amounts due under the facility attract interest at SONIA and
are repayable on demand.
u The Group has in place a £1.75 billion unsecured revolving credit
facility (the 'revolving facility'), maturing in June 2026. The facility
accrues interest at a margin over SONIA that is based on credit rating. The
facility remains undrawn as at 31 December 2023.
Borrowings initially recognised at fair value are being amortised to par value
over the life of the borrowings.
For the purposes of the additional fair value disclosures for liabilities
recognised at amortised cost, all borrowings have been categorised as Level 2
financial instruments.
Further details of the loans due to third parties (loans a. to j.) are
contained in note E5 to the consolidated financial statements.
Reconciliation of liabilities arising from financing activities
The table below details changes in the Company's liabilities arising from
financing activities, including both cash and non-cash changes. Liabilities
arising from financing activities are those for which cash flows were, or
future cash flows will be, classified in the Company's statement of cash
flows as cash flows from financing activities.
Cash Non-cashflow
At 1 January 2023 New borrowings, net of costs Repayments Dividend in specie payment Movement in foreign exchange (Amortisation)/accretion Capitalised interest Movement in fair value At 31 December 2023
£m £m £m £m £m £m £m £m £m
£428 million subordinated notes 433 - (231) - - (3) - - 199
US $500 million Tier 2 bonds 383 - - - (21) 6 - - 368
€500 million Tier 2 notes 414 - - - (9) 4 - - 409
US $750 million Contingent Convertible Tier 1 notes 618 - - - (32) 1 - - 587
£500 million Tier 2 notes 487 - - - - 2 - - 489
US $500 million Fixed Rate Reset Tier 2 notes 412 - (119) - (20) 1 - - 274
£500 million 5.867% Tier 2 subordinated notes 543 - - - - (7) - - 536
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes 259 - - - - (5) - - 254
£250 million 4.016% Tier 3 subordinated notes 256 - - - - (3) - - 253
£350 million Fixed Rate Reset Callable Tier 2 subordinated notes - 346 - - - - - - 346
Loan due to Standard Life Assurance Limited 1 309 - - (318) - - 9 - -
Senior loan due to ReAssure Limited 718 - (718) - - - - - -
€100 million loan due to Standard Life International DAC 89 - - - (2) - 3 - 90
£130 million floating term loan due to ReAssure Life Limited 130 - - - - - 8 - 138
£250 million loan due to ReAssure Limited - 250 - - - - 11 - 261
£250 million remittance loan due to ReAssure Limited - 250 - - - - 7 - 257
€50 million loan due to Standard Life International DAC - 43 - - - - 1 - 44
£150 million remittance loan due to Phoenix Life Assurance Limited 1 - 150 - (146) - (4) - - -
£50 million remittance loan due to Standard Life Assurance Limited 1 - 50 - (49) - (1) - - -
Cash-pooling with other Group entities 1,178 361 (294) - - - 63 - 1,308
Derivative assets 2 (225) - - - - (1) - 108 (118)
6,004 1,450 (1,362) (513) (84) (10) 102 108 5,695
1 The liability has been discharged via a dividend in specie payment.
2 Cross currency swaps to hedge against adverse currency movements in respect
of the Group's Euro and US Dollar denominated borrowings (see note 6 for
further details).
Cash Non-cashflow
At 1 January 2022 New borrowings, net of costs Repayments Movement in foreign exchange Accretion/(amortisation) Capitalised interest Movement in fair value At 31 December 2022
£m £m £m £m £m £m £m £m
£428 million subordinated notes 435 - - - (2) - - 433
£450 million Tier 3 subordinated notes 449 - (450) - 1 - - -
US $500 million Tier 2 bonds 337 - - 41 5 - - 383
€500 million Tier 2 notes 389 - - 21 4 - - 414
US $750 million Contingent Convertible Tier 1 notes 551 - - 66 1 - - 618
£500 million Tier 2 notes 485 - - - 2 - - 487
US $500 million Fixed Rate Reset Tier 2 notes 368 - - 44 - - 412
£500 million 5.867% Tier 2 subordinated notes 550 - - - (7) - - 543
£250 million 4.016% Tier 3 subordinated notes 257 - - - (1) - - 256
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes 266 - - - (7) - - 259
Loan due to Standard Life Assurance Limited 300 - - - - 9 - 309
Senior loan due to ReAssure Limited2 - 718 - - - - - 718
€100 million loan due to Standard Life International DAC - 88 - 1 - - - 89
£130 million floating term loan to ReAssure Life Limited - 130 - - - - - 130
Cash-pooling with other Group entities - 1,338 (166) - - 6 - 1,178
Derivative assets 1 (48) - - - - - (177) (225)
Derivative liabilities 1 5 - - - - - (5) -
4,344 2,274 (616) 173 (4) 15 (182) 6,004
1 Cross currency swaps to hedge against currency movements in respect of the
Group's Euro and US Dollar denominated borrowings (see note 6 for further
details).
2 Settled simultaneously with the issuance of the £718 million contingent
loan.
6. Derivatives
The accounting policy for derivatives is included in note E3 to the
consolidated financial statements.
In June 2021, the Company entered into four cross currency swaps in order to
hedge against adverse currency movements in respect of its Euro and US Dollar
denominated borrowings.
From December 2021, the Company also hedged certain Euro, US Dollar, Japanese
Yen and Hong Kong Dollar exposures to adverse foreign currency movements in
respect of underlying business within its subsidiaries.
The fair value of the derivative financial instruments is as follows:
Asset Liability
2023 2022 2023 2022
£m £m £m £m
Cross currency swaps 118 225 - -
Foreign currency swaps 1 32 1 22
119 257 1 22
Derivative collateral arrangements
The accounting policy for collateral arrangements is included in note E4 to
the consolidated financial statements.
Assets accepted
The maximum exposure to credit risk in respect of over-the-counter ('OTC')
derivative assets is £119 million (2022: £257 million) of which credit risk
of £30 million (2022: £86 million) is mitigated by use of collateral
arrangements (which are settled net after taking account of any OTC derivative
liabilities owed by the counterparty).
Assets pledged
The Company has not pledged any collateral in respect of its OTC derivative
liabilities.
7. Provisions
The accounting policy for provisions is included in note G7 to the
consolidated financial statements.
In 2019, the Company recognised an initial Standard Life transition and
transformation restructuring provision of £159 million. During the year, £27
million (2022: £28 million) of the restructuring provision was utilised and
the provision was decreased by £7 million (2022: increased by £33 million).
The remaining provision of £63 million (2022: £97 million) is expected to be
utilised within one to three years. See note G7 to the consolidated financial
statements for further details.
Following the acquisition of the ReAssure businesses in 2020, the Group
established a transition and transformation programme which aims to deliver
the integration of the Group's operating models via a series of phases. During
2023, the Group announced its intention to migrate existing ReAssure policies
to the TCS platform which raised a valid expectation of the impacts in those
likely to be affected.
The initial provision of £127 million included migration costs, severance
costs and other expenses. Migration costs are considered a direct expenditure
necessarily entailed by the restructuring and represent an obligation arising
from arrangements entered into with TCS during 2023. No costs have been
provided for that relate to the ongoing servicing of policies. Migration costs
payable to TCS are subject to limited uncertainty as they are fixed under the
terms of the agreement entered into. The severance costs are subject to
uncertainty and will be impacted by the number of staff that transfer to TCS,
and the average salaries and number of years' service of those affected.
During the year, the provision was increased by £65 million and £33 million
was utilised. The remaining provision of £159 million is expected to be
utilised within one to five years.
8. Lease liabilities
The accounting policy for lease liabilities is included in note G9 to the
consolidated financial statements.
Lease liabilities relate to office premises at 20 Old Bailey, London. The
lease was assigned on 24 March 2021 for a term of 12 years and 9 months, with
an option to break the contract on 25 December 2028. It is currently not
expected that the break clause will be exercised.
2023 2022
£m £m
At 1 January 20 21
Lease payments (2) (1)
At 31 December 18 20
Amount due within twelve months 2 1
Amount due after twelve months 16 19
9. Accruals and deferred income
The accounting policy for accruals and deferred income is included in note G10
to the consolidated financial statements.
2023 2022
£m £m
Accruals and deferred income 118 124
Amount due for settlement after 12 months 5 -
10. Property, plant and equipment
The accounting policy for property, plant and equipment is included in note G3
to the consolidated financial statements.
Property, plant and equipment includes the right-of-use asset relating to
office premises leased at 20 Old Bailey, London. Depreciation is being charged
on a straight line basis over the term of the lease.
