REG - Phoenix Group Hldgs - 2021 Annual Financial Report
14/03/2022 07:00
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RNS Number : 6359E Phoenix Group Holdings PLC 14 March 2022
Phoenix Group Holdings plc: 2021 Full Year Results
14 March 2022
Phoenix Group announces a record set of financial results for 2021, its first
ever organic dividend increase of 3% and a new dividend policy
CASH RESILIENCE GROWTH
Operating companies' + Solvency II Surplus and + Incremental new business long-term cash generation
cash generation
SCCR
£1,184m
£1,717m £5.3bn and 180%
2020: £766m
2020: £1,713m 2020: £5.3bn and 164%
Financial highlights
Delivering cash
· Record cash generation(1) of £1,717m in 2021 (2020: £1,713m)
exceeds our £1.5bn-to-£1.6bn target range for the year.
· 2021 cash generation includes c.£400m of integration synergies,
with integration synergies to date across the Standard Life and ReAssure
acquisitions now in excess of £2.5bn.
· Having met our two conditions for dividend growth, the Board is
recommending a 2021 final dividend of 24.8p per share, which includes our
first ever organic dividend increase of 3% (2021 total dividend: 48.9p per
share).
· Our increased dividend cost of c.£0.5bn per annum remains just
as sustainable over the long term with c.£11.8bn of Group long-term free cash
available to shareholders (after deducting interest on debt to maturity).
Delivering resilience
· Strong balance sheet maintained with a Solvency II Surplus of
£5.3bn(2) as at 31 December 2021 (2020: £5.3bn(3)).
· Increased Solvency II Shareholder Capital Coverage Ratio(2,4)
('SCCR') of 180% as at 31 December 2021 (2020: 164%(3,4)); SCCR is currently
at the top-end of our target range of 140%-to-180%, which provides significant
capacity to invest into both organic and inorganic growth opportunities.
· Fitch leverage ratio(5) of 28% as at 31 December 2021 is within
our target range of 25%-to-30% (2020: 28%).
Delivering growth
· Record new business long-term cash generation of £1,184m in 2021
(2020: £766m(6)) means that Phoenix has proved 'the wedge' hypothesis for the
first time, with organic growth from our Open business more than offsetting
the natural run-off of our Heritage business (currently c.£800m per annum).
· 2021 new business long-term cash generation comprises £950m from
our Bulk Purchase Annuities (BPA) business (2020: £522m) and £234m from our
capital-light asset-based businesses including Workplace (2020: £244m(7)).
· Record level of BPA premiums contracted in 2021 at £5.6bn (2020:
£2.5bn), which is a 124% year-on-year increase, and reflects the investment
we have made into our capabilities, with our capital strain reducing to 6.5%
(2020: 9%).
· Clear momentum is also building in our Workplace business, with
41 new smaller schemes won during 2021, due to the investment we are making
into our proposition and through leveraging the Standard Life brand acquired
in 2021.
Other key financial metrics
· Assets under administration increased to £310bn as at 31
December 2021 (2020: £307bn(8)).
· IFRS operating profit increased to £1,230m in 2021 (2020:
£1,199m).
New dividend policy
· To better reflect that Phoenix is now a growing, sustainable
business, the Board has announced Phoenix Group's new dividend policy and now
"intends to pay a dividend that is sustainable and grows over time".
Our strategic priorities support us in delivering on our purpose and strategy
Optimising our in-force business
· Record Solvency II management actions of £1.5bn in 2021,
including c.£700m from a range of 'business as usual' actions, as well as
c.£550m of capital synergies from our new harmonised internal model.
· 48% year-on-year increase in illiquid asset origination in 2021
with £3.0bn of new assets originated (2020: £2.0bn).
· Sale of Ark Life completed in November 2021; proceeds of £198m
can be reinvested into future growth opportunities.
Enhancing our operating model and culture
· Integration synergies of £824m were delivered in 2021, including
£590m realised from the Standard Life acquisition (£1,632m total to date -
134% of target) and £234m from ReAssure (£930m total in just 18 months - 89%
of target).
· Female representation in Top 100 leadership positions increased
to 31(9) as we improve our gender equality (2020: 21).
Growing our business to support both new and existing customers
· Investment into our Open business capabilities underpinned a
strong year in BPA and built momentum in Workplace.
· Having acquired the trusted Standard Life brand, we can now fully
leverage it to accelerate future growth.
· Strong customer satisfaction scores maintained at 92%+, exceeding
our targets.
Innovating to provide our customers with better financial futures
· Developed a roadmap to transition 1.5m customers and over £15bn
of assets into a sustainable default fund in 2022.
· Launched Phoenix Insights - a new think tank set up to inform,
debate and catalyse actions across society to enable better longer lives,
through a combination of public engagement and high-impact research.
Investing in a sustainable future
· 2021 illiquid asset origination includes £1.3bn of investment
into sustainable assets (2020: £788m), with £542m invested into social
housing, £364m into healthcare & education and £220m in positive
environmental impact projects.
· 34% reduction in Scope 1 & 2 premises emissions intensity(10)
in 2021; on track for net zero in own operations by 2025.
· Announced ambitious new 2025 and 2030 interim portfolio
decarbonisation targets on our path to net zero by 2050.
New targets
· Cash - 1-year 2022 cash generation target range of
£1.3bn-£1.4bn; 3-year 2022-24 cash generation target of £4.0bn.
· Resilience - continue to operate within our SCCR target range of
140%-180% and Fitch leverage range of 25%-30%.
· Growth - prove 'the wedge' in 2022 with incremental new business
long-term cash generation >£800m, as well as a clear ambition to execute
value-accretive M&A with significant opportunities within the c.£480bn
Heritage market.
Strategic outlook
Phoenix has a clear and differentiated strategy, which leverages the major
market trends, where the whole is greater than the sum of the parts. Our
Heritage business will provide our Open asset-based businesses with structural
cost advantages through our unique TCS partnership and access to c.13m
customers, and our BPA business will benefit from significant capital
efficiencies through risk diversification. While for M&A our scalable
platform and balance sheet unlock significant cost and capital synergies. We
are therefore confident of delivering both organic and inorganic growth going
forward.
Commenting on the results, Phoenix Group CEO, Andy Briggs said:
"It has been an outstanding year for Phoenix, with a record set of financial
results and significant strategic progress made as we fully embraced our
purpose. 2021 marked a pivotal moment for Phoenix, with £1.2 billion of new
business from our Open business more than offsetting the run-off of our
Heritage business for the first time. This demonstrates that Phoenix is a
growing, sustainable business, and enabled the Board to recommend our first
ever organic dividend increase of 3%. Phoenix has also today announced a new
dividend policy which sets out our intention to pay a dividend that is
sustainable and grows over time."
Enquiries
Investors/analysts:
Claire Hawkins, Director of Corporate Affairs, 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 financial supplement details
There will be a live virtual presentation for analysts and investors today
starting at 09:30 (GMT).
A link to the live webcast of the presentation, with the facility to raise
questions, as well as a copy of the presentation and a detailed financial
supplement will be available at:
https://www.thephoenixgroup.com/investor-relations/results-reports-and-presentations
(https://www.thephoenixgroup.com/investor-relations/results-reports-and-presentations)
You can also register for the live webcast
at: https://phoenixfullyear2021.virtualhub.events/
(https://phoenixfullyear2021.virtualhub.events/?page_id=12)
A replay of the presentation and transcript will also be available on our
website following the event.
Dividend details
The recommended final dividend of 24.8p per share is expected to be paid on 9
May 2022.
The ordinary shares will be quoted ex-dividend on the London Stock Exchange as
of 31 March 2022. The record date for eligibility for payment will be 1 April
2022.
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 2021 Solvency II capital position is an estimated
position and reflects a regulator approved recalculation of transitionals as
at 31 December 2021 and recognition of the foreseeable Final 2021 shareholder
dividend of £248m.
3. 31 December 2020 Solvency II capital position is an estimated
position and reflects a dynamic recalculation of transitionals for the Group's
Life companies and recognition of the foreseeable Final 2020 shareholder
dividend. Had the dynamic recalculation not been assumed, the Solvency II
surplus and the Shareholder Capital Coverage Ratio would decrease by £0.1bn
and 1% respectively.
4. The Shareholder Capital Coverage Ratio excludes Solvency II own funds
and Solvency Capital Requirements of unsupported with-profit funds and
unsupported pension schemes.
5. Current Fitch leverage ratio is estimated by management.
6. £766m incremental new business long-term cash generation in 2020
includes £23m for Wrap SIPP, Onshore Bond and TIP products. These products
are not included in 2021 due to the economic interest having been transferred
to abrdn plc effective 01 January 2021 following the announced sale in
February 2021.
7. £244m incremental new business long-term cash generation in 2020
includes £23m for Wrap SIPP, Onshore Bond and TIP products. These products
are not included in 2021 due to the economic interest having been transferred
to abrdn plc effective 01 January 2021 following the announced sale in
February 2021.
8. 2020 pro forma for the disposal of £29.1bn of assets from the Wrap
SIPP, Onshore Bond and TIP products due to the economic interest having been
transferred to abrdn plc effective 01 January 2021 and the disposal of £1.8bn
of assets from Ark Life which was sold to Irish Life in November 2021.
9. Includes known hires at 31 December 2021 who join in 2022.
10. Emissions from occupied premises per full-time employee intensity.
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 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, social, environmental and business conditions;
asset prices; market related risks such as fluctuations in interest rates and
exchange rates, the potential for a sustained low-interest rate environment,
and the performance of financial markets generally; the policies and actions
of governmental and/or regulatory authorities, including, for example,
initiatives related to the financial crisis, the COVID-19 pandemic, climate
change and the effect of the UK's version of the "Solvency II" requirements on
the Group's capital maintenance requirements; the impact of inflation and
deflation; the political, legal, social and economic effects of the COVID-19
pandemic and the UK's exit from the European Union; information technology or
data security breaches (including the Group being subject to cyberattacks);
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);
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 proposed or future acquisitions, disposals or combinations
within relevant industries; risks associated with arrangements with third
parties; inability of reinsurers to meet obligations or unavailability of
reinsurance coverage; the impact of changes in capital, solvency or accounting
standards, and tax and other legislation and regulations in the jurisdictions
in which members of the Group operate.
As a result, the Group's actual future financial condition, performance and
results may differ materially from the plans, goals, ambitions 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.
Chairman's statement
Embracing our purpose
2021 has seen Phoenix make significant strategic progress as we fully embraced
our purpose of 'helping people secure a life of possibilities.
2021 has been another landmark year for Phoenix Group with our strong
financial and operational performance enabling us to deliver on our ambition
of 'proving the wedge'. This means that organic growth from our Open business
has more than offset the run-off of our Heritage business for the first time.
It is a pivotal moment for Phoenix as it transforms us from a business that
was in long-term run-off to a business that is now growing and sustainable.
Importantly, the investment we are making into our business is directly
benefiting all of our stakeholders, including our customers, colleagues,
investors and wider society. We are delivering our vision of growing a strong
and sustainable business that helps more people on their journey to and
through retirement.
Our purpose drives our actions
As the UK's largest long-term savings and retirement business we can make a
significant difference to society and we are committed to making change happen
today to support people in having better financial futures. We therefore have
three core pillars that underpin our comprehensive sustainability strategy
which is aligned to our purpose.
Our first pillar is 'investing in a sustainable future', where we will use our
scale to drive real change and invest in the things that help to build a more
sustainable world. We are responsible for looking after c.£310 billion of
customer and shareholder assets, which requires us to keep their money safe
and provide them with strong long-term financial returns. We will do this by
integrating sustainability into every investment decision we make, through
investing responsibly, by tracking our performance to deliver our ambitious
decarbonisation goals and through engaging to drive wider system change.
Our second pillar is 'engaging people in better financial futures', which is
about providing our customers with the right guidance and products, at the
right time, to support the right decisions. We will do this through delivering
fund and product innovation to develop sustainable retirement income solutions
that help close the pension savings gap and by empowering our customers to
plan their financial futures. We also want to drive a national conversation
about the implications of longer lives, through our new think tank, Phoenix
Insights. While Phoenix Group will continue to advocate for change, using our
scale and influence.
Our third pillar is 'building a leading responsible business'. We will do this
by continuing to invest in our people and culture, working responsibly with
our supply chain, supporting our communities and reducing the environmental
impact of our own operations.
Against each pillar we have set clear targets, including our ambitious 2025
and 2030 interim decarbonisation targets for our investment portfolio, as part
of our roadmap to net zero by 2050. We also have a commitment for being net
zero across our own operations by 2025. You can find out more about our
strategy and targets in our 2021 Sustainability Report.
Inaugural organic dividend increase
As a result of the Group's strong financial performance in 2021, I am
delighted to announce that the Board is recommending Phoenix Group's inaugural
organic dividend increase. The Board had previously set two clear conditions
for considering an organic dividend increase, both of which have been met in
2021. The Board has therefore determined that a 3% increase in the Group's
2021 Final dividend to 24.8 pence per share is appropriate, meaning the
Group's total dividend for 2021 will be 48.9 pence per share. Importantly, the
Board has always been clear that any organic dividend increase must maintain
our existing long-term dividend sustainability, which the growth in our
business in 2021 has ensured.
Going forward, we now expect the business to continue growing organically and
we also remain committed to M&A, where we see significant opportunities in
the marketplace. As a result, the Board has evolved the Group's dividend
policy to reflect that it now has two potential drivers of future dividend
increases; organic and inorganic growth. However, the Board will, as ever,
continue to prioritise the Group's long-term dividend sustainability, which is
why our dividend policy is to pay a dividend that is sustainable and grows
over time.
Board changes
We recently announced a series of Board changes that will take effect this
year, which are a result of my having received the great honour of being
elected as the next Lord Mayor of the City of London. It is due to the support
I have received from the Board, our major shareholders and our regulators that
I will be able to commence this role in November 2022. However, in order to
assume this full-time position, I will need to take a 14-month sabbatical from
my role as Phoenix Group Chairman, commencing 1 September 2022. As a result,
the Board has decided that, subject to regulatory approval, our current Senior
Independent Director, Alastair Barbour, will assume the role of interim
Chairman during my sabbatical. Alastair will in turn step down as Chair of the
Board Audit Committee in September and given that he will have served for 10
years by 2023, he will then leave the Board upon my return in November 2023.
In his place, Karen Green has been chosen, subject to regulatory approval, to
become our new Senior Independent Director.
I am also delighted to welcome Katie Murray to Phoenix Group, who is joining
the Board as an independent Non-Executive Director in April 2022. Katie is
currently Group Chief Financial Officer of the NatWest Group and brings a
wealth of relevant experience to the Group.
Finally, I would like to thank Christopher Minter from Swiss Re for his
insightful counsel while on the Board. Christopher left the Board in 2021
following Swiss Re's initial disposal of shares which reduced their stake
below the 10% threshold that entitled them to a Board seat.
Outlook
As we enter 2022, the Board and I believe that Phoenix is well-positioned to
execute our ambitious strategy at pace and to continue embracing our purpose.
Thank you
Finally, I would like to take the opportunity to thank the Board, our
colleagues, our partners and our wider stakeholders for their hard work,
dedication and support in delivering what has been a pivotal year for Phoenix
Group.
Nicholas Lyons
Chairman
Chief Executive Officer's report
Phoenix is a growing, sustainable business
2021 was a pivotal year for Phoenix as we demonstrated that we are a growing,
sustainable business with our Open business delivering organic growth that
more than offsets the Heritage run-off for the first time.
I am delighted with our performance in 2021, which has seen us deliver record
financial results and make significant progress against our strategic
objectives, as we continued to embrace our purpose.
I passionately believe that the best businesses have a core social purpose,
and at Phoenix ours is 'helping people secure a life of possibilities'. As a
purpose-led organisation we are committed to delivering better outcomes for
all of our stakeholders, including our customers, colleagues, investors and
wider society.
A pivotal year for Phoenix
2021 marked a pivotal moment in Phoenix Group's evolution as our Open business
delivered annual organic growth that, for the first time, will more than
offset the natural run-off of our Heritage book. This is what we refer to as
proving 'the wedge' and it means that Phoenix has now demonstrated that it is
a growing, sustainable business.
This has been enabled by the strong momentum we have built in our Open
business, driven by the investment we have made into developing our
capabilities and through leveraging the Standard Life brand that we acquired
earlier this year.
We operate a clear financial framework that delivers Cash, Resilience and
Growth. During 2021 we delivered record cash generation of £1,717 million,
exceeding our 2021 target range of £1.5-to-£1.6 billion. We maintained our
resilient Solvency II ('SII') capital position with a SII Surplus of
£5.3 billion (2020: £5.3 billion) and increased our Shareholder Capital
Coverage Ratio ('SCCR') to 180% (2020: 164%). Our Open business has also
delivered record new business long-term cash generation of £1,184 million,
an increase of 55% from 2020 (£766 million). This strong financial
performance means that we have once again exceeded our public financial
targets.
As a result, I am delighted that the Board is recommending Phoenix Group's
inaugural organic dividend increase of 3%. Importantly, the Board has always
been clear that an organic dividend increase would only be implemented if the
increased level of dividend remained every bit as sustainable over the long
term as it previously was. Owing to the growth in our business, that is the
case in 2021.
Phoenix is unique for the dependable cash and resilience our operating model
delivers. As a result, we can be confident that our in-force business can pay
our current, increased dividend over the very long term. And growth, whether
through the investment in our Open business or through further M&A, has
the ability to increase this dividend further over time, whilst fully
maintaining its sustainability.
Market trends offer growth opportunities
As the UK's largest long-term savings and retirement business, it is critical
that we understand the major drivers of change in the market. There are four
key drivers, which offer Phoenix Group significant growth opportunities.
Delivering our strategy
We have a clear strategy. Our Heritage business is the bedrock of the Group.
It delivers high levels of predictable cash that both funds our dividend over
the long term and generates surplus cash to reinvest into organic Open
business growth and inorganic M&A. We are already the market-leaders in
Heritage and M&A, which create significant shareholder value, while the
investment we are making into our Open division is building market-leading
businesses here too. At Phoenix, the whole really is greater than the sum of
the parts. This is because our Heritage business provides our Open business
with significant cost and capital efficiencies as well as access to
c.13 million customers, and simultaneously it also supports us in delivering
higher synergies from M&A.
If our strategy is the what, then our strategic priorities are the how. These
are the key programmes and initiatives that will differentiate us, building
distinctive capabilities to win in our chosen markets, and support us in
delivering on our strategy and our purpose. We have five strategic priorities
as outlined below.
Optimise our in-force business
Phoenix is the market leader in managing in-force business for cash and
resilience, which in turn underpins our sustainable dividend. It is the
in-force business that delivered our record cash generation and ongoing
resilience during 2021.
A key driver of this is our expertise in optimising for cost and capital
efficiencies, the output of which we call 'management actions'. During 2021 we
delivered total management actions of £1.5 billion for the year. This
included the UK's first approved internal model harmonisation of two legacy
models which delivered in-year capital benefits of c.£550 million and
unlocks a pipeline of further value-accretive management actions as well as
supporting future M&A.
Another aspect of optimising our in-force business is to continually assess
whether our portfolio of assets is maximising value for shareholders. We
therefore undertook a strategic review of our European operations in 2021, in
response to unsolicited expressions of interest. This culminated with the sale
of Ark Life, an Irish closed-book business acquired as part of ReAssure, for
£198 million, which completed in November 2021. This transaction accelerated
the cash release from the business and allows us to reinvest the capital into
higher return growth opportunities.
We have also made significant progress in building a strong asset management
function which supports us in enhancing our capital efficiency. We do this
through the proactive management of our c.£40 billion shareholder credit
portfolio including the origination of more capital efficient illiquid assets
to back our illiquid liabilities, with £3 billion originated in 2021.
Meanwhile, we continue to operate our unique dynamic hedging approach which
protects our SII balance sheet by hedging the majority of our market risks.
Enhance our operating model and culture
Phoenix is the market-leader in delivering M&A integrations and customer
migrations that realise substantial cost and capital synergies. During 2021 we
have, once again, demonstrated how good we are at realising cost and capital
synergies from our integrations.
We have delivered £590 million of further synergies from Standard Life in the
year, meaning we have now realised over £1.6 billion of synergies, which is
£400 million more than the revised target we set post-acquisition. While on
ReAssure, we have delivered £234 million of synergies in 2021, which is a
total of £930 million to date, in just 18 months, against a revised target of
just over £1 billion. With £2.5 billion of total synergies delivered to
date, this demonstrates the significant value we create through M&A.
This is underpinned by our unique capability of delivering multiple
integrations concurrently, as we delivered both the migration of 170,000 Old
Mutual Wealth customers onto our ALPHA platform, and the ongoing migration of
Phoenix customers from Capita to TCS, to realise synergies and improve the
customer experience.
A crucial component for delivering on our purpose and strategy is attracting
and retaining the best talent. That is why we are committed to making Phoenix
the best place our colleagues have ever worked, by creating a workforce that
is reflective of our community and which enables colleagues to bring their
whole self to work. We therefore introduced a refreshed people and culture
strategy in 2021 and strengthened our teams through the hiring of
market-leading talent. Achieving cultural cohesion and inclusiveness is even
more critical as we navigate our new ways of working. For this reason we made
a significant investment into the latest technology to enhance collaboration
and inclusion in the hybrid workplace.
It is therefore great to see our efforts reflected in a further increase in
our employee engagement, with our average score currently 7.5 of 10, meeting
our target for the year. I am also pleased that our focus on increasing female
representation is beginning to develop momentum, with the number of females in
our Top 100 leadership positions increasing from 21 to 31.
Grow our business to support both new and existing customers
We delivered record new business long-term cash generation of £1,184 million
in 2021, a 55% increase on 2020. This reflects the significant investment we
have made into our Open business and asset management capabilities, as well as
the acquisition of the Standard Life brand which the majority of our Open
business now operates under.
Our Retirement Solutions business was the largest contributor in 2021 with
£950 million of new business long-term cash generation, having contracted
£5.6 billion of BPA premiums in the year. This was more than double the
£2.5 billion of premiums in 2020. Importantly, we have also reduced our
capital strain from 9% in 2020 to 6.5% in 2021, primarily due to the benefits
of our internal model harmonisation as well as the strong illiquid asset
origination overseen by our asset management function. The Standard Life brand
has already begun to deliver benefits in the BPA business where the brand is
resonating strongly amongst pension trustees and their advisers, thus opening
up more opportunities for us.
Meanwhile, the multi-year investment we are making into our Workplace pensions
proposition is beginning to deliver momentum, as we look to balance our growth
from BPA over time. We were delighted to win 41 new schemes during the year.
While these new schemes are small in terms of assets, it is an important
milestone, with advisers giving us the opportunity to prove ourselves on these
smaller schemes before we hopefully begin winning the larger schemes in time.
In addition, positive net flows of £0.6 billion during the year provide a
good platform to build on. This success has been supported by our investment
and commitment to the Standard Life brand, as we reignite its reputation
amongst employee benefit consultants and advisers.
It is also pleasing to see that the investment in our propositions and
customer service platforms is reflected in our continued high customer
satisfaction scores, which once again exceeded our targets. We delivered a
Combined Group telephony customer satisfaction score of 92% (target: 90%) and
a Standard Life digital journeys satisfaction score of 95% (target: 92%).
Innovate to provide our customers with better financial futures
Engaging and supporting people in improving their financial futures is crucial
to fulfilling our purpose of 'helping people secure a life of possibilities'.
The UK faces a significant retirement savings gap which we are committed to
helping close by engaging with our customers. We want to provide people with
the right guidance and products, at the right time, to support the right
decisions.
We are investing into fund and product innovation to develop flexible
retirement solutions and sustainable fund choices. Key successes in 2021
include transitioning our Workplace Master Trust to a sustainable default fund
and the launch of our new range of innovative Lifetime Mortgage products
through Standard Life. We are also developing our digital capabilities to
deliver broader engagement options, with a 16% increase in customer log-ins
across our Standard Life digital platforms in 2021 and the launch of our
Homebuyer Hub and Money Mindset pilots. This was also underpinned by new
initiatives to enhance digital literacy skills and better support vulnerable
customers.
The UK's ageing society does present significant long-term challenges for
people in being able to realise the potential of their longer lives, which is
why we established a new think-tank, Phoenix Insights, in 2021.
Invest in a sustainable future
As the UK's largest long-term savings and retirement business we are
responsible for managing c.£310 billion of assets on behalf of our
c.13 million customers. Our customers and shareholders trust us to reflect
their priorities in how we invest. That means keeping their money safe and
providing them with strong long-term financial returns, while using our scale
to play our part in delivering a sustainable future.
That is why we are integrating sustainability across our business. This
requires us to collaborate closely with our asset management partners to fully
integrate ESG across our third-party managed assets and we are embedding
best-in-class data analytics and capabilities to support this.
We also need to invest responsibly and are doing this in three ways. Firstly,
we are designing decarbonising portfolios that deliver reduced carbon
emissions, but maintain the broad risk and return profile. We must then use
our position of influence to bring about corporate change through active
stewardship. And we also need to evolve our investment decisions to increase
the sustainable assets held within both our shareholder and policyholder
funds.
We have made great progress on this journey in 2021 by putting in place the
core foundations to deliver on our ambitions. A great example of this is the
£1.3 billion of investment we allocated to sustainable assets in 2021, which
represents 67% of our illiquid asset origination (excluding ERM). This
included £542 million of investment into affordable housing, £364 million
into healthcare and education, and £220 million into projects with positive
environmental impacts.
In 2020 we committed to being net zero carbon across our investment portfolio
by 2050 and during 2021 we set ambitious new interim investment portfolio
decarbonisation targets too. This includes our target for a 25% reduction by
2025 in the carbon emission intensity of our c.£160 billion of listed equity
and credit assets where we exercise control and influence, as well as a
>50% reduction in the carbon emission intensity of the c.£250 billion of
assets directly within our control by 2030.
We are also committed to being net zero in our own operations by 2025, which
we remain on track to achieve, with strong progress made in 2021 through a 34%
year-on-year reduction in premises emissions per FTE intensity.
Outlook
Phoenix has a clear and differentiated strategy, which creates shareholder
value through leveraging the major market trends, and where the whole is
greater than the sum of the parts.
Heritage is the bedrock of our business, which delivers high levels of
predictable cash, that covers our current dividend into the long term. And it
also generates surplus cash, that we can re-invest into both our Open
business, and into M&A, to support future dividend increases.
We continue to see M&A as a key priority and are ready to consider
transactions today. We estimate the UK Heritage market is c.£480 billion
with a small number of large portfolios, as well as a larger number of
small-to-mid size portfolios that we could acquire for cash. We are the
market-leader in Heritage M&A and a trusted partner for vendors, which
gives us great confidence in the outlook for M&A.
Thank you
Phoenix Group's strong 2021 performance could not have been achieved without
our exceptional people and I would therefore like to thank my colleagues
throughout the Group for their hard work in 2021.
Andy Briggs
Group Chief Executive Officer
Business review
Delivering cash, resilience and growth
It was a pivotal year for Phoenix as we proved 'the wedge' for the first time
and announced our inaugural dividend increase of 3% for 2021.
Phoenix has delivered another strong financial performance in 2021. We
reported record cash generation of £1.7 billion, exceeding our target range
of £1.5bn-to-£1.6bn for the year, and maintained our resilience through a
strong Solvency II (SII) balance sheet with a SII surplus of £5.3 billion and
SII SCCR of 180%.
In 2018 we set out a strategy to prove 'the wedge' hypothesis, by investing to
deliver new business growth which would allow us to offset the natural run-off
of the Heritage business cash generation (currently c.£800 million). I am
therefore delighted that we have delivered £1.2 billion in new business
long-term cash generation in 2021 to more than prove 'the wedge'.
Having met our two conditions for organic dividend growth, the Board has
recommended our inaugural organic dividend increase of 3%, which remains just
as sustainable over the long-term owing to our business growth in 2021.
A strong financial performance in 2021
Key financial metrics: 2021 2020 YOY change
Cash Cash generation £1,717m £1,713m 0%
Solvency II PGH Solvency II surplus £5.3bn £5.3bn -
Capital
PGH Shareholder Capital Coverage Ratio ('SCCR') 180% 164% +16%pts
New Business Incremental long-term cash generation £1,184m £766m 55%
Dividends Total dividend per share 48.9p 47.5p
Final dividend per share 24.8p 24.1p +3%
2021 2020 YOY change
Other financial metrics:
Assets Assets under administration £310bn £307bn¹ +1%
Leverage Fitch leverage 28% 28% -
ratio
IFRS (Loss)/profit after tax £(709)m £834m N/A
Operating profit £1,230m £1,199m 3%
before tax
1 Proforma for the disposal of £29 billion of assets from the Wrap
SIPP, TIP and Onshore Bond businesses sold
to abrdn plc in 2021, as well as £2 billion of assets from Ark Life which was
sold to Irish Life in 2021
Our key performance indicators
With our financial framework designed to deliver cash, resilience and growth,
we recognise the need to use a broad range of metrics to measure and report
the performance of our company, 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 page 38 of
the Annual Report & Accounts and the IFRS financial statements are set out
from page 155 onwards of the Annual Report & Accounts.
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, which are summarised below.
Cash generation
Cash generation remains our key performance metric. It represents free surplus
above capital requirements distributed from the life companies to the Group,
generated through margins earned on different life and pension products and
the release of capital requirements.
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.
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')".
Fitch leverage
The Group seeks to manage the level of debt on its balance sheet by monitoring
its financial leverage ratio. This is to ensure we maintain our investment
grade rating issued by Fitch Ratings and optimise our financial flexibility to
support future acquisitions. Our financial leverage is calculated (using Fitch
Ratings' stated methodology) as debt as a percentage of the sum of debt and
equity.
Incremental long-term cash generation
Incremental 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 current period
within our Open business, including Bulk Purchase Annuities ('BPA'). By
generating sufficient incremental long-term cash generation to offset the
run-off of our Heritage business cash flows (currently c.£800 million per
annum), we can bring sustainability to future cash generation to prove what we
describe as 'the wedge' hypothesis.
Assets under Administration
The Group's Assets under Administration ('AUA') is another measure of growth.
It represents our assets administered by or on behalf of the Group, covering
both shareholder and policyholder, and indicates the potential long-term
earnings capability of the Group arising from its insurance and investment
business.
Operating profit
The Group uses operating profit as a further performance measure to
demonstrate longer-term performance on an IFRS basis. IFRS operating profit is
less affected by the short-term market volatility driven by Solvency II
hedging (as illustrated above) and non-recurring items than IFRS profit. A
more detailed definition of operating profit is set out on page 321 of the
Annual Report & Accounts.
Cash
Cash generation & group liquidity
Operating companies' cash generation represents cash remitted by the Group's
operating companies to the holding companies. Please see the APM section on
page 321 of the Annual Report & Accounts for further details of this
measure.
Cash generation from the operating companies' is principally used to fund the
Group's shareholder dividends, debt interest and repayments, and its various
operating costs. Any surplus remaining is available for reinvestment into
organic and inorganic growth opportunities. 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.
Group cash flow analysis
£m 2021 2020
Cash and cash equivalents at 1 January 1,055 275
Operating companies cash generation:
Cash receipts from life companies 1,717 1,073
Cash remittances to Standard Life international - (50)
Total cash receipts(¹) 1,717 1,023
Uses of cash:
Operating expenses (80) (42)
Pension scheme contributions (11) (80)
Debt interest (250) (184)
Non-operating cash outflows (305) (66)
Uses of cash before debt repayments (646) (372)
and shareholder dividend
Debt repayments (322) -
Shareholder dividend (482) (403)
Total uses of cash (1,450) (775)
Debt issuance (net of fees) - 1,445
Cost of acquisitions - (1,265)
ReAssure Holding Company cash acquired - 580
Support of BPA activity (359) (228)
Closing cash and cash equivalents at 31 December 963 1,055
1 Total cash receipts include £95 million received by the holding
companies in respect of tax losses surrendered
(2020: £108 million). 2020 excludes £690 million of cash generation from
ReAssure arising in period prior
to completion.
Cash receipts
Cash generated by the operating companies during 2021 was £1,717 million
(2020: £1,713 million). This exceeded the Group's target range of
£1.5bn-to-£1.6bn for the year.
Uses of cash
Operating expenses of £80 million (2020: £42 million) represent corporate
office costs, net of income earned on holding company cash and investment
balances. The increase relative to 2020 reflects the inclusion of a full year
of costs borne by the ReAssure corporate entities, together with increased
LTIP costs and the costs associated with the development of capabilities
across our Group functions as we execute our growth strategy.
Annual pension scheme contributions of £11 million (2020: £80 million). 2021
only reflects contributions into the Abbey Life Scheme, due to the completion
of contributions into the Pearl Pension Scheme during 2020.
Debt interest of £250 million (2020: £184 million) increased in the year due
to the inclusion of a full year's coupon on the three debt instruments
substituted to the Group as part of the acquisition of the ReAssure businesses
in August 2020 (£250 million Tier 2, £500 million Tier 2 and £250 million
Tier 3), and additional debt raised to help fund the acquisition.
Non-operating cash outflows of £305 million (2020: £66 million) include
£230 million of Group project expenses including transition activity, and the
£68 million settlement of a creditor recognised at 31 December 2020 with
abrdn plc ('abrdn') relating to amounts due under indemnity arrangements
pertaining to FCA Thematic Review findings in Standard Life. Other items
included £49 million of net cash received from abrdn upon entering into a new
agreement to simplify the strategic partnership, including consideration for
the disposal of the Wrap SIPP, Onshore Bond and TIP businesses, and £56m of
net other items, including hedge collateral posted and one-off ReAssure costs.
Shareholder dividend
The shareholder dividend of £482 million represents the payment of £241
million in May for the 2020 final dividend and the payment of the 2021 interim
dividend of £241 million in September.
Debt repayments & issuance (net of fees)
£322 million of debt repayments in 2021 include the £200 million Tier 2
subordinated bond in April and £122 million senior bond in July. (2020: debt
issuance of £1,445 million net of fees).
Support of BPA activity
Funding of £359 million (2020: £228 million) has been provided to the life
companies to support a strong year in BPA with £5.6 billion of premiums
written. With the capital strain on BPAs having reduced to 6.5% in 2021 (2020:
9%).
Future sources and uses of cash
Looking over the period 2022-24, we expect to have significant Group cash
resources of around £5.0 billion. This will more than cover the Group's
expected uses of c.£3.3 billion for operating and integration costs, debt
interest and repayments, and our shareholder dividend cost at its new,
increased level. As a result, the Group expects to have a significant amount
of surplus cash of around £1.7 billion available for investment into organic
growth through BPA and inorganic growth opportunities through further M&A.
Group Long-Term Free Cash
£bn Group LTFC Group LTFC Pro forma
Year ended 31 December 2021 Year ended 31 December 20201
Long-term in-force cash generation 17.0 17.7
Less M&A and transition costs (0.2) (0.3)
Plus closing Holding Company cash 1.0 1.0
Long-term Group cash 17.8 18.4
Less shareholder debt (4.6) (5.0)
Group Long-Term Free Cash 13.2 13.4
1 Stated on a pro forma basis to reflect the impact of the sale of Wrap
SIPP, Onshore Bond and TIP products to SLA (£0.2bn) and the impact of the
increase in the rate
of corporation tax from April 2023 to 25% announced in the March 2021 budget
(£0.3bn).
Group long-term free cash
Group Long-Term Free Cash ('LTFC') is comprised of long-term cash generation
expected to emerge from our in-force business plus existing Group holding
company cash, less an allowance for costs associated with our M&A
integration activity and a deduction for our shareholder debt outstanding.
LTFC is an important measure for demonstrating the business is growing, as we
seek to ensure that our recurring sources of cash exceed our recurring uses.
This is one of the two conditions we had set for considering an inaugural
organic dividend increase.
I am therefore delighted that the investment in our capabilities has enabled
us to deliver £1.2 billion of incremental long-term cash generation during
the year. When combined with our £0.2 billion over-delivery of management
actions in 2021 and an additional year of estimated management actions now
reflected for 2024 in our targets, we have seen our recurring sources of cash
exceed our recurring uses by c.£0.3 billion in the year. This means we met
our second dividend condition, which supported our decision to increase our
shareholder dividend for 2021.
Group long-term free cash was £13.2 billion at the end of 2021, slightly down
on 2020 (£13.4 billion) due to some non-recurring expenses. The first of
these is the significant investment we are making into the capabilities needed
to deliver our continued growth ambitions, where the capitalised impact of
future costs has decreased LTFC by c.£0.2 billion. The second non-recurring
expense was from the industry-wide transition from LIBOR-to-SONIA which had a
c.£0.2 billion adverse impact.
With £13.2 billion of LTFC available, we have a significant amount of
dependable cash that will emerge from our current in-force book, which
supports our increased dividend over the very long term.
Resilience
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-profit funds and
future management charges on investment contracts, the treatment of certain
subordinated debt instruments as capital items, and a number of valuation
differences, most notably in respect of insurance contract liabilities,
taxation and intangible assets.