Total Property, Plant and Equipment
2023
£m
Cost or valuation
At 1 January and 31 December 22
Depreciation
At 1 January (3)
Depreciation (2)
At 31 December (5)
Carrying amount at 31 December 17
Total Property, Plant and Equipment
2022
£m
Cost or valuation
At 1 January and 31 December 22
Depreciation
At 1 January (1)
Depreciation (2)
At 31 December (3)
Carrying amount at 31 December 19
11. Investment in group entities
2023 2022
£m £m
Cost
At 1 January 14,420 14,220
Additions 305 200
At 31 December 14,725 14,420
Impairment
At 1 January and 31 December (4,189) (4,189)
Carrying amount
At 31 December 10,536 10,231
In April 2023, the Company acquired 100% of the issued share capital of SLF of
Canada UK Limited business for a cost of £250 million. In addition, during
the year the Company established a Bermuda based entity, Phoenix Group
Holdings (Bermuda) Limited, and capital contributions totaling £55 million
were paid to the entity.
During 2023, the following Part VII schemes (transfer of insurance business)
were undertaken which had the effect of reallocating the value of the
Company's investment in Group entities between certain subsidiaries:
• the PLL and RLL EU business policies were transferred into a new EU
regulated life company, Phoenix Life Assurance Europe DAC ('PLAE'), within the
Group.
• the business of PLAL, SLAL and Standard Life Pension Funds Limited
('SLPF') was transferred to PLL. In line with the strategic objectives of the
Group, the transfer simplifies the operating model whilst resulting in
financial, operational and liquidity benefits with the excess capital
position, after allowing for costs and capital policy, of the life companies
improving significantly.
• Additionally, during 2023 the servicing activities of Pearl Group
Services Limited and Standard Life Asset and Employee Services Limited were
transferred to Phoenix Group Management Services Limited. In line with the
strategic objectives of the Group, the transfer simplifies the operating model
resulting in operational benefits.
As at 31 December 2023 and 31 December 2022, the market capitalisation of the
Company was lower than the net asset value, and this was considered to be an
indicator that the Company's investments in its subsidiaries may have been
impaired. Where such indicators are identified, an impairment test is
performed.
As a starting point, the contribution of the life insurance subsidiaries to
the recoverable amount has been determined with reference to Solvency II Own
Funds, which reflects a probability-weighted best estimate of cash flows for
in-force insurance and investment contracts consistent with the Group's
operating plan with an allowance for risk, together with an economic valuation
of the underlying assets and other liabilities. Suitable adjustments were made
to Solvency II Own Funds in order to align with the dividend paying capacity
of the life insurance subsidiaries, which included the removal of the surplus
attributable to policyholders in the with-profit funds. Where the Solvency II
Own Funds exceeded the carrying value of the investment in subsidiary,
management has concluded that no impairment is required.
For one of its subsidiaries, Phoenix Life Holdings Limited ("PLHL"), the
carrying value of the investment exceeded the Solvency II Own Funds as at 31
December 2023. Accordingly, a value in use test was applied that utilises cash
flow projections based on the emergence of surplus for in-force business on a
Solvency II basis, together with new business cash flows on a Solvency II
basis. This analysis has been informed by dividend projections on a consistent
basis to that set out in the Group's business plan approved by the Board. The
value in use calculation has used a discount rate of 10%, calculated using a
risk adjusted weighted average cost of capital approach, and a long term
growth rate after the initial five year business plan period of 2%. A 1%
increase in the discount rate would reduce the recoverable amount by £920
million and would not result in any impairment being recognised in respect of
PLHL. A 1% reduction in the long-term growth rate would reduce the recoverable
amount by £684 million and would also not result in any impairment being
recognised in respect of PLHL.
Based on the assessment above, no impairment has been recorded in 2023 in
respect of the investment in Group entities (2022: £nil).
For a list of principal Group entities, refer to note H6 of the consolidated
financial statements in which the entities directly held by the Company are
separately identified.
12. Loans and deposits
Carrying value Fair value
2023 2022 2023 2022
£m £m £m £m
Loans due from Phoenix Life Holdings Limited (note a) 1,284 1,273 1,299 1,279
Cash-pooling to other Group entities (note b) 5 546 5 546
Loan due from Phoenix Group Employee Benefit Trust (note c) 13 13 13 13
Loan due from ReAssure Limited (note d) - 718 - 718
Loans and deposits due from Group entities 1,302 2,550 1,317 2,556
Total loans and deposits 1,302 2,550 1,317 2,556
Amounts due after 12 months 1,297 2,004
All loans and deposit balances are due from Group entities and are measured at
amortised cost using the effective interest method. The fair value of these
loans and deposits are also disclosed. None of the loans are considered to be
overdue.
a On 12 December 2018, the Company was assigned a £428 million
subordinated loan by Phoenix Life Holdings Limited ('PLHL'). The loan accrues
interest at a rate of 6.675% and matures on 18 December 2025. This loan was
initially recognised at fair value of £439 million and is amortised to par
over the period to 2025. At 31 December 2023, the carrying value of the loan
was £432 million (2022: £433 million).
On 12 December 2018, the Company was assigned a £450 million subordinated
loan by PLHL. The loan accrues interest at a rate of 4.158% and matured on 20
July 2022. On 20 July 2022, the amount due on the maturity of the subordinated
loan of £450 million was advanced under a new loan to PLHL. The new loan
accrues interest at a compounded rate of SONIA rate plus a margin of 1.30% and
is capitalised. During the year interest of £27 million (2022: £7 million)
was capitalised. The loan matures on 31 December 2027. At 31 December 2023,
the carrying value of the loan was £484 million (2022: £457 million due
under the subordinated loan).
On 12 December 2018, the Company was assigned a US $500 million loan by PLHL
due to mature in 2027 with a coupon of 5.375%. This loan was initially
recognised at fair value of £349 million and is accreted to par over the
period to 2027. Movement in foreign exchange during the period decreased the
carrying value by £20 million (2022: £41 million increase). At 31 December
2023, the carrying value of the loan was £368 million (2022: £383 million).
b On 13 September 2022, the Company entered into an uncommitted
intra-group cash-pooling facility with certain subsidiaries, under which the
Company will either borrow funds from, or lend funds to, the relevant
subsidiary. All amounts due under the facility attract interest at SONIA and
are repayable on demand.
c On 18 June 2019, the Company was assigned an interest free facility
arrangement with Phoenix Group Employee Benefit Trust ('EBT'). As at 31
December 2023, the carrying value of the loan was £13 million (2022: £13
million). The loan is fully recoverable until the awards held in the EBT vest
to the participants, at which point the loan is reviewed for impairment. Any
impairments are determined by comparing the carrying value to the estimated
recoverable amount of the loan. During the year funding of £12 million (2022:
£12 million) was provided to the EBT and £12 million of the loan was
impaired (2022: £12 million).
d On 31 December 2022, the Company issued a contingent loan of £718
million with RAL which accrues interest at a rate of SONIA plus 2.95%. Loan
repayments and interest payments are made quarterly in arrears. Repayment of
principal each quarter is set at the amount of surplus emerging from a
specified block of unit-linked business in RAL, less interest payable. RAL
made the quarterly loan repayments due on 30 June and 30 September 2023, and
repaid the loan in full on 21 December 2023.
For the purposes of the additional fair value disclosures for assets
recognised at amortised cost, all loans and deposits are categorised as Level
3 financial instruments. The fair value of loans and deposits with no external
market is determined by internally developed discounted cash flow models using
a risk adjusted discount rate corroborated with external market data where
possible.
Details of the factors considered in determination of fair value are included
in note E2 to the consolidated financial statements.
13. Financial assets
2023 2022
£m £m
Financial assets at fair value through profit or loss
Derivatives 119 257
Debt securities 1 1
Collective investment schemes 1,017 775
1,137 1,033
Amounts due after 12 months 1 1
Determination of fair value and fair value hierarchy of financial assets
Details of the factors considered in determination of the fair value are
included in note E2 to the consolidated financial statements.
Year ended 31 December 2023 Level 1 Level 2 Level 3 Total
£m £m £m £m
Financial assets at fair value through profit or loss
Derivatives - 119 - 119
Debt securities - - 1 1
Collective investment schemes 1,017 - - 1,017
1,017 119 1 1,137
Year ended 31 December 2022 Level 1 Level 2 Level 3 Total
£m £m £m £m
Financial assets at fair value through profit or loss
Derivatives - 257 - 257
Debt securities - - 1 1
Collective investment schemes 775 - - 775
775 257 1 1,033
There were no transfers between levels in either 2023 or 2022.
Level 3 financial instrument sensitivities
The investment in debt securities is in respect of debt holdings in a property
investment structure which was originally transferred to the Company via an
in-specie dividend received from Old PGH during 2019. The holding was disposed
of during the year ended 31 December 2020, but a balance of £1 million
remains in respect of a potential repayment of cash reserves that may be due
to the Company. The amount recognised has taken account of both the uncertain
nature of the value of the proceeds and when they will be received.
14. Deferred Tax
The accounting policy for tax assets and liabilities is included in note G8 to
the consolidated financial statements.
Movement in deferred tax balances
1 January 2023 Credit for the year 31 December 2023
£m £m £m
Provisions and other temporary differences 113 46 159
1 January 2022 Credit for the year 31 December 2022
£m £m £m
Provisions and other temporary differences 82 31 113
The standard rate of UK corporation tax for the accounting period is 23.5%
(2022: 19%).
Following cancellation of the planned corporation tax rate reduction from 19%
to 17% announced in the Chancellor's Budget of March 2020, an increase to 25%
effective from April 2023 was announced in the Budget of 3 March 2021.
Accordingly, deferred tax assets and liabilities are provided at the rate of
25%.
15. Cash and cash equivalents
The accounting policy for cash and cash equivalents is included in note G6 to
the consolidated financial statements.
2023 2022
£m £m
Bank and cash balances 1 -
16. Cash flows from operating activities
2023 2022
£m £m
(Loss)/profit for the year before tax (89) 26
Non-cash movements in loss/profit for the year before tax:
Impairment of loan due from subsidiary 12 12
Investment income (965) (127)
Finance costs 399 287
Fair value losses/(gains) on financial assets 117 (171)
Foreign exchange movement on borrowings at amortised cost (63) 173
Share-based payment charge 22 16
Depreciation 2 2
(Increase)/decrease in investment assets (242) 290
Net decrease/(increase) in working capital 218 (925)
Cash utilised by operations (589) (417)
17. Capital and risk management
The Company's capital comprises share capital, the Tier 1 Notes and all
reserves as calculated in accordance with International Financial Reporting
Standards ('IFRS'), as set out in the statement of changes in equity. Under
English company law, dividends must be paid from distributable profits. As the
ultimate parent undertaking of the Group, the Company manages its capital to
ensure that it has sufficient distributable profits to pay dividends in
accordance with its dividend policy. The distributable reserves of the Company
as at 31 December 2023 were £4,621 million (2022: £5,062 million).
At 31 December 2023, total capital was £6,963 million (2022: £7,398
million). The movement in capital in the period comprises the total
comprehensive income for the period attributable to owners of £79 million
(2022: £116 million), dividends paid of £520 million (2022: £496 million),
coupon paid on Tier 1 Notes, net of tax relief of £22 million (2022: £22
million), credit to equity for equity-settled share-based payments of £22
million (2022: £16 million) and issue of ordinary share capital of £6
million (2022: £4 million).
In addition, the Group also manages its capital on a regulatory basis as
described in note I3 to the consolidated financial statements.
The principal risks and uncertainties facing the Company are interest rate
risk, liquidity risk, foreign currency risk and credit risk. The Company
hedges its currency risk exposure arising on foreign currency hybrid debt.
Details of the Group's financial risk management policies are outlined in note
E6 to the consolidated financial statements.
Credit risk management practices
The Company's current credit risk grading framework comprises the following
categories:
Category Description Basis for recognising ECL
Performing The counterparty has a low risk of default and does not have any past-due 12 month ECL
amounts
Doubtful There has been a significant increase in credit risk since initial recognition Lifetime ECL - not credit impaired
In default There is evidence indicating the asset is credit-impaired Lifetime ECL - credit impaired
Write-off There is evidence indicating that the counterparty is in severe financial Amount is written off
difficulty and the Company has no realistic prospect of recovery
The table below details the credit quality of the Company's financial assets,
as well as the Company's maximum exposure to credit risk by credit risk rating
grades:
2023 External credit rating Internal credit rating 12 month or lifetime ECL Gross carrying amount Loss allowance Net carrying amount
£m £m £m
Loans and deposits (note 12) N/A Performing 12 month ECL 1,302 - 1,302
Other amounts due from Group entities (note 20) N/A Performing 12 month ECL 25 - 25
Cash and cash equivalents (note 15) A N/A 12 month ECL 1 - 1
2022 External credit rating Internal credit rating 12 month or lifetime ECL Gross carrying amount Loss allowance Net carrying amount
£m £m £m
Loans and deposits (note 12) N/A Performing 12 month ECL 2,550 - 2,550
Other amounts due from Group entities (note 20) N/A Performing 12 month ECL 19 - 19
The Company considers reasonable and supportable information that is relevant
and available without undue cost or effort to assess whether there has been a
significant increase in risk since initial recognition. This includes
quantitative and qualitative information and forward-looking analysis.
Loans and deposits - The Company is exposed to credit risk relating to loans
and deposits from other Group companies, which are considered to be of low
risk. Given their low risk, the loss allowance has been set at less than £1
million. The Company assesses whether there has been a significant increase in
credit risk since initial recognition by assessing whether there have been any
historic defaults, by reviewing the going concern assessment of the borrower
and the ability of the Group to prevent a default by providing a capital or
cash injection. Specific considerations for the loan to the Employee Benefit
Trust are discussed in note 12.
Amounts due from other Group entities - The credit risk from activities
undertaken in the normal course of business is considered to be extremely low.
Given their low risk, the loss allowance has been set at less than £1
million. The Company assesses whether there has been a significant increase in
credit risk since initial recognition by assessing past credit impairments,
history of defaults and the long-term stability of the Group.
Cash and cash equivalents - The Company's cash and cash equivalents are held
with bank and financial institution counterparties which have investment grade
'A' credit ratings. The Company considers the associated credit risk is low
based on the external credit ratings of the counterparties and, there being no
history of default, the impact to the net carrying amount stated in the table
above is therefore considered not to be material.
The Company writes off a financial asset when there is information indicating
that the counterparty is in severe financial difficulty and there is no
realistic prospect of recovery, e.g. when the counterparty has been placed
into liquidation or has entered into bankruptcy proceedings. Financial assets
written off may still be subject to enforcement activities under the Company's
recovery procedures, taking into account legal advice where appropriate. Any
recoveries made are recognised in profit or loss.
18. Share-based payments
Detailed information on the Long-term incentive plans, Sharesave schemes and
Deferred bonus share schemes is contained in note I1 in the consolidated
financial statements.
19. Directors' remuneration
Details of the remuneration of the Directors of Phoenix Group Holdings plc is
included in the Directors' Remuneration Report on pages 111 to 140 of the
Annual Report and Accounts.
20. Related party transactions
The Company has related party transactions with Group entities and its key
management personnel. Details of the total compensation of key management
personnel, being those having authority and responsibility for planning,
directing and controlling the activities of the Group, including the Executive
and Non-Executive Directors, are included in note I4 to the consolidated
financial statements.
During the year ended 31 December 2023, the Company entered into the following
transactions with related parties.
2023 2022
£m £m
Dividend income from other Group entities 655 455
Interest income from other Group entities 210 124
865 579
Expense to other Group entities 561 246
Interest expense to other Group entities 196 60
757 306
Amounts due from related parties at the end of the year:
2023 2022
£m £m
Loans due from Group entities 1,302 2,550
Interest accrued on loans due from Group entities 28 29
Other amounts due from Group entities 25 19
1,355 2,598
Amount due for settlement after 12 months 1,297 2,004
Amounts due to related parties at the end of the year:
2023 2022
£m £m
Loans due to Group entities 2,098 2,424
Interest accrued on loans due to Group entities 15 14
Other amounts due to Group entities 62 43
2,175 2,481
Amount due for settlement after 12 months 700 1,246
21. Auditor's remuneration
Details of auditor's remuneration for Phoenix Group Holdings plc and its
subsidiaries is included in note C6 to the consolidated financial statements.
22. Events after the reporting period
Details of events after the reporting date are included in note I7 to the
consolidated financial statements.
N Lyons
A Briggs
R Thakrar
K Green
H Iioka
K Murray
E Bucks
M Gregory
J Pollock
B Richards
D Scott
M Semple
N Shott
21 March 2024
Additional life company asset disclosures
The analysis of the asset portfolio provided below comprises the assets held
by the Group's life companies, and it is stated net of derivative liabilities.
It excludes other Group assets such as cash held in the holding and management
service companies and the assets held by the non-controlling interests in
consolidated collective investment schemes. The information is presented on a
look-through basis into the underlying funds.
The following table provides an overview of the exposure by asset category of
the Group's life companies' shareholder and policyholder funds:
31 December 2023
Carrying value Shareholder and non-profit funds1 Participating supported1 Participating non-supported2 Unit-linked2 Total
£m £m £m £m £m
Cash and cash equivalents 4,129 1,085 5,309 8,002 18,525
Debt securities - gilts and foreign government bonds 7,753 286 15,039 12,312 35,390
Debt securities - other government and supranationals 2,021 230 2,175 3,253 7,679
Debt securities - infrastructure loans - project finance3 1,137 - - - 1,137
Debt securities - infrastructure loans - corporate4 1,523 - 1 - 1,524
Debt securities - local authority loans5 1,032 1 2 4 1,039
Debt securities - loans guaranteed by export credit agencies and 733 - - - 733
supranationals6
Debt securities - private corporate credit7 2,271 - 106 8 2,385
Debt securities - loans to housing association8 1,243 - 8 2 1,253
Debt securities - commercial real estate loans9 1,147 - - - 1,147
Debt securities - equity release mortgages9 4,486 - - - 4,486
Debt securities - other debt securities 15,097 1,152 12,397 27,688 56,334
38,443 1,669 29,728 43,267 113,107
Equity securities 117 50 17,227 112,122 129,516
Property investments 47 16 1,677 5,062 6,802
Income strips9 - - - 674 674
Other investments10 (371) (529) 822 10,800 10,722
Total Life Company assets 42,365 2,291 54,763 179,927 279,346
Less assets held by disposal groups11 - - - (4,780) (4,780)
At 31 December 2023 42,365 2,291 54,763 175,147 274,566
Cash and cash equivalents in Group holding companies 1,012
Cash and financial assets in other Group companies 686
Financial assets held by the non-controlling interest in consolidated 4,018
collective investment schemes
Financial assets in consolidated funds held by disposal groups11 188
Total Group consolidated assets excluding amounts classified as held for sale 280,470
Comprised of:
Investment property 3,698
Financial assets 272,946
Cash and cash equivalents 7,168
Derivative liabilities (3,342)
280,470
1 Includes assets where shareholders of the life companies
bear the investment risk.