Group Solvency II capital position
Our Solvency II capital position remains strong, with a resilient surplus of
£5.3 billion, which includes the deduction of our 2021 final dividend. Our
Shareholder Capital Coverage Ratio ('SCCR') has increased from 164% to 180%,
and is currently at the top-end of our 140%-to-180% target range, providing
the capacity to invest into both organic and inorganic growth opportunities.
Change in Group Solvency II surplus (estimated)
The Group Solvency II Surplus has remained stable at £5.3 billion
year-on-year. Our ongoing surplus emergence of £0.6 billion and significant
over-delivery of management actions at £1.5 billion provided us with the
capacity to pay our operating costs, dividends and interest of £0.8 billion,
with surplus then available for reinvestment into growth, and headroom to
absorb several non-recurring impacts.
We delivered a record level of management actions in 2021, which included
around £0.7 billion from "BAU" activity, including illiquid asset origination
and asset risk management actions. In addition, our internal model
harmonisation success provided a significant contribution, at around £0.6
billion, the majority of which was a reduction in SCR.
As a result of our unique hedging strategy, designed to stabilise our capital
position, we saw a small £0.1 billion positive economic variance This extends
our track record of small economic variances through periods of market
volatility.
We invested £0.4 billion of capital into growth, primarily for the funding of
£5.6 billion of BPA premiums written in the year.
Elsewhere, assumptions, model and methodology changes were negative £0.2
billion and we repaid debt of £0.2 billion. There was also an adverse impact
of £0.3 billion from the industry-wide transition from LIBOR-to-SONIA and the
change in the UK Corporation Tax rate. A range of other items totalled a
negative £0.3 billion.
Change in SCCR (estimated)
While the surplus remained stable year-on-year, our SCCR has increased by
16%pts to 180% as at 31 December 2021 with a number of contributing factors.
The largest single contributor was the £1.5 billion of management actions
delivered, which increased the SCCR by 28%pts.
We have also reflected the future change in the Corporation Tax rate, which
had a positive impact on the SCCR primarily due to an increase in loss
absorbing capacity of deferred taxes in the SCR, and the transition from
LIBOR-to-SONIA. The net combination of these two impacts has decreased our
SCCR by 1%pt.
Further adverse SCCR movements include the strain borne from the writing of
new BPA business which decreased the SCCR by 10%pts and the c.£0.2 billion
debt repayment which reduced the SCCR by 3%pts.
Sensitivity and scenario analysis
As part of the Group's internal risk management processes, the Own Funds and
regulatory SCR are tested against
a number of financial scenarios.
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 illustrative stress impacts shown.
Illustrative risk exposure stress testing
Estimated impact(1 )on PGH Solvency II Surplus SCCR
£bn %
Solvency II base 5.3 180
Equities: 20% fall in markets (0.1) 4
Long-term rates: 80bps rise in interest rates(2) (0.2) 3
Long-term rates: 70bps fall in interest rates(2) 0.2 (3)
Long-term inflation: 70bps rise in inflation(3) Nil (1)
Property: 12% fall in values(4) (0.2) 3
Credit spreads: 150bps widening with no allowance for downgrades(5) (0.4) (4)
Credit downgrade: immediate full letter downgrade (0.4) (10)
on 20% of portfolio(6)
Lapse: 10% increase/decrease in rates(7) (0.2) (1)
Longevity: 6 months increase(8) (0.7) (11)
1 Assumes stress occurs on 1 January 2022 and that there is no market
recovery.
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 Stress reflects a structural change in long-term inflation with an
increase of 70bps across the curve
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 150bps 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 no 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 Applied to the annuity portfolio.
Unrewarded market risk sensitivities
We have a particularly 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. We use a range of hedging
instruments to hedge these risk exposures in order to stabilise the SII
surplus. This translates into the low sensitivities presented in the table
above.
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 exposure arises from both cost inflation
expectations and inflation-linked policies.
Rewarded credit risk sensitivities
We do however retain the credit risk in our c.£40 billion shareholder credit
portfolio, where we see the risk as rewarded. The shareholder credit assets
are primarily used to back the Group's annuity portfolio.
However, we actively manage our credit portfolio to ensure it remains high
quality and diversified, and to maintain our sensitivities within risk
appetite.
The key sensitivity we focus on here is a full letter downgrade of 20% of our
credit portfolio, which reduced slightly in 2021 to £0.4 billion and is
therefore small in the context of the Group's £5.3 billion Solvency II
surplus.
Demographic risk sensitivities
We also have two key demographic risks that we manage. Lapse risk arises from
customers surrendering policies early or keeping policies with valuable
guarantees for longer. While our longevity risk principally arises from our
annuity book, but this is managed through reinsurance, where we retain around
half of the risk across our current in-force book, and reinsure most of this
risk on new business.
Life company free surplus
Life Company Free Surplus represents the Solvency II surplus of the Life
Companies that is in excess of their Board-approved capital management
policies. It is this Free Surplus from which the life companies remit cash to
Group. As at 31 December 2021, the Life Company Free Surplus is £2.6 billion
(2020: £2.9 billion). The table shown analyses the movement in 2021.
Estimated
position as at 31 December
2021
£bn
Opening Free Surplus 2.9
Surplus generation and run-off of capital requirements 0.8
Management actions 1.2
Economics, financing and other (0.7)
Free Surplus before cash remittances 4.2
Cash remittances to holding companies (1.6)
Closing Free Surplus 2.6
Growth
Incremental new business long-term cash generation 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.
Assets under administration ('AUA') provide 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 ability to deliver
new business growth.
A reconciliation from the Group's IFRS statement of consolidated financial
position to the Group's AUA is provided
on page 314 of the Annual Report & Accounts.
Please see the APM section on page 321 of the Annual Report & Accounts for
further details of these measures.
Incremental new business long-term cash generation
We have delivered a record level of incremental new business long-term cash
generation of £1,184 million in 2021, with a
55% increase on 2020 (£766 million).
This means that for the first time we have delivered new business growth which
allows us to offset the natural run-off of the Heritage business cash
generation of c.£800 million, thus more than proving 'the wedge'.
This is a pivotal moment for Phoenix as it demonstrates we are a growing,
sustainable business.
Retirement Solutions
The investment we have made into developing our Bulk Purchase Annuity ('BPA')
business and asset management capabilities has supported Phoenix in writing
£5.6 billion of BPA premiums in 2021. Having completed two significant
transactions of £1.7 billion and £1.8 billion, it is clear we have become an
established BPA market player.
This in turn has delivered £950 million of long-term cash generation, an 82%
increase on 2020 (£522 million). We also successfully reduced our capital
strain from 9% in 2020 to 6.5% in 2021, largely reflecting the capital
efficiency benefit from our new harmonised internal model. Despite a
competitive market and low credit spreads, we have maintained our pricing
discipline which is evidenced by our delivery of a double-digit IRR in 2021.
Importantly though, we are not growing in BPA at the expense of our
resilience, with a balanced portfolio and low credit risk sensitivity
remaining our long-term ambition here.
Workplace
Our Workplace business has delivered broadly stable incremental long-term cash
generation of £139 million in the year (2020: £140 million), which largely
reflects several large scheme losses offsetting new business growth.
However, I was delighted that we saw clear momentum building in our Workplace
business, with 41 new schemes won during 2021. While these schemes are small
in terms of assets, it is an important milestone, with advisers giving us the
opportunity to prove ourselves on these smaller schemes, before we hopefully
begin winning the larger schemes in time.
Customer savings and investment ('CS&I')
The 2021 incremental long-term cash generation of £29 million from our
CS&I business is down on the prior year (2020: £56 million) primarily due
to the sale of the platform businesses to abrdn which contributed £23 million
of incremental long-term cash generation in 2020.
Europe
We have seen an increase in the incremental long-term cash generation from our
European business at £31 million (2020: £25m), reflecting a marked increase
in Offshore Bond sales in the Irish business.
SunLife
Our incremental long-term cash generation from SunLife of £35 million has
increased year-on-year (2020: £23 million) due to strong new business in the
period.
Group AUA
Group AUA as at 31 December 2021 was £310.4 billion (2020: £337.7 billion).
The decrease in the year is driven by the removal of £29.1 billion of AUA
relating to the disposal of the Wrap SIPP, TIP and Onshore Bond business to
abrdn, and the removal of £1.8 billion of Ark Life assets following its
disposal to Irish Life.
Heritage net flows
UK Heritage net outflows of £11.2 billion (2020: £7.3 billion) reflect
policyholder outflows on claims such as maturities and surrenders, net of
total premiums received in the period from in-force contracts. This increase
year-on-year is due to the inclusion of a full years' experience of ReAssure
Heritage net flows compared with five months post acquisition that were
reported in 2020.
Retirement Solutions net flows
Net flows in Retirement Solutions, which encompasses our individual annuity
and BPA businesses, were £3.3 billion (2020: £0.9 billion). in 2021. Gross
inflows during the period were £6.2 billion (2020: £3.2 billion), inclusive
of £5.6 billion of new BPA premiums written in the year. Outflows of £2.9
billion in the period (2020 £2.3 billion) primarily reflect the natural
run-off of our in-payment annuity policies.
Workplace net flows
Net inflows within our Workplace business were a positive £0.6 billion in
2021 (2020: £1.7 billion). Gross inflows were £4.9 billion, slightly up on
2020 (£4.7 billion). However, 2021 outflows of £4.3 billion (2020: £3.0
billion) were impacted by c.£2 billion of historic scheme losses delayed
partly due to the pandemic and reflect decisions taken on our legacy
proposition that has since been improved substantially.
Positive net flows in the year provide a platform to build upon, and the 41
schemes won in 2021, while small, are testament to the reignited market
interest in the Standard Life proposition following our brand acquisition and
investment.
Other asset businesses net flows
We have seen net outflows of £0.7 billion businesses (2020: £0.3 billion net
inflows) from our other asset based businesses. Gross inflows were £4.7
billion in the year (2020: £6.3 billion), primarily reflecting our individual
retirement products sold in the UK and Europe, while outflows of £5.4 billion
in the year (2020: £6.0 billion) are largely due to the natural run-off of
our CS&I and Europe businesses.
Other movements including markets
AUA increased by £11.6 billion (2020: £18.5 billion) as a result of other
movements, largely driven by the net positive impacts of market movements,
largely due to a rise in equity markets.
IFRS Results
IFRS (loss) / profit is a GAAP measure of financial performance and is
reported in our statutory financial statements on page 155 onwards of the
Annual Report & Accounts.
Operating profit is a non-GAAP financial performance measure based on expected
long-term investment returns. It is stated before amortisation and impairment
of intangibles, other non-operating items, finance costs and tax.
Please see the APM section on page 321 of the Annual Report & Accounts for
further details of this measure.
IFRS profit and loss statement
£m 2021 2020
Heritage 537 431
Open 788 817
Service company (24) 6
Group costs (71) (55)
Operating profit before tax 1,230 1,199
Investment return variances and economic assumption changes (1,125) 101
Amortisation and impairment of intangibles (639) (482)
Other non-operating items (65) 281
Finance costs (217) (191)
Profit before tax attributable to non-controlling interest 128 36
(Loss)/profit before tax attributable to owners (688) 944
Tax charge attributable to owners (21) (110)
(Loss)/profit after tax attributable to owners (709) 834
IFRS (loss)/profit after tax
The Group generated an IFRS loss after tax attributable to owners of £709
million (2020: profit of £834 million), which primarily reflects £1,125
million of adverse investment return variances and economic assumption changes
and £639 million of charges for amortisation and impairment of intangibles,
as well as several other movements shown in the table below.
Operating profit
The Group generated an increased operating profit of £1,230 million (2020:
£1,199 million), reflecting the contribution of a full year of profits from
the ReAssure business and increased Bulk Purchase Annuity ('BPA') new business
in the period, offset by the adverse impact of strengthened expense
assumptions required to reflect our growth ambitions.
The 2020 split of operating profit by segment has been restated to reflect
that the management and reporting of ReAssure has been aligned with that of
the other Group businesses. In 2020 ReAssure was shown as a separate segment,
whereas this is now allocated within our Heritage and Open business segments.
Basis of operating profit
Operating profit generated by our Heritage and Open business segments is based
on expected investment returns on financial investments backing shareholder
and policyholder funds over the reporting period, with consistent allowance
for the corresponding expected movements in liabilities (being the release of
prudent margins and the interest cost of unwinding the discount on the
liabilities).
The principal assumptions underlying the calculation of the long-term
investment return are set out in note B2.1 to the IFRS consolidated financial
statements.
Operating profit includes the effect of variances in experience for
non-economic items, such as mortality and persistency, and the effect of
changes in non-economic assumptions. Any impact from market movements is shown
outside of operating profit. Operating profit is net of policyholder finance
charges and policyholder tax.
Heritage operating profit
Our Heritage business segment does not actively sell new life or pension
policies and runs-off gradually over time. Our Heritage segment delivered
operating profit of £537 million (2020: £431 million¹), including a full
year of profits for ReAssure, partly offset by a strengthening of expense
assumptions.
Open operating profit
The Group's Open business segment delivered an operating profit of £788
million (2020: £817 million¹). This includes operating profits generated in
the Group's Retirement Solutions, Workplace and CS&I business units, as
well as new business distributed through the Group's SunLife brand and our
European operations. 2021 includes stronger Retirement Solutions new business
profits of £291 million (2020: £216 million). This was more than offset by a
reduced longevity benefit that was c.£100 million lower than in 2020 due to
an element of positive one-off updates to ReAssure longevity assumptions last
year, and strengthening of expense assumptions to reflect the investment into
our growth ambitions.
Service company
The operating loss for management services from the service company of £24
million (2020: profit of £6 million) comprises income from the life and
holding companies in accordance with the respective management services
agreements less fees related to the outsourcing of services and other
operating costs. The decrease compared to the prior period reflects additional
costs incurred, driven by investment in the Open division and the development
of asset management capabilities in support of our growth strategy. This
partly reflects that these costs have not yet been factored into the
management service agreements for recharging back to the life companies.
Group costs
Group costs in the period were £71 million (2020: £55 million¹). They
mainly comprise project recharges from the service companies and the returns
on the scheme surpluses/deficits of the Group staff pension schemes. The
increase in costs compared to the prior period principally reflects the
inclusion of a full year of corporate and project costs associated with the
ReAssure businesses (versus five months in 2020) and costs associated with
developing out our Group capabilities to support our growth ambitions.
Investment return variances and economic assumption changes
The net adverse investment return variances and economic assumption changes of
£1,125 million (2020: £101 million positive) have primarily arisen as a
result of rising yields, increasing inflation and rising global equity
markets. Movements in yields, inflation and equity markets are hedged to
protect our Solvency II surplus from volatility, but our IFRS balance sheet
is, in effect, "over-hedged" as it is not impacted by the additional SII
balance sheet items (see illustration on page 29 of the Annual Report &
Accounts). Therefore, the impact of the adverse hedging instrument values,
which offset the positive market movements in the period gives rise to losses
in the IFRS results. However, importantly the Group's cash generation and
dividend capacity are broadly unaffected by this due to the Group's continued
resilient Solvency
balance sheet.
Amortisation and impairment of acquired in-force business and other
intangibles
The previously acquired in-force business is being amortised in line with the
expected run-off profile of the profits to which it relates.
Amortisation and impairment of acquired in-force business during the year
totalled £572 million (2020: £464 million) with the increase from the prior
year driven by a full year's amortisation charges on intangible assets
recognised on acquisition of ReAssure and an impairment charge of £40 million
primarily arising from the sale of Ark Life and an update to the reserving
methodology on a specific block of European unit-linked insurance contracts.
Amortisation and impairment of other intangible assets totalled £67 million
in the year (2020: £18 million), including a £47 million impairment charge
in relation to goodwill associated with the management services companies.
Other non-operating items
The previously acquired in-force business Other non-operating items had an
adverse impact of £65 million in the year (2020: £281 million positive).
Positive impacts include the £110 million net gain recognised on the
transaction to simplify the strategic relationship with abrdn plc, including
the disposal of the Wrap SIPP, Onshore bond and TIP businesses, and the
acquisition of the Standard Life brand. Also included is an £83 million
policyholder tax benefit recognised following the favourable conclusion of
discussions with HMRC in respect of excess management expenses attached to the
L&G Mature Savings business acquired as part of ReAssure.
These positive non-operating items are offset by a number of non-recurring
expenses. Integration costs of £119 million across both the Standard Life and
ReAssure programmes, including delivery of the harmonised internal model, were
incurred and are inclusive of internal costs. There was also a £58m impact of
providing for the costs of implementation of the new IFRS 17 insurance
accounting standard. While we also incurred a loss of £23 million recognised
on disposal of Ark Life, which includes the recycling of £14 million of
foreign exchange ('FX') losses that had been accumulated in the FX reserve on
consolidation.
The remaining non-recurring expenses of £58 million relate to various Group
projects. The large variance to the prior year is largely due to a sizeable
gain that was recognised on acquisition of the ReAssure business of £372
million
during 2020.
Finance costs
Finance costs of £217 million (2020: £191 million) have increased by £26
million, reflecting a full year of interest charges on the three debt
instruments which were substituted to the Group as part of the acquisition of
the ReAssure businesses in July 2020 and the additional debt issued by the
Group to finance the ReAssure acquisition.
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 charge for the period attributable to owners is £21 million
(2020: £110 million) based on a loss (after policyholder tax) of £688
million (2020: profit of £944 million).
The tax credit of £131 million arising on the loss (after policyholder tax)
is primarily offset by a £147 million tax charge arising from the impact of
the new 25% corporate tax rate effective from 1 April 2023 on deferred tax. A
reconciliation of the tax charge is set out in note C6.4 to the Group
financial statements.
Financial leverage
The Group seeks to manage the level of debt on its balance sheet by monitoring
its financial leverage ratio. The financial leverage ratio as at 31 December
2021 (as calculated by the Group in accordance with Fitch Ratings' stated
methodology) is 28% (2020: 28%). This is within the target range management
considers to be associated with maintaining an investment grade rating of 25%
to 30%.
1 2020 operating profit split has been restated to split ReAssure across
Open, Heritage and Group costs segments as appropriate
Dividend
Inaugural organic dividend increase
Phoenix has a strong dividend track record and we have significantly
outperformed the wider FTSE 100 over the past seven years. However, until now
our historical dividend increases had only come from M&A.
We had outlined two clear conditions that would act as triggers for the Board
to consider an organic dividend increase.
The first was to prove 'the wedge' through organic growth that would more than
offset the run-off of our Heritage business (currently c.£800 million p.a.).
The second was that the Group's recurring sources of cash exceeded our
recurring uses.
I am delighted that we have met these two conditions in 2021, having proven
'the wedge' with new business long-term cash generation of £1.2 billion and
with our recurring sources of cash exceeding our recurring uses by around
£300 million.
As a result, the Board has assessed that a dividend increase is appropriate
and is therefore recommending the Group's inaugural organic dividend increase
of 3% in the Final 2021 dividend to 24.8 pence per share, This equates to a
Total 2021 dividend of 48.9 pence per share.
This increase reflects both the growth in our business and our strong
overdelivery of management actions in 2021. Our new, increased level of
dividend is just as sustainable as it was previously.
Future dividend policy and approach
Having proven 'the wedge' for the first time and announced our inaugural
organic increase, the Board has evolved our dividend policy to reflect the
growing, sustainable business that Phoenix now is.
We have evolved our previous policy that was for a "stable and sustainable
dividend" to a policy which is to pay a dividend that is sustainable and grows
over time.
It is important to emphasise that the Board will, above all else, prioritise
the sustainability of our dividend over the
long term.
Phoenix Group can now grow both organically through its Open business and
inorganically through M&A. The Board will therefore now assess annually
whether business growth can fund a dividend increase that is sustainable over
the long term.
We are confident that the cash from today's in-force business, without any new
business or any M&A, can pay our current, increased dividend over the long
term. What is really exciting is that we now have two sources of potential
dividend increases, through both organic growth and inorganic growth.
The Board and I believe this is an important milestone in the evolution of the
Phoenix Group investment case.
Outlook
Looking ahead
We have a differentiated strategy, which leverages the major market trends,
and where the whole is greater than the sum of the parts.
Heritage is the bedrock of our business, which delivers high levels of
predictable cash that covers our dividend into the very long term. And it also
generates surplus cash, that we can re-invest into both our Open business, and
into M&A, to support future dividend increases.
We remain focused on optimising every pound of shareholder capital through a
rigorous capital allocation framework that ensures we only invest in growth
opportunities that drive real value.
Phoenix continues to offer an attractive dividend, covered into the very long
term by today's in-force business. And that now has the potential to grow both
organically and inorganically.
New financial targets
We have a clear set of targets as we continue to prioritise the delivery of
cash, resilience and growth.
Starting with cash, Phoenix has set two new cash generation targets. The first
is a one-year target range for 2022 of £1.3- to-£1.4 billion. And the second
is a three-year target of £4.0 billion across 2022 to 2024.
In terms of resilience, we will continue to maintain a strong Solvency II
surplus through our unique, dynamic hedging approach. This will see us
continue to operate within our Solvency II SCCR target range of 140%-to-180%
and continue to manage our key individual risk sensitivities on an absolute
surplus basis. Despite the difficult ongoing economic backdrop and volatile
markets, our uniquely resilient Solvency II balance sheet is strongly
positioned to enable us to deliver on our ambitions in 2022.
In addition, we will continue to manage the Group's gearing level by operating
within our Fitch financial leverage ratio target range of 25%-30%.
Looking to growth. The investment we are making into our Open business
proposition, along with setting aside around £300 million of capital per
annum for new BPA, means that we are now confident of delivering ongoing
organic growth, which will more than offset the Heritage run-off,
year-after-year. As a result, we expect to prove 'the wedge' again in 2022, by
delivering >£800 million of incremental new business long-term cash
generation.
Inorganic growth through M&A also remains a key priority for Phoenix. In
terms of the market opportunity, we believe that the c.£480 billion UK
Heritage market is split between a small number of large deals and a larger
number of small-to-mid sized deals. We stand ready to do our next deal,
enabled by our scalable platforms, and our £1.3 billion of available
firepower.
I look forward to an exciting year in 2022 as we continue to deliver on our
purpose and our strategy.
Rakesh Thakrar
Group Chief Financial Officer
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 2020 Annual Report and Accounts,
published in March 2021.
The Board Risk Committee has carried out a robust assessment of principal
risks and emerging risks. As a result of this review, 'Cyber Resilience',
which was previously considered under the 'Operational Resilience' principal
risk, is now treated as a separate principal risk in its own right. As
highlighted in the 2021 Interim Report, this recognises the growing importance
of managing Cyber risk to enable the Group to effectively deliver its
strategic objectives. Further details of the Group's exposure to financial and
insurance risks and how these are managed are provided in note E6 and F4 (to
the IFRS consolidated financial statements).
Strategic priorities:
1 Optimise our in-force business
2 Enhance our operating model and culture
3 Grow our business to support both new and existing customers
4 Innovate to provide our customers with better financial futures
5 Invest in a sustainable future
Risk Impact Mitigation Strategic priorities Change from 2020 Annual Report and Accounts
STRATEGIC RISK
The Group fails to make further value adding acquisitions or effectively The Group is exposed to the risk of failing to drive value through inorganic The Group continues to assess and execute new inorganic growth opportunities 1 No change
transition acquired businesses growth opportunities, including acquisitions of life and pensions books of and applies a clear set of criteria to assessing these opportunities.
business.
2 Significant progress has been made in 2021 on the Standard Life Assurance and
The Group's acquisition strategy is supported by the Group's financial
ReAssure plc integrations, with further integration of a number of key
The transition of acquired businesses into the Group, including customer strength and flexibility, strong regulatory relationships and its track record 3 business areas, including Finance and Actuarial. The Group has also made the
migrations, could introduce structural or operational challenges that result of generating value and delivering good customer outcomes that are in line strategic decision to re-phase the remaining legacy Standard Life migrations
in the Group failing to deliver the expected outcomes for customers or value with expectations. in order to build new capability to support future new business growth, which
for shareholders.
means the legacy Standard Life migrations will now complete by 2025.
The financial and operational risks of target businesses are assessed in the
acquisition phase and potential mitigants are identified. A key milestone in the Standard Life Assurance integration was delivered in
September 2021 when the Group received PRA approval for its harmonised
Integration plans are developed and resourced with appropriately skilled staff Internal Model, bringing together the Internal Models of Standard Life
to ensure target operating models are delivered in line with expectations. Assurance and Phoenix. Harmonisation brings the Group a material enhancement
to its risk management and modelling capabilities. This fundamentally
Customer migrations are planned thoroughly with robust execution controls in underpins the security of the Group's customers.
place. Lessons learned from previous migrations are applied to future activity
to continuously strengthen the Group's processes. The alignment to and embedding of the Group's Risk Management Framework within
ReAssure plc was successfully completed in 2021.
The Group's ongoing investment in technology and enhancing the technological
infrastructure of the Group is informed by lessons learned from completed
integration activities. Investments aim to deliver a stable and scalable
environment to deliver market leading migrations and integrations as the Group
delivers its strategic objectives through acquisitions.
The Group's strategic partnerships fail to deliver the expected benefits Strategic partnerships are a core enabler for delivery the Group's strategy; The Group has in place established engagement processes with abrdn plc to 2 No change
they allow it to meet the needs of its customers and clients and deliver value oversee and develop the strategic partnership. These processes reflect the
for its shareholders. The Group's end state operating model will leverage the simplified and extended strategic partnership between the Group and abrdn plc 3 Whilst the Group has strengthened and simplified its strategic partnerships
strengths of its strategic partners whilst retaining in-house key skills which that was announced in February 2021.
over 2021, 'No Change' is reflective of the Group's ongoing reliance on its
differentiate it from
4 strategic partners to deliver the volume of change needed to deliver the
the market. The Group's engagement with Diligenta, and its parent TCS, adheres to a Group's strategic objectives.
rigorous governance structure, in line with the Group's Supplier Management
There is a risk that the Group's strategic partnerships do not deliver the Model. As a result, productive and consistent relationships have been The Group continues to develop the partnership with TCS to support its
expected benefits. Some of the Group's key strategic partnerships include: developed with TCS, which will continue to develop throughout future phases of strategic deliverables. Both parties have managed the impacts of COVID-19 with
the enlarged partnership. actions being taken to protect strategic and BAU activity. Actions include the
abrdn plc: Provides investment management services to the Group including the
implementation of hybrid working models and the strengthening of change
development of investment solutions for customers. abrdn plc manages c. £165 The Group has in place established processes to oversee services provided by management and prioritisation processes.
billion of the Group's assets under administration, at January 2022. HSBC.
The simplified and extended partnership with abrdn plc continues to progress
TCS: The Group's enlarged partnership with TCS is expected to support growth towards the Target Operating Model with key milestones such as the transfer of
plans for the Open business, enabling further market-leading digital and specialist colleagues back to the Group alongside the purchase of the Standard
technology capabilities to be developed to support enhanced customer outcomes. Life brand from abrdn plc completed in 2021.
HSBC: Provides fund accounting services to the Group.
The Group fails to deliver long-term growth in its The Open business has strong foundations and is central to the Group's purpose The Group's Open Division Business Unit structure brings focus and 2 No change
Open business of helping people secure a life of possibilities. It is also fundamental to accountability to its Open ambitions, particularly in key growth areas of
the Group's plans of proving 'the wedge' which assumes that Open business Retirement Solutions (including Bulk Purchase Annuities (BPA)) and Pensions 3 Long-term cash generation, driven by BPA activity, in the Open business in
growth can offset the run-off from the in-force business and bring and Savings.
2021, offset the run-off of the in-force business for the year. However, 'No
sustainability to organic cash generation.
4 Change' reflects that there is still uncertainty (both in internal and
The Open Division holds an annual strategy setting exercise to consider external environments) around the delivery of consistent long-term growth.
Confidence in the Group might be diminished if the Open business fails to customer needs, interests of shareholders, the competitive landscape and
deliver against
the Group's overall purpose Over 2021 the Group completed BPA transactions with a combined premium of
its strategic objectives, particularly as the Group seeks to promote a
and objectives. £5.6 billion, more than double the premiums of 2020.
'customer obsessed' mind-set underpinned by strong retention and consolidation
This demonstrates the Group has the ability to compete and win in the BPA
as customers journey to and through retirement. As part of its Annual Operating Plan the Group is committed to making market.
significant investment in its Open business that will include propositions
which are driven by customer insight. In 2021 the Group purchased the Standard Life brand from abrdn plc. The brand
is central to the Group's plans, will elevate its market presence and enhance
The Group is established in the BPA market and continues to invest in its the Standard Life experience for customers, clients, financial advisers and
operating model to further strengthen its capability to support its growth employee benefit consultants.
plans.
The Group continues to develop its Workplace propositions under the Standard
For new BPA business, the Group continues to be selective and proportionate, Life brand and strengthen the Group's position as a leading pensions provider.
focusing on value not volume, by applying the Group's rigorous Capital In addition to the brand purchase, 68 roles in marketing, retail adviser
Allocation Framework. distribution and data were also transferred from abrdn plc, bringing
considerable subject matter expertise into the Group and enhancing its Open
business capabilities.
The Group does not have sufficient capacity and capability to fully deliver The Group's ability to deliver change on time and within budget could be The Group's Change Management Framework was strengthened in 2021 with an 1 No change
its significant change agenda which is required to execute the Group's adversely impacted by insufficient resource and capabilities as well as enhanced change model, consistent with ensuring empowerment and accountability
strategic objectives inefficient prioritisation, scheduling and oversight of projects. The risk within Business Units to effectively deliver change. The Group continues to 2 In 2022, the Group will continue to manage a significant volume of change,
could materialise both within the Group and its strategic partners. assess the prioritisation of change to ensure there
consistent with 2021.
is clear alignment to the 3
This could result in the benefits of change not being realised by the Group in
Group's strategy.
A strengthening of the Change Management Framework has been delivered over the
the timeframe assumed in its business plans
4 last 12 months. Following an external review, the Group has delivered
and may result in the Group being unable to deliver its strategic objectives. Information setting out the levels of resource demand and supply, both a
improvements to resource management practices and introduced a new portfolio
current and forecast view, will continue to be provided to accountable senior 5 and hub model to simplify the management of a complex change stack. This
management so that informed decision-making can take place. This aims to promotes the delegation of responsibility; avoiding bottlenecks at senior
ensure all material risks to delivery are appropriately identified, assessed, management.
managed, monitored and reported.
The Group fails to appropriately prepare for and manage the effects of climate The Group is exposed to market risks related to climate change as a result of A Group-wide project was undertaken to enhance the approach to managing the 1 No change
change and wider ESG risks the potential implications of a transition to a low carbon economy. financial risks of climate change, including embedding climate risk
considerations within the Group's RMF, to meet the requirements of the PRA 2 A number of positive initiatives are underway to deliver against the Group's
In addition, there are long-term market, insurance, reputational, Supervisory Statement 3/19 (SS3/19). The Group's disclosures, in line with the
Net-Zero targets and social purpose. However, 'No Change' is driven by the
propositional and operational implications of physical risks resulting from Task Force on climate-related Financial Disclosures ('TCFD') are outlined in 3 Group's recognition that significant work, over a number of years, is required
climate change (e.g. the impact of physical risks on the prospects of current the Group's Climate Report. The report also includes planned future priorities
to deliver on these commitments.
and future investment holdings, along with potential impacts on future across each of the TCFD focus areas. 4
actuarial assumptions).
In 2021 the Group made a commitment to reducing carbon intensity for £250
Consideration of material climate-related risks has been embedded into the 5 billion of its investment portfolio by at least 50% by 2030. In addition, an
The Group is also exposed to the risk of failing to respond to wider Group's risk policies. interim de-carbonisation target of a 25% reduction in the carbon emission
Environmental, Social and Governance ('ESG') risks and delivering on its
intensity of its investments by 2025 has been set. The Group has been working
social purpose; for example, failing to meet its sustainability commitments. The Group's sustainability strategy has continued to evolve to respond to the with its key partners and suppliers to encourage them to adopt Science Based
A failure to deliver could result in adverse customer outcomes, reduced changing needs of stakeholders, resulting in the Group setting targets to Targets (SBTi) carbon reduction targets.
colleague engagement, reduced proposition attractiveness and reputational monitor progress towards its sustainability commitments. Further details on
risks. the sustainability strategy are available in the Sustainability Report. The TCFD disclosures in the Group's Climate Report provide an overview of
progress to date in achieving compliance with SS3/19 and planned future
The Group continues to actively engage with regulators on progress with all priorities across each of the TCFD focus areas. This includes internal climate
climate change and sustainability-related deliverables. risk appetites linked to metrics and targets, further embedding of climate
risk considerations within the Group's RMF and enhancement of internal climate
risk reporting.
The Group has taken an active approach in understanding the requirements to
deliver on its social purpose; including the launch of a new think tank,
Phoenix Insights.
CUSTOMER RISK
The Group fails to deliver fair outcomes for its customers or fails to deliver The Group is exposed to the risk that it fails to deliver fair outcomes for The Group's Conduct Risk Appetite sets the boundaries within which the Group 2 No change
propositions that continue to meet the evolving needs of customers its customers, leading to adverse customer experience and potential customer expects customer outcomes to be managed.
detriment. This could also lead to reputational damage for the Group and/or
3 In 2021, the Group continued to make significant investments in its
financial losses. The Group Conduct Risk Framework, which overarches the Risk Universe and all
propositions; launching Investment Pathways and announcing a partnership with
risk policies, is designed to detect where customers are at risk of poor 4 Key Group to launch a lifetime mortgage range, supporting customers with the
In addition a failure to deliver propositions that meet the evolving needs of outcomes, minimise conduct risks, and respond with timely and appropriate
later stages of financial planning.
customers may result in the Group's failure to deliver its purpose of helping mitigating actions. 5
people secure a life
Throughout the pandemic the Group has continued to provide ongoing support to
of possibilities. The Group has a suite of customer policies which set out key customer risks customers, including those most vulnerable, both when paying out on their
and minimum control standards in place to mitigate them. protection plans and when making decisions about their life savings during
this period of uncertainty.
The Group maintains a strong and open relationship with the FCA and other
regulators, particularly on matters involving customer outcomes. As noted in the 2020 Annual Report and Accounts and the 2021 Interim Report,
following the acquisition of ReAssure plc the Group completed a Part VII
The Group's Proposition Development Process ensures consideration of customer transfer of business acquired from L&G. Customers in this book of business
needs and conduct risk when developing propositions. were migrated to the Group's in-house administration platform. The Group
continues to monitor the service levels delivered to migrated customers to
ensure there is alignment to internal customer service standards.
In light of the situation in Ukraine a review of the legal and regulatory
requirements from the sanctions has been performed. The review concluded that
, at the time of writing, a low level of risk exists given that the Group has
a low volume of customers that reside in Russia and Belarus. In addition, no
Russian banks have employer schemes or products with the Group.
OPERATIONAL RISK
The Group or its outsourcers are not sufficiently operationally resilient The Group is exposed to the risk of causing intolerable levels of disruption The Group has established an Operational Resilience Framework that identifies 1 No change
to its customers and stakeholders if it cannot maintain the provision of important business services, accountability, sets tolerances for disruption
important business services when faced with a major operational disruption to and describes the processes that will deliver the required level of 2 This principal risk was rated as 'Heightened' in the 2020 Annual Report and
core IT systems and operations. This could occur either in-house or within the resilience. This enhances the protection of customers and stakeholders,
Accounts; there has been no change to the position since. There remain two
Group's primary and downstream outsourcers and includes a range of preventing intolerable harm and supports compliance with the regulations. The 3 core drivers for this risk assessment: COVID-19 uncertainty and strategic
environmental and Group works closely with its outsourcers to ensure that the level of customer transformation.
climatic factors. resilience delivered is aligned to the Group's impact tolerances.
Whilst many potential exposures to COVID-19 can now be effectively mitigated,
The Group regularly conducts customer migrations as part of transition The Group and its outsourcers have well established business continuity a large-scale loss of colleagues due to illness or incapacity, in the UK or
activities in delivering against its strategic objectives. The fundamental management and disaster recovery frameworks that are subject to an annual globally, on a temporary or more permanent basis is more challenging to
risk faced when executing migrations is an interruption to the safe, stable refresh and regular testing. resolve in the short-term as there remains uncertainty around the efficacy of
and secure customer services delivered by the Group. Any service interruption
vaccines against future COVID-19 mutations.
may result in the Group failing to deliver expected customer outcomes. The Group continues to actively manage operational capacity and monitor
service continuity required to deliver its strategy, including transition The Group aims to deliver considerable customer transformation activity in
Regulatory requirements in respect of operational resilience were published in activities. Rigorous planning and stress testing is in place to identify and 2022, consistent with the quantum of change in 2021. Although the scale of
March 2021, together with a timetable to achieve full compliance. Whilst the develop pre-emptive management strategies should services be impacted as a change exposes the Group to significant risk, this is mitigated through
specific requirement to work within set impact tolerances takes effect in result of customer migrations. strengthened Resilience and Change Management Frameworks.