2 Includes assets where policyholders bear most of the
investment risk.
3 Total infrastructure loans - project finance of £1,137
million include £1,097 million classified as Level 3 debt securities in the
fair value hierarchy.
4 Total infrastructure loans - corporate of £1,524 million
include £1,493 million classified as Level 3 debt securities in the fair
value hierarchy.
5 Total local authority loans of £1,039 million include
£932 million classified as Level 3 debt securities in the fair value
hierarchy.
6 Total loans guaranteed by export credit agencies and
supranationals of £733 million include £486 million classified as Level 3
debt securities in the fair value hierarchy.
7 Total private corporate credit of £2,385 million include
£1,829 million classified as Level 3 debt securities in the fair value
hierarchy.
8 Total loans to housing associations of £1,253 million
include £1,186 million classified as Level 3 debt securities in the fair
value hierarchy.
9 All commercial real estate loans, equity release mortgages
and income strips are classified as Level 3 debt securities in the fair value
hierarchy.
10 Includes policy loans of £1 million, other loans of £189
million, net derivative liabilities of £(770) million, reinsurers' share of
investment contracts of £9,700 million and other investments of £1,602
million.
11 See note H3 to the consolidated financial statements for
further details.
31 December 2022 restated1
Carrying value Shareholder and non-profit funds2 Participating supported2 Participating non-supported3 Unit-linked3 Total
£m £m £m £m £m
Cash and cash equivalents 4,385 1,027 5,312 6,445 17,169
Debt securities - gilts and foreign government bonds 4,913 260 15,065 13,212 33,450
Debt securities - other government and supranational 1,691 242 1,717 2,341 5,991
Debt securities - infrastructure loans - project finance4 922 - - - 922
Debt securities - infrastructure loans - corporate5 1,205 - 1 - 1,206
Debt securities - local authority loans6 686 1 2 4 693
Debt securities - loans guaranteed by export credit agencies and 509 - - - 509
supranationals7
Debt securities - private corporate credit8 1,660 - 100 8 1,768
Debt securities - loans to housing associations9 769 - 8 2 779
Debt securities - commercial real estate loans10 1,104 - - - 1,104
Debt securities - equity release mortgages10 3,934 - - - 3,934
Debt securities - other debt securities 13,895 1,118 13,067 33,515 61,595
31,288 1,621 29,960 49,082 111,951
Equity securities 109 46 17,114 94,462 111,731
Property investments 68 22 1,698 5,361 7,149
Income strips10 - - - 786 786
Other investments11 (1,241) (508) 732 9,273 8,256
Total Life Company assets 34,609 2,208 54,816 165,409 257,042
Less assets held by disposal groups12 - - - (8,312) (8,312)
At 31 December 2022 34,609 2,208 54,816 157,097 248,730
Cash and cash equivalents in Group holding companies 502
Cash and financial assets in other Group companies 1,071
Financial assets held by the non-controlling interest in consolidated 4,213
collective investment schemes
Financial assets in consolidated funds held by disposal groups12 1,147
Total Group consolidated assets excluding amounts classified as held for sale 255,663
Comprised of:
Investment property 3,727
Financial assets 248,972
Cash and cash equivalents 8,839
Derivative liabilities (5,875)
255,663
1 Prior period comparatives have been restated on transition
to IFRS 17 Insurance Contracts (see note A2.1 for further details). This has
resulted in a net reduction of £(9) million as result of moving £(11)
million policy loans to insurance contracts along with a £2 million increase
in reinsurance share of investment contracts.
2 Includes assets where shareholders of the life companies
bear the investment risk.
3 Includes assets where policyholders bear most of the
investment risk.
4 Total infrastructure loans - project finance of £922
million include £882 million classified as Level 3 debt securities in the
fair value hierarchy.
5 Total infrastructure loans - corporate of £1,206 million
include £1,175 million classified as Level 3 debt securities in the fair
value hierarchy.
6 Total local authority loans of £693 million include £596
million classified as Level 3 debt securities in the fair value hierarchy.
7 Total loans guaranteed by export credit agencies and
supranationals of £509 million include £402 million classified as Level 3
debt securities in the fair value hierarchy.
8 Total private corporate credit of £1,768 million include
£1,422 million classified as Level 3 debt securities in the fair value
hierarchy.
9 Total loans to housing associations of £779 million
include £691 million classified as Level 3 debt securities in the fair value
hierarchy.
10 All commercial real estate loans, equity release mortgages
and income strips are classified as Level 3 debt securities in the fair value
hierarchy.
11 Includes other loans of £398 million, net derivative
liabilities of £(1,837) million, reinsurers' share of investment contracts of
£9,090 million and other investments of £605 million.
12 See note H3 to the consolidated financial statements for
further details.
The following table provides a reconciliation of the total life company assets
to the Assets under Administration ('AUA') as at 31 December 2023 detailed in
the Business Review on page 37.
2023 2022
£bn £bn
Total Life Company assets excluding amounts classified as held for sale 274.6 248.7
Off-balance sheet AUA1 10.3 10.3
Less: Wrap SIPP and Onshore Bond assets2 (2.4) -
Assets Under Administration 282.5 259.0
1 Off-balance sheet AUA represents assets held in respect of
certain Group Self-Invested Personal Pension products where the beneficial
ownership interest resides with the customer (and which are therefore not
recognised in the consolidated statement of financial position) but on which
the Group earns fee revenue.
2 Assets held in Wrap Self-Invested Personal Pension ('Wrap
SIPP') and Onshore Bond products the associated profits of which accrue to
abrdn plc under a profit transfer arrangement have been excluded from AUA (see
note H3 to the consolidated financial statements for further details).
All of the life companies' debt securities are held at fair value through
profit or loss under IFRS 9 Financial Instruments (2022: IAS 39 Financial
Instruments: Recognition & Measurement), and therefore already reflect any
reduction in value between the date of purchase and the reporting date.
The life companies have in place a comprehensive database that consolidates
credit exposures across counterparties, geographies and business lines. This
database is used for credit monitoring, stress testing and scenario planning.
The life companies continue to manage their balance sheets prudently and have
taken extra measures to ensure their market exposures remain within risk
appetite.
For each of the life companies' significant financial institution
counterparties, industry and other data has been used to assess the exposure
of the individual counterparties. As part of the Group's risk appetite
framework and analysis of shareholder exposure to a potential worsening of the
economic situation, this assessment has been used to identify counterparties
considered to be most at risk from defaults. The financial impact on these
counterparties, and the contagion impact on the rest of the shareholder
portfolio, is assessed under various scenarios and assumptions. This analysis
is regularly reviewed to reflect the latest economic outlook, economic data
and changes to asset portfolios. The results are used to inform the Group's
views on whether any management actions are required.
The table below shows the Group's market exposure analysed by credit rating
for the shareholder debt portfolio, which comprises of debt securities held in
the shareholder and non-profit funds.
Sector analysis of shareholder and non-profit fund bond portfolio
AAA AA A BBB BB & below1 Total
£m £m £m £m £m £m
Industrials - 127 216 520 10 873
Basic materials - 1 126 55 - 182
Consumer, cyclical 10 227 344 82 70 733
Technology and telecoms 118 142 644 706 1 1,611
Consumer, non-cyclical 197 334 677 240 - 1,448
Structured finance - - 37 - - 37
Banks2 314 749 2,915 682 13 4,673
Financial services 65 558 197 69 14 903
Diversified - 4 17 6 - 27
Utilities 14 515 979 1,208 10 2,726
Sovereign, sub-sovereign and supranational3 1,348 8,932 658 152 - 11,090
Real estate 132 588 3,334 1,259 92 5,405
Investment companies - 91 48 8 - 147
Insurance 18 325 176 106 - 625
Oil and gas - 218 330 149 - 697
Collateralised debt obligations - 7 2 - - 9
Private equity loans - - 18 105 - 123
Equity release mortgages4 2,504 991 864 127 - 4,486
Infrastructure - 467 243 1,881 57 2,648
At 31 December 2023 4,720 14,276 11,825 7,355 267 38,443
1 Includes unrated holdings of £17 million.
2 The £4,673 million total shareholder exposure to bank
debt comprised £3,730 million senior debt and £943 million subordinated
debt.
3 Includes £762 million reported as local authority loans,
£467 million reported as loans guaranteed by export credit agencies and
supranationals and £87 million reported as private corporate credit in the
summary table on page 306.
4 The credit ratings attributed to equity release mortgages
are based on the ratings assigned to the internal securitised loan notes.
Sector analysis of shareholder and non-profit fund bond portfolio
AAA AA A BBB BB & below1 Total
£m £m £m £m £m £m
Industrials - 395 252 643 11 1,301
Basic materials - 1 130 6 - 137
Consumer, cyclical - 311 314 111 67 803
Technology and telecoms 186 288 517 551 - 1,542
Consumer, non-cyclical 246 328 802 231 - 1,607
Structured finance - - 38 - - 38
Banks2 526 464 2,919 344 39 4,292
Financial services 139 401 100 68 19 727
Diversified - 5 29 - - 34
Utilities 19 141 727 1,353 - 2,240
Sovereign, sub-sovereign and supranational3 932 5,838 509 116 2 7,397
Real estate 76 234 2,590 1,053 180 4,133
Investment companies 1 125 - 5 - 131
Insurance 22 354 321 70 43 810
Oil and gas - 132 346 55 - 533
Collateralised debt obligations - 7 - - - 7
Private equity loans - - 7 69 - 76
Equity release mortgages4 2,216 852 810 56 - 3,934
Infrastructure - 123 60 1,208 155 1,546
At 31 December 2022 4,363 9,999 10,471 5,939 516 31,288
1 Includes unrated holdings of £108 million.
2 The £4,292 million total shareholder exposure to bank
debt comprised £3,345 million senior debt and £947 million subordinated
debt.
3 Includes £686 million reported as local authority loans
and £107 million reported as loans guaranteed by export credit agencies and
supranationals in the summary table on page 307.
4 The credit ratings attributed to equity release mortgages
are based on the ratings assigned to the internal securitised loan notes.
The following table sets out the debt security exposure by country of the
shareholder and non-profit funds of the life companies:
Analysis of shareholder debt security exposure by country Sovereign, sub-sovereign and supranational Corporate and other Total Sovereign, sub-sovereign and supranational Corporate and other Total
2023 2023 2023 2022 2022 2022
£m £m £m £m £m £m
UK 9,046 16,169 25,215 5,914 13,781 19,695
Supranationals 704 - 704 541 45 586
USA 274 4,764 5,038 317 5,122 5,439
Germany 133 811 944 46 716 762
France 169 1,724 1,893 153 921 1,074
Netherlands 79 457 536 24 417 441
Italy - 304 304 - 145 145
Ireland 35 88 123 - 74 74
Spain 12 253 265 17 103 120
Luxembourg 55 133 188 56 118 174
Belgium 89 134 223 28 83 111
Australia 1 477 478 1 386 387
Canada 45 410 455 6 385 391
Mexico 2 157 159 2 137 139
Other - non-Eurozone 1 356 1,125 1,481 252 1,241 1,493
Other - Eurozone 90 347 437 40 217 257
Total shareholder debt securities 11,090 27,353 38,443 7,397 23,891 31,288
1 There was no shareholder exposure to Russia, Ukraine and Belarus at 31
December 2023 and 31 December 2022.
Additional capital disclosures
PGH PLC Solvency II surplus
The PGH plc surplus at 31 December 2023 is £3.9 billion (2022: £4.5
billion).
31 December 31 December
2023 2022
Estimated £bn
£bn
Own Funds 11.1 11.1
SCR (7.2) (6.6)
Surplus 3.9 4.5
Composition of own funds
Own Funds items are classified into different Tiers based on the features of
the specific items and the extent to which they possess the following
characteristics, with Tier 1 being the highest quality:
• availability to be called up on demand to fully absorb losses on a
going-concern basis, as well as in the case of winding-up ('permanent
availability'); and
• in the case of winding-up, the total amount that is available to absorb
losses before repayment to the holder until all obligations to policyholders
and other beneficiaries have been met ('subordination').
PGH plc's total Own Funds are analysed by Tier as follows:
31 December 31 December
2023 2022
Estimated £bn
£bn
Tier 1 - Unrestricted 6.7 6.8
Tier 1 - Restricted 1.1 1.1
Tier 2 2.7 2.6
Tier 3 0.6 0.6
Total Own Funds 11.1 11.1
PGH plc's unrestricted Tier 1 capital accounts for 60% (2022: 61%) of total
Own Funds and comprises ordinary share capital, surplus funds of the
unsupported with-profit funds which are recognised only to a maximum of the
SCR, and the accumulated profits of the remaining business.
Restricted Tier 1 capital comprises the contingent convertible Tier 1 Notes
issued in January 2020 and the Tier 1 Notes issued in April 2018, the terms of
which enable the instruments to qualify as restricted Tier 1 capital for
regulatory reporting purposes.
Tier 2 capital is comprised of subordinated notes whose terms enable them to
qualify as Tier 2 capital for regulatory reporting purposes.
Tier 3 items include the Tier 3 subordinated notes of £0.2 billion (2022:
£0.2 billion) and the deferred tax asset of £0.4 billion (2022: £0.4
billion).
Breakdown of SCR
The Group operates one single PRA approved Internal Model covering all the
Group entities, with the exception of the Irish entity, Standard Life
International Designated Activity Company ('SLIDAC'), the acquired ReAssure
and SLF Canada UK Limited businesses. SLIDAC, ReAssure and SLF Canada UK
Limited businesses calculate their capital requirements in accordance with the
Standard Formula. An analysis of the pre-diversified SCR of PGH plc is
presented below:
31 December 2023 Estimated 31 December 2022
Internal Model ReAssure, SLIDAC and Internal Model ReAssure, and SLIDAC
% SLF Canada UK Limited % Standard Formula
Standard Formula %
%
Longevity 17 10 15 17
Credit 19 19 17 19
Persistency 19 33 18 28
Interest rates 5 3 8 6
Operational 8 4 8 4
Swap spreads 2 - 2 -
Property 6 1 4 1
Other market risks 10 18 15 14
Other non-market risks 14 12 13 11
Total pre-diversified SCR 100 100 100 100
The principal risks of the Group are described in detail in note E6 and F11 in
the IFRS consolidated financial statements.
Minimum capital requirements
Under the Solvency II regulations, the Minimum Capital Requirement ('MCR') is
the minimum amount of capital an insurer is required to hold below which
policyholders and beneficiaries would become exposed to an unacceptable level
of risk if an insurer was allowed to continue its operations. For Groups this
is referred to as the Minimum Consolidated Group SCR ('MGSCR').
The MCR is calculated according to a formula prescribed by the Solvency II
regulations and is subject to a floor of 25% of the SCR or €4.0 million,
whichever is higher, and a cap of 45% of the SCR. The MCR formula is based on
factors applied to technical provisions and capital at risk. The MGSCR
represents the sum of the MCRs of the underlying insurance companies.
The Eligible Own Funds to cover the MGSCR is subject to quantitative limits as
shown below:
• the Eligible amounts of Tier 1 items should be at least 80% of the
MGSCR; and
• the Eligible amounts of Tier 2 items shall not exceed 20% of the MGSCR.
PGH plc's MGSCR at 31 December 2023 is £1.8 billion (2022: £2.3 billion).
PGH plc's Eligible Own Funds to cover MGSCR is £7.9 billion (2022: £8.2
billion) leaving an excess of Eligible Own Funds over MGSCR of £6.1 billion
(2022: £5.9 billion), which translates to an MGSCR coverage ratio of 432%
(2022: 361%).
Alternative performance measures
The Group assesses its financial performance based on a number of measures.
Some measures are management derived measures of historic or future financial
performance, position or cash flows of the Group; which are not defined or
specified in accordance with relevant financial reporting frameworks such as
International Financial Reporting Standards ('IFRS') or Solvency II.
These measures are known as Alternative Performance Measures ('APMs').
APMs are disclosed to provide stakeholders with further helpful information on
the performance of the Group and should be viewed as complementary to, rather
than a substitute for, the measures determined according to IFRS and Solvency
II requirements. Accordingly, these APMs may not be comparable with similarly
titled measures and disclosures by other companies.
A list of the APMs used in our results as well as their definitions, why they
are used and, if applicable, how they can be reconciled to the nearest
equivalent GAAP measure is provided below. Further discussion of these
measures can be found in the business review from page 30.
APMs marked with 'NEW' have been introduced in the period. IFRS adjusted
shareholders' equity has been introduced following the adoption of IFRS 17.
New business net funds flows, Operating Cash Generation ('OCG'), recurring
management actions, Return on Capital ('RoC') and Solvency II leverage have
been introduced to reflect the evolution of the Group's strategy as described
in the CEO's Report and Our strategic priorities and KPIs and Directors
Remuneration Report sections of the Annual Report. New business contribution
('NBC'), BPA Capital Strain (Pre-Capital Management Policy) and BPA premiums
written have been described in previous annual reports but as these have taken
on more prominence are also marked as new.