March 2025, the Group is already exposed to regulatory censure in the event of
operational disruption where the Regulator determines that the cause was, The Group and its outsourcer's implementated a hybrid working model The Group has taken action through previous strategic transformation activity
fully or in part, a breach of existing regulation. significantly reducing exposure to a number to reduce exposure to technological redundancy and key person dependency risk,
of physical risks caused by COVID-19. increasing resilience of our customer service.
The Group is impacted by significant changes in the regulatory, legislative or Changes in regulation could lead to non-compliance with new requirements that The Group undertakes proactive horizon scanning to understand potential 1 Heightened
political environment could impact the Group's fair treatment of its customers. These could require changes to the regulatory and legislative landscape. This allows the Group to
changes to working practices and have an adverse impact on resources and understand the potential impact of these changes to amend working practices to 2 There is uncertainty around future Solvency II reforms; expected to be
financial performance.. meet the new requirements by the deadline.
proposed by HM Treasury in April 2022. The scope is expected to include a
3 60-70% reduction to the Risk Margin, a review of the Fundamental Spread
Political uncertainty or changes in the government could see changes in policy component of the Matching Adjustment and a relaxation of Matching Adjustment
that could impact the industry in which eligibility rules. Detail on potential reforms to Solvency Capital Requirement
the Group operates. has not yet featured. While there are potential upsides for the Group
(including broader investment opportunities to advance the Group's growth and
sustainability objectives), there remains significant uncertainty as to what
the final package of reforms will look like, how it will impact the Group, and
the timing for implementation.
Broader financial services regulation is also being consulted on by HM
Treasury, which aims to establish how much rule-making power will pass from
legislation to the UK's regulators.
The FCA has proposed a new Consumer Duty, designed to give a higher level of
protection to consumers. The aim is to drive culture change and instil
consumer trust, an aim welcomed by the Group. The FCA is consulting on draft
rules and plans to publish final rules by 31 July 2022. An internal project
has been initiated to support this work.
The Group or its Supply Chain are not sufficiently cyber resilient As the Group continues to grow in size and profile this could lead to The Group is continually strengthening its cyber security controls, attack 1 New principal risk
increased interest from cyber criminals and a greater risk of cyber-attack detection and response processes, identifying weaknesses through ongoing
which could have significant impact on customer outcomes, strategic assessment and review. 2 Heightened
objectives, regulatory obligations and the Group's reputation and brand.
The Information/Cyber Security Strategy includes a continuous Information Cyber Resilience was previously a component considered under the 'Operational
Based on external events and trends, the threat posed by a cyber security Security and Cyber Improvement Programme, which is driven by input from the Resilience' principal risk.
breach remains high and the complexity of the Group's increasingly Annual Cyber Risk Assessments.
interconnected digital ecosystem exposes it to multiple attack vectors. These
The key driver for the heightened rating is the conflict in Ukraine which has
include phishing and business email compromise, hacking, data breach and The Group continues to assess and utilise cyber security tools and increased cyber threat levels and the likelihood of a cyber-attack from a
supply chain compromise. capabilities. The specialist Line 2 Information Security & Cyber Risk team State actor, particularly on supply chains and the wider Financial Services
provides independent oversight and challenge of information security controls; industry which the Group relies upon. The Group regularly monitors National
Increased use of online functionality to meet customer preferences and future identifying trends, internal and external threats and advising on appropriate Cyber Security Centre guidance.
ways of working including remote access to business systems adds additional mitigation solutions.
challenges to cyber resilience and could impact service provision and Customer
The Group's cyber controls are designed and maintained to repel the full range
security. Comprehensive outsourced service provider and third party oversight and of the cyber-attack scenarios; although the Group's main threat is considered
assurance processes are in place. Regular Board, Executive, Risk and Audit to be Cyber Crime, from Individuals or Organised Crime Groups, the same
Committee engagement occurs within the Group. controls are utilised to defend against a Nation-State level cyber-attack. In
H2 2021 the Group continued to strengthen its cyber controls, including in
areas such as Detect and Respond capabilities and infrastructure scanning
capabilities.
The Group fails to retain or attract a diverse and engaged workforce with the Delivery of the Group's strategy is dependent on a talented, diverse and Timely communications to colleagues aim to provide clarity around corporate 1 No change
skills needed to deliver its strategy engaged workforce. activities. Communications include details of key milestones to deliver
against the Group's plans. 2 Whilst there have been strong engagement scores in colleague surveys during
Periods of prolonged uncertainty can result in a loss of critical corporate
2021, 'No Change' is driven by uncertainty regarding the longer term social
knowledge, unplanned departures of key individuals or the failure to attract The Group regularly benchmarks terms and conditions against the market. The 3 and marketplace impacts of the pandemic on colleague attrition and sickness.
individuals with the appropriate skills to help deliver the Group's strategy. Group maintains and reviews succession plans for key individuals, ensuring
Skills essential to the Group are currently in high-demand in the wider
successors bring appropriate diversity of thought, backgrounds and 4 marketplace and recruitment and retention has the potential to be impacted by
This risk is inherent in the Group's business model given the nature of experiences.
post-Brexit, COVID-19 and inflationary factors. The Group continues to monitor
acquisition activity and specialist risk management skillsets.
5 this closely but remains confident in the attractiveness of its colleague
The Group continues to manage colleague uncertainty of integration activities proposition.
Potential areas of uncertainty include: the ongoing transition of the Standard through cross-organisational collaboration, health and wellbeing support and
Life Assurance and ReAssure businesses into the Group, the expanded strategic regular communications to staff. The Group has opted to implement a hybrid working model. The approach is
partnership with TCS and the introduction of the hybrid working model.
focused on empowerment by enabling leaders and colleagues to agree together
The Group conducts monthly colleague surveys to monitor engagement levels and the right working arrangements which meet individual, team and business needs.
identify any concerns; appropriate actions are taken following analysis of the
results. Strategic investments in technology and other resources have been made to
maximise the efficacy of the hybrid model implementation.
The Group continues to actively manage operational capacity required to
deliver its strategy with ongoing focus on senior bandwidth, attrition and The increased scale and presence of the Group, and success in multi-site and
sickness. remote working, gives greater access to a larger talent pool to attract in the
future. In addition, the Group's Graduate Programmes restarted in 2021,
A move to hybrid working offers colleagues greater flexibility in both where helping to support the talent pipeline.
and how they choose to work in future.
MARKET RISK
Adverse market movements can impact the Group's ability to meet its cash flow The Group and its customers are exposed to the implications of adverse market The Group undertakes regular monitoring activities in relation to market risk 1 No change
targets, along with the potential to negatively impact customer sentiment 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 2 Market stability improved in 2021, driven by a successful COVID-19 vaccine
future cash flows and long-term investment performance for shareholders and to residential property and private investments, as a result of its BPA
rollout. However, there remains significant market uncertainty as a result of
customers. investment strategy, is actively monitored. The Group's exposures are 3 the developing conflict in Ukraine which has resulted in economic sanctions
currently relatively small in the context of the Group's AUM and remain within being introduced against Russia and Belarus as well as the risks presented by
There are a number of drivers for market movements including government and risk appetite. further mutations of the COVID-19 virus.
central bank policies, geopolitical events, market sentiment, sector specific
sentiment, global pandemics and financial risks of climate change, including The Group continues to implement de-risking strategies to mitigate unwanted The Group continues to monitor its exposure to markets affected by the
risks from the transition to a low carbon economy. customer and shareholder outcomes from certain market movements, such as conflict in Ukraine and the effects of the conflict on markets in which the
equities, interest rates, inflation and foreign currencies. Group transacts.
The Group maintains cash buffers in its holding companies and has access to a Inflation is considered a risk over the short to medium-term, with a shortage
credit facility to reduce reliance on emerging cash flows. of labour in key industries and ongoing supply chain issues increasing costs.
The Bank of England is faced with a balancing act of managing inflation and
The Group's excess capital position continues to be closely monitored and aiding the post-COVID recovery. Changes in inflation have, to date, followed
managed. market predictions; however, any unexpected moves in interest rates are likely
The Group regularly discusses market outlook with its asset managers. to impact asset values significantly. The Group's strategy involves hedging
the major market risks and in 2021 the Group's Stress and Scenario Testing
Programme demonstrated the resilience of its balance sheet to market stresses.
Contingency actions remain available to help manage the Group's capital and
liquidity position if any unanticipated market movements occur.
INSURANCE RISK
The Group may be exposed to adverse demographic experience which is out of The Group has guaranteed liabilities, annuities and other policies that are The Group undertakes regular reviews of experience and annuitant survival 1 No change
line with expectations sensitive to future longevity, persistency and mortality rates. For example, checks to identify any trends or variances in assumptions.
if annuity policyholders live for longer than expected, then the Group will
3 'No Change' is driven by remaining uncertainty around future demographic
need to pay their benefits for longer. The Group regularly reviews assumptions to reflect the continued trend of experience as a result of COVID-19 impacts.
reductions in future mortality improvements.
The amount of additional capital required to meet additional liabilities could
Demographic experience and the latest views on future trends are considered in
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 regular assumption reviews although, for most products, experience over the
targets. use of longevity swaps and reinsurance contracts to maintain this risk within COVID-19 pandemic has been given little weight given its anomalous nature.
appetite.
The Group completed bulk annuity transactions with a combined premium of £5.6
The Group actively monitors persistency risk metrics and exposures against billion in 2021. Consistent with previous transactions, the Group continues to
appetite across the Open and Heritage businesses. reinsure the vast majority of the longevity risk with existing arrangements
that are reviewed regularly.
Where required, the Group continues to take capital management actions to
mitigate adverse demographic experience.
CREDIT RISK
The Group is exposed to the risk of downgrade or failure of a significant The Group is exposed to the risk of downgrades and deterioration in the The Group regularly monitors its counterparty exposures and has specific 1 No change
counterparty creditworthiness or default of investment, reinsurance or banking limits relating to individual counterparties, sector concentration and
counterparties. geography. 2 Over the last 12 months the Group has continued to undertake de-risking action
This could cause immediate financial loss, or a reduction in future profits.
to increase the overall credit quality of the portfolio and mitigate the
The Group undertakes regular stress and scenario testing of the credit impact of future downgrades on risk capital. Furthermore, the Group has
The Group is also exposed to trading counterparties, such as reinsurers or portfolio. Where possible, exposures are diversified through the use of a enhanced its counterparty concentration limits framework to better manage
service providers failing to meet all or part of their obligations. range of counterparty providers. All material reinsurance and derivative counterparty failure risk. This positive progress is balanced by residual
positions are appropriately collateralised. uncertainty, due to the wider economic and social impacts arising from
COVID-19, and the developing conflict in Ukraine which presents an increased
The Group regularly discusses market outlook with its asset managers. risk of downgrades and defaults. This results in 'No Change' overall.
For mitigation of risks associated with stock-lending, additional protection The Group has immaterial credit exposure to Russia and no shareholder exposure
is provided through indemnity insurance. to sanctioned Russian banks.
The Group continues to increase investment in illiquid credit assets as a
result of BPA transactions. This is in line with the Group's strategic asset
allocation plan and within risk appetite.
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. Key risks discussed by senior management and the
Board during 2021 include:
Risk Title Description Risk universe category
Consumer Duty The FCA has set out plans for a higher level of consumer protection in retail Customer
financial markets, where firms are competing vigorously in the interests of
consumers. Consultation underway to introduce a new 'Consumer Duty', setting
higher expectations for the standard of care that firms provide to consumers.
Artificial Intelligence Risk in late adoption of operational efficiency opportunities that AI Operational
capabilities could present, e.g. by not keeping up with emerging machine
learning and perception systems.
Solvency II Reforms HM Treasury issued Call for Evidence on potential reforms to SII for the UK, Operational, Financial Soundness
post-Brexit. The scope is expected to include a 60-70% reduction to the Risk
Margin, a review of the Fundamental Spread component of the Matching
Adjustment and a relaxation of Matching Adjustment eligibility rules. Detail
on potential reforms to Solvency Capital Requirement has not yet featured.
Pension Superfunds Pension Superfunds could offer a cheaper or easier option than Bulk Purchase Strategic
Annuities (BPAs) for Defined Benefit schemes looking to de-risk and transfer
their liabilities.
Statement of Directors' responsibilities
Statement of Directors' responsibilities in respect of the Annual Report and
Accounts of Phoenix Group Holdings plc
The Directors are responsible for 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 the Group's business for the year ended 31
December 2021, covers the future developments in the business of Phoenix Group
Holdings plc and its consolidated subsidiaries and provides details of any
important events affecting the Company and its subsidiaries after the
year-end. For the purposes of compliance with DTR 4.1.5R(2) and DTR 4.1.8R,
the required content of the 'Management Report' can be found in the Strategic
Report and this Directors' Report, including the sections of the Annual Report
and Accounts incorporated by reference.
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 the
Group and the Company and of the profit or loss of the Group and the Company
for that period.
In preparing these financial statements the Directors are required to:
· select suitable accounting policies 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 and
prudent;
· 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 the Group and
Company financial position and financial performance;
· in respect of the consolidated financial statements, state
whether UK-adopted international accounting standards have been followed,
subject to any material departures disclosed and explained in the consolidated
financial statements;
· in respect of the Company financial statements, state whether
UK-adopted international 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 the Company
and/or the Group will continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's and Group's transactions and
disclose with reasonable accuracy at any time the financial position of the
Company and the 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 the Group and Company 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 making, and continuing to make,
the Company's Annual Report and Accounts available on the Company's website.
Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
The Directors as at the date of this Directors' Report, whose names and
functions are listed in the Board of Directors section on pages 74 to 76 of
the Annual Report & Accounts, confirm that, to the best of their
knowledge:
· the consolidated financial statements, prepared in accordance
with UK-adopted international accounting standards 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
· they consider 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 11 March 2022.
By order of the Board
Andy Briggs Rakesh Thakrar
Group Chief Group Chief
Executive Officer Financial Officer
12 March 2022
Consolidated income statement
For the year ended 31 December 2021
Notes 2021 2020
£m
£m
Gross premiums written 7,455 4,706
Less: premiums ceded to reinsurers F3 (2,079) (796)
Net premiums written 5,376 3,910
Fees and commissions C1 1,001 794
Total revenue, net of reinsurance payable 6,377 4,704
Net investment income C2 18,001 16,935
Other operating income 76 121
Gain on completion of abrdn plc transaction A6.1 110 -
Loss on disposal of Ark Life H3 (23) -
Gain on acquisition of ReAssure businesses H2.1 - 372
Gain on L&G Part VII portfolio transfer H2.2 - 85
Net income 24,541 22,217
Policyholder claims (9,656) (7,808)
Less: reinsurance recoveries 1,597 1,613
Change in insurance contract liabilities 3,076 (3,249)
Change in reinsurers' share of insurance contract liabilities (177) (568)
Transfer from/(to) unallocated surplus F2 106 (113)
Net policyholder claims and benefits incurred (5,054) (10,125)
Change in investment contract liabilities (16,812) (7,991)
Amortisation and impairment of acquired in-force business G2 (577) (469)
Amortisation of other intangibles G2 (20) (18)
Impairment of goodwill G2 (47) -
Administrative expenses C3 (2,056) (1,674)
Net income/(expense) under arrangements with reinsurers F3.3 22 (219)
Net income attributable to unitholders (185) (217)
Total operating expenses (24,729) (20,713)
(Loss)/profit before finance costs and tax (188) 1,504
Finance costs C5 (242) (234)
(Loss)/profit for the year before tax (430) 1,270
Tax charge attributable to policyholders' returns C6 (258) (326)
(Loss)/profit before the tax attributable to owners (688) 944
Tax charge C6 (279) (436)
Add: tax attributable to policyholders' returns C6 258 326
Tax charge attributable to owners C6 (21) (110)
(Loss)/profit for the year attributable to owners (709) 834
Attributable to:
Owners of the parent (837) 798
Non-controlling interests D5 128 36
(709) 834
Earnings per ordinary share
Basic (pence per share) B3 (86.4)p 91.8p
Diluted (pence per share) B3 (86.4)p 91.5p
Statement of comprehensive income
For the year ended 31 December 2021
Notes 2021 2020
£m
£m
(Loss)/profit for the year (709) 834
Other comprehensive income/(expense):
Items that are or may be reclassified to profit or loss:
Cash flow hedges:
Fair value gains arising during the year 44 129
Reclassification adjustments for amounts recognised in profit or loss (36) (79)
Exchange differences on translating foreign operations (45) 33
Foreign currency translation reserve recycled to profit or loss on disposal of H3 14 -
Ark Life
Items that will not be reclassified to profit or loss:
Remeasurements of net defined benefit asset/liability G1 281 (21)
Tax charge relating to other comprehensive income items C6 (138) (37)
Total other comprehensive income for the year 120 25
Total comprehensive (expense)/income for the year (589) 859
Attributable to:
Owners of the parent (717) 823
Non-controlling interests D5 128 36
(589) 859
Statement of consolidated financial position
As at 31 December 2021
Notes 2021 2020
£m
£m
Assets
Pension scheme asset G1 36 11
Reimbursement rights G1 212 -
Intangible assets
Goodwill 10 57
Acquired in-force business 4,323 5,013
Other intangibles 232 171
G2 4,565 5,241
Property, plant and equipment G3 130 119
Investment property G4 5,283 7,128
Financial assets
Loans and deposits 475 647
Derivatives E3 4,567 6,880
Equities 86,981 82,634
Investment in associate 431 400
Debt securities 104,761 109,455
Collective investment schemes 85,995 89,248
Reinsurers' share of investment contract liabilities 9,982 9,559
E1 293,192 298,823
Insurance assets
Reinsurers' share of insurance contract liabilities F1 8,587 9,542
Reinsurance receivables 69 141
Insurance contract receivables 70 94
8,726 9,777
Current tax G8 419 263
Prepayments and accrued income 373 343
Other receivables G5 1,805 1,622
Cash and cash equivalents G6 9,112 10,998
Assets classified as held for sale A6.1 9,946 -
Total assets 333,799 334,325
Equity and liabilities
Equity attributable to owners of the parent
Share capital D1 100 100
Share premium 6 4
Shares held by employee benefit trust D2 (12) (6)
Foreign currency translation reserve 71 102
Merger relief reserve D1 1,819 1,819
Other reserves D3 56 48
Retained earnings 3,775 4,970
Total equity attributable to owners of the parent 5,815 7,037
Tier 1 Notes D4 494 494
Non-controlling interests D5 460 341
Total equity 6,769 7,872
Liabilities
Pension scheme liabilities G1 3,103 2,036
Insurance contract liabilities
Liabilities under insurance contracts F1 128,864 133,907
Unallocated surplus F2 1,801 1,768
130,665 135,675
Financial liabilities
Investment contracts 160,417 165,106
Borrowings E5 4,225 4,567
Deposits received from reinsurers 3,569 4,080
Derivatives E3 1,248 1,001
Net asset value attributable to unitholders 3,568 3,791
Obligations for repayment of collateral received 3,442 5,205
E1 176,469 183,750
Provisions G7 235 282
Deferred tax G8 1,399 1,036
Reinsurance payables 143 134
Payables related to direct insurance contracts G9 1,864 1,669
Current tax G8 19 -
Lease liabilities G10 99 84
Accruals and deferred income G11 567 521
Other payables G12 721 1,266
Liabilities classified as held for sale A6.1 11,746 -
Total liabilities 327,030 326,453
Total equity and liabilities 333,799 334,325
Statement of consolidated changes in equity
For the year ended 31 December 2021
Share capital (note D1) Share premium (note D1) Shares held 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
by the employee benefit trust
£m
£m
£m
£m
£m
£m
£m
£m
(note D2)
£m
At 1 January 2021 100 4 (6) 102 1,819 48 4,970 7,037 494 341 7,872
(Loss)/profit for the year - - - - - - (837) (837) - 128 (709)
Other comprehensive (expense)/income for the year - - - (31) - 8 143 120 - - 120
Total comprehensive (expense)/income for the year - - - (31) - 8 (694) (717) - 128 (589)
Issue of ordinary share capital, net of associated commissions and expenses - 2 - - - - - 2 - - 2
Dividends paid on ordinary shares - - - - - - (482) (482) - - (482)
Dividends paid to non-controlling interests - - - - - - - - - (9) (9)
Credit to equity for equity-settled share-based payments - - - - - - 14 14 - - 14
Shares distributed by the employee benefit trust - - 10 - - - (10) - - - -
Shares acquired by the employee benefit trust - - (16) - - - - (16) - - (16)
Coupon paid on Tier 1 Notes, net of tax relief - - - - - - (23) (23) - - (23)
At 31 December 2021 100 6 (12) 71 1,819 56 3,775 5,815 494 460 6,769
Statement of consolidated changes in equity
For the year ended 31 December 2020
Share capital (note D1) Share premium (note D1) Shares held by employee benefit trust Foreign currency translation reserve Merger Other reserves (note D3) Retained earnings Total Tier 1 Notes (note D4) Non-controlling interests (note D5) Total equity
£m
£m
(note D2)
£m
relief
£m
£m
£m
£m
£m
£m
£m
reserve
(note D1)
£m
At 1 January 2020 72 2 (7) 69 - (2) 4,651 4,785 494 314 5,593
Profit for the year - - - - - - 798 798 - 36 834
Other comprehensive income/(expense) for the year - - - 33 - 50 (58) 25 - - 25
Total comprehensive income for the year - - - 33 - 50 740 823 - 36 859
Issue of ordinary share capital, net of associated commissions and expenses 28 2 - - 1,819 - - 1,849 - - 1,849
Dividends paid on ordinary shares - - - - - - (403) (403) - - (403)
Dividends paid to non-controlling interests - - - - - - - - - (9) (9)
Credit to equity for equity-settled share-based payments - - - - - - 13 13 - - 13
Shares distributed by employee benefit trust - - 8 - - - (8) - - - -
Shares acquired by employee benefit trust - - (7) - - - - (7) - - (7)
Coupon paid on Tier 1 Notes, net of tax relief - - - - - - (23) (23) - - (23)
At 31 December 2020 100 4 (6) 102 1,819 48 4,970 7,037 494 341 7,872
Statement of consolidated cash flows
For the year ended 31 December 2021
Notes 2021 2020
£m
£m
Cash flows from operating activities
Cash (utilised)/generated by operations I2 (871) 7,316
Taxation paid (149) (562)
Net cash flows from operating activities (1,020) 6,754
Cash flows from investing activities
Proceeds from completion of abrdn plc transaction A6 115 -
Disposal of Ark Life, net of cash disposed H3 189 -
Acquisition of ReAssure businesses, net of cash acquired H2.1 - (979)
Net cash flows from investing activities 304 (979)
Cash flows from financing activities
Proceeds from issuing ordinary shares, net of associated commission and 2 2
expenses
Ordinary share dividends paid B4 (482) (403)
Dividends paid to non-controlling interests D5 (9) (9)
Repayment of policyholder borrowings E5.2 (18) (55)
Repayment of shareholder borrowings E5.2 (322) -
Repayment of lease liabilities G10 (16) (18)
Proceeds from new shareholder borrowings, net of associated expenses E5.2 - 1,445
Proceeds from new policyholder borrowings, net of associated expenses E5.2 17 -
Coupon paid on Tier 1 Notes (29) (29)
Interest paid on policyholder borrowings - (5)
Interest paid on shareholder borrowings (237) (171)
Net cash flows from financing activities (1,094) 757
Net (decrease)/increase in cash and cash equivalents (1,810) 6,532
Cash and cash equivalents at the beginning of the year 10,998 4,466
Less: cash and cash equivalents of operations classified as held for sale A6.1 (76) -
Cash and cash equivalents at the end of the year 9,112 10,998
Notes to the consolidated financial statements
A. Significant accounting policies
A1. Basis of preparation
The consolidated financial statements for the year ended 31 December 2021 set
out on pages 155 to 293 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 12
March 2022.
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.
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. In assessing whether the Group is a going concern the Directors have
taken into account the guidance issued by the Financial Reporting Council
('FRC'), Guidance for Directors of UK Companies Going Concern and Liquidity,
in October 2009. The considerations and approach are consistent with FRC
provisions issued in September 2014 and the assessment has taken into account
the requirements of the pronouncement from the Financial Reporting Lab,
'Covid-19 - Going concern, risk and viability'. Further details of the going
concern assessment for the period to 31 March 2023 are included in the
Directors' Report on page 139.
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.
A2. Accounting policies
The principal accounting policies have been consistently applied in these
consolidated financial statements. Where an accounting policy can be directly
attributed to a specific note to the consolidated financial statements, the
policy is presented within that note, with a view to enabling greater
understanding of the results and financial position of the Group. All other
significant accounting policies are disclosed below.
A2.1 Foreign currency transactions
Items included in the financial statements of each of the Group's entities are
measured using the currency of the primary economic environment in which the
entity operates (the 'functional currency'). The consolidated financial
statements are presented in sterling, which is the Group's presentation
currency.
The results and financial position of all Group companies that have a
functional currency different from the presentation currency are translated
into the presentation currency as follows:
• assets and liabilities are translated at the closing rate at the period
end;
• income, expenses and cash flows denominated in foreign currencies are
translated at average exchange rates; and
• all resulting exchange differences are recognised through the statement
of consolidated comprehensive income and taken to the foreign currency
translation reserve within equity.
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 debt securities and other monetary financial assets
measured at fair value through profit or loss are included in foreign exchange
gains and losses. Translation differences on non-monetary items at fair value
through profit or loss are reported as part of the fair value gain or loss.
A3. Critical accounting estimates and judgements
The preparation of financial statements requires management to make
judgements, estimates and assumptions that affect the application of policies
and reported amounts of assets and liabilities, income and expenses.
Disclosures of judgements made by management in applying the Group's
accounting policies include those that have the most significant effect on the
amounts that are recognised in the consolidated financial statements.
Disclosures of estimates and associated assumptions include those that have a
significant risk of resulting in a material change to the carrying value of
assets and liabilities within the next year. The estimates and associated
assumptions are based on historical experience and various other factors that
are believed to be reasonable under the circumstances, the results of which
form the basis of the judgements 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, determination of the fair value of financial
assets and liabilities, valuation of pension scheme assets and liabilities and
valuation of intangibles on initial recognition.
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,
recognition of pension surplus, the determination of operating profit,
identification of intangible assets arising on acquisitions, the recognition
of an investment as an associate and determination of control with regards to
underlying entities. Details of all critical accounting estimates and
judgements are included below.
A3.1 Insurance and investment contract liabilities
Insurance and investment contract liability accounting is discussed in more
detail in the accounting policies in note F1 with further detail of the key
assumptions made in determining insurance and investment contract liabilities
included in note F4. Economic assumptions are set taking into account market
conditions as at the valuation date. Non-economic assumptions, such as future
expenses, longevity and mortality are set based on past experience, market
practice, regulations and expectations about future trends.
The valuation of insurance contract liabilities is sensitive to the
assumptions which have been applied in their calculation. Details of
sensitivities arising from significant non-economic assumptions are detailed
on page 228 in note F4.
Classification of contracts as insurance is based upon an assessment of the
significance of insurance risk transferred to the Group. Insurance contracts
are defined by IFRS 4 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.
A3.2 Fair value of financial assets and liabilities
Financial assets and liabilities are measured at fair value and accounted for
as set out in the accounting policies in note E1. 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
E2.3.
A3.3 Pension scheme obligations
The valuation of pension scheme obligations is determined using actuarial
valuations that depend upon a number of assumptions, including discount rate,
inflation and longevity. External actuarial advice is taken with regard to
setting the financial assumptions to be used in the valuation. As defined
benefit pension schemes are long-term in nature, such assumptions can be
subject to significant uncertainty.
Further details of these estimates and the sensitivity of the defined benefit
obligation to key assumptions are provided in note G1.
A3.4 Recognition of pension scheme surplus
A pension scheme surplus can only be recognised to the extent that the
sponsoring employer can utilise the asset through a refund of surplus or a
reduction in contributions. A refund is available to the Group where it has an
unconditional right to a refund on a gradual settlement of liabilities over
time until all members have left the scheme. A review of the Trust Deeds of
the Group's pension schemes that recognise a surplus has highlighted that the
Scheme Trustees are not considered to have the unilateral power to trigger a
wind-up of the Scheme and the Trustees' consent is not needed for the
sponsoring company to trigger a wind-up. Where the last beneficiary died or
left the Scheme, the sponsoring company could close the Scheme and force the
Trustees to trigger a wind-up by withholding its consent to continue the
Scheme on a closed basis. This view is supported by external legal opinion and
is considered to support the recognition of a surplus. Management has
determined that the scheme administrator would be subject to a 35% tax charge
on a refund and therefore any surplus is reduced by this amount. Further
details of the Group's pension schemes are provided in note G1.
A3.5 Operating profit
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 operating
profit based on risk-free yields at the start of the financial year, as
detailed in note B2, and as to what constitutes an operating or non-operating
item in accordance with the accounting policy detailed in note B1.
A3.6 Acquisition of the ReAssure businesses
The identification and valuation of identifiable intangible assets, such as
acquired in-force business, arising from the Group's acquisition of the
ReAssure businesses during the prior year, required the Group to make a number
of judgements and estimates. Further details are included in notes G2
'Intangible assets' and H2 'Acquisitions and portfolio transfers'.
A3.7 Control and consolidation
The Group has invested in a number of collective investment schemes and other
types of investment where judgement is applied in determining whether the
Group controls the activities of these entities. These entities are typically
structured in such a way that owning the majority of the voting rights is not
the conclusive factor in the determination of control in line with the
requirements of IFRS 10 Consolidated Financial Statements. The control
assessment therefore involves a number of further considerations such as
whether the Group has a unilateral power of veto in general meetings and
whether the existence of other agreements restrict the Group from being able
to influence the activities. Further details of these judgements are given in
note H1.
A3.8 Impact of climate risk on 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 fair value is assumed to include
current information and knowledge 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 51 of the Annual Report
and Accounts.
Insurance and investment contract liabilities 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 2021, 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 F4.
The assessment of impairment for goodwill and intangibles is based on value in
use calculations. Value in use represents the value of future cash flows and
uses the Group's five year annual operating plan and the expectation of
long-term economic growth beyond this period. The five 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.
A4. Adoption of new accounting pronouncements in 2021
In preparing the consolidated financial statements, the Group has adopted the
following standards, interpretations and amendments effective from 1 January
2021:
• Amendment to IFRS 16 Leases COVID-19-Related Rent Concessions beyond 30
June 2021 (1 June 2020): The amendment permits lessees, as a practical
expedient, not to assess whether particular rent concessions occurring as a
direct consequence of the COVID-19 pandemic are lease modifications and
instead to account for those rent concessions as if they are not lease
modifications. The Group does not expect to make use of this practical
expedient.
• Interest Rate Benchmark Reform - Phase 2 (Amendments to IFRS 9, IAS 39,
IFRS 7, IFRS 4 and IFRS 16) (1 January 2021): The changes introduced in Phase
2 of the Interest Rate Benchmark Reform project relate to the modification of
financial assets, financial liabilities and lease liabilities (introducing a
practical expedient for modifications required by the IBOR reform), specific
hedge accounting requirements to ensure hedge accounting is not discontinued
solely because of the IBOR reform, and disclosure requirements applying IFRS 7
to accompany the amendments regarding modifications and hedge accounting. The
IASB also amended IFRS 4 to require insurers that apply the temporary
exemption from IFRS 9 to apply the amendments in accounting for modifications
directly required by IBOR reform.
Additional disclosures have been included in note E6.1 to provide details of
the derivative and non-derivative financial instruments affected by the
interest rate benchmark reform together with a summary of the actions taken by
the Group to manage the risks relating to the reform.
• Amendments to IFRS 4 Insurance Contracts - Extension of the Temporary
Extension for applying IFRS 9 Financial Instruments (1 January 2021):
Following the issue of IFRS 17 Insurance Contracts (Revised) in June 2020, the
end date for applying the two options under the IFRS 4 amendments (including
the temporary exemption from IFRS 9) was extended to 1 January 2023, aligning
the date with the revised effective date of IFRS 17. The Group has taken
advantage of this extension to align the implementation of IFRS 9 and IFRS 17.
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.
• IFRS 9 Financial Instruments (1 January 2023): Under IFRS 9, all
financial assets will be measured either at amortised cost or fair value and
the basis of classification will depend on the business model and the
contractual cash flow characteristics of the financial assets. In relation to
the impairment of financial assets, IFRS 9 requires the use of an expected
credit loss model, as opposed to the incurred credit loss model required under
IAS 39 Financial Instruments: Recognition and Measurement. The expected credit
loss model will require the Group to account for expected credit losses and
changes in those expected credit losses at each reporting date to reflect
changes in credit risk since initial recognition.
The Group has taken advantage of the temporary exemption granted to insurers
in IFRS 4 Insurance Contracts from applying IFRS 9 until 1 January 2023 as a
result of meeting the exemption criteria as at 31 December 2015. As at this
date the Group's activities were considered to be predominantly connected with
insurance as the percentage of the total carrying amount of its liabilities
connected with insurance relative to the total carrying amount of all its
liabilities was greater than 90%. Following the acquisition of the ReAssure
businesses on 22 July 2020, this assessment was re-performed and the Group's
activities were still considered to be predominantly connected with insurance.
IFRS 9 will be implemented at the same time as the new insurance contracts
standard (IFRS 17 Insurance Contracts) effective from 1 January 2023. During
the year, the Group continued its implementation activities in respect of IFRS
9 and expects to continue to value the majority of its financial assets at
fair value through profit or loss on initial recognition, either as a result
of these financial assets being managed on a fair value basis or as a result
of using the fair value option to irrevocably designate the assets at fair
value through profit or loss. A number of additional disclosures will be
required by IFRS 7 Financial Instruments: Disclosures as a result of
implementing IFRS 9.
Additional disclosures have been made in note E1.2 to the consolidated
financial statements to provide information to allow comparison with entities
who have already adopted IFRS 9.
• IFRS 3 Business Combinations (1 January 2022): The amendments update a
reference in IFRS 3 to the Conceptual Framework for Financial Reporting
without changing the accounting requirements for business combinations. There
are no impacts from this amendment.
• IAS 16 Property, Plant and Equipment (1 January 2022): The amendments
prohibit the Group from deducting from the cost of property, plant and
equipment amounts received from selling items produced while the Group is
preparing the asset for its intended use. Instead, such sales proceeds and
related costs should be recognised in profit or loss. These amendments do not
currently have any impact on the Group.
• IAS 37 Provisions, Contingent Liabilities and Contingent Assets (1
January 2022): The amendments specify which costs a company includes when
assessing whether a contract will be loss making. These amendments are not
expected to have any impact on the Group.
• Annual Improvements Cycle 2018 - 2020 (1 January 2022): Minor amendments
to IFRS 1 First-time Adoption of International Financial Reporting Standards,
IFRS 9 Financial Instruments, IAS 41 Agriculture and the Illustrative Examples
accompanying IFRS 16 Leases. These amendments do not currently have any impact
on the Group.
• IFRS 17 Insurance Contracts (1 January 2023): Once effective IFRS 17
will replace IFRS 4 the current insurance contracts standard and it is
expected to significantly change the way the Group measures and reports its
insurance contracts. The overall objective of the new standard is to provide
an accounting model for insurance contracts that is more useful and consistent
for users.
IFRS 17 applies to insurance contracts (including reinsurance contracts) an
entity issues, reinsurance contracts an entity holds and investment contracts
with discretionary participation features an entity issues provided it also
issues insurance contracts. The scope of IFRS 17 for the Group is materially
consistent with that of IFRS 4. Investment contracts will be measured under
IFRS 9.
IFRS 17 requires that contracts are divided into groups for the purposes of
recognition and measurement. Portfolios of contracts are identified by
grouping together contracts which have similar risks and are managed together.
These groups are then further divided into groups based on their expected
profitability. Contracts which are onerous at inception cannot be grouped with
contracts which are profitable at inception. Contracts which are issued more
than one year apart are not permitted to be included within the same group,
although there is some relief from this requirement for business in-force at
the date of transition under the transitional arrangements.
The standard introduces three measurement approaches, of which two, the
general model and the variable free approach, are applicable to the Group's
business. The main features of these models are the measurement of an
insurance contract as the present value of expected future cash flows
including acquisition costs, plus an explicit risk adjustment, remeasured at
each reporting period using current assumptions, and a contractual service
margin ('CSM').
The risk adjustment represents the compensation the Group requires for bearing
the uncertainty about the amount and timing of cash flows that arise from
non-financial risk as the obligations under the insurance contract are
fulfilled.
The CSM represents the unearned profit of a group of insurance contracts and
is recognised in profit or loss as the insurance service is provided to the
customer using coverage units. Coverage units are a measurement of the quantum
of service provided across the life of the contract and are used to measure
the service provided in the reporting period and release a corresponding
amount of profit to the income statement. If a group of contracts becomes
loss-making after inception the loss is recognised immediately in the income
statement. This treatment of profits and losses in respect of services is
broadly consistent with the principles of IFRS 15 and IAS 37 applicable to
other industries.