APMs marked with 'CHANGED' have been amended from that disclosed in the Annual
Report and Accounts 2022. Fitch leverage ratio and adjusted operating profit
have been amended to reflect the adoption of IFRS 17.
APM Definition Why this measure is used Reconciliation to financial statements
Adjusted operating profit Adjusted operating profit is a financial performance measure based on expected This measure provides a more representative view of the Group's performance A reconciliation of adjusted operating profit to the IFRS result before tax
long-term investment returns. It is stated before tax and non-operating items than the IFRS result after tax as it provides long-term performance attributable to owners is included in the business review on page 36.
including amortisation and impairments of intangibles, finance costs information unaffected by short-term economic volatility and one-off items,
attributable to owners and other non-operating items which in the Director's and is stated net of policyholder finance charges and tax.
CHANGED view should be excluded by their nature or incidence to enable a full
understanding of financial performance.
It helps give stakeholders a better understanding of the underlying
performance of the Group by identifying and analysing non-operating items.
Further details of the components of this measure and the assumptions inherent
in the calculation of the long-term investment return are included in note
B2.1 to the consolidated financial statements.
Assets under administration The Group's Assets under Administration ('AUA') represents assets administered AUA indicates the potential earnings capability of the Group arising from its A reconciliation from the Group's IFRS statement of consolidated financial
by or on behalf of the Group, covering both policyholder fund and shareholder insurance and investment business. AUA flows provide a measure of the Group's position to the Group's AUA is provided on page 308.
assets. It includes assets recognised in the Group's IFRS statement of ability to deliver new business growth.
consolidated financial position together with certain assets administered by
the Group for which beneficial ownership resides with customers.
Bulk Purchase Annuity ('BPA') Capital Strain (Pre-Capital Management Policy) Represents the capital deployment on BPA measured on a Solvency II basis, BPA Capital Strain (Pre-Capital Management Policy) reflects how efficiently The capital deployed in writing BPA business is included within the new
before capital management policy, expressed as a proportion of the BPA capital is deployed on BPA to deliver new business growth. business strain component of the change in Solvency SII surplus in the period,
Premium. as set out in the diagram on page 34.
NEW
It is calculated as the capital deployed (being the Solvency II Technical
Provisions plus SCR plus acquisition costs plus reinsurance premium less BPA
Premium, net of tax) as a proportion of the BPA Premium.
BPA premiums written Represents the aggregate, gross of reinsurance, new business premium volume BPA premiums written provides a measure of the Group's ability to deliver new BPA premiums written is not directly
for BPA business, measured at the risk transfer date, written in the period. business growth.
reconcilable to the financial statements as premiums are no longer reported on
the IFRS income statement. BPA premium written is included within the
NEW 'Estimates of present value of future cash flows' line on the effect of
contracts initially recognised in the year in Note F8.1 for the Retirement
Solutions disclosure group.
Fitch leverage ratio The Fitch leverage ratio is calculated by Phoenix (using Fitch Ratings' stated The Group seeks to manage the level of debt on its balance sheet by monitoring The adjusted equity component of the Fitch leverage ratio is as set out below
methodology) as debt as a percentage of the sum of debt and equity. Debt is its financial leverage position. One of the output metrics used in this regard for the IFRS adjusted shareholders' equity metric.
defined as the IFRS carrying value of shareholder borrowings. Equity is is the Fitch leverage ratio. This is to ensure the Group maintains its
defined as the sum of equity attributable to the owners of the parent, investment grade credit rating as issued by Fitch Ratings.
CHANGED non-controlling interests, contractual service margin ('CSM') (net of tax),
policyholders' share of the estate and the Tier 1 Notes. Fitch Leverage
FY23
£bn
Shareholders' equity
2.5
CSM (net of tax)
2.1
Adjusted shareholders' equity
4.6
Non controlling interests
0.5
Policyholder surplus in
With-profit funds
4.2
Tier 1
notes
1.0
Total Shareholders' Equity- Fitch basis A 10.3
Total Shareholder debt B
3.1
Fitch Leverage (B/A + B)
23%
Non-controlling interests is directly sourced from the Group's IFRS statement
of consolidated financial position and Tier 1 notes from the borrowings note
E5 on pages 209 to 211. Policyholder surplus in with-profit funds is a
subset of Estimates of present value of future cash flows within insurance
contract liabilities in Note F1 on page 226.
Group in force Long-term Free Cash ('LTFC') Group in force Long-term Free Cash ('LTFC') is comprised of long-term cash to LTFC provides a measure of the Group's total long-term cash available for The metric is not directly reconcilable to the financial statements as it
emerge from in-force business, plus holding company cash, less an allowance operating costs, interest, growth and shareholder returns. Increases in LTFC includes a significant component relating to cash that is expected to emerge
for costs associated with in-flight mergers and acquisitions and the related will be driven by sources of long-term cash i.e. new business and in the future. Holding company cash included within LTFC is consistent with
transition activities, and a deduction for shareholder debt outstanding. over-delivery of management actions. Decreases in LTFC will reflect the uses the holding company cash and cash equivalents as disclosed in the cash section
of cash at holding company level, including expenses, interest, investment in of the business review. Shareholder debt outstanding reflects the face value
BPA and dividends. of the shareholder borrowings disclosed on page 209.
The calculation for the LTIP performance metric excludes any future Is a measure in the 2023 LTIP.
shareholder dividends and is before interest on debt until maturity.
IFRS adjusted shareholders' equity IFRS adjusted shareholders' equity is calculated as IFRS Total equity Adjusted shareholders' equity provides a meaningful measure of the value Adjusted shareholders' equity reconciles to the IFRS balance sheet as follows:
attributable to owners of the parent plus the CSM, net of tax. generated by the Group, including the value held in the CSM for IFRS 17
FY23
contracts.
£m
NEW Total equity attributable to owners 2,496
of the parent
Add: CSM 2,853
Less: Tax on CSM (713)
Adjusted shareholders' equity 4,636
Total equity attributable to owners of the parent is directly sourced from the
Group's IFRS statement of consolidated financial position on pages 166 and
167. CSM is set out in note F1 on page 227. Tax is reflected at the deferred
tax rate of 25%.
Incremental new business long-term cash Incremental new business long-term cash generation represents the operating This measure provides an indication of the Group's performance in delivering Incremental new business long-term cash generation is not directly
companies' total cash generation that is expected to arise in future years as new business growth to offset the impact of run-off of the Group's legacy reconcilable to the financial statements as it relates to cash generation
generation a result of new business transacted in the current period. It excludes any business and to bring sustainability to future cash generation. expected to arise in the future.
costs associated with the acquisition of the new business.
Group in force Long-term Free Cash ('LTFC') Group in force Long-term Free Cash ('LTFC') is comprised of long-term cash to LTFC provides a measure of the Group's total long-term cash available for The metric is not directly reconcilable to the financial statements as it
emerge from in-force business, plus holding company cash, less an allowance operating costs, interest, growth and shareholder returns. Increases in LTFC includes a significant component relating to cash that is expected to emerge
for costs associated with in-flight mergers and acquisitions and the related will be driven by sources of long-term cash i.e. new business and in the future. Holding company cash included within LTFC is consistent with
transition activities, and a deduction for shareholder debt outstanding. over-delivery of management actions. Decreases in LTFC will reflect the uses the holding company cash and cash equivalents as disclosed in the cash section
of cash at holding company level, including expenses, interest, investment in of the business review. Shareholder debt outstanding reflects the face value
BPA and dividends. of the shareholder borrowings disclosed on page 209.
The calculation for the LTIP performance metric excludes any future Is a measure in the 2023 LTIP.
shareholder dividends and is before interest on debt until maturity.
Life Company Free Surplus The Solvency II surplus of the Life Companies that is in excess of their Board This figure provides a view of the level of surplus capital in the Life Life Company Free Surplus is a subset of the change in Solvency II surplus
approved capital according to their capital management policies. Companies that is available for distribution to the holding companies, and the over the period set out in the diagram on page 34. It can be reconciled as
generation of Free Surplus underpins future Operating Cash Generation ('OCG'). follows:
FY23
£bn
Group Solvency II surplus 3.9
Less: Non-life company components 0.7
Less: Capital Management Policy (2.4)
Life Company Free Surplus 2.2
Net fund flows Represents the aggregate net position of gross AUA inflows less gross Net fund flows provides a measure of the Group's ability to deliver new Net fund flows is not directly reconcilable to the financial statements as it
outflows. It is an in-year movement in the Group's AUA. business growth. includes movements in AUA which do not flow directly to the Group's IFRS
consolidated income statement. However, a reconciliation from the Group's IFRS
statement of consolidated financial position to the Group's AUA is provided on
page 308.
New business contribution ('NBC') Represents the increase in Solvency II Shareholder Own funds arising from new The measure provides an assessment of the day one value (excluding a cost of NBC is a subset of the new business element within Group's Solvency II
business written in the year, assuming assets have been fully transitioned in capital) arising on the writing of new business, and is stated after analysis of movement set out on page 34 and is adjusted for the items
to the pricing portfolio, and provides an assessment of the day one value applicable tax and acquisition costs. This measure is a 2024 AIP metric. stated..
(excluding a cost of capital) arising on the writing of new business on a
NEW discounted basis. It is adjusted to exclude (i) prudence in the Fundamental
Spread, (ii) the associated risk margin and (iii) any restrictions in
respect of contract boundaries. Is stated on a net of tax basis, is after
acquisition costs and includes future year cash flows in which long term
maintenance costs are deducted and therefore it excludes any short term cost
overruns.
New business net fund flows Represents the aggregate net position of AUA inflows less outflows for new New business net fund flows provides a measure of the Group's ability to New business net fund flows is not directly reconcilable to the financial
business written in the period. deliver new business growth. statements. It is a subset of Net fund flows described above.
NEW
Operating Cash Generation ('OCG') Operating Cash Generation ('OCG') is the emergence of cash on a Solvency II The measure provides the sources of recurring organic cash generated which can The components of the OCG are:
basis as surplus emerges (being the in-force business run off over time and be used to support sustainable cash remittances from the Life Companies,
capital unwind, plus day one surplus from writing new business (net of day 1 which in turn supports the Group's dividend as well as funding investment to
strain for fee based business) plus group tax relief), plus recurring generate sustainable growth. FY23
and management actions. As a cash measure it will be reported in line with Life
Company Free Surplus view and therefore is the excess of their Board approved
capital according to their capital management policies. £bn
Operating Surplus Generation ('OSG') Surplus emergence
0.8
OCG before adjustment to reflect the release of capital management policy is
referred to as Operating Surplus Generation ('OSG'). Recurring management actions
0.3
NEW OSG
1.1
Release of capital management policy
OCG
1.1
OSG forms a component of the change in Solvency II surplus in the period as
set out in the diagram on page 34.
Recurring management actions Recurring management actions are measured on a Solvency II basis and represent The measure is a key component of OCG and one of the sources which can be used Recurring management actions are a subset of the Solvency II surplus generated
the Day 1 impact on Own Funds and SCR. They are management actions that are to support sustainable cash remittances from the Life Companies in the period as shown in the diagram on page 34.
either genuinely repeatable, repeatable in nature but subject to diminishing
returns or not repeatable but benefits are expected from similar types of
NEW actions
Policy for making pro forma adjustments in the Annual Report and Accounts
Pro forma adjustments will be used in the Annual Report and Accounts ('ARA')
where management considers that they allow the user of the ARA to better
understand the financial performance, financial position, cash flows or
outlook of the Group.
Examples of where pro forma adjustments may be used are in relation to
acquisitions or disposals which are material to the Group, changes to the
Group's capital structure or changes in reporting frameworks the Group applies
such as Solvency II or IFRS. Where pro forma adjustments are considered
necessary for the understanding of the financial performance, financial
position, cash flows or outlook of the Group these will be clearly labelled as
pro forma with a clear explanation provided as to the reason for the
adjustments and the Key Performance Indicators, Alternative Performance
Metrics and other performance metrics impacted.
APM Definition Why this measure is used Reconciliation to financial statements
Return on Capital ('RoC') Reflects the Solvency II Own Funds component of the Operating Cash Generation The RoC measure is intended to demonstrate our efficiency in allocating FY23
(i.e. the inforce and new business surplus generation and group tax relief), capital to generate returns for our shareholders. It will demonstrate if we
less financing costs plus recurring management actions divided by Opening are using our capital efficiently to generate optimal returns, performance and £ bn
Unrestricted Core Tier 1 Shareholder Capital (UT1) + Deferred tax assets growth to deliver long term shareholder value. This measure is included in the
NEW ('DTA'). At a high level, this could be more simply described as the 2024 LTIP. Own Funds component of OCG
operating growth in own funds less financing costs as a percentage of opening
0.6
own funds excluding debt.
Less Financing costs
(0.2)
Recurring Management actions
0.3
Total Own Funds
0.7
Divided by
Opening Shareholder UT1 +
5.0
Opening DTA
0.4
Opening Total Capital
5.4
ROC=
12.8%
The Own Funds component of OCG and recurring management actions are a subset
of OCG as described previously. Financing costs are sourced directly from
the segmental result on page 182.
Opening Shareholder UT1 is directly sourced from the borrowings analysis on
page 209 and the Tier 1 notes classified as equity on page 194. The opening
DTA is a component of the Solvency II balance sheet within the Own Funds
balance in the diagram on page 34.
Shareholder Capital Coverage Ratio Represents total Eligible Own Funds divided by the Solvency Capital The unsupported with-profit funds and Group pension funds do not contribute to Further details of the Shareholder Capital Coverage Ratio and its calculation
Requirements ('SCR'), adjusted to a shareholder view through the exclusion of the Group Solvency II surplus. However, the inclusion of related Own Funds and are included in the business review on pages 34 and 35.
amounts relating to those ring-fenced with-profit funds and Group pension SCR amounts dampens the implied Solvency II capital ratio. The Group therefore
schemes whose Own Funds exceed their SCR. focuses on a shareholder view of the capital coverage ratio which is
considered to give a more accurate reflection of the capital strength of the
Group.
Solvency II Leverage Solvency II leverage is calculated as the Solvency II value of debt divided by The Group are targeting a £500m reduction in debt over the medium term to FY23
the value of Solvency II Regulatory Own Funds. Values for debt are adjusted deliver a SII leverage ratio of c30%
to allow for the impact of currency hedges in place over foreign currency
£bn
denominated debt.
NEW Solvency II Leverage
Regulatory Eligible Own Funds
10.9
Total Debt
3.9
Solvency II Leverage
36%
Regulatory Eligible Own Funds is a component of the calculation of the Group's
regulatory Solvency II surplus as set out on page 34.
Total debt is that taken from borrowings analysis on page 209.
Both amounts are adjusted for the value of the foreign currency hedges used to
hedge foreign currency exposure on the Group's borrowings as described on page
193.
Total cash generation Cash remitted by the Group's operating companies to the Group's holding The statement of consolidated cash flows prepared in accordance with IFRS Total cash generation is not directly reconcilable to an equivalent GAAP
companies. combines cash flows relating to shareholders with cash flows relating to measure (IFRS statement of consolidated cash flows) as it includes amounts
(formerly referred to as operating companies' cash generation) policyholders, but the practical management of cash within the Group maintains that eliminate on consolidation.
a distinction between the two. The Group therefore focuses on the cash flows
of the holding companies which relate only to shareholders. Such cash flows
are considered more representative of the cash generation that could
potentially be distributed as dividends or used for debt repayment and Further details of holding companies' cash flows are included within the
servicing, Group expenses and pension contributions. business review on pages 32 to 33, and a breakdown of the Group's cash
position by type of entity is provided in the additional life company asset
disclosures section on page 306.
Total cash generation is a key performance indicator used by management for
planning, reporting and executive remuneration.
Total equity attributable to owners of the parent is directly sourced from the
Group's IFRS statement of consolidated financial position on pages 166 and
167. CSM is set out in note F1 on page 227. Tax is reflected at the deferred
tax rate of 25%.
Incremental new business long-term cash
generation
Incremental new business long-term cash generation represents the operating
companies' total cash generation that is expected to arise in future years as
a result of new business transacted in the current period. It excludes any
costs associated with the acquisition of the new business.
This measure provides an indication of the Group's performance in delivering
new business growth to offset the impact of run-off of the Group's legacy
business and to bring sustainability to future cash generation.
Incremental new business long-term cash generation is not directly
reconcilable to the financial statements as it relates to cash generation
expected to arise in the future.
Group in force Long-term Free Cash ('LTFC')
Group in force Long-term Free Cash ('LTFC') is comprised of long-term cash to
emerge from in-force business, plus holding company cash, less an allowance
for costs associated with in-flight mergers and acquisitions and the related
transition activities, and a deduction for shareholder debt outstanding.
The calculation for the LTIP performance metric excludes any future
shareholder dividends and is before interest on debt until maturity.
LTFC provides a measure of the Group's total long-term cash available for
operating costs, interest, growth and shareholder returns. Increases in LTFC
will be driven by sources of long-term cash i.e. new business and
over-delivery of management actions. Decreases in LTFC will reflect the uses
of cash at holding company level, including expenses, interest, investment in
BPA and dividends.
Is a measure in the 2023 LTIP.
The metric is not directly reconcilable to the financial statements as it
includes a significant component relating to cash that is expected to emerge
in the future. Holding company cash included within LTFC is consistent with
the holding company cash and cash equivalents as disclosed in the cash section
of the business review. Shareholder debt outstanding reflects the face value
of the shareholder borrowings disclosed on page 209.