Under the general model the CSM is adjusted for non-economic assumption
changes relating to future periods. For certain contracts with participating
features the variable fee approach is applied, this allows changes in economic
assumptions and experience to adjust the CSM as well as non-economic
assumptions, reflecting the variable nature of the entity's earnings driven by
investment returns.
IFRS 17 requires the standard to be applied retrospectively. Where this is
assessed as impracticable the standard allows the application of a simplified
retrospective approach or a fair value approach to determine the contractual
service margin.
The measurement principles set out in IFRS 17 will significantly change the
way in which the Group measures its insurance contracts and investment
contracts with discretionary participation features ('DPF'), and associated
reinsurance contracts. These changes will impact the pattern in which profit
emerges when compared to IFRS 4 and add complexity to valuation processes,
data requirements and assumption setting.
The introduction of IFRS 17 will simplify the presentation of the statement of
financial position. It requires the presentation of groups of insurance (or
reinsurance) contracts that are in an asset position separately from those in
a liability position. The presentation of the income statement will change
more significantly with IFRS 17 setting out how components of the
profitability of contracts are disaggregated into an insurance service result
and insurance finance income/expenses. IFRS 17 also requires extensive
disclosures on the amounts recognised from insurance contracts and the
nature and extent of risks arising from them.
The Group's implementation project continued through 2021 with a focus on
finalising methodologies and developing the operational capabilities required
to implement the standard including data, systems and business processes. The
focus for 2022 is on embedding the operational capabilities and determining
the transition balance sheet and comparatives required for 2023 reporting.
• Classification of Liabilities as Current and Non-current (Amendments to
IAS 1 Presentation of Financial Statements) (1 January 2023): The 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.
• Disclosure of Accounting Policies (Amendments to IAS 1 Presentation of
Financial Statements and IFRS Practice Statement 2 Making Materiality
Judgements) (1 January 2023): 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. The amendments to IFRS Practice Statement 2 do not contain an
effective date or transition requirements. These amendments are not expected
to have any impact on the Group.
• Definition of Accounting Estimates (Amendments to IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors) (1 January 2023): 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.
These amendments are not expected to have any impact on the Group.
• Deferred Tax related to Assets and Liabilities arising from a Single
Transaction (Amendments to IAS 12 Income Taxes) (1 January 2023): 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.
There will potentially be some additional disclosures required in relation to
the Group's leasing arrangements as a result of implementing these amendments.
• 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.
On 31 January 2020, the UK left the EU and effective from 1 January 2021, the
European Commission will no longer endorse international accounting standards
for use in the UK. UK legislation provides that all IFRSs that had been
endorsed by the EU on or before 31 December 2020 became UK-adopted
international accounting standards. From 1 January 2021, any new IFRSs or
amended IFRSs will require independent endorsement in the UK to be part of the
suite of UK-adopted international accounting standards that can be applied by
UK companies. On 21 May 2021 the powers to endorse and adopt IFRSs for the UK
were delegated by the Secretary of State to the UK Endorsement Board.
The following amendments to standards listed above have been endorsed for use
in the UK by the Secretary of State:
• Interest Rate Benchmark Reform - Phase 2 (Amendments to IFRS 9, IAS 39,
IFRS 7, IFRS 4 and IFRS 16);
• Amendment to IFRS 16 Leases COVID-19-Related Rent Concessions; and
• Amendments to IFRS 4 Insurance Contracts - Extension of the Temporary
Extension for applying IFRS 9 Financial Instruments.
The amendments to IFRS 9 Financial Instruments formed part of the EU-adopted
IFRSs which were adopted by the UK on 1 January 2021 and have previously been
endorsed by the EU.
A6. Significant transactions during the year
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.
A6.1 New agreement with abrdn plc (formerly Standard Life Aberdeen 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's growth strategy.
Under the terms of the transaction, the Group will 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 and effective from 1 January 2021 has transferred the economic benefit of
this business to abrdn plc. The Group has also acquired ownership of the
Standard Life brand and as part of this acquisition, the relevant marketing,
distribution and data team members transferred to the Group. As a result, the
Client Service and Proposition Agreement ('CSPA'), entered into between the
two groups following the acquisition of the Standard Life businesses in 2018,
has been dissolved. In addition, Phoenix and abrdn plc resolved all legacy
issues in relation to the Transitional Service Agreement ('TSA') entered into
at the time of the acquisition of the Standard Life businesses and the CSPA.
The Group received cash consideration for the overall transaction of £115
million, £62 million of which has been deferred as detailed below. On
completion of the agreement the Group recognised a net gain on the transaction
of £89 million which has been recognised in the consolidated income statement
as follows:
2021
£m
Sale of Wrap SIPP, Onshore and TIP business (51)
Transfer of marketing services and termination of CSPA1 14
Value attributed to acquisition of the brand (note G2.5) 111
Resolution of legacy issues and project costs 36
Gain on completion of abrdn plc transaction 110
Attributable tax charge (21)
89
1 Includes the impact of derecognising the CSPA related intangible
asset. Further details are included in note G2.5.
The sale of the Wrap SIPP, Onshore Bond and TIP business currently within
Standard Life Assurance Limited, will be effected through a Part VII transfer
targeted for completion in late 2023. 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 has been 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.
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 are not expected
to exceed the carrying value of the related net assets and accordingly the
disposal group has been measured at fair value less costs to sell. At the date
of the transaction an impairment loss of £59 million was recognised upon
classification of the business as held for sale in respect of the acquired
in-force business ('AVIF'). The major classes of assets and liabilities
classified as held for sale are as follows:
2021
£m
Acquired in-force business 54
Investment property 3,309
Financial assets 6,507
Cash and cash equivalents 76
Assets classified as held for sale 9,946
Assets in consolidated funds1 1,788
Total assets of the disposal group 11,734
Investment contract liabilities (11,676)
Other financial liabilities (4)
Provisions (2)
Deferred tax liabilities (10)
Accruals and deferred income (54)
Liabilities classified as held for sale (11,746)
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 2021 and therefore consolidates 100% of the assets with
any non-controlling interest recognised as net asset value attributable to
unitholders.
A6.2 Disposal of Ark Life
On 1 November 2021, the Group completed the sale of Ark Life Assurance Company
DAC ('Ark Life') to Irish Life Group Limited for gross cash consideration of
€230 million (£198 million). Further details of the transaction are
provided in note H3.
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.
As at 31 December 2020, following the acquisition of the ReAssure businesses,
a separate operating segment was reported which included all of the ReAssure
businesses. During the year, the Group has again reassessed its operating
segments to reflect that the management and reporting of the ReAssure
businesses have been aligned with that of the other Group businesses.
Consequently, the results previously reported within the ReAssure segment are
all now reported within the UK Heritage and UK Open segments and within
Unallocated Group. The Group now has four reportable segments comprising UK
Heritage, UK Open, Europe and Management Services, as set out in note B1.1.
For management purposes, the Group is organised into business units based on
their products and services. For reporting purposes, business units are
aggregated where they share similar economic characteristics including the
nature of products and services, types of customers and the nature of the
regulatory environment. No such aggregation has been required in the current
year.
The UK Heritage segment contains UK businesses which no longer actively sell
products to policyholders and which therefore run-off gradually over time.
These businesses will accept incremental premiums on in-force policies.
The UK Open segment includes new and in-force life insurance and investment
policies in respect of products that the Group continues to actively market to
new and existing policyholders. This includes products such as workplace
pensions and Self-Invested Personal Pensions ('SIPPs') distributed through the
Group's Strategic Partnership with abrdn plc, products sold under the SunLife
brand, and annuities, including Bulk Purchase Annuity contracts.
The Europe 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 Management Services segment comprises income from the life and holding
companies in accordance with the respective management service agreements less
fees related to the outsourcing of services and other operating costs.
Unallocated Group includes consolidation adjustments and Group financing
(including finance costs) which are managed on a Group basis and are not
allocated to individual operating segments.
Inter-segment transactions are set on an arm's length basis in a manner
similar to transactions with third parties. Segmental results include those
transfers between business segments which are then eliminated on
consolidation.
The business of Ark Life, which was disposed of during the year (see note H3),
was allocated to the Heritage operating segment.
The Wrap SIPP, Onshore Bond and TIP businesses that have been classified as a
disposal group held for sale as at 31 December 2021 (see note A6.1) are
allocated to the Open operating segment.
Segmental measure of performance: Operating Profit
The Group uses a non-GAAP measure of performance, being operating profit, to
evaluate segment performance. Operating profit is considered to provide a
comparable measure of the underlying performance of the business as it
excludes the impact of short-term economic volatility and other one-off items.
This measure incorporates an expected return, including a longer-term return
on financial investments backing shareholder and policyholder funds over the
period, with consistent allowance for the corresponding expected movement in
liabilities. Annuity new business profits are included in operating profit
using valuation assumptions consistent with the pricing of the business
(including the Group's expected longer-term asset allocation backing the
business).
Operating profit includes the effect of variances in experience for
non-economic items, such as mortality and expenses, and the effect of changes
in non-economic assumptions. It also incorporates the impacts of significant
management actions where such actions are consistent with the Group's core
operating activities (for example, actuarial modelling enhancements and data
reviews). Operating profit is reported net of policyholder finance charges and
policyholder tax.
Operating profit excludes the impact of the following items:
• the difference between the actual and expected experience for economic
items and the impacts of changes in economic assumptions on the valuation of
liabilities (see notes B2.1 and B2.2);
• amortisation and impairments of intangible assets (net of policyholder
tax);
• finance costs attributable to owners;
• gains or losses on the acquisition or disposal of subsidiaries (net of
related costs);
• the financial impacts of mandatory regulatory change;
• the profit or loss attributable to non-controlling interests;
• integration, restructuring or other significant one-off projects; and
• any other items which, in the Directors' view, should be disclosed
separately by virtue of their nature or incidence to enable a full
understanding of the 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.
Whilst the excluded items are important to an assessment of the consolidated
financial performance of the Group, management considers that the presentation
of the operating profit metric provides useful information for assessing the
performance of the Group's operating segments on an ongoing basis. The IFRS
results are significantly impacted by the amortisation of intangible balances
arising on acquisition, the one-off costs of integration activities and the
costs of servicing debt used to finance acquisition activity, which are not
indicative of the underlying operational performance of the Group's segments.
Furthermore, the hedging strategy of the Group is calibrated to protect the
Solvency II capital position and cash generation capability of the operating
companies, as opposed to the IFRS financial position. This can create
additional volatility in the IFRS result which is excluded from the operating
profit metric.
The Group therefore considers that operating profit provides a good indicator
of the ability of the Group's operating companies to generate cash available
for the servicing of the Group's debts and for distribution to shareholders.
Accordingly, the measure is more closely aligned with the business model of
the Group and how performance is managed by those charged with governance.
Restatement of prior period information
As noted above, during the year the Group reassessed its operating segments to
reflect the way the ReAssure businesses are now managed and reported.
Consequently, the results previously reported within the ReAssure segment are
now reported within the UK Heritage and UK Open segments and within
Unallocated Group. UK Heritage and UK Open operating profit for the year ended
30 December 2020 has been increased by £153 million to £431 million and
£301 million to £773 million respectively and Unallocated Group has
decreased by £10 million to an operating loss of £55 million. UK Heritage
segmental revenue has been increased by £251 million to £939 million and UK
Open segmental revenue has been decreased by £69 million to £2,529 million.
B1.1 Segmental result
Notes 2021 2020 restated1
£m
£m
Operating profit
UK Heritage 537 431
UK Open 701 773
Europe 87 44
Management Services (24) 6
Unallocated Group (71) (55)
Total segmental operating profit 1,230 1,199
Investment return variances and economic assumption changes B2.2 (1,125) 101
on long-term business and owners' funds
Amortisation and impairment of acquired in-force business (572) (464)
Amortisation and impairment of other intangibles and goodwill G2 (67) (18)
Other non-operating items (65) 281
Finance costs on borrowing attributable to owners (217) (191)
(Loss)/profit before the tax attributable to owners of the parent (816) 908
Profit before tax attributable to non-controlling interests 128 36
(Loss)/profit before the tax attributable to owners (688) 944
1 See note B1 for details of the restatement
Other non-operating items in respect of 2021 include:
• a net £110 million gain arising on the transaction with abrdn plc,
which included the sale of the Group's UK investment and platform related
products and the acquisition by the Group of the Standard Life brand (see note
A6.1 for further details);
• a loss on disposal of £23 million arising on the sale of Ark Life
Assurance Company DAC ('Ark Life') (see note H3 For further details);
• £35 million related to the increase in provision for costs associated
with the delivery of the Group Target Operating Model for IT and Operations;
• £45 million of costs associated with the ongoing ReAssure integration
programme; costs of £27 million associated with the integration of the Old
Mutual Wealth business acquired by ReAssure Group plc in December 2019 and
costs of £12 million associated with the integration of the acquired L&G
mature savings business;
• an £83 million policyholder tax benefit recognised following the
favourable conclusion of discussions with HMRC in respect of certain excess
management expenses associated with the L&G mature savings business;
• £58 million of costs associated with the implementation of IFRS 17,
which will be effective from 1 January 2023;
• £44 million of other corporate project costs; and
• net other one-off items totalling a cost of £14 million.
Other non-operating items in respect of 2020 include:
• a gain on acquisition of £372 million reflecting the excess of the fair
value of the net assets acquired over the consideration paid for the
acquisition of ReAssure Group plc (see note H2.1 for further details);
• a gain of £85 million arising on completion of the Part VII transfer of
the mature savings liabilities and associated assets from the L&G Group
(see note H2.2 for further details);
• a net £43 million of additional costs associated with the delivery of
the Group Target Operating Model for IT and Operations, comprising a £74
million increase in expenses recognised within liabilities under insurance
contracts and partly offset by a £31 million release within the Transition
and Transformation restructuring provision;
• costs of £37 million associated with the acquisition of ReAssure Group
plc, and £19 million incurred under the subsequent integration programme;
• costs of £20 million associated with the ongoing integration of the Old
Mutual Wealth business acquired by ReAssure Group plc in December 2019,
incurred since the Group's acquisition of ReAssure Group plc in July 2020;
• costs of £16 million associated with the transfer and integration of
the L&G mature savings business;
• £34 million of other corporate project costs; and
• net other one-off items totalling a cost of £7 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
2021 UK Heritage £m UK Open Europe Management Services Unallocated Group Total
£m
£m
£m
£m
£m
Revenue from external customers:
Gross premiums written 880 5,034 1,541 - - 7,455
Less: premiums ceded to reinsurers (284) (1,739) (56) - - (2,079)
Net premiums written 596 3,295 1,485 - - 5,376
Fees and commissions 634 297 70 - - 1,001
Income from other segments - - - 1,146 (1,146) -
Total segmental revenue 1,230 3,592 1,555 1,146 (1,146) 6,377
2020 restated1 UK Heritage £m UK Open Europe Management Services Unallocated Group Total
£m
£m
£m
£m
£m
Revenue from external customers:
Gross premiums written 765 2,726 1,215 - - 4,706
Less: premiums ceded to reinsurers (267) (500) (29) - - (796)
Net premiums written 498 2,226 1,186 - - 3,910
Fees and commissions 441 303 50 - - 794
Income from other segments - - - 737 (737) -
Total segmental revenue 939 2,529 1,236 737 (737) 4,704
1 See note B1 for details of the restatement
Of the revenue from external customers presented in the table above, £5,448
million (2020: £3,818 million) is attributable to customers in the United
Kingdom ('UK') and £929 million (2020: £886 million) to the rest of the
world. The Europe operating segment comprises business written in Ireland and
Germany to customers in both Europe and the UK. No revenue transaction with a
single customer external to the Group amounts to greater than 10% of the
Group's revenue.
The Group has total non-current assets (other than financial assets, deferred
tax assets, pension schemes and rights arising under insurance contracts) of
£5,245 million (2020: £7,042 million) located in the UK and £410 million
(2020: £433 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
operating profit measure that incorporates an expected return on investments
supporting its long-term business. The accounting policy adopted in the
calculation of operating profit is detailed in note B1. The methodology for
the determination of the expected investment return is explained below
together with an analysis of investment return variances and economic
assumption changes recognised outside of operating profit.
B2.1 Calculation of the long-term investment return
The expected return on investments for both owner and policyholder funds is
based on opening economic assumptions applied to the funds under management at
the beginning of the reporting period. Expected investment return assumptions
are derived actively, based on market yields on risk-free fixed interest
assets at the start of each financial year.
The long-term risk-free rate used as a basis for deriving the long-term
investment return is set by reference to the swap curve at the 15-year
duration plus 10bps at the start of the year. A risk premium of 349bps is
added to the risk-free yield for equities (2020: 349bps), 249bps for
properties (2020: 249bps), 55bps for corporate bonds (2020: 55bps) and 15bps
for gilts (2020: 15bps). The reduction in the risk-free rate reflected the
lower expected return for these assets at the beginning of the period due to
the lower fixed interest yields experienced in 2020.
The principal assumptions underlying the calculation of the long-term
investment return are:
2021 2020
%
%
Equities 4.1 4.7
Properties 3.1 3.7
Gilts 0.8 1.4
Corporate bonds 1.2 1.8
B2.2 Investment return variances and economic assumption changes recognised
outside of operating profit
Operating profit for life assurance business is based on expected investment
returns on financial investments backing owners' and policyholder funds over
the reporting period, with consistent allowance for the corresponding expected
movements in liabilities. Operating profit includes the effect of variance in
experience for non-economic items, for example mortality, persistency and
expenses, and the effect of changes in non-economic assumptions. Changes due
to economic items, for example market value movements and interest rate
changes, which give rise to variances between actual and expected investment
returns, and the impact of changes in economic assumptions on liabilities, are
disclosed separately outside operating profit.
The movement in liabilities included in operating profit reflects both the
change in liabilities due to the expected return on investments and the impact
of experience variances and assumption changes for non-economic items.
The effect of differences between actual and expected economic experience on
liabilities, and changes to economic assumptions used to value liabilities,
are taken outside operating profit. For many types of long-term business,
including unit-linked and with-profit funds, movements in asset values are
offset by corresponding changes in liabilities, limiting the net impact on
profit. For other long-term business, the profit impact of economic volatility
depends on the degree of matching of assets and liabilities, and exposure to
financial options and guarantees. For non-long-term business including owners'
funds, the total investment income, including fair value gains, is analysed
between a calculated longer-term return and short-term fluctuations.
The investment return variances and economic assumption changes excluded from
operating profit are as follows:
2021 2020
£m
£m
Investment return variances and economic assumption changes on long-term (1,125) 101
business and owners' funds
The net adverse investment return variances and economic assumption changes on
long-term business and owners' funds of £1,125 million in 2021 (2020:
positive £101 million) primarily reflect IFRS losses arising on life company
hedging positions.
The impact of equity, interest rate and inflation movements on future profits
in relation to with-profit bonuses and unit linked charges is hedged in order
to benefit the regulatory capital position rather than the IFRS net assets.
The impact of market movements on the value of the related hedging instruments
is reflected in the IFRS results, but the corresponding change in the value of
future profits is not. Such future profits are actively valued under Solvency
II requirements but are either not recognised on an IFRS basis or are not
revalued unless there is evidence of impairment (e.g. AVIF). This leads to
volatility in the Group's IFRS results.
As a result of improving equity markets, rising yields and increasing
inflation in the year, losses have been experienced on hedging positions held
by the life companies. Continued strategic asset allocation initiatives
undertaken by the Group, including investment in higher yielding assets and
credit management actions provided a partial offset to the adverse variances
experienced.
In 2020, declines in certain equity markets and falling yields gave rise to
net gains on hedging positions, partially offset by adverse variances relating
to movements in credit spreads and credit downgrades. The prior year result
also included gains arising on derivative instruments entered into on
announcement of the ReAssure acquisition to protect the Group's exposure to
equity risk in the period prior to completion.
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 operating profit net of financing costs. 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.
2021 Operating profit Financing costs Operating earnings net of financing costs Other non-operating items Total
£m
£m
£m
£m
£m
Profit/(loss) before the tax attributable to owners 1,230 (217) 1,013 (1,701) (688)
Tax (charge)/credit attributable to owners (243) 44 (199) 178 (21)
Profit/(loss) for the year attributable to owners 987 (173) 814 (1,523) (709)
Coupon paid on Tier 1 notes, net of tax relief - (23) (23) - (23)
Deduct: Share of result attributable to non-controlling interests - - - (128) (128)
Profit/(loss) for the year attributable to ordinary equity holders of the 987 (196) 791 (1,651) (860)
parent
2020 Operating profit Financing costs Operating earnings net of financing costs Other non-operating items Total
£m
£m
£m
£m
£m
Profit/(loss) before the tax attributable to owners 1,199 (191) 1,008 (64) 944
Tax (charge)/credit attributable to owners (199) 48 (151) 41 (110)
Profit/(loss) for the year attributable to owners 1,000 (143) 857 (23) 834
Coupon paid on Tier 1 notes, net of tax relief - (23) (23) - (23)
Deduct: Share of result attributable to non-controlling interests - - - (36) (36)
Profit/(loss) for the year attributable to ordinary equity holders of the 1,000 (166) 834 (59) 775
parent
The weighted average number of ordinary shares outstanding during the period
is calculated as follows:
2021 2020 Number million
Number million
Issued ordinary shares at beginning of the year 999 722
Effect of ordinary shares issued - 123
Own shares held by the employee benefit trust (1) (1)
Weighted average number of ordinary shares 998 844
The diluted weighted average number of ordinary shares outstanding during the
period is 1,001 million (2020: 846 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 2,702,934 shares for the year
ended 31 December 2021 (2020: 2,316,109 shares). As losses have an
anti-dilutive effect, none of the share-based awards have a dilutive effect in
the calculation of basic earnings per share for the year ended 31 December
2021.
Earnings per share disclosures are as follows:
2021 2020
pence
pence
Basic earnings per share (86.4) 91.8
Diluted earnings per share (86.4) 91.5
Basic operating earnings net of financing costs per share 79.2 98.8
Diluted operating earnings net of financing costs per share 79.0 98.5
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.
2021 2020
£m
£m
Dividends declared and paid in the year 482 403
On 5 March 2021, the Board recommended a final dividend of 24.1p per share in
respect of the year ended 31 December 2020. The dividend was approved at the
Group's Annual General Meeting, which was held on 14 May 2021. The dividend
amounted to £241 million and was paid on 18 May 2021.
On 10 August 2021, the Board declared an interim dividend of 24.1p per share
for the half year ended 30 June 2021. The dividend amounted to £241 million
and was paid on 3 September 2021.
C. Other income statement notes
C1. Fees and commissions
Fees related to the provision of investment management services and
administration services are recognised as services are provided. Front end
fees, which are charged at the inception of service contracts, are deferred as
a liability and recognised over the life of the contract. 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.
2021 UK Heritage £m UK Open Europe Total
£m
£m
£m
Fee income from investment contracts without DPF 606 291 81 978
Initial fees deferred during the year - - (11) (11)
Revenue from investment contracts without DPF 606 291 70 967
Other revenue from contracts with customers 28 6 - 34
Fees and commissions 634 297 70 1,001
2020 restated1 UK Heritage UK Open Europe Total
£m
£m
£m
£m
Fee income from investment contracts without DPF 429 293 58 780
Initial fees deferred during the year - - (8) (8)
Revenue from investment contracts without DPF 429 293 50 772
Other revenue from contracts with customers 12 10 - 22
Fees and commissions 441 303 50 794
1 The comparative information for fee income from investments without
DPF has been restated. The ReAssure fee income of £145 million has been
included within the UK Heritage fee income total of £441 million. For further
details of the restatement see note B1.
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.
C2. 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.
2021 2020
£m
£m
Investment income
Interest income on loans and deposits at amortised cost 1 8
Interest income on financial assets designated at FVTPL on initial recognition 2,647 2,313
Dividend income 4,384 3,525
Rental income 365 325
Net interest expense on Group defined benefit pension scheme (liability)/asset (37) (29)
7,360 6,142
Fair value gains/(losses)
Financial assets and financial liabilities at FVTPL:
Designated upon initial recognition 12,354 8,021
Held for trading - derivatives (2,908) 2,824
Investment property 1,195 (52)
10,641 10,793
Net investment income 18,001 16,935
C3. Administrative expenses
Administrative expenses
Administrative expenses are recognised in the consolidated income statement as
incurred.
Deferred acquisition costs
For insurance and investment contracts with DPF, acquisition costs which
include both incremental acquisition costs and other direct costs of acquiring
and processing new business, are deferred.
For investment contracts without DPF, incremental costs directly attributable
to securing rights to receive fees for asset management services sold with
unit-linked investment contracts are deferred.
Trail or renewal commission on investment contracts without DPF where the
Group does not have an unconditional legal right to avoid payment is deferred
at inception of the contract and an offsetting liability for contingent
commission is established.
Deferred acquisition costs are amortised over the life of the contracts as the
related revenue is recognised. After initial recognition, deferred acquisition
costs are reviewed by category of business and are written off to the extent
that they are no longer considered to be recoverable.
2021 2020
£m
£m
Employee costs 531 433
Outsourcer expenses 209 175
Movement in provision for transition and transformation programme (see note - (31)
G7)
Professional fees 321 230
Commission expenses 178 152
Office and IT costs 150 124
Investment management expenses and transaction costs 528 437
Direct costs of life companies - 4
Direct costs of collective investment schemes 28 25
Depreciation 18 28
Pension service costs - 2
Pension administrative expenses 6 5
Advertising and sponsorship 58 58
Stamp duty payable on acquisition of ReAssure businesses - 16
Other 59 45
2,086 1,703
Acquisition costs deferred during the year (38) (34)
Amortisation of deferred acquisition costs 8 5
Total administrative expenses 2,056 1,674
Employee costs comprise:
2021 2020
£m
£m
Wages and salaries 483 390
Social security contributions 48 43
531 433
2021 2020 Number
Number
Average number of persons employed 7,885 5,752
C4. Auditor's remuneration
During the year the Group obtained the following services from its auditor at
costs as detailed in the table below.
2021 2020
£m
£m
Audit of the consolidated financial statements 1.8 2.1
Audit of the Company's subsidiaries 9.8 9.6
11.6 11.7
Audit-related assurance services 2.3 2.3
Reporting accountant assurance services - 0.1
Total fee for assurance services 13.9 14.1
Other non-audit services - 0.4
Total fees for other services - 0.4
Total auditor's remuneration 13.9 14.5
No services were provided by the Company's auditors to the Group's pension
schemes in either 2021 or 2020.
Audit of the consolidated financial statements in 2020 included amounts in
respect of reporting to the auditor of abrdn plc given their status as a
significant investor. The 2020 balance also includes amounts in respect of the
audit of the acquisition balance sheet of the acquired ReAssure Group
businesses.
Audit related assurance services includes fees payable for services where the
reporting is required by law or regulation to be provided by the auditor, such
as reporting on regulatory returns. It also includes fees payable in respect
of reviews of interim financial information and services where the work is
integrated with the audit itself.
Reporting accountant services relate to assurance reporting on historical
information included within investment circulars. In 2020, this included
public reporting associated with the acquisition of ReAssure Group.
There were no other non-audit services provided during the year (2020: £0.4
million). The 2020 fees related to services provided to ReAssure Group where
the engagement occurred prior to completion of the acquisition and which were
terminated within the three-month grace period.
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 96 to 100.
C5. Finance costs
Interest payable is recognised in the consolidated income statement as it
accrues and is calculated using the effective interest method.
2021 2020
£m
£m
Interest expense
On financial liabilities at amortised cost 239 230
On leases 3 4
242 234
Attributable to:
· policyholders 2 10
· owners 240 224
242 234
C6. Tax charge
Income tax comprises current and deferred tax. Income tax is recognised in the
consolidated income statement except to the extent that it relates to items
recognised in the statement of consolidated comprehensive income or the
statement of consolidated changes in equity, in which case it is recognised in
these statements.
Current tax is the expected tax payable on the taxable income for the year,
using tax rates and laws enacted or substantively enacted at the date of the
statement of consolidated financial position together with adjustments to tax
payable in respect of previous years.
The tax charge is analysed between tax that is payable in respect of
policyholders' returns and tax that is payable on owners' returns. This
allocation is calculated based on an assessment of the effective rate of tax
that is applicable to owners for the year.
C6.1 Current year tax charge
2021 2020
£m
£m
Current tax:
UK corporation tax (9) 306
Overseas tax 114 59
105 365
Adjustment in respect of prior years (66) (4)
Total current tax charge 39 361
Deferred tax:
Origination and reversal of temporary differences 120 111
Change in the rate of UK corporation tax 147 (37)
Adjustments in respect of prior years (27) 1
Total deferred tax charge 240 75
Total tax charge 279 436
Attributable to:
· policyholders 258 326
· owners 21 110
Total tax charge 279 436
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 £258
million (2020: £326 million).
The current tax prior year adjustment relates principally to the utilisation
of excess management expenses transferred with the Legal & General
business transfer in 2020. The benefit of the excess management expenses was
not recognised in 2020 as discussions were ongoing with HMRC as to the
appropriate tax treatment of the business transfer and associated
transactions. Discussions with HMRC concluded late in 2021 and in accordance
with IAS 12 and IFRIC 23 it is now considered appropriate to recognise the
benefit of the excess management expenses. The expenses were utilised in full
in the 2020 period reducing the current tax charge in 2020 by £57 million
and increasing the utilisation of the capital losses in the company generating
a further reduction to the current tax charge of £9 million, resulting in a
prior year tax credit of £66 million in total. This comprises a policyholder
tax credit of £79 million and a shareholder tax charge of £13 million.
C6.2 Tax charged to other comprehensive Income
2021 2020
£m
£m
Current tax charge 1 12
Deferred tax charge on defined benefit schemes 137 25
138 37
C6.3 Tax credited to equity
2021 2020
£m
£m
Current tax credit on Tier 1 Notes (6) (6)
Deferred tax credit on share schemes (1) -
(7) (6)
C6.4 Reconciliation of tax charge
2021 2020
£m
£m
(Loss)/profit for the year before tax (430) 1,270
Policyholder tax charge (258) (326)
(Loss)/profit before the tax attributable to owners (688) 944
Tax (credit)/charge at standard UK rate of 19%1 (131) 179
Non-taxable income, gains and losses2 (10) (78)
Disallowable expenses3 19 9
Prior year tax credit for shareholders4 (7) (17)
Movement on acquired in-force amortisation at less than 19% 34 77
Profits taxed at rates other than 19%5 (22) (10)
Recognition of previously unrecognised deferred tax assets6 (13) (25)
Deferred tax rate change7 147 (37)
Current year losses not valued 1 9
Other 3 3
Owners' tax charge 21 110
Policyholder tax charge 258 326
Total tax charge for the year 279 436
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 The balance primarily relates to the release of provisions no longer
required following the resolution of legacy matters with abrdn plc and
non-taxable dividends.
3 Disallowable expense deductions are primarily in relation to goodwill
impaired in the year and the loss on disposal of Ark Life Assurance Company
DAC.
4 The 2021 prior year tax credit recognised in the current period
predominately relates to the recognition of a £(17) million deferred tax
credit on fair value adjustments on external loans, a £(5) million current
tax credit arising on the release of an overprovision for tax on shareholder
profits within Standard Life Assurance Limited and a £13 million charge
arising from the shareholder tax impact of the utilisation of excess
management expenses transferred in 2020 with the Legal and General business.
5 Profits taxed at rates other than 19% relates to overseas profits,
consolidated fund investments and UK life company profits subject to marginal
shareholder tax rates.
6 The 2021 tax credit predominately represents the recognition of tax
credits of £(9) million in relation to tax losses, £(2) million in relation
to intangible assets within Standard Life International DAC and £(2) million
in relation to capital losses within the ReAssure group.
7 The 2021 deferred tax rate change relates to the impact of the new 25%
corporation tax rate effective from 1 April 2023.
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.
2021 2020
£m
£m
Issued and fully paid:
999.5 million ordinary shares of £0.10 each (2020: 999.2 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:
2021 Number £
Shares in issue at 1 January 999,232,144 99,923,214
Ordinary shares issued in the year 303,914 30,391
Shares in issue at 31 December 999,536,058 99,953,605
During the year, 303,914 shares were issued at a premium £2 million in order
to satisfy obligations to employees under the Group's sharesave schemes (see
note I1).
2020 Number £
Shares in issue at 1 January 721,514,944 72,151,494
Ordinary shares issued to Swiss Re and MS&AD 277,277,138 27,727,714
Other ordinary shares issued in the year 440,062 44,006
Shares in issue at 31 December 999,232,144 99,923,214
On 22 July 2020, the Group acquired 100% of the issued share capital of
ReAssure Group plc from Swiss Re Finance Midco (Jersey) Limited, an indirect
subsidiary of Swiss Re Limited, for total consideration of £3.1 billion. The
consideration consisted of £1.3 billion of cash, funded through the issuance
of debt and own resources, and the issue of 277,277,138 shares ('the
Acquisition Shares') to Swiss Re Group on 23 July 2020.
Pursuant to an agreement between Swiss Re Group and MS&AD Insurance Group
Holdings ('MS&AD'), MS&AD transferred its entire shareholding in
ReAssure Group plc to the Swiss Re Group prior to 22 July 2020 in
consideration for the transfer of 144,877,304 of the Acquisition Shares at
completion. The equity stake in the Group held by Swiss Re Group and MS&AD
was valued at £1,847 million, based on the share price at that date.
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 relief reserve as
opposed to in share premium. A merger relief reserve is required to be used as
a result of the Group having issued equity shares as part consideration for
the shares of ReAssure Group plc and securing at least a 90% holding in that
entity.
During 2020, 440,062 shares were issued at a premium of £2 million in order
to satisfy obligations to employees under the Group's sharesave schemes (see
note I1).
D2. Shares held by the employee benefit trust
Where the Phoenix Group Employee Benefit Trust ('EBT') acquires shares in the
Company or obtains rights to purchase its shares, the consideration paid
(including any attributable transaction costs, net of tax) is shown as a
deduction from owners' equity. Gains and losses on sales of shares held by the
EBT are charged or credited to the own shares account in equity.
The EBT holds shares to satisfy awards granted to employees under the Group's
share-based payment schemes.
2021 2020
£m
£m
At 1 January 6 7
Shares acquired by the EBT 16 7
Shares awarded to employees by the EBT (10) (8)
At 31 December 12 6
During the year 1,490,492 (2020: 1,230,763) shares were awarded to employees
by the EBT and 2,423,407 (2020: 1,087,410) shares were purchased. The number
of shares held by the EBT at 31 December 2021 was 1,885,918 (2020: 953,003).
The Company provided the EBT with an interest-free 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.
2021 Owner-occupied property revaluation reserve Cash flow hedging reserve Total other reserves
£m
£m
£m
At 1 January 2021 5 43 48
Other comprehensive income for the year - 8 8
At 31 December 2021 5 51 56
2020 Owner-occupied property revaluation reserve Cash flow hedging reserve Total other reserves
£m
£m
£m
At 1 January 2020 5 (7) (2)
Other comprehensive income for the year - 50 50
At 31 December 2020 5 43 48
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. Hedge accounting has been
adopted effective from the date of designation of the hedging relationship.
In April 2020, the Group terminated the derivative instruments which had
previously been designated as hedging instruments in its cash flow hedging
relationships. Hedge accounting was discontinued from the point of termination
of the derivative instruments. The remaining cash flow hedging reserve will
continue to be reclassified to profit or loss over the remaining term of the
hedged items.
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.
2021 2020
£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 (2020: £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.
SLPET
£m
At 1 January 2021 341
Profit for the year 128
Dividends paid (9)
At 31 December 2021 460
SLPET
£m
At 1 January 2020 314
Profit for the year 36
Dividends paid (9)
At 31 December 2020 341
The non-controlling interests of £460 million (2020: £341 million) reflects
third party ownership of Standard Life Private Equity Trust ('SLPET')
determined at the proportionate value of the third party interest in the
underlying assets and liabilities. SLPET is a UK Investment Trust listed and
traded on the London Stock Exchange. As at 31 December 2021, the Group held
55.2% of the issued share capital of SLPET (2020: 55.2%).
The Group's interest in SLPET is held in the with-profit and unit-linked funds
of the Group's life companies. Therefore, the shareholder exposure to the
results of SLPET is limited to the impact of those results on the shareholder
share of distributed profits of the relevant fund.
Summary financial information showing the interest that non-controlling
interests have in the Group's activities and cash flows is shown below:
SLPET 2021 2020
£m
£m
Statement of financial position:
Financial assets 452 335
Other assets 19 9
Total assets 471 344
Total liabilities 11 3
Income statement:
Net income 134 41
Profit after tax 128 36
Comprehensive income 128 36
Cash flows:
Net increase/(decrease) in cash equivalents 10 (19)
E. Financial assets & liabilities
E1. Fair values
Financial assets
Purchases and sales of financial assets are recognised on the trade date,
which is the date that the Group commits to purchase or sell the asset.
Loans and deposits are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market and only
include assets where a security has not been issued. These loans and deposits
are initially recognised at cost, being the fair value of the consideration
paid for the acquisition of the investment. All transaction costs directly
attributable to the acquisition are also included in the cost of the
investment. Subsequent to initial recognition, these investments are carried
at amortised cost, using the effective interest method.
Derivative financial instruments are largely classified as held for trading.
They are recognised initially at fair value and subsequently are remeasured to
fair value. The gain or loss on remeasurement to fair value is recognised in
the consolidated income statement. Derivative financial instruments are not
classified as held for trading where they are designated and effective as a
hedging instrument. For such instruments, the timing of the recognition of any
gain or loss that arises on remeasurement to fair value in profit or loss
depends on the nature of the hedge relationship.
Equities, debt securities and collective investment schemes are designated at
FVTPL and accordingly are stated in the statement of consolidated financial
position at fair value. They are designated at FVTPL because this is
reflective of the manner in which the financial assets are managed and reduces
a measurement inconsistency that would otherwise arise with regard to the
insurance liabilities that the assets are backing.
Reinsurers share of investment contracts liabilities without DPF are valued,
and associated gains and losses presented, on a basis consistent with
investment contracts liabilities without DPF as detailed under the 'Financial
liabilities' section below.
Impairment of financial assets
The Group assesses at each period end whether a financial asset or group of
financial assets held at amortised cost are impaired. The Group first
assesses whether objective evidence of impairment exists. If it is determined
that no objective evidence of impairment exists for an individually assessed
financial asset, the asset is included in a group of financial assets with
similar credit risk characteristics and that group of financial assets is
collectively assessed for impairment. Assets that are individually assessed
for impairment and for which an impairment loss is, or continues to be
recognised, are not included in the collective assessment of impairment.
Fair value estimation
The fair 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 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 Company retains the right to receive cash flows from the assets, but
has assumed an obligation to pay them in full without material delay to a
third party under a 'pass-through' arrangement; or
• the Company has transferred its rights to receive cash flows from the
asset and has either transferred substantially all the risks and rewards of
the asset, or has neither transferred nor retained substantially all the risks
and rewards of the asset, but has transferred control of the asset.
Financial liabilities
On initial recognition, financial liabilities are recognised when due and
measured at the fair value of the consideration received less directly
attributable transaction costs (with the exception of liabilities at FVTPL for
which all transaction costs are expensed).
Subsequent to initial recognition, financial liabilities (except for
liabilities under investment contracts without DPF and other liabilities
designated at FVTPL) are measured at amortised cost using the effective
interest method.
Financial liabilities are designated upon initial recognition at FVTPL and
where doing so results in more meaningful information because either:
• it eliminates or significantly reduces accounting mismatches that would
otherwise arise from measuring assets or liabilities or recognising the gains
and losses on them on different bases; or
• a group of financial assets, financial liabilities or both is managed
and its performance is evaluated and managed on a fair value basis, in
accordance with a documented risk management or investment strategy, and
information about the investments is provided internally on that basis to the
Group's key management personnel.
Investment contracts without DPF
Contracts under which the transfer of insurance risk to the Group from the
policyholder is not significant are classified as investment contracts and
accounted for as financial liabilities.
Receipts and payments on investment contracts without DPF are accounted for
using deposit accounting, under which the amounts collected and paid out are
recognised in the statement of consolidated financial position as an
adjustment to the liability to the policyholder.
The valuation of liabilities on unit-linked contracts 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 the
'change in investment contract liabilities' in the consolidated income
statement.
Investment contract policyholders are charged for policy administration
services, investment management services, surrenders and other contract fees.
These fees are recognised as revenue over the period in which the related
services are performed. If the fees are for services provided in future
periods, then they are deferred and recognised over those periods. 'Front end'
fees are charged on some non-participating investment contracts. Where the
non-participating investment contract is measured at fair value, such fees
which relate to the provision of investment management services are deferred
and recognised as the services are provided.
Deposits received from reinsurers
It is the Group's practice to obtain collateral to cover certain reinsurance
transactions, usually in the form of cash or marketable securities. Where cash
collateral is available to the Group for investment purposes, it is recognised
as a 'financial asset' and the collateral repayable is recognised as 'deposits
received from reinsurers' in the statement of consolidated financial position.
The 'deposits received from reinsurers' are measured at amortised cost.
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, or 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 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.
E1.1 Fair values analysis
The table below sets out a comparison of the carrying amounts and fair values
of financial instruments as at 31 December 2021:
Carrying value
2021 Total Amounts Fair value
£m
due for settlement after 12 months
£m
£m
Financial assets
Financial assets at fair value through profit or loss:
Held for trading - derivatives 4,571 3,208 4,571
Designated upon initial recognition:
Equities1 87,059 - 87,059
Investment in associate (see note H4)1 431 - 431
Debt securities 106,990 88,965 106,990
Collective investment schemes1 90,164 - 90,164
Reinsurers' share of investment contract liabilities1 10,009 - 10,009
Financial assets measured at amortised cost:
Loans and deposits 475 48 475
Total financial assets 299,699 299,699
Less amounts classified as financial assets held for sale (see note A6.1)2 (6,507) (6,507)
Total financial assets less financial assets classified as held for sale 293,192 293,192
Carrying value
Total Amounts Fair value
£m
due for settlement after 12 months
£m
£m
Financial liabilities
Financial liabilities at fair value through profit or loss:
Held for trading - derivatives 1,252 989 1,252
Designated upon initial recognition:
Borrowings 70 70 70
Net asset value attributable to unitholders1 3,568 - 3,568
Investment contract liabilities1 172,093 - 172,093
Financial liabilities measured at amortised cost:
Borrowings 4,155 3,688 4,564
Deposits received from reinsurers 3,569 3,150 3,569
Obligations for repayment of collateral received 3,442 - 3,442
Total financial liabilities 188,149 188,558
Less amounts classified as financial liabilities held for sale3 (11,680) (11,680)
Total financial liabilities less financial liabilities held for sale 176,469 176,878
1 These assets and liabilities have no specified settlement date.
2 Amounts classified as financial assets held for sale include
derivatives of £4 million, equities of £78 million, debt securities of
£2,229 million, collective investment schemes of £4,169 million and
reinsurers' share of investment contract liabilities of £27 million.
3 Amounts classified as financial liabilities held for sale include
derivative liabilities of £4 million and investment contract liabilities of
£11,676 million.
Carrying value
2020 Total Amounts Fair value
£m
due for settlement after 12 months
£m
£m
Financial assets
Financial assets at fair value through profit or loss:
Held for trading - derivatives 6,880 6,429 6,880
Designated upon initial recognition:
Equities1 82,634 - 82,634
Investment in associate (see note H4)1 400 - 400
Debt securities 109,455 94,070 109,455
Collective investment schemes1 89,248 - 89,248
Reinsurers' share of investment contract liabilities1 9,559 - 9,559
Financial assets measured at amortised cost:
Loans and deposits 647 60 647
Total financial assets 298,823 298,823
Carrying value
Total Amounts Fair value
£m
due for settlement after 12 months
£m
£m
Financial liabilities
Financial liabilities at fair value through profit or loss:
Held for trading - derivatives 1,001 727 1,001
Designated upon initial recognition:
Borrowings 84 84 84
Net asset value attributable to unitholders1 3,791 - 3,791
Investment contract liabilities1 165,106 - 165,106
Financial liabilities measured at amortised cost:
Borrowings 4,483 4,161 5,016
Deposits received from reinsurers 4,080 3,381 4,080
Obligations for repayment of collateral received 5,205 - 5,205
Total financial liabilities 183,750 184,283
1 These assets and liabilities have no specified settlement date.
E1.2 IFRS 9 Temporary exemption disclosures
Following application of the temporary exemption granted to insurers in IFRS 4
Insurance Contracts from applying IFRS 9 Financial Instruments (see note A5)
the table below separately identifies financial assets with contractual cash
flows that are solely payments of principal and interest ('SPPI') (excluding
those held for trading or managed on a fair value basis) and all other
financial assets, measured at fair value through profit or loss.
2021 2020
£m
£m
Financial assets with contractual cash flows that are SPPI excluding those
held for trading or managed on a fair value basis:
Loans and deposits 475 647
Cash and cash equivalents1 9,112 10,998
Accrued income 282 251
Other receivables2 1,697 1,541
All other financial assets that are measured at fair value through profit or 292,717 298,176
loss3
1 Cash and cash equivalents excludes assets classified as held for sale
of £76 million (2020: £nil).
2 Other receivables excludes deferred acquisition costs.
3 The change in fair value during 2021 of all other financial assets that
are measured at fair value through profit or loss is a £5,881 million gain
(2020: £11,087 million gain). The balance excludes £6,507 million (2020:
£nil) of financial assets that are measured at fair value through profit or
loss classified as held for sale.
An analysis of credit ratings of financial assets with contractual cash flows
that are SPPI, excluding those held for trading or managed on a fair value
basis, is provided below:
2021 AAA AA A BBB BB and Non-rated1 Unit-linked £m Total Less amounts classified as held for sale (see note A6.1) Total
Carrying value
£m
£m
£m
£m
below
£m
£m
£m
£m
£m
Loans and deposits - 6 - - - 414 55 475 - 475
Cash and cash equivalents 382 1,686 5,161 181 - 3 1,775 9,188 (76) 9,112
Accrued income - - - - - 282 - 282 - 282
Other receivables - - - - - 1,697 - 1,697 - 1,697
382 1,692 5,161 181 - 2,396 1,830 11,642 (76) 11,566
2020 AAA AA A BBB BB and Non-rated1 Unit-linked £m Total
Carrying value
£m
£m
£m
£m
below
£m
£m
£m
Loans and deposits - 6 195 - - 368 78 647
Cash and cash equivalents 30 1,728 7,049 173 - 10 2,008 10,998
Accrued income - - - - - 251 - 251
Other receivables - - - - - 1,541 - 1,541
30 1,734 7,244 173 - 2,170 2,086 13,437
1 The Group has assessed its non-rated assets as having a low credit
risk.
E2.1 Determination of fair value and fair value hierarchy of financial
instruments
Level 1 financial instruments
The fair value of financial instruments traded in active markets (such as
exchange traded securities and derivatives) is based on quoted market prices
at the period end provided by recognised pricing services. Market depth and
bid-ask spreads are used to corroborate whether an active market exists for an
instrument. Greater depth and narrower bid-ask spread indicate higher
liquidity in the instrument and are classed as Level 1 inputs. For collective
investment schemes, fair value is by reference to published bid prices.
Level 2 financial instruments
Financial instruments traded in active markets with less depth or wider
bid-ask spreads which do not meet the classification as Level 1 inputs, are
classified as Level 2. The fair values of financial instruments not traded in
active markets are determined using broker quotes or valuation techniques with
observable market inputs. Financial instruments valued using broker quotes are
classified 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.
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. Fair value hierarchy
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.
2021 Level 1 Level 2 Level 3 Total fair value
£m
£m
£m
£m
Financial assets measured at fair value
Derivatives 161 4,173 237 4,571
Financial assets designated at FVTPL upon initial recognition:
Equities 85,108 52 1,899 87,059
Investment in associate 431 - - 431
Debt securities 57,992 36,546 12,452 106,990
Collective investment schemes 86,244 3,634 286 90,164
Reinsurers' share of investment contract liabilities 10,009 - - 10,009
239,784 40,232 14,637 294,653
Total financial assets measured at fair value 239,945 44,405 14,874 299,224
Less amounts classified as held for sale (see note A6.1) (5,194) (421) (892) (6,507)
Total financial assets measured at fair value, excluding amounts classified as 234,751 43,984 13,982 292,717
held for sale
Financial assets for which fair values are disclosed
Loans and deposits at amortised cost - 464 11 475
234,751 44,448 13,993 293,192
2021 Level 1 Level 2 Level 3 Total fair value
£m
£m
£m
£m
Financial liabilities measured at fair value
Derivatives 155 972 125 1,252
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings - - 70 70
Net asset value attributable to unit-holders 3,568 - - 3,568
Investment contract liabilities - 172,093 - 172,093
3,568 172,093 70 175,731
Total financial liabilities measured at fair value 3,723 173,065 195 176,983
Less amounts classified as held for sale (see note A6.1) - (11,680) - (11,680)
Total financial liabilities measured at fair value, excluding amounts 3,723 161,385 195 165,303
classified as held for sale
Financial liabilities for which fair values are disclosed
Borrowings at amortised cost - 4,564 - 4,564
Deposits received from reinsurers - 3,484 85 3,569
Obligations for repayment of collateral received - 3,442 - 3,442
Total financial liabilities for which fair values are disclosed - 11,490 85 11,575
3,723 172,875 280 176,878
2020 Level 1 Level 2 Level 3 Total fair value
£m
£m
£m
£m
Financial assets measured at fair value
Derivatives 320 6,362 198 6,880
Financial assets designated at FVTPL upon initial recognition:
Equities 81,024 47 1,563 82,634
Investment in associate 400 - - 400
Debt securities 74,043 25,248 10,164 109,455
Collective investment schemes 86,677 2,170 401 89,248
Reinsurers' share of investment contract liabilities 8,962 597 - 9,559
251,106 28,062 12,128 291,296
Total financial assets measured at fair value 251,426 34,424 12,326 298,176
Financial assets for which fair values are disclosed
Loans and deposits at amortised cost - 632 15 647
251,426 35,056 12,341 298,823
2020 Level 1 Level 2 Level 3 Total fair value
£m
£m
£m
£m
Financial liabilities measured at fair value
Derivatives 119 720 162 1,001
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings - - 84 84
Net asset value attributable to unitholders 3,791 - - 3,791
Investment contract liabilities - 165,106 - 165,106
3,791 165,106 84 168,981
Total financial liabilities measured at fair value 3,910 165,826 246 169,982
Financial liabilities for which fair values are disclosed
Borrowings at amortised cost - 4,812 204 5,016
Deposits received from reinsurers - 3,983 97 4,080
Obligations for repayment of collateral received - 5,205 - 5,205
Total financial liabilities for which fair values are disclosed - 14,000 301 14,301
3,910 179,826 547 184,283
E2.3 Level 3 financial instrument sensitivities
Level 3 investments in equities (including private equity and unlisted
property investment vehicles) and collective investment schemes (including
hedge funds) are valued using net asset statements provided by independent
third parties, and therefore no sensitivity analysis has been prepared.
E2.3.1 Debt securities
Analysis of Level 3 debt securities 2021 2020
£m
£m
Unquoted corporate bonds:
Local authority loans 917 646
Private placements 3,120 2,297
Loans guaranteed by export credit agencies 159 54
Infrastructure loans 1,491 1,564
Equity release mortgages 4,214 3,484
Commercial real estate loans 1,317 1,075
Income strips 886 692
Bridging loans to private equity funds 339 320
Corporate transactions - 29
Other 9 3
Total Level 3 debt securities 12,452 10,164
Less amounts classified as held for sale (892) -
Total Level 3 debt securities excluding amounts classified as held for sale 11,560 10,164
The Group holds unquoted corporate bonds comprising investments in local
authority loans, loans guaranteed by export credit agencies, private
placements and infrastructure loans with a total value of £5,687 million
(2020: £4,561 million). These unquoted corporate bonds are secured on various
assets and are valued using a discounted cash flow model. The discount rate is
made up of a risk-free rate and a spread. The risk-free rate is taken from an
appropriate gilt of comparable duration. The spread is taken from a basket of
comparable securities. The valuations are sensitive to movements in this
spread. An increase of 65bps would decrease the value by £468 million
(an increase of 35bps in 2020: £246 million) and a decrease of 65bps would
increase the value by £513 million (a decrease of 35bps in 2020: £190
million).
During 2020, as a result of the effects of the COVID-19 pandemic, the credit
ratings for a small number of unquoted corporate bonds were downgraded and the
impacts of this were reflected in the fair values at 31 December 2021 and 31
December 2020. There remains some ongoing uncertainty in respect of the credit
ratings for unquoted corporate bonds and commercial real estate loans.
Internal review processes are in place to closely monitor credit ratings and
additional reviews are carried out as required, for example when triggered by
credit performance or market factors. The financial impact of reasonable
movements in spreads has been quantified above.
Included within debt securities are investments in equity release mortgages
with a value of £4,214 million (2020: £3,484 million). The loans are valued
using a discounted cash flow model and a Black-Scholes model for valuation of
the No-Negative Equity Guarantee ('NNEG'). The NNEG caps the loan repayment in
the event of death or entry into long-term care to be no greater than the
sales proceeds from the property.
The future cash flows are estimated based on assumed levels of mortality
derived from published mortality tables, entry into long-term care rates and
voluntary redemption rates. Cash flows include an allowance for the expected
cost of providing a NNEG assessed under a real world approach using a closed
form model including an assumed level of property value volatility. For the
NNEG assessment, property values are indexed from the latest property
valuation point and then assumed to grow in line with 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 Equity Release Mortgage ('ERM') loans.
Considering the fair valuation uses certain inputs that are not market
observable, the fair value measurement of these loans has been categorised as
a Level 3 fair value. The key non-market observable input is the voluntary
redemption rate, for which the assumption varies by the origin, age and loan
to value ratio of each portfolio. Experience analysis is used to inform this
assumption, however where experience is limited for more recently originated
loans, significant expert judgement is required.
The significant sensitivities arise from movements in the yield curve,
inflation rate, house prices, mortality and voluntary redemption rate. An
increase of 100bps in the yield curve would decrease the value by £443
million (2020: £351 million) and a decrease of 100bps would increase the
value by £512 million (2020: £397 million). An increase of 1% in the
inflation rate would increase the value by £26 million (2020: £29 million)
and a decrease of 1% would decrease the value by £43 million (2020: £48
million).
An increase of 10% in house prices would increase the value by £13 million
(2020: £16 million) and a decrease of 10% would decrease the value by £23
million (2020: £26 million). An increase of 5% in mortality would decrease
the value by £10 million (2020: £11 million) and a decrease of 5% in
mortality would increase the value by £9 million (2020: £7 million). An
increase of 15% in the voluntary redemption rate would decrease the value by
£22 million (2020: £24 million) and a decrease of 15% in the voluntary
redemption rate would increase the value by £23 million (2020: £22 million).
The Group also holds investments in commercial real estate loans with a value
of £1,317 million (2020: £1,075 million). The loans are valued using a
model which discounts the expected projected future cash flows at the
risk-free rate plus a spread derived from a basket of comparable securities.
The valuation is sensitive to changes in the discount rate. An increase of
65bps in the discount rate would decrease the value by £24 million (an
increase of 35bps in 2020: £15 million) and a decrease of 65bps would
increase the value by £24 million (a decrease of 35bps in 2020: £16
million).
Also included within debt securities are income strips with a value of £886
million (2020: £692 million). Income strips are transactions where an
owner-occupier of a property has sold a freehold or long leasehold interest to
the Group, and has signed a long lease (typically 30-45 years) or a ground
lease (typically 45-175 years) and retains the right to repurchase the
property at the end of the lease for a nominal sum (usually £1). The income
strips are valued using an income capitalisation approach, where the annual
rental income is capitalised using an appropriate yield. The yield is
determined by considering recent transactions involving similar income strips.
The valuation is sensitive to movements in yield. An increase of 35bps would
decrease the value by £94 million (2020: £68 million) and a decrease of
35bps would increase the value by £121 million (2020: £86 million).
E2.3.2 Borrowings
Included within borrowings measured at fair value and categorised as Level 3
financial liabilities are property reversion loans with a value of £70
million (2020: £84 million), measured using an internally developed model.
The valuation is sensitive to the key assumption of the discount rate. An
increase in the discount rate of 1% would decrease the value by £1 million
(2020: £1 million) and a decrease of 1% would increase the value by £1
million (2020: £1 million).
E2.3.3 Longevity swap contracts
Included within derivative assets and derivative liabilities are longevity
swap contracts with corporate pension schemes with a fair value of £230
million (2020: £155 million) and £49 million (2020: £85 million)
respectively. These derivatives are valued on a discounted cash flow basis,
key inputs to which are the interest rate swap curve and RPI and CPI inflation
rates.
An increase of 100bps in the swap curve would decrease the net value by £28
million (2020: £15 million) and a decrease of 100bps would increase the net
value by £35 million (2020: £17 million). An increase of 1% in the RPI and
CPI inflation rates would increase the value by £8 million (2020: £11
million) and a decrease of 1% would decrease the value by £8 million (2020:
£12 million).
E2.3.4 Derivatives
Included within derivative assets are forward local authority loans, forward
private placements and forward infrastructure loans with a value of £7
million (2020: £43 million). These investments include a commitment to
acquire or provide funding for fixed rate debt instruments at specified future
dates. These investments are valued using a discounted cash flow model that
takes a comparable UK Treasury stock and applies a credit spread to reflect
reduced liquidity. The credit spreads are derived from a basket of comparable
securities. The valuations are sensitive to movements in this spread. An
increase of 65bps would decrease the value by £25 million (an increase of
35bps in 2020: £19 million) and a decrease of 65bps would increase the value
by £27 million (a decrease of 35bps in 2020: £20 million).
Also included within derivative liabilities is the Equity Release Income Plan
('ERIP') total return swap with a value of £67 million
(2020: £75 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). The carrying value of the financial liability is
the discounted present value of the relevant share of all future property
sales that will be passed to the counterparty as part of the swap arrangement.
The valuation is sensitive to the discount rate applied. An increase of 1% in
the discount rate would decrease the value by £2 million (2020: £3 million)
and a decrease of 1% in the discount rate would increase the value by £2
million (2020: £3 million).
E2.4 Transfers of financial instruments between Level 1 and Level 2
2021 From From
Level 1 to Level 2
Level 2 to Level 1
£m
£m
Financial assets measured at fair value
Derivatives 51 -
Financial assets designated at FVTPL upon initial recognition:
Equities 33 17
Debt securities 1,742 1,006
Collective investment schemes 32 42
1,807 1,065
Total financial assets measured at fair value 1,858 1,065
2020 From From
Level 1 to Level 2
Level 2 to Level 1
£m
£m
Financial assets measured at fair value
Financial assets designated at FVTPL upon initial recognition:
Debt securities 492 10,174
Collective investment schemes 1 -
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 the current period.
In the prior period, there was an overall net movement of financial assets
from Level 2 to Level 1 and this movement was the result of an exercise to
harmonise the approach to determining the fair value hierarchy for Level 1 and
Level 2 debt securities across the Group. The methodology was updated to
consistently use spread data and trade volume data to determine the activeness
of the market. This resulted in assets being moved from Level 2 to Level 1,
and from Level 1 to Level 2.
E2.5 Movement in Level 3 financial instruments measured at fair value
2021 At Net (losses)/gains in income statement Purchases Sales Transfers from Level 1 and Level 2 Transfers to Level 1 At Unrealised (losses)/gains on assets held at end of period
1 January 2021
£m
£m
£m
£m
and Level 2
31 December 20211
£m
£m
£m
£m
Financial assets
Derivatives 198 (74) 113 - - - 237 (82)
Financial assets designated at FVTPL upon initial recognition:
Equities 1,563 436 269 (368) - (1) 1,899 278
Debt securities 10,164 88 6,394 (4,210) 26 (10) 12,452 115
Collective investment schemes 401 (70) 34 (94) 15 - 286 22
12,128 454 6,697 (4,672) 41 (11) 14,637 415
Total financial assets 12,326 380 6,810 (4,672) 41 (11) 14,874 333
1 Total financial assets of £14,874 million includes £892 million of
assets classified as held for sale.
2021 At Net (gains)/losses in income statement Purchases Sales/ Transfers from Level 1 and Level 2 Transfers to Level 1 At Unrealised (gains)/losses on liabilities held at end of period
1 January 2021
£m
£m
repayments
£m
and Level 2
31 December 2021
£m
£m
£m
£m
£m
Financial liabilities
Derivatives 162 (19) - (18) - - 125 (29)
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings 84 4 - (18) - - 70 5
Total financial liabilities 246 (15) - (36) - - 195 (24)
2020 At Net gains/(losses) in income statement Effect of Sales Transfers from Level 1 and Level 2 Transfers to Level 1 At Unrealised gains/(losses) on assets held at end of period
1 January 2020
£m
acquisitions/
£m
£m
and Level 2
31 December 2020
£m
£m
purchases
£m
£m
£m
Financial assets
Derivatives 175 23 - - - - 198 36
Financial assets designated at FVTPL upon initial recognition:
Equities 1,596 113 213 (361) 2 - 1,563 44
Debt securities 6,026 432 6,301 (2,635) 63 (23) 10,164 471
Collective investment schemes 646 (161) 1 (85) - - 401 (100)
8,268 384 6,515 (3,081) 65 (23) 12,128 415
Total financial assets 8,443 407 6,515 (3,081) 65 (23) 12,326 451
2020 At Net gains in Effect of Sales/ Transfers from Level 1 and Level 2 Transfers to Level 1 At Unrealised losses on liabilities held at end of period
1 January 2020
income statement
acquisitions/
Repayments
£m
and Level 2
31 December 2020
£m
£m
purchases
£m
£m
£m
£m
Financial liabilities
Derivatives 74 17 78 (7) - - 162 13
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings 99 4 - (19) - - 84 4
Total financial liabilities 173 21 78 (26) - - 246 17
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 or repurchasing in the near term or with the objective of
generating a profit from short-term fluctuations in price or margin. The
Group also holds derivatives to hedge financial liabilities denominated
in foreign currency.
Derivative financial instruments are largely classified as held for trading.
Such instruments are recognised initially at fair value and are subsequently
remeasured to fair value. The gain or loss on remeasurement to fair value is
recognised in the consolidated income statement. Derivative financial
instruments are not classified as held for trading where they are designated
as a hedging instrument and where the resultant hedge is assessed as
effective. For such instruments, any gain or loss that arises on remeasurement
to fair value is initially recognised in other comprehensive income and is
recycled to profit or loss as the hedged item impacts the profit or loss.
See note E1 for further details of the Group's hedging accounting policy.
E3.1 Summary
The fair values of derivative financial instruments are as follows:
Assets Liabilities 2021 Assets Liabilities 2020
2021
£m
2020
£m
£m
£m
Forward currency 180 58 286 134
Credit default swaps 63 39 108 13
Contracts for difference 8 2 7 4
Interest rate swaps 1,509 506 2,754 98
Total return bond swaps 3 - 52 -
Swaptions 1,722 11 2,643 27
Inflation swaps 232 98 59 132
Equity options 408 254 543 322
Stock index futures 41 122 53 90
Fixed income futures 46 33 63 20
Retrocession contracts - - - 1
Longevity swap contracts 230 49 155 85
Currency futures 7 1 1 -
Cross-currency swaps 122 12 156 -
Equity Release Income Plan total return swap - 67 - 75
4,571 1,252 6,880 1,001
Less amounts classified as held for sale (see note A6.1) (4) (4) - -
4,567 1,248 6,880 1,001
E3.2 Corporate transactions
The Group has in place longevity swap arrangements with corporate pension
schemes which do not meet the definition of insurance contracts under the
Group's accounting policies. Under these arrangements the majority of the
longevity risk has been passed to third parties. Derivative assets of £230
million and derivative liabilities of £49 million have been recognised as at
31 December 2021 (2020: £155 million and £85 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.
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
2021 (2020: 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
2021 Gross and net amounts of recognised financial assets Financial instruments and cash collateral received Derivative liabilities Net
Financial assets
£m
£m
£m
amount
£m
OTC derivatives 4,394 3,600 487 307
Exchange traded derivatives 177 5 6 166
Stock lending 1,587 1,587 - -
Total 6,158 5,192 493 473
Related amounts not offset
Financial liabilities Gross and net amounts of recognised financial liabilities Financial instruments and cash collateral pledged Derivative assets Net
£m
£m
£m
amount
£m
OTC derivatives 1,096 319 487 290
Exchange traded derivatives 156 24 6 126
Total 1,252 343 493 416
Related amounts not offset
2020 Gross and net amounts of recognised financial assets Financial instruments and cash collateral received Derivative liabilities Net
Financial assets
£m
£m
£m
amount
£m
OTC derivatives 6,523 5,389 219 915
Exchange traded derivatives 357 9 17 331
Stock lending 2,435 2,435 - -
Total 9,315 7,833 236 1,246
Related amounts not offset
Financial liabilities Gross and net amounts of recognised financial liabilities Financial instruments and cash collateral pledged Derivative assets Net
£m
£m
£m
amount
£m
OTC derivatives 886 328 219 339
Exchange traded derivatives 115 31 17 67
Total 1,001 359 236 406
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 £945 million (2020: £885 million).
The amounts recognised as financial assets and liabilities from cash
collateral received at 31 December 2021 are set out below.
OTC derivatives
2021 2020
£m
£m
Financial assets 3,442 5,205
Financial liabilities (3,442) (5,205)
The maximum exposure to credit risk in respect of OTC derivative assets is
£4,394 million (2020: £6,523 million) of which credit risk of £4,087
million (2020: £5,608 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 £177 million (2020: £357
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 2021 in respect of OTC derivative
liabilities of £1,096 million (2020: £886 million) amounted to £942 million
(2020: £1,216 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
£1,749 million (2020: £2,686 million).
The maximum exposure to credit risk in respect of stock lending transactions
is £1,587 million (2020: £2,435 million) of which credit risk of £1,587
million (2020: £2,435 million) is mitigated through the use of collateral
arrangements.
E4.4 Other collateral arrangements
Details of collateral received to mitigate the counterparty risk arising from
the Group's reinsurance transactions is given in note F3.
Collateral has also been pledged and charges have been granted in respect of
certain Group borrowings. The details of these arrangements are set out in
note E5.
E5. Borrowings
The Group classifies the majority of its interest bearing borrowings as
financial liabilities carried at amortised cost and these are recognised
initially at fair value less any attributable transaction costs. The
difference between initial cost and the redemption value is amortised through
the consolidated income statement over the period of the borrowing using the
effective interest method.
Certain borrowings are designated upon initial recognition at fair value
through profit or loss and measured at fair value where doing so provides more
meaningful information due to the reasons stated in the financial liabilities
accounting policy (see note E1). Transaction costs relating to borrowings
designated upon initial recognition at fair value through profit or loss are
expensed as incurred.
Borrowings are classified as either policyholder or shareholder borrowings.
Policyholder borrowings are those borrowings where there is either no or
limited shareholder exposure, for example, borrowings attributable to the
Group's with-profit operations.
E5.1 Analysis of borrowings
Carrying value Fair value
2021 2020 2021 2020
£m
£m
£m
£m
£200 million multi-currency revolving credit facility (note a) 17 - 17 -
Property reversions loan (note b) 70 84 70 84
Total policyholder borrowings 87 84 87 84
£200 million 7.25% unsecured subordinated loan (note c) - 200 - 204
£300 million senior unsecured bond (note d) - 122 - 125
£428 million Tier 2 subordinated notes (note e) 427 426 498 517
£450 million Tier 3 subordinated notes (note f) 450 449 457 470
US $500 million Tier 2 bonds (note g) 368 364 408 416
€500 million Tier 2 bonds (note h) 416 442 490 516
US $750 million Contingent Convertible Tier 1 notes (note i) 551 545 581 585
£500 million Tier 2 notes (note j) 485 484 593 622
US $500 million Fixed Rate Reset Tier 2 notes (note k) 368 364 389 395
£500 million 5.867% Tier 2 subordinated notes (note l) 550 556 598 620
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes (note m) 266 272 269 280
£250 million 4.016% Tier 3 subordinated notes (note n) 257 259 264 266
Total shareholder borrowings 4,138 4,483 4,547 5,016
Total borrowings 4,225 4,567 4,634 5,100
Amount due for settlement after 12 months 3,758 4,245
a. Standard Life Private Equity Trust has in place a £200 million
syndicated multi-currency revolving credit facility of which £17 million
(2020: £nil) had been drawn down as at 31 December 2021. The facility expires
on 6 December 2024. 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
receive an amount calculated by reference to the movement in the Halifax House
Price Index and the Group is required to indemnify Santander against profits
or losses arising from mortality or surrender experience which differs from
the basis used to calculate the reversion amount. During 2021, repayments
totalling £18 million were made (2020: £19 million). Note G4 contains
details of the assets that support this loan.
c. Scottish Mutual Assurance Limited issued £200 million 7.25% undated,
unsecured subordinated loan notes on 23 July 2001 ('PLL subordinated debt').
With effect from 1 January 2009, following a Part VII transfer, these loan
notes were transferred into the shareholder fund of PLL. On 25 March 2021,
PLL redeemed this subordinated debt in full. The notes were redeemed at their
principal amount together with interest accrued to the repayment date.
d. On 7 July 2014, the Group's financing subsidiary, PGH Capital plc
('PGHC'), issued a £300 million 7 year senior unsecured bond at an annual
coupon rate of 5.75% ('£300 million senior bond'). On 20 March 2017, Old PGH
(the Group's ultimate parent company up to December 2018) was substituted in
place of PGHC as issuer of the £300 million senior bond. On 5 May 2017, Old
PGH completed the purchase of £178 million of the £300 million senior bond
at a premium of £25 million in excess of the principal amount and accrued
interest on the purchased bonds was settled on this date. On 18 June 2019, the
Company was substituted in place of Old PGH as issuer of the £300 million
senior bond. On 7 July 2021, the senior bond matured and the £122 million
outstanding balance was repaid in full along with the final coupon of £7
million.
e. On 23 January 2015, PGHC issued £428 million of subordinated notes due
2025 at a coupon of 6.625%. Fees associated with these notes of £3 million
were deferred and are being amortised over the life of the notes in the
statement of consolidated financial position. Upon exchange £32 million of
these notes were held by Group companies. On 27 January 2017, £17 million of
the £428 million subordinated notes held by Group companies were sold to
third parties and a further £15 million were sold to third parties on 31
January 2017, thereby increasing external borrowings by £32 million. On 20
March 2017, Old PGH was substituted in place of PGHC as issuer of the £428
million subordinated notes and then on 12 December 2018 the Company was
substituted in place of Old PGH as issuer.
f. On 20 January 2017, PGHC issued £300 million Tier 3 subordinated
notes due 2022 at a coupon of 4.125%. On 20 March 2017, Old PGH was
substituted in place of PGHC as issuer of the £300 million Tier 3
subordinated notes. On 5 May 2017, Old PGH completed the issue of a further
£150 million of Tier 3 subordinated notes, the terms of which are the same
as the Tier 3 subordinated notes issued in January 2017. The Group received a
premium of £2 million in excess of the principal amount. Fees associated with
these notes of £5 million were deferred and are being amortised over the life
of the notes. On 12 December 2018 the Company was substituted in place of Old
PGH as issuer.
g. 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.
h. 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.
i. 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.
j. 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.
k. 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.
l. 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 will be amortised over the remaining life of the notes. Interest is
payable semi-annually in arrears on 13 June and 13 December.
m. 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 will be 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.
n. 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.
o. The Group has in place a £1.25 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 2021.
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 G10).
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 New borrowings, net of costs £m Repayments £m Changes in fair value Movement Other movements1 £m Movements in fair value £m At
1 January 2021
£m
in foreign exchange
31 December 2021
£m
£m
£m
£200 million multi-currency revolving credit facility - 17 - - - - - 17
Property Reversions loan 84 - (18) 4 - - - 70
£200 million 7.25% unsecured subordinated loan 200 - (200) - - - - -
£300 million senior unsecured bond 122 - (122) - - - - -
£428 million Tier 2 subordinated notes 426 - - - - 1 - 427
£450 million Tier 3 subordinated notes 449 - - - - 1 - 450
US $500 million Tier 2 bonds 364 - - - 4 - - 368
€500 million Tier 2 notes 442 - - - (26) - - 416
US $750 million Contingent Convertible Tier 1 notes 545 - - - 5 1 - 551
£500 million Tier 2 notes 484 - - - - 1 - 485
US $500 million Fixed Rate Reset Tier 2 notes 364 - - - 4 - - 368
£500 million 5.867% Tier 2 subordinated notes 556 - - - - (6) - 550
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes 272 - - - - (6) - 266
£250 million 4.016% Tier 3 subordinated notes 259 - - - - (2) - 257
Derivative assets 2 - - - - - - 48 48
Derivative liabilities 2 - - - - - - (5) (5)
4,567 17 (340) 4 (13) (10) 43 4,268
1 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 New borrowings, net of costs £m Repayments £m Changes in fair value Movement Other movements1 £m Movements in fair value At
1 January 2020
£m
in foreign exchange
31 December 2020
£m
£m £m
£m
Limited recourse bonds 2022 7.59% 35 - (36) - - - 1 -
Property Reversions loan 99 - (19) - 4 - - 84
£200 million 7.25% unsecured 196 - - - - - 4 200
subordinated loan
£300 million senior unsecured bond 121 - - - - - 1 122
£428 million Tier 2 subordinated notes 426 - - - - - - 426
£450 million Tier 3 subordinated notes 449 - - - - - - 449
US $500 million Tier 2 bonds 376 - - - - (12) - 364
€500 million Tier 2 notes 417 - - - - 24 1 442
US $750 million Contingent - 566 - - - (23) 2 545
Convertible Tier 1 notes
£500 million Tier 2 notes - 483 - - - - 1 484
US $500 million Fixed Rate Reset - 396 - - - (32) - 364
Tier 2 notes
£500 million 5.867% Tier 2 - - - 559 - - (3) 556
subordinated notes
£250 million Fixed Rate Reset - - - 275 - - (3) 272
Callable Tier 2 subordinated notes
£250 million 4.016% Tier 3 - - - 259 - - - 259
subordinated notes
2,119 1,445 (55) 1,093 4 (43) 4 4,567
1 Comprises amortisation under the effective interest method applied to
borrowings held at amortised cost. No interest was capitalised in the year.