Life Company Free Surplus
The Solvency II surplus of the Life Companies that is in excess of their Board
approved capital according to their capital management policies.
This figure provides a view of the level of surplus capital in the Life
Companies that is available for distribution to the holding companies, and the
generation of Free Surplus underpins future Operating Cash Generation ('OCG').
Life Company Free Surplus is a subset of the change in Solvency II surplus
over the period set out in the diagram on page 34. It can be reconciled as
follows:
FY23
£bn
Group Solvency II surplus 3.9
Less: Non-life company components 0.7
Less: Capital Management Policy (2.4)
Life Company Free Surplus 2.2
Net fund flows
Represents the aggregate net position of gross AUA inflows less gross
outflows. It is an in-year movement in the Group's AUA.
Net fund flows provides a measure of the Group's ability to deliver new
business growth.
Net fund flows is not directly reconcilable to the financial statements as it
includes movements in AUA which do not flow directly to the Group's IFRS
consolidated income statement. However, a reconciliation from the Group's IFRS
statement of consolidated financial position to the Group's AUA is provided on
page 308.
New business contribution ('NBC')
NEW
Represents the increase in Solvency II Shareholder Own funds arising from new
business written in the year, assuming assets have been fully transitioned in
to the pricing portfolio, and provides an assessment of the day one value
(excluding a cost of capital) arising on the writing of new business on a
discounted basis. It is adjusted to exclude (i) prudence in the Fundamental
Spread, (ii) the associated risk margin and (iii) any restrictions in
respect of contract boundaries. Is stated on a net of tax basis, is after
acquisition costs and includes future year cash flows in which long term
maintenance costs are deducted and therefore it excludes any short term cost
overruns.
The measure provides an assessment of the day one value (excluding a cost of
capital) arising on the writing of new business, and is stated after
applicable tax and acquisition costs. This measure is a 2024 AIP metric.
NBC is a subset of the new business element within Group's Solvency II
analysis of movement set out on page 34 and is adjusted for the items
stated..
New business net fund flows
NEW
Represents the aggregate net position of AUA inflows less outflows for new
business written in the period.
New business net fund flows provides a measure of the Group's ability to
deliver new business growth.
New business net fund flows is not directly reconcilable to the financial
statements. It is a subset of Net fund flows described above.
Operating Cash Generation ('OCG')
and
Operating Surplus Generation ('OSG')
NEW
Operating Cash Generation ('OCG') is the emergence of cash on a Solvency II
basis as surplus emerges (being the in-force business run off over time and
capital unwind, plus day one surplus from writing new business (net of day 1
strain for fee based business) plus group tax relief), plus recurring
management actions. As a cash measure it will be reported in line with Life
Company Free Surplus view and therefore is the excess of their Board approved
capital according to their capital management policies.
OCG before adjustment to reflect the release of capital management policy is
referred to as Operating Surplus Generation ('OSG').
The measure provides the sources of recurring organic cash generated which can
be used to support sustainable cash remittances from the Life Companies,
which in turn supports the Group's dividend as well as funding investment to
generate sustainable growth.
The components of the OCG are:
FY23
£bn
Surplus emergence
0.8
Recurring management actions
0.3
OSG
1.1
Release of capital management policy
OCG
1.1
OSG forms a component of the change in Solvency II surplus in the period as
set out in the diagram on page 34.
Recurring management actions
NEW
Recurring management actions are measured on a Solvency II basis and represent
the Day 1 impact on Own Funds and SCR. They are management actions that are
either genuinely repeatable, repeatable in nature but subject to diminishing
returns or not repeatable but benefits are expected from similar types of
actions
The measure is a key component of OCG and one of the sources which can be used
to support sustainable cash remittances from the Life Companies
Recurring management actions are a subset of the Solvency II surplus generated
in the period as shown in the diagram on page 34.
Policy for making pro forma adjustments in the Annual Report and Accounts
Pro forma adjustments will be used in the Annual Report and Accounts ('ARA')
where management considers that they allow the user of the ARA to better
understand the financial performance, financial position, cash flows or
outlook of the Group.
Examples of where pro forma adjustments may be used are in relation to
acquisitions or disposals which are material to the Group, changes to the
Group's capital structure or changes in reporting frameworks the Group applies
such as Solvency II or IFRS. Where pro forma adjustments are considered
necessary for the understanding of the financial performance, financial
position, cash flows or outlook of the Group these will be clearly labelled as
pro forma with a clear explanation provided as to the reason for the
adjustments and the Key Performance Indicators, Alternative Performance
Metrics and other performance metrics impacted.
APM
Definition
Why this measure is used
Reconciliation to financial statements
Return on Capital ('RoC')
NEW
Reflects the Solvency II Own Funds component of the Operating Cash Generation
(i.e. the inforce and new business surplus generation and group tax relief),
less financing costs plus recurring management actions divided by Opening
Unrestricted Core Tier 1 Shareholder Capital (UT1) + Deferred tax assets
('DTA'). At a high level, this could be more simply described as the
operating growth in own funds less financing costs as a percentage of opening
own funds excluding debt.
The RoC measure is intended to demonstrate our efficiency in allocating
capital to generate returns for our shareholders. It will demonstrate if we
are using our capital efficiently to generate optimal returns, performance and
growth to deliver long term shareholder value. This measure is included in the
2024 LTIP.
FY23
£ bn
Own Funds component of OCG
0.6
Less Financing costs
(0.2)
Recurring Management actions
0.3
Total Own Funds
0.7
Divided by
Opening Shareholder UT1 +
5.0
Opening DTA
0.4
Opening Total Capital
5.4
ROC=
12.8%
The Own Funds component of OCG and recurring management actions are a subset
of OCG as described previously. Financing costs are sourced directly from
the segmental result on page 182.
Opening Shareholder UT1 is directly sourced from the borrowings analysis on
page 209 and the Tier 1 notes classified as equity on page 194. The opening
DTA is a component of the Solvency II balance sheet within the Own Funds
balance in the diagram on page 34.
Shareholder Capital Coverage Ratio
Represents total Eligible Own Funds divided by the Solvency Capital
Requirements ('SCR'), adjusted to a shareholder view through the exclusion of
amounts relating to those ring-fenced with-profit funds and Group pension
schemes whose Own Funds exceed their SCR.
The unsupported with-profit funds and Group pension funds do not contribute to
the Group Solvency II surplus. However, the inclusion of related Own Funds and
SCR amounts dampens the implied Solvency II capital ratio. The Group therefore
focuses on a shareholder view of the capital coverage ratio which is
considered to give a more accurate reflection of the capital strength of the
Group.
Further details of the Shareholder Capital Coverage Ratio and its calculation
are included in the business review on pages 34 and 35.
Solvency II Leverage
NEW
Solvency II leverage is calculated as the Solvency II value of debt divided by
the value of Solvency II Regulatory Own Funds. Values for debt are adjusted
to allow for the impact of currency hedges in place over foreign currency
denominated debt.
The Group are targeting a £500m reduction in debt over the medium term to
deliver a SII leverage ratio of c30%
FY23
£bn
Solvency II Leverage
Regulatory Eligible Own Funds
10.9
Total Debt
3.9
Solvency II Leverage
36%
Regulatory Eligible Own Funds is a component of the calculation of the Group's
regulatory Solvency II surplus as set out on page 34.
Total debt is that taken from borrowings analysis on page 209.
Both amounts are adjusted for the value of the foreign currency hedges used to
hedge foreign currency exposure on the Group's borrowings as described on page
193.
Total cash generation
(formerly referred to as operating companies' cash generation)
Cash remitted by the Group's operating companies to the Group's holding
companies.
The statement of consolidated cash flows prepared in accordance with IFRS
combines cash flows relating to shareholders with cash flows relating to
policyholders, but the practical management of cash within the Group maintains
a distinction between the two. The Group therefore focuses on the cash flows
of the holding companies which relate only to shareholders. Such cash flows
are considered more representative of the cash generation that could
potentially be distributed as dividends or used for debt repayment and
servicing, Group expenses and pension contributions.
Total cash generation is a key performance indicator used by management for
planning, reporting and executive remuneration.
Total cash generation is not directly reconcilable to an equivalent GAAP
measure (IFRS statement of consolidated cash flows) as it includes amounts
that eliminate on consolidation.
Further details of holding companies' cash flows are included within the
business review on pages 32 to 33, and a breakdown of the Group's cash
position by type of entity is provided in the additional life company asset
disclosures section on page 306.
Additional information
Statutory results
Financial information contained in this document does not constitute statutory
accounts within the meaning of section 434 of the Companies Act 2006 ('the
Act'). The statutory accounts for the year ended 31 December 2022 have been
filed with the Registrar of Companies and those for the year ended 31 December
2023 will be filed with the register of companies following the Annual General
Meeting. The report of the auditor on those statutory accounts was
unqualified, did not draw attention to any matters by way of emphasis and did
not contain a statement under section 498(2) or (3) of the Act.
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