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 F4.
E6.1 Financial risk and the Asset Liability Management ('ALM') framework
The use of financial instruments naturally exposes the Group to the risks
associated with them, chiefly market risk, credit risk and financial soundness
risk.
Responsibility for agreeing the financial risk profile rests with the board of
each life company, as advised by investment managers, internal committees and
the actuarial function. In setting the risk profile, the board of each life
company will receive advice from the Chief Investment Officer, the relevant
with-profit actuary and the relevant actuarial function holder as to the
potential implications of that risk profile with regard to the probability of
both realistic insolvency and of failing to meet the regulatory Minimum
Capital Requirement. The Chief Actuary will also advise the extent to which
the investment risk taken is consistent with the Group's commitment to deliver
fair customer outcomes.
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 F4.
The Group's overall exposure to market and credit risk is monitored by
appropriate committees, which agree policies for managing each type of risk on
an ongoing basis, in line with the investment strategy developed to achieve
investment returns in excess of amounts due in respect of insurance
contracts. The effectiveness of the Group's ALM framework relies on the
matching of assets and liabilities arising from insurance and investment
contracts, taking into account the types of benefits payable to policyholders
under each type of contract. Separate portfolios of assets are maintained for
with-profit business funds (which include all of the Group's participating
business), non-linked non-profit funds and unit-linked funds.
LIBOR transition
The Group has largely completed its transition from LIBOR to the replacement
Risk Free Rates. The programme has gone through a systematic process to
identify and address balance sheet exposures with LIBOR dependencies. All
derivative exposures and the majority of non-derivative asset exposures have
successfully been transitioned over the course of the programme. Insurance
contract liabilities and related items have transitioned to the SONIA Solvency
II curve published by the PRA with an adjustment of 36bps. The remaining
residual exposures relate to indirect exposures in a small proportion of
liquid and illiquid credit assets, and a direct exposure of £55 million in
relation to two illiquid credit assets referencing Sterling LIBOR. These
residual exposures do not give rise to material solvency or liquidity risks
for the Group.
The indirect liquid credit exposures are in relation to fixed rate loans, with
LIBOR only relevant if the issuer cannot repay the debt at the expected
maturity date. Cessation of LIBOR will have no impact on trading or liquidity.
The indirect illiquid credit exposure relates to two loans where LIBOR is only
relevant on a prepayment. The Group does not anticipate a prepayment and this
issue does not affect the fair value of the loans.
The liquid indirect exposures will be resolved through liability management
transactions launched by issuers, which either already include sufficient
fallback provisions or the asset managers will continue to engage directly
with the issuers to amend the fallback clauses. For all of the remaining
illiquid exposures, progress on transitioning away from LIBOR is well advanced
and is expected to complete before the next interest rate reset date.
E6.2 Financial risk analysis
Transactions in financial instruments result in the Group assuming financial
risks. These include credit risk, market risk and financial soundness risk.
Each of these are described below, together with a summary of how the Group
manages the risk, along with sensitivity analysis where appropriate. The
sensitivity analysis does not take into account second order impacts of market
movements, for example, where a market movement may give rise to potential
indicators of impairment for the Group's intangible balances.
A Group-wide project was undertaken to enhance the Group's approach to
managing the financial risks of climate change, including embedding climate
risk considerations into the Group's overall Risk Management Framework. The
project has enabled the Group to embed the requirements and demonstrate
compliance with the PRA Supervisory Statement SS3/19. Further details on
managing the related climate change risks are provided in the Task Force for
Climate-related Financial Disclosures ('TCFD') on page 51 of the
Annual Report and Accounts and details of the impact of climate change on the
financial statements are included in note A3.8.
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 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 with-profit funds (where risks and
rewards fall wholly to shareholders), non-profit funds and shareholders'
funds.
The Group holds £21,668 million (2020: £23,799 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 £1,036 million
(2020: £1,156 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 an increase in
the profit after tax in respect of a full financial year, and in equity, of
£28 million (2020: decrease £5 million).
A 100bps narrowing 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 £37
million (2020: increase £2 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. 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. 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.
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.
2021 AAA AA A BBB BB and below Non-rated Unit-linked £m Total Less amounts classified as held for sale £m Total
£m
£m
£m
£m
£m
£m
£m
£m
Loans and deposits - 6 - - - 414 55 475 - 475
Derivatives - 965 1,737 388 - 1,343 138 4,571 (4) 4,567
Debt securities1,2 9,097 40,142 22,782 16,290 3,292 6,788 8,599 106,990 (2,229) 104,761
Reinsurers' share of insurance contract liabilities - 4,963 3,539 37 - 48 - 8,587 - 8,587
Reinsurers' share of investment contract liabilities - - - - - - 10,009 10,009 (27) 9,982
Cash and cash equivalents 382 1,686 5,161 181 - 3 1,775 9,188 (76) 9,112
9,479 47,762 33,219 16,896 3,292 8,596 20,576 139,820 (2,336) 137,484
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. £110 million of AAA, £1,110
million of AA, £2,556 million of A, £2,480 million of BBB and £518 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 £4,214 million (further details are set out in note E2.3) and
non-rated bonds.
2020 AAA AA A BBB BB and Non-rated Unit-linked £m Total
£m
£m
£m
£m
below
£m
£m
£m
Loans and deposits - 6 195 - - 368 78 647
Derivatives - 1,220 2,263 1,967 - 1,231 199 6,880
Debt securities1,2 9,041 35,184 24,747 14,960 2,497 6,658 16,368 109,455
Reinsurers' share of insurance contract liabilities - 6,524 2,966 - - 52 - 9,542
Reinsurers' share of investment contract liabilities - 16 - 1 - - 9,542 9,559
Cash and cash equivalents 30 1,728 7,049 173 - 10 2,008 10,998
9,071 44,678 37,220 17,101 2,497 8,319 28,195 147,081
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. £117 million of AAA, £963 million
of AA, £2,446 million of A, £1,741 million of BBB and £219 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 £3,484 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 Internal Credit Rating Committee and a Portfolio Credit
Committee to perform oversight and monitoring 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 are those that do not have a public
rating from an external credit assessment institution. The internal credit
ratings used by the Group are provided by fund managers or for certain assets
(in particular, equity release mortgages) determined by the Life Companies.
The Committees review the policies, processes and practices to ensure the
appropriateness of the internal ratings assigned to asset classes, in line
with regulatory requirements.
Throughout 2021, the Group has continued to take 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 313 and include
information on the Group's market exposure analysed by credit rating, sector
and country of exposure for the shareholder debt portfolio. In light of
developments regarding the Russia-Ukraine conflict, this includes the
shareholders' debt exposure to Russia and Ukraine. The Group's exposure to
Russia and Ukraine is small when compared to the size of its overall
investment portfolio.
Concentration of credit risk
Concentration of credit risk might exist where the Group has significant
exposure to an individual counterparty or a group of counterparties with
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic and
other conditions. The Group has most of its counterparty risk within its life
business and this is monitored by the counterparty limit framework contained
within the Group Credit Risk Policy and further provided 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. This
is due to the nature of the outsourced services market. The Group operates a
policy to manage outsourcer service counterparty exposures and the impact from
default is reviewed regularly by executive committees and measured through
stress and scenario testing.
Reinsurance
The Group is exposed to credit risk as a result of insurance risk transfer
contracts with reinsurers. The Group's policy is to place reinsurance only
with highly rated counterparties. The Group is restricted from assuming
concentrations of risk with individual external reinsurers by specifying
limits on ceding and minimum conditions for acceptance and retention
of reinsurers. However, due to the nature of the reinsurance market and the
restricted range of reinsurers that have acceptable credit ratings, some
concentration risk does arise with individual reinsurers. The Group manages
its exposure to reinsurance credit risk through the operation of a credit
policy, collateralisation where appropriate, and regular monitoring of
exposures at the Reinsurance Management Committee.
Collateral
The credit risk of the Group is mitigated, in certain circumstances, by
entering into collateral agreements. The amount and type of collateral
required depends on an assessment of the credit risk of the counterparty.
Guidelines are implemented regarding the acceptability of types of collateral
and the valuation parameters. Collateral is mainly 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 and an approach to investment management
that determines:
• the constituents of market risk for the Group;
• the basis used to fair value financial assets and liabilities;
• the asset allocation and portfolio limit structure;
• diversification from and within benchmarks by type of instrument and
geographical area;
• the net exposure limits by each counterparty or group of counterparties,
geographical and industry segments;
• control over hedging activities;
• reporting of market risk exposures and activities; and
• monitoring of compliance with market risk policy and review of market
risk policy for pertinence to the changing environment.
All operations comply with regulatory requirements relating to the taking of
market risk.
Markets remain volatile, particularly given concerns over inflation and how
quickly central banks will act to reduce these pressures on economies whilst
balancing the need to aid post pandemic recovery. This is discussed in more
detail on page 64 of the Risk Management section of the Annual Report and
Accounts.
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 and in equity. 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 the declared annual bonus. The contribution of the
supported participating business to the Group result is determined by the
shareholders' interest in any change in value in the capital advanced to the
with-profit funds.
In the non-participating funds, policy liabilities' sensitivity to interest
rates are matched primarily with debt securities and hedging if necessary to
match duration, with the result that sensitivity to changes in interest rates
is very low. The Group's exposure to interest rates principally arises from
the Group's hedging strategy to protect the regulatory capital position, which
results in an adverse impact on profit on an increase in interest rates.
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.
Due to the correlation between interest rates and inflation, a combined
sensitivity has been presented. Comparative information has been restated to
incorporate a movement in the rate of inflation.
An increase of 1% in interest rates and 0.6% in the rate of inflation, with
all other variables held constant, would result in a decrease in profits after
tax in respect of a full financial year, and in equity, of £364 million
(2020 restated: £399 million).
A decrease of 1% in interest rates and 0.6% in the rate of inflation, with all
other variables held constant, would result in an increase in profits after
tax in respect of a full financial year, and in equity, of £415 million (2020
restated: £585 million).
Equity and property risk
The Group has exposure to financial assets and liabilities whose values will
fluctuate as a result of changes in market prices other than from interest
rate and currency fluctuations. This is due to factors specific to individual
instruments, their issuers or factors affecting all instruments traded in the
market. Accordingly, the Group limits its exposure to any one counterparty in
its investment portfolios and to any one foreign market.
The portfolio of marketable equity securities and property investments which
is carried in the statement of consolidated financial position at fair value,
has exposure to price risk. The Group's objective in holding these assets is
to earn higher long-term returns by investing in a diverse portfolio of
equities and properties. Portfolio characteristics are analysed regularly and
price risks are actively managed in line with investment mandates. The Group's
holdings are diversified across industries and concentrations in any one
company or industry are limited.
Equity and property price risk is primarily borne in respect of assets held in
with-profit funds, unit-linked funds or equity release mortgages in the
non-profit funds. For unit-linked funds this risk is borne by policyholders
and asset movements directly impact unit prices and hence policy values. For
with-profit funds policyholders' future bonuses will be impacted by the
investment returns achieved and hence the price risk, whilst the Group also
has exposure to the value of guarantees provided to with-profit policyholders.
In addition some equity investments are held in respect of shareholders'
funds. 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 sensitivity analysis for equity and property price risk illustrates how a
change in the fair value of equities and properties affects the Group result.
It takes into account the effect of such changes in equity and property prices
on all assets and liabilities that contribute to the Group's reported profit
after tax and in equity (but excludes the impact on the Group's pension
schemes).
A 10% decrease in equity prices, with all other variables held constant, would
result in an increase in profits after tax in respect of a full financial
year, and in equity, of £294 million (2020: £281 million).
A 10% increase in equity prices, with all other variables held constant, would
result in a decrease in profits after tax in respect of a full financial
year, and in equity, of £263 million (2020: £263 million).
A 10% decrease in property prices, with all other variables held constant,
would result in a decrease in profits after tax in respect
of a full financial year, and in equity, of £6 million (2020: £25
million).
A 10% increase in property prices, with all other variables held constant,
would result in an increase in profits after tax in respect
of a full financial year, and in equity, of £4 million (2020: £16
million).
The sensitivity to changes in equity prices is primarily driven by the Group's
equity hedging arrangements over the value of future management charges that
are linked to asset values.
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, some historic business written
in the Republic of Ireland and Ark Life business (until sold on 1 November
2021), 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 the year, 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.
Sensitivity of profit after tax and equity to fluctuations in currency
exchange rates is not considered significant at 31 December 2021, since
unhedged exposure to foreign currency was relatively low (2020: not considered
significant).
E6.2.3 Financial soundness risk
Financial soundness risk is a broad risk category encompassing capital
management risk, tax risk and liquidity and funding risk.
Capital management risk is defined as the failure of the Group, or one of its
separately regulated subsidiaries, to maintain sufficient capital to provide
appropriate security for policyholders and meet all regulatory capital
requirements whilst not retaining unnecessary capital. The Group has exposure
to capital management risk through the requirements of the Solvency II capital
regime, as implemented by the PRA, to calculate regulatory capital adequacy at
a Group level. The Group's UK life subsidiaries have exposure to capital
management risk through the Solvency II regulatory capital requirements
mandated by the PRA at the solo level. The Group's approach to managing
capital management risk is described in detail in note I3.
Tax risk is defined as the risk of financial failure, reputation damage, loss
of earnings/value arising from a lack of liquidity, funding or capital, and/or
the inappropriate recording, reporting, understanding of tax legislation and
disclosure of financial, taxation and regulatory information. 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 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 Principles and
Practices of Financial Management ('PPFM');
• cash flows are appropriately managed and the reputation of the Group is
safeguarded; and
• appropriate information on liquidity risk is available to those making
decisions.
The Group's 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 plausible scenarios;
• effective liquidity portfolio management; 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 acquisition 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, 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. Liabilities under insurance contract contractual
maturities are included based on the estimated timing of the amounts
recognised in the statement of consolidated financial position in accordance
with the requirements of IFRS 4 Insurance Contracts:
2021 1 year or less or on demand 1-5 years Greater than No fixed Total Less amounts classified as held for sale (see note A6.1) Total
£m
£m
5 years
term
£m
£m
£m
£m
£m
Liabilities under insurance contracts 14,319 36,061 78,484 - 128,864 - 128,864
Investment contracts 172,093 - - - 172,093 (11,676) 160,417
Borrowings1 664 1,380 2,772 70 4,886 - 4,886
Deposits received from reinsurers1 419 834 2,355 - 3,608 - 3,608
Derivatives1 259 517 583 - 1,359 (4) 1,355
Net asset value attributable to unitholders 3,568 - - - 3,568 - 3,568
Obligations for repayment of collateral received 3,442 - - - 3,442 - 3,442
Reinsurance payables 80 13 50 - 143 - 143
Payables related to direct insurance contracts 1,864 - - - 1,864 - 1,864
Lease liabilities1 11 59 72 - 142 - 142
Accruals and deferred income 548 59 7 7 621 (54) 567
Other payables 721 - - - 721 - 721
2020 1 year or less or on demand 1-5 years Greater than No fixed Total
£m
£m
5 years
term
£m
£m
£m
Liabilities under insurance contracts 20,027 32,703 81,177 - 133,907
Investment contracts 165,106 - - - 165,106
Borrowings1 551 1,661 3,145 84 5,441
Deposits received from reinsurers1 699 832 2,569 - 4,100
Derivatives1 274 526 224 - 1,024
Net asset value attributable to unitholders 3,791 - - - 3,791
Obligations for repayment of collateral received 5,205 - - - 5,205
Reinsurance payables 134 - - - 134
Payables related to direct insurance contracts 1,669 - - - 1,669
Lease liabilities1 12 36 84 - 132
Accruals and deferred income 509 4 8 - 521
Other payables 1,265 - 1 - 1,266
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.
Investment contract policyholders have the option to terminate or transfer
their contracts at any time and to receive the surrender or transfer value of
their policies. Although these liabilities are payable on demand, and are
therefore included in the contractual maturity analysis as due within one
year, the Group does not expect all these amounts to be paid out within one
year of the reporting date.
A significant proportion of the Group's financial assets are held in gilts,
cash, supranationals and investment grade securities which the Group considers
sufficient to meet the liabilities as they fall due. The vast majority of
these investments are readily realisable immediately since most of them are
quoted in an active market.
E6.2.4 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, malpractice 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 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 minimum control standards 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 Treatment: Failure to have a customer centric culture which
drives appropriate behaviours and decisions leading to customer interactions
and outcomes which meet or exceed reasonable customer and regulator
expectations and which take account of potential customer vulnerability.
• 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 Group's customer treatment risk appetite and regulatory
requirements.
• Product and Propositions: Failure to design and/or manage
products/propositions appropriately, or failure of the manufacturer to ensure
that products/propositions are distributed to the appropriate target market,
perform as intended and in line with the expectations set.
• Sales and Distribution: Inappropriate (unclear, unfair or misleading)
financial promotions, sales practices and/or distribution agreements resulting
in poor customer outcomes leading to reputational, financial and/or
operational detriment.
The Group's Conduct Risk Appetite, sets the boundaries within which the Group
expect customer outcomes to be managed. In addition, the Group Conduct Risk
Framework, which overarches our Risk Universe and all risk policies, consists
of a set of outcomes, intents and standards for all staff to follow to ensure
that we have embedded and effective controls in place across our business
activities to detect where our customers are at risk of poor outcome, minimise
conduct risks, and respond with timely and appropriate mitigating actions.
From a qualitative perspective, 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 of contracts
Contracts are classified as insurance contracts where the Group accepts
significant insurance risk from the policyholder by agreeing to compensate
the policyholder if a specified uncertain event adversely affects the
policyholder.
Contracts under which the transfer of insurance risk to the Group from the
policyholder is not significant are classified as investment contracts or
derivatives and accounted for as financial liabilities (see notes E1 and E3
respectively).
Some insurance and investment contracts contain a Discretionary Participation
Feature ('DPF'). This feature entitles the policyholder to additional
discretionary benefits as a supplement to guaranteed benefits. Investment
contracts with a DPF are recognised, measured and presented as insurance
contracts.
Contracts with reinsurers are assessed to determine whether they contain
significant insurance risks. Contracts that do not give rise
to a significant transfer of insurance risk to the reinsurer are classified
as financial instruments and are valued at fair value through profit or loss.
Insurance contracts and investment contracts with DPF
Insurance liabilities
Insurance contract liabilities for non-participating business, other than
unit-linked insurance contracts, are calculated on the basis of current data
and assumptions, using either a net premium or gross premium method. Where a
gross premium method is used, the liability includes allowance for prudent
lapses. Negative policy values are allowed for on individual policies:
• where there are no guaranteed surrender values; or
• in the periods where guaranteed surrender values do not apply even
though guaranteed surrender values are applicable after a specified period of
time.
For unit-linked insurance contract liabilities the provision is based on the
fund value, together with an allowance for any excess of future expenses over
charges, where appropriate.
For participating business, the liabilities under insurance contracts and
investment contracts with DPF are calculated in accordance with the following
methodology:
• liabilities to policyholders arising from the with-profit business are
stated at the amount of the realistic value of the liabilities, adjusted to
exclude the owners' share of projected future bonuses;
• acquisition costs are not deferred; and
• reinsurance recoveries are measured on a basis that is consistent with
the valuation of the liability to policyholders to which the reinsurance
applies.
The With-Profit Benefit Reserve ('WPBR') for an individual contract is
determined by either a retrospective calculation of 'accumulated asset share'
approach or by way of a prospective 'bonus reserve valuation' method. The cost
of future policy related liabilities is determined using a market consistent
approach, mainly based on a stochastic model calibrated to market conditions
at the end of the reporting period. Non-market related assumptions (for
example, persistency, mortality and expenses) are based on experience adjusted
to take into account future trends.
The realistic liability for any contract is equal to the sum of the WPBR and
the cost of future policy-related liabilities. The cost of future
policy-related liabilities includes the unallocated surplus attributable to
policyholders for the Group's with-profit funds.
Where policyholders have valuable guarantees, options or promises in respect
of the with-profit business, these costs are generally valued using a
stochastic model.
In calculating the realistic liabilities, account is taken of the future
management actions consistent with those set out in the Principles and
Practices of Financial Management ('PPFM').
Standard Life Assurance Limited ('SLAL'), a wholly owned subsidiary of the
Group, includes the Heritage With Profits Fund ('HWPF'). In 2006, the
Standard Life Assurance Company demutualised. The demutualisation was governed
by its Scheme of Demutualisation ('the Scheme'). Under the Scheme
substantially all of the assets and liabilities of the Standard Life Assurance
Company were transferred to SLAL.
The Scheme provides that certain defined cash flows (recourse cash flows)
arising in the HWPF on specified blocks of UK and Ireland business, both
participating and non-participating, may be transferred out of that fund when
they emerge, being transferred to the Shareholder Fund ('SHF') or the
Proprietary Business Fund ('PBF') of SLAL, and thus accrue to the ultimate
benefit of equity holders of the Company. Under the Scheme, such transfers are
subject to certain constraints in order to protect policyholders. The Scheme
also provides for additional expenses to be charged by the PBF to the HWPF in
respect of German branch business in SLAL.
Under the realistic valuation, the discounted value of expected future cash
flows on participating contracts not reflected in the WPBR is included in
the cost of future policy related liabilities (as a reduction where future
cash flows are expected to be positive). The discounted value of expected
future cash flows on non-participating contracts not reflected in the measure
of non-participating liabilities is recognised as a separate asset (where
future cash flows are expected to be positive). The Scheme requirement to
transfer future recourse cash flows out of the HWPF is recognised as an
addition to the cost of future policy related liabilities. The discounted
value of expected future cash flows on non-participating contracts can be
apportioned between those included in the recourse cash flows and those
retained in the HWPF for the benefit of policyholders.
Applying the policy noted above for the HWPF:
• The value of participating investment contract liabilities on the
consolidated statement of financial position is reduced by future expected
(net positive) cash flows arising on participating contracts.
• Future expected cash flows on non-participating contracts are not
recognised as an asset of the HWPF on the consolidated statement of financial
position. However, future expected cash flows on non-participating contracts
that are not recourse cash flows under the Scheme are used to reduce the value
of participating insurance and participating investment contract liabilities
on the consolidated statement of financial position
Present value of future profits on non-participating business in the with-profit funds
For UK with-profit life funds, an amount may be recognised for the present
value of future profits ('PVFP') on non-participating business written in a
with-profit fund where the determination of the realistic value of liabilities
in that with-profit fund takes account, directly or indirectly, of this value.
Where the value of future profits can be shown to be due to policyholders,
this amount is recognised as a reduction in the liability rather than as an
intangible asset. This is then apportioned between the amounts that have been
taken into account in the measurement of liabilities and other amounts which
are shown as an adjustment to the unallocated surplus.
Where it is not possible to apportion the future profits on this
non-participating business to policyholders, the PVFP on this business is
recognised as an intangible asset and changes in its value are recorded as a
separate item in the consolidated income statement (see note G2).
The value of the PVFP is determined in a manner consistent with the realistic
measurement of liabilities. In particular, the methodology and assumptions
involve adjustments to reflect risk and uncertainty, are based on current
estimates of future experience and current market yields and allow for market
consistent valuation of any guarantees or options within the contracts. The
value is also adjusted to remove the value of capital backing the non-profit
business if this is included in the realistic calculation of PVFP. The
principal assumptions used to calculate the PVFP are the same as those used in
calculating the insurance contract liabilities given in note F4.
Embedded derivatives
Embedded derivatives, including options to surrender insurance contracts, that
meet the definition of insurance contracts or are closely related to the host
insurance contract, are not separately measured. All other embedded
derivatives are separated from the host contract and measured at fair value
through profit or loss.
Liability adequacy
At each reporting date, liability adequacy tests are performed to assess
whether the insurance contract and investment contract with DPF liabilities
are adequate. Current best estimates of future cash flows are compared to the
carrying value of the liabilities. Any deficiency is charged to the
consolidated income statement.
The Group's accounting policies for insurance contracts meet the minimum
specified requirements for liability adequacy testing under IFRS 4 Insurance
Contracts, as they allow for current estimates of all contractual cash flows
and of related cash flows such as claims handling costs. Cash flows resulting
from embedded options and guarantees are also allowed for, with any deficiency
being recognised in the consolidated income statement.
Reinsurance
Amounts recoverable from reinsurers are estimated in a manner consistent with
the outstanding claims provision or settled claims associated with the
reinsured policy.
Reinsurance ceded
The Group cedes insurance risk in the normal course of business. Reinsurance
assets represent balances due from reinsurance providers. Reinsurers' share of
insurance contract liabilities is dependent on expected claims and benefits
arising under the related reinsured policies.
Reinsurance assets are reviewed for impairment at each reporting date, or more
frequently, when an indication of impairment arises during the reporting
period. Impairment occurs when there is objective evidence, as a result of an
event that occurred after initial recognition of the reinsurance asset, that
the Group may not receive all outstanding amounts due under the terms of the
contract and the event has a reliably measurable impact on the amounts that
the Group will receive from the reinsurer. The impairment loss is recognised
in the consolidated income statement. The reinsurers' share of investment
contract liabilities is measured on a basis that is consistent with the
valuation of the liability to policyholders to which the reinsurance applies.
Reinsurance premiums payable in respect of certain reinsured individual and
group pensions annuity contracts are payable by quarterly instalments and are
accounted for on a payable basis. Due to the period of time over which
reinsurance premiums are payable under these arrangements, the reinsurance
premiums and related payables are discounted to present values using a pre-tax
risk-free rate of return. The unwinding of the discount is included as a
charge within the consolidated income statement.
Reinsurance accepted
The Group accepts insurance risk under reinsurance contracts. Amounts paid to
cedants at the inception of reinsurance contracts in respect of future profits
on certain blocks of business are recognised as a reinsurance asset. Changes
in the value of the reinsurance assets created from the acceptance of
reinsurance are recognised as an expense in the consolidated income statement,
consistent with the expected emergence of the economic benefits from the
underlying blocks of business.
At each reporting date, the Group assesses whether there are any indications
of impairment. When indications of impairment exist, an impairment test is
carried out by comparing the carrying value of the asset with the estimate of
the recoverable amount. When the recoverable amount is less than the carrying
value, an impairment charge is recognised as an expense in the consolidated
income statement. Reassurance assets are also considered in the liability
adequacy test for each reporting period.
Consolidated income statement recognition
Gross premiums
In respect of insurance contracts and investment contracts with DPF, premiums
are accounted for on a receivable basis and exclude any taxes or duties based
on premiums. Funds at retirement under individual pension contracts converted
to annuities with the Group are, for accounting purposes, included in both
claims incurred and premiums within gross premiums written.
Reinsurance premiums
Outward reinsurance premiums are accounted for on a payable basis. Reinsurance
premiums include amounts receivable as refunds of premiums in cases where the
Group cancels arrangements for the reinsurance of risk to another reinsurer.
Gross benefits and claims
Claims on insurance contracts and investment contracts with DPF reflect the
cost of all claims arising during the period, including policyholder bonuses
allocated in anticipation of a bonus declaration. Claims payable on maturity
are recognised when the claim becomes due for payment and claims payable on
death are recognised on notification. Surrenders are accounted for at the
earlier of the payment date or when the policy ceases to be included within
insurance contract liabilities. Where claims are payable and the contract
remains in-force, the claim instalment is accounted for when due for payment.
Claims payable include the costs of settlement.
Reinsurance claims are recognised when the related gross insurance claim is
recognised according to the terms of the relevant contract.
Gains or losses on purchasing reinsurance are recognised in the consolidated
income statement at the date of purchase and are not amortised. They are the
difference between the premiums ceded to reinsurers and the related change in
the reinsurers' share of insurance contract liabilities.
The table below shows a summary of the liabilities under insurance contracts
and the related reinsurers' share included within assets in the statement of
consolidated financial position.
Gross liabilities Reinsurers' share Gross liabilities 2020 Reinsurers' share
2021
2021
£m
2020
£m
£m
£m
Life assurance business:
Insurance contracts 99,169 8,587 103,012 9,542
Investment contracts with DPF 29,695 - 30,895 -
128,864 8,587 133,907 9,542
Amounts due for settlement after 12 months 114,545 7,472 113,880 8,546
Gross liabilities Reinsurers' share Gross liabilities 2020 Reinsurers'
2021
2021
£m
share
£m
£m
2020
£m
At 1 January 133,907 9,542 95,643 7,324
Premiums 7,455 2,079 4,706 796
Claims (9,656) (1,597) (7,808) (1,613)
Foreign exchange adjustments (1,168) (48) 851 4
Disposal of Ark Life (see note H3) (799) (730) - -
Acquisition of ReAssure businesses (see note H2.1) - - 24,606 2,782
L&G Part VII portfolio transfer (see note H2.2) - - 9,558 -
Other changes in liabilities1 (875) (659) 6,351 249
At 31 December 128,864 8,587 133,907 9,542
1 Other changes in liabilities principally comprise changes in economic
and non-economic assumptions and experience.
F2. Unallocated surplus
The unallocated surplus comprises the excess of the assets over the
policyholder liabilities of the with-profit business of the Group's life
operations. For the Group's with-profit funds this represents amounts which
have yet to be allocated to owners since the unallocated surplus attributable
to policyholders has been included within liabilities under insurance
contracts.
If the realistic value of liabilities to policyholders exceeds the value of
the assets in the with-profit fund, the unallocated surplus is valued at
£nil.
In relation to the HWPF, amounts are considered to be allocated to
shareholders when they emerge as recourse cash flows within the HWPF.
• The unallocated surplus of the HWPF comprises the value of future
recourse cash flows in participating contracts (but not the value of future
cash flows on non-participating contracts), the value of future additional
expenses to be charged on German branch business and the effect of any
measurement differences between the realistic value and the IFRS accounting
policy value of all assets and liabilities other than participating contract
liabilities recognised in the HWPF.
• The recourse cash flows are recognised as they emerge as an addition to
shareholders' profits if positive or as a deduction if negative. As the
additional expenses are charged in respect of the German branch business they
are recognised as an addition to equity holders' profits.
2021 2020
£m
£m
At 1 January 1,768 1,367
Transfer (to)/from consolidated income statement (106) 113
Acquisition of ReAssure businesses (see note H2.1) - 136
L&G Part VII transfer (see note H2.2) - 261
Foreign exchange movements 139 (109)
At 31 December 1,801 1,768
F3. Reinsurance
This section includes disclosures in relation to reinsurance. Further
disclosures and accounting policies relating to reinsurance are included in
note F1.
F3.1 Premiums ceded to reinsurers
Premiums ceded to reinsurers during the period were £2,079 million (2020:
£796 million).
F3.2 Collateral arrangements
It is the Group's practice to obtain collateral to mitigate the counterparty
risk related to reinsurance transactions usually in the form of cash or
marketable financial instruments.
Where the Group receives collateral in the form of marketable financial
instruments which it is not permitted to sell or re-pledge except in the case
of default, it is not recognised in the statement of consolidated financial
position. The fair value of financial assets accepted as collateral for
reinsurance transactions but not recognised in the statement of consolidated
financial position amounts to £4,882 million (2020: £4,324 million).
Where the Group receives collateral on reinsurance transactions in the form of
cash it is recognised in the statement of consolidated financial position
along with a corresponding liability to repay the amount of collateral
received, disclosed as 'Deposits received from reinsurers'. Where there is
interest payable on such collateral, it is recognised within 'Net expense
under arrangements with reinsurers' (see note F3.3). The amounts recognised as
financial assets and liabilities from cash collateral received at 31 December
2021 are set out below.
Reinsurance transactions
2021 2020
£m
£m
Financial assets 373 427
Financial liabilities 373 427
F3.3 Net income/(expense) under arrangements with reinsurers
The Group has reinsured the longevity and investment risk related to a
portfolio of annuity contracts held within the HWPF. At inception of the
reinsurance contract the reinsurer was required to deposit an amount equal to
the reinsurance premium with the Group. The amount recognised in the
statement of consolidated financial position in respect of this deposit is
£3.2 billion as at 31 December 2021 (31 December 2020: £3.7 billion).
Interest is payable to the reinsurer on the deposit at a floating rate. The
Group maintains a ring fenced pool of assets to back this deposit liability.
Annuity payments under the reinsured contracts are made by the Group from the
ring-fenced assets and the deposit liability is reduced by the amount of these
payments. Periodically the Group is required to pay to the reinsurer or
receive from the reinsurer Premium Adjustments defined as the difference
between the fair value of the ring-fenced assets and the deposit amount, such
that the deposit amount equals the fair value of the ring-fenced assets. This
has the effect of ensuring that the investment risk on the ring-fenced pool of
assets falls on the reinsurer. The investment return on the ring-fenced assets
included within net investment return in the consolidated income statement is
equal to an equivalent amount recognised in net expense under arrangements
with reinsurers.
2021 2020
£m
£m
Interest payable on deposits from reinsurers (11) (13)
Premium adjustments 33 (206)
Net income/(expense) under arrangements with reinsurers 22 (219)
F4. 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 or lower than expected
improvements in mortality;
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;
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 leading to losses;
New business pricing inappropriate pricing of new business that is not in line with the underlying
risk factors for that business.
Objectives and policies for mitigating insurance risk
Insurance risks are managed by monitoring risk exposure against predefined
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 Heritage 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.
For the Group's Open business, 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 exposes the Group to persistency and expense risks.
There remains uncertainty around future demographic experience as a result of
COVID-19, as outlined in page 64 of the Annual Report and Accounts. The impact
over the longer term continues to be monitored, however given the uncertainty
no adjustments to assumptions as a result of the impacts of COVID-19 have been
deemed necessary to date.
Sensitivities
Insurance liabilities are sensitive to changes in risk variables, such as
prevailing market interest rates, currency rates and equity prices, since
these variations alter the value of the financial assets held to meet
obligations arising from insurance contracts and changes in investment
conditions also have an impact on the value of insurance liabilities
themselves. Additionally, insurance liabilities are sensitive to the
assumptions which have been applied in their calculation, such as mortality
and lapse rates. Sometimes allowance must also be made for the effect on
future assumptions of management or policyholder actions in certain economic
scenarios. This could lead to changes in assumed asset mix or future bonus
rates. The most significant non economic sensitivities arise from mortality,
longevity and lapse risk.
A decrease of 5% in assurance mortality, with all other variables held
constant, would result in an increase in the profit after tax in respect of a
full year, and an increase in equity of £70 million (2020: £70 million).
An increase of 5% in assurance mortality, with all other variables held
constant, would result in a decrease in the profit after tax in respect of a
full year, and a decrease in equity of £70 million (2020: £70 million).
A decrease of 5% in annuitant longevity, with all other variables held
constant, would result in an increase in the profit after tax in respect of a
full year, and an increase in equity of £517 million (2020: £619 million).
An increase of 5% in annuitant longevity, with all other variables held
constant, would result in a decrease in the profit after tax in respect of a
full year, and a decrease in equity of £530 million (2020: £627 million).
A decrease of 10% in lapse rates, with all other variables held constant,
would result in a decrease in the profit after tax in respect of a full year,
and a decrease in equity of £27 million (2020: £40 million).
An increase of 10% in lapse rates, with all other variables held constant,
would result in an increase in the profit after tax in respect of a full year,
and an increase in equity of £27 million (2020: £44 million).
F4.1 Assumptions
For participating business which is with-profit business (insurance and
investment contracts with DPF), the insurance contract liability
is calculated on a realistic basis, adjusted to exclude the shareholders'
share of future bonuses and the associated tax liability. This is a market
consistent valuation, which involves placing a value on liabilities similar to
the market value of assets with similar cash flow patterns.
The non-participating insurance contract liabilities are determined using
either a net premium or gross premium valuation method.
The assumptions used to determine the liabilities, under these valuation
methods are updated at each reporting date to reflect recent experience.
Material judgement is required in calculating these liabilities and, in
particular, in the choice of assumptions about which there is uncertainty over
future experience. The principal assumptions are as follows:
Discount rates
The Group discounts participating and non-participating insurance contract
liabilities at a risk-free rate derived from the swap yield curve, plus an
illiquidity premium of 36bps.
For certain non-participating insurance contract liabilities (e.g. annuities),
the Group makes a further explicit adjustment to the risk-free rate to reflect
illiquidity in respect of the assets backing those liabilities.
Expenses
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, a
further margin for adverse deviations may then be added to the rate of expense
inflation.
Mortality and longevity rates
Mortality rates are based on 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
For realistic basis funds, the regular bonus rates assumed in each scenario
are determined in accordance with each company's PPFM. Final bonuses are
assumed at a level such that maturity payments will equal asset shares subject
to smoothing rules set out in the PPFM 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 amount
provided in the with-profit and non-profit funds in respect of the future
costs of guaranteed annuity options are £1,968 million (2020: £2,590
million) and £111 million (2020: £131 million) respectively.
In common with other life companies in the UK which have written pension
transfer and opt-out business, the Group has set up provisions for the review
and possible redress relating to personal pension policies. These provisions,
which have been calculated from data derived from detailed file reviews of
specific cases and using a certainty equivalent approach, which give a result
very similar to a market consistent valuation, are included in liabilities
arising under insurance contracts. The total amount provided in the
with-profit funds and non-profit funds in respect of the review and possible
redress relating to pension policies, including associated costs, are £349
million (2020: £374 million) and £6 million (2020: £6 million)
respectively.
With-profit deferred annuities participate in profits only up to the date of
retirement. At retirement, a guaranteed cash option allows the policyholder to
commute the annuity benefit into cash on guaranteed terms.
Demographic prudence margin
For non-participating insurance contract liabilities, the Group sets
assumptions at management's best estimates and recognises an explicit margin
for demographic risks. For participating business in realistic basis funds,
the assumptions about future demographic trends represent 'best estimates'.
Assumption changes
During the year a number of changes were made to assumptions to reflect
changes in expected experience or to reflect transition activity. The impact
of material changes during the year was as follows:
(Decrease)/ (Decrease)/
increase in insurance liabilities
increase in insurance liabilities 2020
2021
£m
£m
Change in longevity assumptions (272) (369)
Change in persistency assumptions (12) 6
Change in mortality assumptions (7) 31
Change in expenses assumptions 275 (36)
2021:
The £272 million positive impact of changes in longevity assumptions reflects
updates to base and improvement assumptions to reflect latest experience
analyses and the most recent Continuous Mortality Investigation 2020
projection tables.
The £12 million and £7 million positive impact of changes in persistency and
mortality assumptions respectively reflects the results of the latest
experience investigations.
The £275 million negative impact of changes in expense assumptions
principally reflects the impact of investment in the Group's growth agenda on
the maintenance cost base, including the development of capabilities within
the Group's Open business, asset management capabilities and within certain
Group functions. The increase in reserves also reflects provision for the
anticipated costs associated with the implementation of IFRS 17 and delivery
of the Group Target Operating Model for IT and Operations.
2020:
The £369 million positive impact of changes in longevity assumptions reflects
updates to base and improvement assumptions to reflect latest experience
analyses and the most recent Continuous Mortality Investigation 2019
projection tables.
The £6 million and £31 million negative impact of changes in persistency and
mortality assumptions respectively reflects the results of the latest
experience investigations.
The £36 million positive impact of changes in expense assumptions principally
reflects synergies generated upon the completion of the Part VII transfer of
the L&G Mature Savings business, partially offset by an increase in
reserves in respect of expected costs associated with the delivery of the
Group Target Operating Model for IT and Operations and updates to investment
expense assumptions, principally reflecting changes to asset mix.
F4.2 Managing product risk
The following sections give an assessment of the risks associated with the
Group's main life assurance products and the ways in which the Group manages
those risks.
Gross1 Reinsurance
2021 Insurance contracts £m Investment contracts with DPF £m Insurance contracts £m Investment contracts with DPF £m
With-profit funds:
Pensions:
Deferred annuities - with guarantees 8,746 53 728 -
Deferred annuities - without guarantees 1,753 341 - -
Immediate annuities 6,506 - 3,787 -
Unitised with-profit 13,344 27,078 - -
Total pensions 30,349 27,472 4,515 -
Life:
Immediate annuities 348 - 1 -
Unitised with-profit 9,364 1,137 - -
Life with-profit 2,166 - 6 -
Total life 11,878 1,137 7 -
Other 1,245 (1) 192 -
Non-profit funds:
Deferred annuities - with guarantees 555 - - -
Deferred annuities - without guarantees 983 - 158 -
Immediate annuities 37,329 - 2,885 -
Protection 2,076 - 876 -
Unit-linked 14,891 1,084 22 -
Other (137) 3 (68) -
99,169 29,695 8,587 -
1 £9,864 million (2020: £7,883 million) of liabilities are subject to
longevity swap arrangements.
Gross Reinsurance
2020 Insurance contracts Investment contracts with DPF Insurance contracts Investment contracts with DPF
£m
£m
£m
£m
With-profit funds:
Pensions:
Deferred annuities - with guarantees 10,095 62 917 -
Deferred annuities - without guarantees 1,835 340 - -
Immediate annuities 7,478 - 4,377 -
Unitised with-profit 14,375 28,210 - -
Total pensions 33,783 28,612 5,294 -
Life:
Immediate annuities 365 - 2 -
Unitised with-profit 9,869 1,210 - -
Life with-profit 2,445 - 7 -
Total life 12,679 1,210 9 -
Other 1,348 - 212 -
Non-profit funds:
Deferred annuities - with guarantees 636 - -
Deferred annuities - without guarantees 1,966 - (115) -
Immediate annuities 35,641 - 2,459 -
Protection 3,012 - 1,713 -
Unit-linked 14,062 1,064 31 -
Other (115) 9 (61) -
103,012 30,895 9,542 -
With-profit fund (unitised and traditional)
The Group operates a number of with-profit funds in which the with-profit
policyholders benefit from a discretionary annual bonus (guaranteed once added
in most cases) and a discretionary final bonus. Non-participating business is
also written in some of the with-profit funds and some of the funds may
include immediate annuities and deferred annuities with Guaranteed Annuity
Rates ('GAR').
The investment strategy of each fund differs, but is broadly to invest in a
mixture of fixed interest investments and equities and/or property and other
asset classes in such proportions as is appropriate to the investment risk
exposure of the fund and its capital resources.
The Group has significant discretion regarding investment policy, bonus policy
and early termination values. The process for exercising discretion in the
management of the with-profit funds is set out in the PPFM for each
with-profit fund and is overseen by with-profit committees. Advice is also
taken from the with-profit actuary of each with-profit fund. Compliance with
the PPFM is reviewed annually and reported to the PRA, Financial Conduct
Authority ('FCA') and policyholders.
The bonuses are designed to distribute to policyholders a fair share of the
return on the assets in the with-profit funds together with other elements of
the experience of the fund. The shareholders of the Group are entitled to
receive one-ninth of the cost of bonuses declared for some funds and £nil for
others. For the HWPF, under the Scheme, shareholders are entitled to receive
certain defined cash flows arising on specified blocks of UK and Irish
business.
Unitised and traditional with-profit policies are exposed to equivalent risks,
the main difference being that unitised with-profit policies purchase notional
units in a with-profit fund whereas traditional with-profit policies do not.
Benefit payments for unitised policies are then dependent on unit prices at
the time of a claim, although charges may be applied. A unitised with-profit
fund price is typically guaranteed not to fall and increases in line with any
discretionary bonus payments over the course of one year.
Deferred annuities
Deferred annuity policies are written to provide either a cash benefit at
retirement, which the policyholder can use to buy an annuity on the terms then
applicable, or an annuity payable from retirement. The policies contain an
element of guarantee expressed in the form that the contract is written in,
i.e. to provide cash or an annuity. Deferred annuity policies written to
provide a cash benefit may also contain an option to convert the cash benefit
to an annuity benefit on guaranteed terms; these are known as GAR policies.
Deferred annuity policies written to provide an annuity benefit may also
contain an option to convert the annuity benefit into cash benefits on
guaranteed terms; these are known as Guaranteed Cash Option ('GCO') policies.
In addition, certain unit prices in the HWPF are guaranteed not to decrease.
During the last decade, interest rates and inflation have fallen and life
expectancy has increased more rapidly than originally anticipated. The
guaranteed terms on GAR policies are more favourable than the annuity rates
currently available in the market available for cash benefits. The guaranteed
terms on GCO policies are currently not valuable. Deferred annuity policies
which are written to provide annuity benefits are managed in a similar manner
to immediate annuities and are exposed to the same risks.
The option provisions on GAR policies are particularly sensitive to downward
movements in interest rates, increasing life expectancy and the proportion of
customers exercising their option. Adverse movements in these factors could
lead to a requirement to increase reserves which could adversely impact profit
and potentially require additional capital. In order to address the interest
rate risk (but not the risk of increasing life expectancy or changing
customer behaviour with regard to exercise of the option), insurance
subsidiaries within the Group have purchased derivatives that provide
protection against an increase in liabilities and have thus reduced the
sensitivity of profit to movements in interest rates (see note E6.2.2).
The Group seeks to manage this risk in accordance with both the terms of the
issued policies and the interests of customers, and has obtained external
advice supporting the manner in which it operates the long-term funds in this
respect.
Immediate annuities
This type of annuity is purchased with a single premium at the outset, and is
paid to the policyholder for the remainder of their lifetime. Payments may
also continue for the benefit of a surviving spouse or partner after the
annuitant's death. Annuities may be level, or escalate at a fixed rate, or may
escalate in line with a price index and may be payable for a minimum period
irrespective of whether the policyholder remains alive.
The main risks associated with this product are longevity and investment
risks. Longevity risk arises where the annuities are paid for the lifetime of
the policyholder, and is managed through the initial pricing of the annuity
and through reinsurance (appropriately collateralised) or transfer of existing
liabilities. Annuities may also be a partial 'natural hedge' against losses
incurred in protection business in the event of increased mortality (and vice
versa) although the extent to which this occurs will depend on the similarity
of the demographic profile of each book of business. In addition, the Group
has in place longevity swaps that provide downside protection over longevity
risk.
The pricing assumption for mortality risk is based on both historic internal
information and externally generated information on mortality experience,
including allowances for future mortality improvements. Pricing will also
include a contingency margin for adverse deviations in assumptions.
Market and credit risk is influenced by the extent to which the cash flows
under the contracts have been matched by suitable assets which is managed
under the ALM framework. Asset/liability modelling is used to monitor this
position on a regular basis.
Protection
These contracts are typically secured by the payment of a regular premium
payable for a period of years providing benefits payable on certain events
occurring within the period. The benefits may be a single lump sum or a series
of payments and may be payable on death, serious illness or sickness.
The main risk associated with this product is the claims experience and this
risk is managed through the initial pricing of the policy (based on actuarial
principles), the use of reinsurance and a clear process for administering
claims.
Market and credit risk is influenced by the extent to which the cash flows
under the contracts have been matched by suitable assets which is managed
under the ALM framework. Asset/liability modelling is used to monitor this
position on a regular basis.
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 four 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') and
the ReAssure Staff Pension Scheme ('ReAssure 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 and also includes the net pension scheme liability
in respect of the Group operated unapproved retirement benefit scheme
('ReAssure Private Retirement Trust'):
2021 2020
£m
£m
Pearl Group Staff Pension Scheme
Economic surplus 263 527
Adjustment for insurance policies eliminated on consolidation (1,680) (596)
Net economic deficit (1,417) (69)
Provision for tax on that part of the economic surplus available as a refund (92) (185)
on a winding-up of the Scheme
Net pension scheme liability, as reported (1,509) (254)
Reimbursement right in respect of reinsurance, as reported 212 -
Add: value attributed to assets held by PLL within financial assets1 1,896 756
Adjusted net pension scheme asset 599 502
PGL Pension Scheme
Economic surplus 26 30
Adjustment for insurance policies eliminated on consolidation (1,618) (1,749)
Net pension scheme liability, as reported (1,592) (1,719)
Add: assets held by PLL within financial assets1 2,084 2,177
Adjusted net pension scheme asset 492 458
Abbey Life Staff Pension Scheme
Economic surplus/(deficit) 12 (61)
Provision for tax on that part of the economic surplus available as a refund (4) -
on a winding-up of the Scheme
Minimum funding requirement obligation (7) -
Net pension scheme asset/(liability) 1 (61)
ReAssure Staff Pension Scheme
Economic surplus 54 16
Provision for tax on that part of the economic surplus available as a refund (19) (5)
on a winding-up of the Scheme
Net pension scheme asset 35 11
ReAssure Private Retirement Trust
Net pension scheme liability (2) (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 for the first time in relation to both the 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.
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 partially offset by the buy-in policies that move in line with the
liabilities. These buy-in policies are eliminated on consolidation
(see sections G1.1 and G1.2 for further details).
Information on each of these schemes is set out below.
Guaranteed Minimum Pension ('GMP') equalisation
GMP is a portion of pension that was accrued by individuals who were
contracted out of the State Second Pension prior to 6 April 1997.
Historically, there was an inequality of benefits between male and female
members who have GMP. A High Court case concluded on 26 October 2018 and
confirmed that GMPs needed to be equalised. A further ruling in November 2020
clarified requirements in respect of transfers out. During 2020, the Group
updated the initial assessment of its allowance for the potential cost of
equalising GMP for the impact between males and females included its IAS 19
actuarial liabilities. At 31 December 2021 the GMP equalisation reserve was
calculated as a percentage uplift to the defined benefit obligation for each
scheme as follows: PGL Scheme: 0.5% (2020: 0.5%); Pearl Scheme: 0.37% (2020:
0.37%); Abbey Life Scheme: 0.37% (2020: 0.37%); and the ReAssure Scheme: 0.1%
(2020: 0.1%).
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 Group Holdings No.2 Limited
('PGH2'), is the principal employer of the Pearl Scheme. The principal
employer meets the administration expenses of the Pearl Scheme. The Pearl
Scheme is administered by a separate trustee company, P.A.T. (Pensions)
Limited, which is separate from the Company. The trustee company is comprised
of four representatives from the Group, three member nominated representatives
and one independent trustee in accordance with the trustee company's articles
of association. The trustee is required by law to act in the interest of all
relevant beneficiaries and is responsible for the investment policy with
regard to the assets.
To the extent that an economic surplus will be available as a refund, the
economic surplus is stated after a provision for tax that would be settled by
the scheme administrators when the refund is made.
The valuation has been based on an assessment of the liabilities of the Pearl
Scheme as at 31 December 2021, 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 2018 was
completed in 2019. This showed a surplus as at 30 June 2018 of £104
million, on the agreed technical provisions basis. The triennial funding
valuation of the Scheme as at 30 June 2021 commenced during the year and is
ongoing as at 31 December 2021. 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
derived from government bond yields 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
On 17 November 2020, the Pearl Scheme entered into a Commitment Agreement with
PGH2 to complete a series of buy-ins that are scheduled to be executed by 31
December 2023. 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. Risks, including longevity improvement risk, were
transferred to PLL effective from 28 May 2021 and 31 August 2021 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.
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 2021 was £1,680 million (2020: £596
million) which includes an amount owed by PLL of £12 million (2020: £nil).
The Commitment Agreement replaced the 2012 Pensions Agreement, which had
previously included provisions covering contribution payments, additional
contributions payable should agreed funding targets not be met, share charge
over certain Group entities and covenant tests. The main terms of the
Commitment Agreement are detailed below.
The new agreement contains provisions under which payments by PGH2 to the
Scheme are required in the event that the Group does not meet the minimum
buy-in completion schedule. There are two different types of payments as
detailed below:
• gilts deficit recovery contributions: These operate in a similar way to
the security under the 2012 Pension Agreement. Contributions calculated as
amounts required to reach full funding on a gilts-basis by 30 June 2027; and
• contingent contributions: These represent a new form of security for the
trustee. The amount of these contributions was initially capped at £200
million, with the cap running off in line with completion of the buy-ins.
Following the completion of the recent buy-in transactions the cap is £50
million.
The new agreement also introduces a new form of security provided by PGH2 to
the trustee which will be in place until the final buy-in is completed. The
share charges over certain Group entities have been replaced by a new surety
bond arrangement. The surety bonds have been written by two external
third-party insurers, each providing £100 million of cover payable to the
Scheme following any one of the following trigger events:
• insolvency of the Company, PGH2, PGS, Standard Life Assurance Limited,
PLL, or Phoenix Life Assurance Limited; and
• failure to pay any contributions to the Scheme due under the terms of
the Commitment Agreement.
The cover provided by the surety bonds will be reduced from £200 million to
£100 million (in aggregate) once the completed aggregate buy-in proportion
exceeds 75%. The cover remains at £200 million following completion of the
October 2021 buy-in transaction. The agreements between the trustee and the
surety providers are backed by a guarantee and an indemnity from the Company,
PGH2 and PGS to the surety providers to repay them in the event of a claim
under the surety bond.
Contributions totalling £70 million were paid into the Pearl Scheme in 2020.
Following the signing of the new Commitment Agreement PGH2 paid the balance of
the remaining contributions under the 2012 Pensions Agreement (£37 million)
in addition to the monthly instalments paid up to the date of the agreement.
No further contributions are to be paid to the Pearl Scheme however, PGH2 will
continue to meet the administrative and non-investment running expenses of the
Scheme as set out in the schedule of contributions.
Reimbursement right asset in respect of reinsurance arrangement
In November 2021, PLL entered into a quota share reinsurance arrangement with
an external insurer to reinsure c.64% of the risks transferred to PLL upon
completion of the third buy-in transaction with the Pearl Scheme. A premium of
£261 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.
Summary of amounts recognised in the consolidated financial statements
The amounts recognised in the consolidated financial statements are as
follows:
2021 Fair value of scheme assets Defined benefit obligation Provision for tax on the economic surplus available as a refund Pension Scheme Liability Reimburse-ment right asset
£m
£m
£m
£m £m
At 1 January 2,315 (2,384) (185) (254) -
Interest income/(expense) 24 (33) (2) (11) -
Included in profit or loss 24 (33) (2) (11) -
Remeasurements:
Return on plan assets excluding amounts included in interest income 27 - - 27 (49)
Gain from changes in demographic assumptions - 22 - 22 -
Gain from changes in financial assumptions - 89 - 89 -
Experience loss - (26) - (26) -
Change in provision for tax on economic surplus available as a refund - - 95 95 -
Included in other comprehensive income 27 85 95 207 (49)
Income received from insurance policies 46 - - 46 -
Benefit payments (108) 108 - - -
Assets transferred as premium for Scheme buy-in (1,497) - - (1,497) -
Assets transferred as premium for reinsurance arrangement - - - - 261
At 31 December 807 (2,224) (92) (1,509) 212
2020 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 2,834 (2,313) (183) (24) 314
Interest income/(expense) 53 (45) (4) (1) 3
Past service cost - (1) - - (1)
Included in profit or loss 53 (46) (4) (1) 2
Remeasurements:
Return on plan assets excluding amounts included in interest income 198 - - - 198
Gain from changes in demographic assumptions - 51 - - 51
Loss from changes in financial assumptions - (205) - - (205)
Experience gain - 19 - - 19
Change in provision for tax on economic surplus available as a refund - - 2 - 2
Change in minimum funding requirement obligation - - - 25 25
Included in other comprehensive income 198 (135) 2 25 90
Employer's contributions 70 - - - 70
Income received from insurance policies 5 - - - 5
Benefit payments (110) 110 - - -
Assets transferred as premium for Scheme buy-in (735) - - - (735)
At 31 December 2,315 (2,384) (185) - (254)
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
2021 2020
Total Of which not quoted in an active market Total Of which not quoted in an active market
£m
£m
£m
£m
Hedging portfolio 438 23 1,505 (30)
Fixed interest gilts - - 50 -
Other debt securities 349 - 1,301 -
Properties 104 104 140 140
Private equities 4 4 5 5
Hedge funds 4 4 5 5
Cash and other 67 - 98 -
Obligations for repayment of stock lending collateral received (159) - (789) -
Reported scheme assets 807 135 2,315 120
Add back:
Insurance policies eliminated on consolidation 1,680 1,680 596 596
Economic value of assets 2,487 1,815 2,911 716
The Group ensures that the investment positions are managed within an Asset
Liability Matching ('ALM') framework that has been developed to achieve
long-term investments that are in line with the obligations under the Pearl
Scheme. Within this framework an allocation of the scheme assets is invested
in collateral for interest rate and inflation rate hedging where the intention
is to hedge 100% of the interest rate and inflation rate risk measured on a
gilts-basis.
The Pearl Scheme uses swaps, UK Government bonds and UK Government stock
lending to hedge the interest rate and inflation exposure arising from the
liabilities which are disclosed in the table above as 'Hedging Portfolio'
assets. Under the Scheme's stock lending programme, the Scheme lends a
Government bond to an approved counterparty and receives a similar value in
the form of cash in return which is typically reinvested into other Government
bonds. The Scheme retains economic exposure to the Government bond, hence
the bonds continue to be recognised as scheme assets with a corresponding
liability to repay the cash received as disclosed in the table above.
Defined benefit obligation
The calculation of the defined benefit obligation can be allocated to the
scheme's members as follows:
• deferred scheme members: 40% (2020: 40%); and
• pensioners: 60% (2020: 60%)
The weighted average duration of the defined benefit obligation at 31 December
2021 is 16 years (2020: 16 years).
Principal assumptions
The principal financial assumptions of the Pearl Scheme are set out in the
table below:
2021 2020
%
%
Rate of increase for pensions in payment (5% per annum or RPI if lower) 3.20 2.85
Rate of increase for deferred pensions ('CPI') 2.70 2.10
Discount rate 2.00 1.40
Inflation - RPI 3.30 2.90
Inflation - CPI 2.70 2.10
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 2020 Core Projections (2020: From 1 January 2017 based on amended CMI 2019
Core Projections) and a long-term rate of improvement of 1.70% (2020: 1.70%)
per annum for males and 1.20% (2020: 1.20%) per annum for females. Under these
assumptions, the average life expectancy from retirement for a member
currently aged 40 retiring at age 60 is 29.8 years and 30.6 years for male and
female members respectively (2020: 30.1 years and 31.0 years respectively).
A quantitative sensitivity analysis for significant actuarial assumptions is
shown below:
2021
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps increase 25bps decrease 25bps increase 25bps 1 year increase 1 year decrease
decrease
Impact on the defined benefit obligation (£m) 2,224 (87) 93 70 (68) 80 (80)
2020
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps increase 25bps decrease 25bps increase 25bps 1 year increase 1 year decrease
decrease
Impact on the defined benefit obligation (£m) 2,384 (95) 98 76 (87) 86 (86)
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. Contributions in the
period to 1 July 2020 were £5 million.
Defined benefit scheme
The defined benefit section of the PGL Pension Scheme is a final salary
arrangement which is closed to new entrants and has 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 2021, 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 2018 was
completed in 2019. This showed a surplus as at 30 June 2018 of £246
million. The IFRS valuation cash flows reflect current 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 2021 is
£1,618 million (2020: £1,749 million).
Summary of amounts recognised in the consolidated financial statements
The amounts recognised in the consolidated financial statements are as
follows:
2021 Fair value of scheme assets Defined benefit obligation £m Total
£m
£m
At 1 January 35 (1,754) (1,719)
Interest income/(expense) - (25) (25)
Administrative expenses (4) - (4)
Past service cost - - -
Included in profit or loss (4) (25) (29)
Remeasurements:
Return on plan assets excluding amounts included in interest income - - -
Gain from changes in demographic assumptions - 16 16
Gain from changes in financial assumptions - 70 70
Experience loss - (3) (3)
Included in other comprehensive income - 83 83
Income received from insurance policies 73 - 73
Benefit payments (73) 73 -
At 31 December 31 (1,623) (1,592)
2020 Fair value of scheme assets Defined benefit obligation Total
£m
£m
£m
At 1 January 54 (1,691) (1,637)
Interest income/(expense) 1 (31) (30)
Administrative expenses (3) - (3)
Past service costs - (1) (1)
Included in profit or loss (2) (32) (34)
Remeasurements:
Return on plan assets excluding amounts included in interest income (4) - (4)
Gain from changes in demographic assumptions - 7 7
Loss from changes in financial assumptions - (154) (154)
Experience gain - 41 41
Included in other comprehensive income (4) (106) (110)
Income received from insurance policies 75 - 75
Benefit payments (75) 75 -
Assets transferred as premium for 2019 scheme buy-in (13) - (13)
At 31 December 35 (1,754) (1,719)
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
2021 2020
Total Of which not quoted in an active market £m Total Of which not quoted in an active market £m
£m
£m
Cash and other 31 - 35 -
Reported scheme assets 31 - 35 -
Add back:
Insurance policies eliminated on consolidation 1,618 1,610 1,749 1,749
Economic value of assets 1,649 1,610 1,784 1,749
Defined benefit obligation
The calculation of the defined benefit obligation can be allocated to the
scheme's members as follows:
• deferred scheme members: 36% (2020: 36%); and
• pensioners: 64% (2020: 64%)
The weighted average duration of the defined benefit obligation at 31 December
2021 is 16 years (2020: 16 years).
Principal assumptions
The principal financial assumptions of the PGL Pension Scheme are set out in
the table below:
2021 2020
%
%
Rate of increase for pensions in payment (7.5% per annum or RPI if lower) 3.30 2.90
Rate of increase for deferred pensions ('CPI') 2.70 2.10
Discount rate 2.00 1.40
Inflation - RPI 3.30 2.90
Inflation - CPI 2.70 2.10
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 2017 to 31 December 2020 are based on modified CMI 2019 Core
Projections and from 1 January 2021 are based on modified CMI 2020 Core
Projections (2020: From 1 January 2017 based on modified CMI 2019 Core
Projections) with a long-term rate of improvement of 1.70% (2020: 1.70%) per
annum for males and 1.20% (2020: 1.20%) per annum for females. Under these
assumptions, the average life expectancy from retirement for a member
currently aged 40 retiring at age 62 is 28.0 years (2020: 28.4 years) and 28.9
years (2020: 29.3 years) for male and female members respectively.
A quantitative sensitivity analysis for significant actuarial assumptions is
shown below:
2021
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps increase 25bps 25bps increase 25bps 1 year increase 1 year decrease
decrease
decrease
Impact on the defined benefit obligation (£m) 1,623 (62) 66 54 (52) 60 (60)
2020
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps increase 25bps 25bps increase 25bps decrease 1 year increase 1 year decrease
decrease
Impact on the defined benefit obligation (£m) 1,754 (67) 70 55 (53) 65 (65)
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
Pearl Life Holdings Limited ('PeLHL'), a fellow subsidiary. PeLHL assumed the
scheme covenant together with all obligations of the scheme following
implementation of the transfer. The Abbey Life Scheme is a registered
occupational pension scheme, set up under trust, and legally separate from
the employer PeLHL. The scheme is administered by Abbey Life Trust Securities
Limited (the trustee), a corporate trustee. There are three trustee
directors, one of whom is nominated by the Abbey Life Scheme members and two
of whom are appointed by PeLHL. The trustee is responsible for administering
the scheme in accordance with the trust deed and rules and pensions laws and
regulations. The Abbey Life Scheme is closed to new entrants 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 2021 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 and a revised
schedule of contributions was agreed effective from November 2021, for PeLHL
to pay the following amounts in respect of deficit contributions:
• fixed monthly contributions of £400,000 payable from 30 April 2021 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 by 31 July 2022, and the
last payment due by 31 July 2025.
The charged accounts are Escrow accounts which were created in 2010 to provide
the trustees with additional security in light of the funding deficit. The
amounts held in the charged accounts do not form part of Abbey Life Scheme
assets.
Under the terms of the 2013 Funding Agreement the funding position of the
Scheme was assessed as at 31 March 2021 and this assessment revealed a
shortfall, calculated in accordance with the terms of the New 2013 Funding
Agreement, which exceeded the amount held in the New 2013 Charged Account. As
such, the entire balance of £42 million was paid from the New 2013 Charged
Account to the Abbey Life Scheme in December 2021.
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 £7 million (2020: £nil) has been recognised
reflecting a charge on any refund of the resultant IAS 19 surplus that arises
after adjustment for discounted future contributions of £21 million in
accordance with the minimum funding requirement. A deferred tax asset of £4
million (2020: £nil) has also been recognised to reflect tax relief at a rate
of 19% 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:
2021 Fair value of scheme assets Defined benefit obligation £m Provision for tax on the economic surplus available as a refund Minimum funding requirement obligation £m Total
£m
£m
£m
At 1 January 280 (341) - - (61)
Interest income/(expense) 4 (5) - - (1)
Administration expenses (1) - - (1)
Included in profit or loss 3 (5) - - (2)
Remeasurements:
Return on plan assets excluding amounts included in interest income 11 - - - 11
Experience loss - (5) - - (5)
Gain from changes in demographic assumptions - 6 - - 6
Gain from changes in financial assumptions - 15 - - 15
Change in minimum funding requirement obligation - - - (7) (7)
Change in provision for tax on economic surplus available as a refund - - (4) - (4)
Included in other comprehensive income 11 16 (4) (7) 16
Employer's contributions 48 - - - 48
Benefit payments (12) 12 - - -
At 31 December 330 (318) (4) (7) 1
2020 Fair value of scheme assets £m Defined benefit obligation Total
£m
£m
At 1 January 254 (329) (75)
Interest income/(expense) 5 (7) (2)
Administrative expenses (1) - (1)
Included in profit or loss 4 (7) (3)
Remeasurements:
Return on plan assets excluding amounts included in interest income 28 - 28
Gain from changes in demographic assumptions - 6 6
Loss from changes in financial assumptions - (31) (31)
Experience gain - 8 8
Included in other comprehensive income 28 (17) 11
Employer's contributions 6 - 6
Benefit payments (12) 12 -
At 31 December 280 (341) (61)
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
2021 2020
Total Of which not quoted in an active market Total Of which
£m
£m
£m
not quoted in an active market
£m
Diversified income fund 139 - 118 -
Fixed interest government bonds 68 - 70 -
Corporate bonds 118 - 86 -
Derivatives 1 1 2 2
Cash and cash equivalents 4 - 4 -
Pension scheme assets 330 1 280 2
Derivative values above include interest rate and inflation rate swaps and
foreign exchange forward contracts. The Abbey Life Scheme has hedged its
inflation risk through an inflation swap. It is currently exposed to interest
rate risk to the extent that the holdings in bonds are mismatched to the
scheme liabilities. The long-term intention is to fully hedge this risk
through an interest rate swap. Further key risks that will remain are
longevity and credit spread exposures.
Defined benefit obligation
The calculation of the defined benefit obligation can be allocated to the
Abbey Life Scheme's members as follows:
• deferred scheme members: 44% (2020: 49%); and
• pensioners: 56% (2020: 51%)
The weighted average duration of the defined benefit obligation at 31 December
2021 is 16 years (2020: 17 years).
Principal assumptions
The principal financial assumptions of the Abbey Life Scheme are set out in
the table below:
2021 2020
%
%
Rate of increase for pensions in payment (5% per annum or RPI if lower) 3.20 2.85
Rate of increase for deferred pensions ('CPI' subject to caps) 2.70 2.10
Discount rate 2.00 1.40
Inflation - RPI 3.30 2.90
Inflation - CPI 2.70 2.10
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 2020 are based on amended
CMI 2020 Core Projections (2020: From 1 January 2017 based on amended CMI 2019
Core Projections) and a long-term rate of improvement of 1.70% (2020: 1.70%)
per annum for males and 1.20% (2020: 1.20%) per annum for females. Under these
assumptions the average life expectancy from retirement for a member currently
aged 45 retiring at age 65 is 24.9 years and 25.7 years for male and female
members respectively (2020: 25.4 years and 26.5 years respectively).
A quantitative sensitivity analysis for significant actuarial assumptions is
shown below:
2021
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps increase 25bps decrease 25bps increase 25bps decrease 1 year increase 1 year decrease
Impact on the defined benefit obligation (£m) 318 (12) 13 8 (9) 12 (12)
2020
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps increase 25bps decrease 25bps increase 25bps decrease 1 year increase 1 year decrease
Impact on the defined benefit obligation (£m) 341 (14) 15 10 (11) 13 (13)
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 was consolidated within the Group financial statements
following the acquisition of the ReAssure businesses on 22 July 2020. 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 2020 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 has 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 instead are 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 £1 million (2020: £1 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:
2021 Fair value of scheme assets Defined benefit obligation £m Provision for tax on the economic surplus available as a refund Total
£m
£m
£m
At 1 January 477 (461) (5) 11
Interest income/(expense) 6 (6) - -
Administrative expenses (1) - - (1)
Included in profit or loss 5 (6) - (1)
Remeasurements:
Return on plan assets excluding amounts included in interest income 19 - - 19
Gain from changes in demographic assumptions - 1 - 1
Gain from changes in financial assumptions - 20 - 20
Experience loss - (2) - (2)
Change in provision for tax on economic surplus available as a refund - - (14) (14)
Included in other comprehensive income 19 19 (14) 24
Employer's contributions 1 - - 1
Benefit payments (10) 10 - -
At 31 December 492 (438) (19) 35
2020 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 - - - -
Acquisition of ReAssure businesses 459 (424) (12) 23
Interest income/(expense) 4 (4) - -
Administrative expenses (1) - - (1)
Included in profit or loss 3 (4) - (1)
Remeasurements:
Return on plan assets excluding amounts included in interest income 19 - - 19
Loss from changes in demographic assumptions - (15) - (15)
Loss from changes in financial assumptions - (25) - (25)
Experience gain - 2 - 2
Change in provision for tax on economic surplus available as a refund - - 7 7
Included in other comprehensive income 19 (38) 7 (12)
Employer's contributions 1 - - 1
Benefit payments (5) 5 - -
At 31 December 477 (461) (5) 11
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
2021 2020
Total Of which not quoted in an active market Total Of which not quoted in an active market
£m
£m
£m
£m
Equities 62 - 56 -
Government bonds 151 - 121 -
Corporate bonds 173 - 181 -
Real Estate - - 41 -
Managed funds 60 - - -
Other Quoted Securities 43 - 70 -
Cash and cash equivalents 3 - 8 -
Pension scheme assets 492 - 477 -
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% (2020: 74%); and
• pensioners: 34% (2020: 26%).
The weighted average duration of the defined benefit obligation at 31 December
2021 is 21 years (2020: 21 years).
Principal assumptions
The principal assumptions of the ReAssure Scheme are set out in the table
below:
2021 2020
%
%
Rate of increase for pensions in payment (5% per annum or RPI if lower) 3.20 2.85
Rate of increase for deferred pensions 2.70 2.10
Rate of increase in salaries 3.70 3.10
Discount rate 2.00 1.40
Inflation - RPI 3.30 2.90
Inflation - CPI 2.70 2.10
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% (2020: 96%) multiplier for males and a 95% (2020: 92%)
multiplier for females, with CMI 2019 projections in line with a 1.50% per
annum long-term trend up to and including 31 December 2020. Future longevity
improvements from 1 January 2021 onwards are in line with CMI 2020 Core
Projections (2020: From 1 January 2015 in line with CMI 2019 Core
Projections) with a long-term trend of 1.7% per annum (2020: 1.5%) for males
and 1.2% (2020: 1.5%) for females.
Under these assumptions the average life expectancy from retirement for a
member currently aged 45 retiring at age 60 is 30.1 years and 31.4 years for
male and female members respectively (2020: 29.8 years and 31.4 years for male
and female members respectively).
A quantitative sensitivity analysis for significant actuarial assumptions is
shown below:
2021
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps increase 25bps decrease 25bps increase 25bps decrease 1 year increase 1 year decrease
Impact on the defined benefit obligation (£m) 438 (21) 23 18 (17) 18 (17)
2020
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps increase 25bps decrease 25bps increase 25bps decrease 1 year increase 1 year decrease
Impact on the defined benefit obligation (£m) 461 (25) 25 21 (21) 18 (18)
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
Insurance and investment contracts with DPF acquired in business combinations
and portfolio transfers are measured at fair value at the time of
acquisition. The difference between the fair value of the contractual rights
acquired and obligations assumed and the liability measured in accordance with
the Group's accounting policies for such contracts is recognised as acquired
in-force business. This acquired in-force business is amortised over the
estimated life of the contracts on a basis which recognises the emergence of
the economic benefits.
The value of acquired in-force business related to investment contracts
without DPF is recognised at its fair value and is amortised on a diminishing
balance basis.
An impairment review is performed whenever there is an indication of
impairment. When the recoverable amount is less than the carrying value, an
impairment loss is recognised in the consolidated income statement. Acquired
in-force business is also considered in the liability adequacy test for each
reporting period.
The acquired in-force business is allocated to relevant cash generating units
for the purposes of impairment testing.
Customer relationships
The customer relationship intangible asset includes vesting pension premiums
and is measured on initial recognition at cost. The cost of this intangible
asset acquired in a business combination is the fair value as at the date of
acquisition. Following initial recognition, the customer relationship
intangible asset is carried at cost less any accumulated amortisation and any
accumulated impairment losses.
The intangible asset is amortised on a straight-line basis over its useful
economic life and assessed for impairment whenever there is an indication that
the recoverable amount of the intangible asset is less than its carrying
value. The customer relationship intangible asset is allocated to relevant
cash generating units for the purposes of impairment testing.
Present value of future profits on non-participating business in the with-profit fund
The present value of future profits ('PVFP') is determined in a manner
consistent with the realistic measurement of insurance contract liabilities.
The Group's accounting policy for PVFP is described in note F1.
Brands and other contractual arrangements
Brands and other contractual arrangements 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 and other contractual arrangements over their estimated useful
lives. They are tested for impairment whenever there is evidence of possible
impairment. For impairment testing, they are allocated to the relevant cash
generating unit. Brands and other contractual arrangements are impaired when
the recoverable amount is less than the carrying value.
Other intangibles
2021 Goodwill Acquired Customer relationships £m Brands and other Total other intangibles £m Total
£m
in-force business
£m
£m
£m
Cost or valuation
At 1 January 57 7,028 297 56 353 7,438
Additions - - - 111 111 111
Disposal of Ark Life - (21) - - - (21)
Termination of Client Services and Proposition Agreement - - - (36) (36) (36)
At 31 December 57 7,007 297 131 428 7,492
Amortisation and impairment
At 1 January - (2,015) (168) (14) (182) (2,197)
Amortisation charge for the year - (537) (15) (5) (20) (557)
Impairment charge for the year1 (47) (99) - - - (146)
Disposal of Ark Life - 21 - - - 21
Termination of Client Services and Proposition Agreement - - - 6 6 6
At 31 December (47) (2,630) (183) (13) (196) (2,873)
Carrying amount 10 4,377 114 118 232 4,619
Less amounts classified as held for sale (see note A6.1) - (54) - - - (54)
Carrying amount at 31 December 10 4,323 114 118 232 4,565
Amount recoverable after 12 months 10 3,834 99 112 211 4,055
1 An impairment charge of £59 million to acquired in-force business has
been included within the 'gain on completion of abrdn plc transaction' in the
consolidated income statement, see note G2.2 for further details.
Other intangibles
2020 Goodwill Acquired Customer relationships £m Present value of future profits Brands and other Total other intangibles £m Total
£m
in-force business
£m
£m
£m
£m
Cost or valuation
At 1 January 57 5,197 297 82 56 435 5,689
Acquisition of ReAssure businesses - 1,831 - - - - 1,831
Reclassification to investment contract liabilities - - - (82) - (82) (82)
At 31 December 57 7,028 297 - 56 353 7,438
Amortisation and impairment
At 1 January - (1,546) (154) - (10) (164) (1,710)
Amortisation charge for the year - (469) (14) - (4) (18) (487)
At 31 December - (2,015) (168) - (14) (182) (2,197)
Carrying amount at 31 December 57 5,013 129 - 42 171 5,241
Amount recoverable after 12 months 57 4,457 115 - 10 125 4,639
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 cost of £47 million is attributable to the Management
Services segment. Value in use has been determined as the present value of
certain future cash flows associated with this business. The cash flows used
in this calculation have been valued using a risk adjusted discount rate of
9.5% (2020: 9.2%) and are consistent with those adopted by management in the
Group's 5 year operating plan and, for the period 2027 and beyond, reflect the
anticipated run-off of the Phoenix Life insurance business. The underlying
assumptions of these projections include management's best estimates with
regards to longevity, persistency, expenses, mortality and morbidity,
determined on the basis as described in note F4.1.
The Management Services segment generates income solely from the services
provided to other operating segments within the Group. As a result of planned
investment in the Group's growth agenda, including the development of
capabilities of the Open segment and certain Group functions, it is
anticipated that the Management Services segment will generate short-term
losses in the period until service agreements can be renegotiated. Together
with the effect of the expected run-off of the relevant Phoenix Life insurance
business, these anticipated short-term losses resulted in an assessment that
the recoverable amount of the goodwill was £nil as at 31 December 2021.
Accordingly, an impairment charge of £47 million has been recognised in the
year. Management considers that any reasonable change in key assumptions would
not cause the recoverable amount to exceed its carrying value.
The remaining £10 million relates to the goodwill recognised on the
acquisition of AXA Wealth during 2016 and has been allocated to the UK Open
segment. This represents the value of the workforce assumed and the potential
for future value creation, which relates to the ability to invest in and grow
the SunLife brand. Value in use has been determined as the present value of
certain future cash flows associated with that business. The cash flows used
in the calculation are consistent with those adopted by management in the
Group's 5 year operating plan, and for the period 2027 and beyond, assume a
zero growth rate. The underlying assumptions of these projections include
market share, customer numbers, commission rates and expense inflation. The
cash flows have been valued at a risk adjusted discount rate of 11% (2020:11%)
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 insurance contracts and investment
contracts with DPF represents the difference between the fair value of the
contractual rights under these contracts and the liability measured in
accordance with the Group's accounting policies for such contracts. This
intangible is being amortised in accordance with the run-off of the book of
business.
AVIF on investment contracts without DPF is amortised in line with emergence
of economic benefits.
AVIF balances are assessed for impairment where an indicator of impairment has
been identified. The following paragraphs set out the impairment indicators
identified and the results of the impairment tests carried out.
On 23 February 2021, the Group entered into an agreement with abrdn plc to
simplify the arrangements of their Strategic Partnership (see note A6 for
further details). 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. The balances in the statement of consolidated financial position
relating to this business were classified as a disposal group held for sale in
February 2021. The total proceeds of disposal for this business are not
expected to exceed the carrying value of the related net assets and
accordingly the disposal group has been recognised at fair value less costs to
sell. The value of the AVIF at 23 February 2021 was £122 million and an
impairment charge of £59 million was recognised on classification of the AVIF
balance as held for sale. This charge has been included within the 'gain on
completion of abrdn plc transaction' in the consolidated income statement. A
further impairment of £8 million has been recognised at 31 December 2021. The
AVIF balance classified as held for sale is not being amortised.
In June 2021, following the Group Board's approval to dispose of Ark Life
Assurance Company DAC, the entity was initially classified as a disposal
group held for sale. The 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. An impairment charge of £18
million has been recognised in respect of the AVIF upon classification of the
business as held for sale and recognised within 'amortisation and impairment
of acquired in-force business' in the consolidated income statement.
During the year, updates to the reserving methodology in respect of a certain
block of unit-linked insurance contracts within the Europe operating segment
resulted in a release of reserves of £20 million. This release of reserves
was considered to be an indicator of impairment in relation to a component of
the AVIF recognised on acquisition of the Standard Life Assurance businesses
as it represented an acceleration of the recognition of profits that had been
capitalised within the AVIF asset. Accordingly, an impairment test was
performed.
The value in use of the AVIF was determined using present value techniques
applied to the best estimate cash flows expected to arise from the relevant
policies that were in-force at the date of initial recognition of the AVIF,
adjusted to reflect an internal view of the required compensation for bearing
the uncertainty associated with those cash flows. The key underlying
assumptions were management's best estimates with regards to persistency and
expenses, which were determined on the basis as described in note F4.1.
It was determined that the carrying value exceeded value in use by £14
million and consequently an impairment charge has been recognised in the year,
the impact of which partly offsets the release of reserves described above.
The resultant net carrying value of this component of the Standard Life
Assurance AVIF was £49 million.
Acquired in-force business of £1,831 million was recognised during the prior
year upon acquisition of the ReAssure businesses (see note H2.1).
G2.3 Customer relationships
The customer relationships intangible at 31 December 2021 relates to vesting
pension premiums which captures the new business arising from policies
in-force at the acquisition date, specifically top-ups made to existing
policies and annuities vested from matured pension policies. The total value
of this customer relationship intangible at acquisition was £297 million and
has been allocated to the UK Heritage segment. This intangible is being
amortised over a 20 year period, and had a remaining useful life as at 31
December 2021 of 7.9 years (2020: 8.9 years).
G2.4 Present value of future profits on non-participating business in the with-profit fund
The principal assumptions used to calculate the present value of future
profits ('PVFP') are the same as those used in calculating the insurance
contract liabilities given in note F4.1.
The PVFP held in intangibles represented future profits on specific blocks of
business in the NPL with-profit fund that was partly attributable to the
holders of the limited recourse bonds (see note E5). As a consequence, the
value of future profits was not attributable solely to policyholders and the
PVFP was therefore presented as a separate intangible asset.
Following the repayment of the limited recourse bonds during the prior year,
the PVFP is shown as fully attributable to policyholders and consequently in
2020 the PVFP has been represented within investment contract liabilities.
G2.5 Brands and other intangibles
Other intangibles include £20 million which was recognised at cost on
acquisition of the AXA Wealth businesses and £36 million recognised at cost
on acquisition of the Standard Life Assurance businesses.
The amount recognised in respect of AXA Wealth represents the value
attributable to the SunLife brand as at 1 November 2016. The intangible asset
was valued on a 'multi-period excess earnings' basis. Impairment testing was
performed in a combined test with the AXA goodwill (see section G2.1). The
value in use continues to exceed its carrying value. This brand intangible is
being amortised over a 10 year period.
Following the acquisition of the Standard Life Assurance businesses in 2018 an
intangible asset was recognised in respect of the Client Services and
Proposition Agreement ('CSPA') with abrdn plc and represented the value of the
Group's contractual rights to use the Standard Life brand. The CSPA formalised
the Strategic Partnership between the two companies and established the
contractual terms by which abrdn plc was previously to continue to market and
distribute certain products to be manufactured by Group companies.
On 23 February 2021, the Group entered into an agreement to acquire ownership
of the Standard Life brand as part of the transaction with abrdn plc, which
transferred to the Group in May 2021. At 31 December 2021, 'brands and other
intangibles' includes £111 million in respect of the Standard Life brand and
represents 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 2021 is £108 million.
As part of the transaction with abrdn plc, the CSPA has been significantly
amended prior to being dissolved. As a consequence, the CSPA intangible
included within 'other intangibles' has been derecognised. At that time, its
carrying value was £30 million and this has been included in the calculation
of the 'gain on completion of abrdn plc transaction' recognised in the
consolidated income statement. This intangible was valued on a 'multi-period
excess earnings' basis and was being amortised over a period of 15 years.
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 the statement of consolidated
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
(2020: 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.
2021 Owner-occupied properties £m Right-of-use assets - property Right-of-use assets - equipment £m Equipment £m Total
£m
£m
Cost or valuation
At 1 January 2021 33 78 2 54 167
Additions 1 22 - 12 35
Remeasurement of Right-of-use assets - 3 - - 3
Disposals (5) (9) - (7) (21)
At 31 December 2021 29 94 2 59 184
Depreciation
At 1 January 2021 - (23) - (25) (48)
Depreciation - (9) (1) (8) (18)
Disposals - 8 - 4 12
At 31 December 2021 - (24) (1) (29) (54)
Carrying amount at 31 December 2021 29 70 1 30 130
2020 Owner-occupied properties Right-of-use assets - property Right-of-use assets - equipment £m Equipment £m Total
£m
£m
£m
Cost or valuation
At 1 January 2020 25 75 2 27 129
Acquisition of ReAssure businesses 8 3 - 4 15
Additions - - - 23 23
At 31 December 2020 33 78 2 54 167
Depreciation
At 1 January 2020 - (11) - (9) (20)
Depreciation - (12) - (16) (28)
At 31 December 2020 - (23) - (25) (48)
Carrying amount at 31 December 2020 33 55 2 29 119
Owner-occupied properties have been valued by accredited independent valuers
at 31 December 2021 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 £29 million
(2020: £33 million) has been categorised as Level 3 based on the
non-observable inputs to the valuation technique used. Unrealised gains for
the current and prior years are £nil.
The fair value of the owner-occupied properties was derived using the
investment method supported by comparable evidence. The significant
non-observable inputs used in the valuations are the expected rental values
per square foot and the capitalisation rates.
The fair value of the owner-occupied properties valuation would increase
(decrease) if the expected rental values per square foot were to be higher
(lower) and the capitalisation rates were to be lower (higher).
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.
2021 2020
£m
£m
At 1 January 7,128 5,943
Acquisition of ReAssure businesses - 556
L&G Part VII portfolio transfer - 1,221
Additions 819 157
Improvements 22 9
Disposals (550) (709)
Remeasurement of right-of-use asset (1) (1)
Movement in foreign exchange (22) 4
Gains/(losses) on adjustments to fair value (recognised in consolidated income 1,196 (52)
statement)
8,592 7,128
Less amounts classified as held for sale (see note A6.1) (3,309) -
At 31 December 5,283 7,128
Unrealised gains/(losses) on properties held at end of year 529 (43)
As at 31 December 2021, a property portfolio including amounts classified as
held for sale of £8,412 million (2020: £6,927 million) is held by the life
companies in a mix of commercial sectors and spread geographically throughout
the UK and Europe.
Investment properties also includes £73 million (2020: £86 million) of
property reversions arising from sales of the NPI Extra Income Plan (see note
E5 for further details) and £86 million (2020: 98 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
2021 was £21 million (2020: £17 million). The remeasurement gives rise to a
reduction of £1 million (2020: £1 million). There were no disposals of
ground rent right-of-use assets during the period (2020: £nil).
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 open market value is measured by
independent local property surveyors having appropriate recognised
professional qualifications with reference to the assumed condition of the
property and local market conditions. The individual properties are valued
triennially and indexed using regional house price indices to the year end
date. The discount rate is a risk-free rate appropriate for the duration of
the asset, adjusted for the deferred possession rate of 3.7% (2020: 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 interest discount rate was 5% (2020: 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 Weighted average Weighted average
non-observable inputs
2021
2020
Commercial RICS valuation Expected income per sq. ft. £21.36 £22.55
Investment Property
Estimated rental value per hotel room £8,534 £8,689
Estimated rental value per parking space £1,097 £1,169
Capitalisation rate 4.65% 5.26%
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 £41 million (2020: £13 million). The
direct operating expenses arising from investment property that did not
generate rental income during the year amounted to £1 million (2020: £1
million).
Future minimum lease rental receivables in respect of non-cancellable
operating leases on investment properties were as follows:
2021 2020
£m
£m
Not later than 1 year 323 304
Later than 1 year and not later than 5 years 1,032 959
Later than 5 years 3,128 2,820
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.
2021 2020
£m
£m
Investment broker balances 249 362
Cash collateral pledged and initial margins posted 958 608
Property related receivables 177 139
Deferred acquisition costs 108 81
Other debtors 313 432
1,805 1,622
Amount recoverable after 12 months 100 76
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.
2021 2020
£m
£m
Bank and cash balances 5,246 6,355
Short-term deposits (including notice accounts and term deposits) 3,942 4,643
9,188 10,998
Less amounts classified as held for sale (see note A6.1) (76) -
9,112 10,998
Deposits are subject to a combination of fixed and variable interest rates.
The carrying amounts approximate to fair value at the period end. Cash and
cash equivalents in long-term business operations and consolidated collective
investment schemes of £8,707 million (2020: £10,584 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.
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
2021 Leasehold properties Staff related Known incidents £m Input VAT recovery provision £m FCA Operational tax provision Transition and Transformation provision Transfer of policy ReAssure provision Other1,2 Total1
£m
£m
thematic reviews provision
£m
£m
administration provision
£m
£m
£m
£m
£m
At 1 January 10 17 35 15 4 12 109 35 7 38 282
Additions in the year - - 30 2 - - - 9 - 27 68
Utilised during the year (1) - (12) - (1) - (17) (9) (3) (28) (71)
Released during the year (1) (8) (7) - (3) - - - (2) (23) (44)
At 31 December 8 9 46 17 - 12 92 35 2 14 235
1 Other and total provisions excludes amounts classified as held for
sale as at 31 December 2021 of £2 million (2020: £nil).
2 Other provisions includes PA(GI) provision of £2 million (2020: £1
million) previously shown separately.
Leasehold properties
The leasehold properties provision includes a £7 million (2020: £9 million)
dilapidations provision in respect of obligations under operating leases and
£1 million (2020: £1 million) in respect of the excess of lease rentals and
other payments on properties that are currently vacant or are expected to
become vacant, over the amounts to be recovered from subletting these
properties.
Staff related
Staff related provisions include provisions for unfunded pensions of £5
million (2020: £13 million), and private medical and other insurance costs
for former employees of £4 million (2020: £4 million).
Known incidents
The known incidents provision was created for historical data quality and
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 the year, a £15 million provision was recognised in relation to errors
in final encashment calculations for With-Profits Trustee Investment Plans. It
is expected that the provision will be utilised within one year. In addition,
an £11 million provision was recognised 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. The provision is expected
to be utilised within one year.
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,
£2 million of the provision was utilised and a further £1 million was
released. It is expected that the remaining balance of £9 million will be
fully utilised within one year.
The balance also includes a provision of £1 million (2020: £10 million)
which reflects the Group's exposure in relation to a an historical
underpayment of guaranteed payments to certain pension customers as a result
of a systems error. During the year, £7 million was utilised and a further
£2 million was released. It is expected that the remaining balance will be
fully utilised within one year.
The remaining provisions of £10 million as at 31 December 2021 (2020: £13
million) are expected to be utilised within one to five years. As at the
balance sheet date, there are no significant uncertainties which could give
rise to a material change in the value of the provisions held for current
known incidents.
Input VAT recovery provision
The provision of £17 million (2020: £15 million) reflects the potential
outcome of ongoing negotiations with HMRC in relation to the changes to the
Partial Exemption Special Method (PESM) necessitated by the addition of the
Standard Life Entities to the Phoenix VAT Group. The provision reflects the
fact that whilst Phoenix considers its proposal for the recovery of VAT on
costs incurred by SLAESL to be fair and reasonable, the revised PESM remains
to be agreed and HMRC may take a different view. The current provision is
based upon a likely alternative basis for recovery considered to reflect the
Group's maximum exposure as at the reporting date, and was increased by £2
million in the year to reflect input VAT recovered in the period. It is
currently expected that the provision will be utilised within one to two
years.
FCA thematic reviews provision - ReAssure
On acquisition of the ReAssure businesses on 22 July 2020, £9 million of
obligations were recognised on a fair value basis, in respect of ReAssure
Life Limited ('RLL') to reflect the costs of voluntary remediation to
customers of certain legacy products. Following the acquisition, £2 million
of the provision was utilised and £3 million was released. During the year,
£1 million of this provision was utilised as final remediation payments were
made and the remaining provision of £3 million was released.
Operational tax provision
The operational tax provision relates to potential tax penalties payable to
HMRC following failure to notify certain customers of changes to their
lifetime allowance usage. The Group is currently in discussion with HMRC in
respect of these items and the provision represents the Group's best estimate
of the maximum exposure as at the reporting date. The balance at 31 December
2021 of £12 million is expected to be utilised within one to two 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 by 2022 which raised a valid expectation of the impacts in those
likely to be affected.
An initial provision of £159 million 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. 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. A 10% increase in the number of staff subject to redundancy,
based on an average length of service and salary, would increase the provision
by £4 million.
During the year, £17 million of the provision has been utilised, and the
remaining £92 million is expected to be utilised within two 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 by 31
December 2021.
An initial provision of £76 million 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. There is a higher
degree of uncertainty in relation to the severance and associated exit costs
which will be impacted by the number of staff that ultimately transfer to
Diligenta. A 10% increase in the level of severance and exit costs would
increase the provision by £1 million. During the year the provision was
increased by £9 million and a further £9 million was utilised. The
remaining provision of £35 million is expected to be utilised within one
year.
ReAssure restructuring provision
During 2020 a £7 million restructuring provision was established in respect
of RLL to cover severance costs. £3 million of the provision was utilised and
a further £2 million was released during the year. The remaining balance of
£2 million is expected to be utilised within one year.
Other provisions
During the year, the £23 million provision in respect of indemnities and
obligations arising under agreements entered into by the Group in association
with corporate activity was released following completion of the transaction
with abrdn plc in February 2021. Further details of this transaction are
included in note A6.1.
Other provisions includes £4 million (2020: £6 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.
The remaining other provisions of £10 million (2020: £8 million) consist of
a number of small balances all of which are less than £2 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.
2021 2020
£m
£m
Current tax:
Current tax receivable 419 263
Current tax payable (19) -
Deferred tax:
Deferred tax liabilities (1,399) (1,036)
Movement in deferred tax liabilities
2021 1 January Recognised in consolidated income statement Recognised Other Less amounts classified as held for sale (see note A6.1) 31 December
£m
£m
in other comprehensive income
movements
£m
£m
£m £m
Trading losses 30 80 - (1) - 109
Capital losses 36 (4) - - - 32
Expenses and deferred acquisition costs carried forward 42 15 - - - 57
Provisions and other temporary differences 129 5 - 1 - 135
Non-refundable pension scheme surplus (128) 13 (140) - - (255)
Pension scheme deficit 13 (16) 3 - - -
Accelerated capital allowances 8 8 - - - 16
Intangibles 39 (2) - (2) - 35
Acquired in-force business (798) (90) - - 10 (878)
Customer relationships (33) (24) - - - (57)
Unrealised gains (365) (230) - 2 - (593)
IFRS transitional adjustments (10) 5 - - - (5)
Other 1 - - 4 - 5
(1,036) (240) (137) 4 10 (1,399)
2020 1 January Recognised in consolidated income statement Recognised Acquisition of ReAssure businesses £m L&G Part VII transfer Other movements 31 December £m
£m
£m
in other comprehensive income
£m £m £m
Trading losses 14 15 - - - 1 30
Capital losses - 14 - 22 - - 36
Expenses and deferred acquisition costs carried forward 20 (90) - 102 10 - 42
Provisions and other temporary differences 32 (27) - 124 - - 129
Non-refundable pension scheme surplus (68) (36) (24) - - - (128)
Committed future pension contributions 12 (13) 1 - - - -
Pension scheme deficit 14 1 (2) - - - 13
Accelerated capital allowances 8 (1) - 1 - - 8
Intangibles 40 (3) - - - 2 39
Acquired in-force business (691) 123 - (230) - - (798)
Customer relationships (33) - - - - - (33)
Unrealised gains (199) (65) - (72) (28) (1) (365)
IFRS transitional adjustments (24) 5 - 9 - - (10)
Other 2 2 - (3) - - 1
(873) (75) (25) (47) (18) 2 (1,036)
The standard rate of UK Corporation tax for the year ended 31 December 2021 is
19% (2020: 19%).
An increase from the current 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 rates between 19% and
25% depending on the expected timing of the reversal of the relevant temporary
difference. Deferred income tax assets are recognised for tax losses carried
forward only to the extent that realisation of the related tax benefit
is probable.
2021 2020
£m
£m
Deferred tax assets have not been recognised in respect of:
Tax losses carried forward 55 52
Excess expenses and deferred acquisition costs 9 7
Intangibles 9 14
Deferred tax assets not recognised on capital losses1 29 42
1 These can only be recognised against future capital gains and have no
expiry date.
There is a technical matter which is currently being discussed with HMRC in
relation to the Legal and General Assurance Society Limited transfer to
ReAssure Limited. These discussions are not sufficiently progressed at this
stage for recognition of any potential tax benefit arising.
There is an ongoing 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). The current tax liability includes an
accrual for the total tax under dispute on the basis that there is sufficient
risk that the tax treatment will not be accepted. The matter is scheduled to
be heard in the First Tier Tribunal in May 2022.
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 2020, 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
progressing claims with HMRC during the course of 2021, 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 2021.
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 2021, 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.
G9. Payables related to direct insurance contracts
Payables related to direct insurance contracts primarily include outstanding
claims provisions. Outstanding claims under insurance and investment
contracts with DPF are valued using a best estimate method under IFRS 4
Insurance Contracts. Outstanding claims under investment contracts without DPF
are measured at full settlement value in accordance with IAS 39 Financial
Instruments: Recognition and Measurement.
2021 2020
£m
£m
Payables related to direct insurance contracts 1,864 1,669
G10. Lease liabilities
The operating 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 classified as
finance 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.
2021 2020
£m
£m
At 1 January 84 84
Acquisition of ReAssure businesses - 5
Leases incepted during the year 27 10
Termination of leases following the disposal of associated investment (1) -
properties
Interest expense 3 4
Lease payments (16) (18)
Remeasurement of leases 2 (1)
At 31 December 99 84
Amount due within 12 months 10 11
Amount due after 12 months 89 73
The Group has elected not to apply the measurement requirements of IFRS 16 to
its low value leases and as such costs of these leases are recognised on a
straight-line basis as expense within administrative expenses. The expense for
the year was £nil (2020: £1 million). Details of the related right-of-use
assets are included in notes G3 and G4.
G11. Accruals and deferred income
This note analyses the Group's accruals and deferred income at the end of the
year.
2021 2020
£m
£m
Accruals 498 452
Deferred income 123 69
Accruals and deferred income including amounts classified as held for sale 621 521
Less amounts classified as held for sale (see note A6.1) (54) -
At 31 December 567 521
Amount due for settlement after 12 months 26 12
G12. 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.
2021 2020
£m
£m
Investment broker balances 228 746
Property related payables 73 37
Investment management fees 77 3
Amount due to abrdn plc on deed of indemnity - 68
Other payables 343 412
721 1,266
Amount due for settlement after 12 months - 1
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 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 2021,
PeLHL held £11 million (2020: £50 million) within debt securities and £14
million (2020: £13 million) within cash and cash equivalents in respect of
these charged accounts. In December 2021, following completion of the 31 March
2021 funding valuation £42 million of assets were transferred from the
charged accounts to the Abbey Life Pension Scheme. 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 2021, RML held £57 million (2020: £57 million) within
debt securities and £1 million (2020: £2 million) within cash and cash
equivalents in respect of this account. Further details of when these amounts
may become payable to the pensions scheme are included in note G1.4.
The Pearl Pension Scheme funding agreement included certain covenants which
restricted the transfer of funds within the Group. As detailed further in
note G1.1, these covenants were terminated under the Commitment Agreement
entered into with the Pearl Pension Scheme in November 2020.
H2. Acquisitions and portfolio transfers
H2.1 Acquisition of ReAssure businesses
On 22 July 2020, the Group acquired 100% of the issued share capital of
ReAssure Group plc from Swiss Re Finance Midco (Jersey) Limited, an indirect
subsidiary of Swiss Re Limited, for total consideration of £3.1 billion. The
consideration consisted of £1.3 billion of cash, funded through the issuance
of debt and own resources, and the issue of 277,277,138 shares ('the
Acquisition Shares') to Swiss Re Group on 23 July 2020.
Pursuant to an agreement between Swiss Re Group and MS&AD Insurance Group
Holdings ('MS&AD'), MS&AD transferred its entire shareholding in
ReAssure Group plc prior to 22 July 2020 to the Swiss Re Group in
consideration for the transfer of 144,877,304 of the Acquisition Shares at
completion. The equity stake in the Group held by Swiss Re Group and MS&AD
was valued at £1,847 million, based on the share price at that date.
H2.2 L&G portfolio transfer
On 6 December 2017, ReAssure Limited, a subsidiary of ReAssure Group plc,
entered into an agreement to acquire the mature savings business of Legal and
General Assurance Society ('LGAS'). The mature savings book consists of a
block of unit-linked and with-profit business, predominantly comprising
traditional insurance based pensions, savings and protection products which
are closed and in
run-off. On that date, ReAssure Limited entered into a risk transfer agreement
('RTA') under which it assumed the risk and rewards associated with the
business for cash consideration of £650 million. The RTA was in-force as at
the date of the Group's acquisition of the ReAssure businesses.
On 7 September 2020, the Group completed a Part VII transfer of the mature
savings liabilities and associated assets with LGAS, which resulted in the
cancellation of the RTA. No further consideration was payable in respect of
the Part VII transfer. This transfer was not deemed to be an acquisition of a
business and consequently the requirements of IFRS 3 have not been applied.
The Part VII transfer directly resulted in an increase in net assets of £85
million, which included £110 million associated with reduced expense
assumptions used for insurance contract liabilities arising upon migration of
the business to the Group's operating model partially offset by the
recognition of net liabilities transferred of £25 million. The gain arising
upon the transfer has been recognised in the consolidated income statement.
H3. Disposal of Ark Life
On 1 November 2021, the Group completed the sale of its entire interest in Ark
Life Assurance Company DAC ('Ark Life') to Irish Life Group Limited for gross
cash consideration of €230 million (£198 million). The carrying value of
the net assets disposed of was £201 million which is after an impairment
loss of £18 million in respect of AVIF that was recognised upon
classification of the business as held for sale.
2021
£m
Carrying value of net assets disposed of
Financial assets 1,880
Reinsurers' share of insurance contract liabilities 730
Reinsurance receivables 5
Other receivables 9
Cash and cash equivalents 9
Insurance contract liabilities (799)
Investment contract liabilities (1,598)
Deferred tax liabilities (4)
Other liabilities (31)
Net assets disposed of 201
Cash consideration received 198
Less: transaction costs (6)
Net consideration received 192
Foreign currency translation reserves recycled to the consolidated income (14)
statement
Loss on disposal (23)
H4. Associates: Investment in UK Commercial Property Trust Limited ('UKCPT')
UKCPT is a property investment company which is domiciled in Guernsey and is
admitted to the official list of the UK Listing Authority and to trading on
the London Stock Exchange.
The Group's interest in UKCPT is held in the with-profit funds of the Group's
life companies. Therefore, the shareholder exposure to fair value movements
in the Group's investment in UKCPT is limited to the impact of those movements
on the shareholder share of distributed profits of the relevant fund.
As at 31 December 2021, the Group held 44.5% (2020: 44.6%) of the issued share
capital of UKCPT and the value of this investment, measured at fair value and
included within financial assets, was £431 million (2020: £400 million).
Management has concluded that the Group did not control UKCPT in either the
current or comparative periods. The Group does not hold a unilateral power of
veto in general meetings and voting is subject to certain restrictions in
accordance with the terms of an existing relationship agreement it has with
UKCPT.
Summary consolidated financial information (at 100%) for the UKCPT group is
shown below:
2021 2020
£m
£m
Non-current assets 1,508 1,183
Current assets 90 170
Non-current liabilities (248) (198)
Current liabilities (25) (28)
1,325 1,127
Revenue 58 65
Profit/(loss) for the year after tax 236 (10)
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 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 £16 million
(2020: £7 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.
2021 Carrying value of financial assets 2020 Carrying value of financial assets restated
£m
£m
Equities 871 467
Collective investment schemes 85,995 89,248
Debt securities1 10,991 12,613
97,857 102,328
1 Comparative figures have been restated to include £4,545 million debt
securities that have been classified as structured entities.
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 Type of investment (including class of shares held) % of shares/ units held
of business
Subsidiaries:
Phoenix Life Limited (life assurance company) Wythall2 Ordinary Shares 100.00%
Phoenix Life Assurance Limited (life assurance company) Wythall2 Ordinary Shares 100.00%
Standard Life Assurance Limited (life assurance company - directly owned by Edinburgh3 Ordinary Shares 100.00%
the Company)
Standard Life International Designated Activity Company (life assurance Dublin4 Ordinary Shares 100.00%
company - directly owned by the Company)
Standard Life Pension Funds Limited (life assurance company) Edinburgh3 Limited by Guarantee 100.00%
ReAssure Life Limited (life assurance company) Telford5 Ordinary Shares 100.00%
ReAssure Limited (life assurance company) Telford5 Ordinary Shares 100.00%
Pearl Group Management Services Limited (management services company) Wythall2 Ordinary Shares 100.00%
Pearl Group Services Limited (management services company) Wythall2 Ordinary Shares 100.00%
Standard Life Assets and Employee Services Limited (management services Edinburgh3 Ordinary Shares 100.00%
company)
ReAssure Companies Services Limited (management services company) Telford5 Ordinary Shares 100.00%
PGMS (Ireland) Limited (management services company) Dublin6 Ordinary Shares 100.00%
ReAssure UK Services Limited (management services company) Telford5 Ordinary Shares 100.00%
PA (GI) Limited (non-trading company) Wythall2 Ordinary Shares 100.00%
103 Wardour Street Retail Investment Company Limited (investment company) Telford5 Ordinary Shares 100.00%
3 St Andrew Square Apartments Limited (property management company) Edinburgh7 Ordinary Shares 100.00%
Abbey Life Assurance Company Limited (non-trading company) 1 Wythall2 Ordinary Shares 100.00%
Abbey Life Trust Securities Limited (pension trustee company) Wythall2 Ordinary Shares 100.00%
Abbey Life Trustee Services Limited (dormant company) 1 Wythall2 Ordinary Shares 100.00%
Alba LAS Pensions Management Limited (dormant company) 1 Glasgow8 Ordinary Shares 100.00%
Alba Life Trustees Limited (non-trading company) Edinburgh3 Ordinary Shares 100.00%
Axial Fundamental Strategies (US Investments) LLC (investment company) Delaware9 Limited Liability Company 100.00%
BA (FURBS) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
BL Telford Limited (dormant company) 1 Telford5 Ordinary Shares 100.00%
Britannic Finance Limited (finance and insurance services company) 1 Wythall2 Ordinary Shares 100.00%
Britannic Group Services Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Britannic Money Investment Services Limited (investment advice company) 1 Wythall2 Ordinary Shares 100.00%
Century Trustee Services Limited (dormant company) 1 Wythall2 Ordinary Shares 100.00%
CH Management Limited (investment company) Delaware10 Ordinary Shares 100.00%
Cityfourinc (dormant company) 1 Wythall2 Unlimited with Shares 100.00%
ERIP General Partner Limited (General Partner to ERIP Limited Partnership) Telford5 Ordinary Shares 80.00%
ERIP Limited Partnership (Limited Partnership) Telford5 Ordinary Shares 100.00%
G Assurance & Pensions Services Limited (non-trading company) 1 Telford5 Ordinary Shares 100.00%
G Financial Services Limited (dormant company) 1 Telford5 Ordinary Shares 100.00%
G Life H Limited (holding company)1 Telford5 Ordinary Shares 100.00%
G Park Management Company Limited (property management company) London11 Ordinary Shares 100.00%
G Trustees Limited (trustee company) Telford5 Ordinary Shares 100.00%
Gallions Reach Shopping Park (Nominee) Limited (dormant company) London11 Ordinary Shares 100.00%
Gresham Life Assurance Society Limited (dormant company) 1 Telford5 Ordinary Shares 100.00%
Iceni Nominees (No. 2) Limited (dormant company) London11 Ordinary Shares 100.00%
IH (Jersey) Limited (dormant company) Jersey12 Ordinary Shares 100.00%
Impala Holdings Limited (holding company) Wythall2 Ordinary Shares 100.00%
Impala Loan Company 1 Limited (dormant company) Edinburgh3 Ordinary Shares 100.00%
Inesia SA (investment company) Luxembourg13 Ordinary Shares 100.00%
Inhoco 3107 Limited (dormant company) London11 Ordinary Shares 100.00%
London Life Limited (dormant company) 1 Wythall2 Ordinary Shares 100.00%
London Life Trustees Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Namulas Pension Trustees Limited (dormant company) Telford5 Ordinary Shares 100.00%
National Provident Institution (dormant company)1 Wythall2 Unlimited without Shares 100.00%
National Provident Life Limited (dormant company) 1 Wythall2 Ordinary Shares 100.00%
NM Life Trustees Limited (dormant company) Telford5 Ordinary Shares 100.00%
NM Pensions Limited (dormant company) 1 Telford5 Ordinary Shares 100.00%
Northampton General Partner Limited (dormant company) 1 Telford5 Ordinary Shares 100.00%
NP Life Holdings Limited (dormant company) 1 Wythall2 Ordinary Shares 100.00%
NPI (Printworks) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
NPI (Westgate) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Phoenix (Barwell 2) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Phoenix (Chiswick House) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Pearl (Covent Garden) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Pearl (Martineau Phase 1) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Pearl (Martineau Phase 2) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Phoenix (Moor House 1) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Phoenix (Moor House 2) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Pearl (Moor House) Limited (dormant company) 1 Wythall2 Ordinary Shares 100.00%
Phoenix (Printworks) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Phoenix (Stockley Park) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Pearl (WP) Investments LLC (investment company) Delaware9 Limited Liability Company 100.00%
Pearl AL Limited (dormant company) 1 Glasgow8 Ordinary Shares 100.00%
Pearl Assurance Group Holdings Limited (investment company) 1 Wythall2 Ordinary Shares 100.00%
Pearl Customer Care Limited (financial services company) 1 Wythall2 Ordinary Shares 100.00%
Pearl Group Holdings (No. 1) Limited (finance company) London14 Ordinary Shares 100.00%
Pearl Group Holdings (No. 2) Limited (holding company) Wythall2 Ordinary Shares 100.00%
Pearl Group Secretariat Services Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Pearl Life Holdings Limited (holding company) Wythall2 Ordinary Shares 100.00%
Phoenix Group Management Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Pearl MP Birmingham Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Pearl RLG Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Pearl Trustees Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Phoenix ULA Limited (dormant company) 1 Wythall2 Ordinary Shares 100.00%
PG Dormant (No 4) Limited (dormant company) 1 Wythall2 Ordinary Shares 100.00%
PG Dormant (No 5) Limited (dormant company) 1 Wythall2 Ordinary Shares 100.00%
PG Dormant (No 6) Limited (dormant company) 1 Wythall2 Ordinary Shares 100.00%
Phoenix Group Management Services Limited (dormant company) London14 Ordinary Shares 100.00%
PGH (LC1) Limited (dormant company) 1 London15 Ordinary Shares 100.00%
PGH (LC2) Limited (dormant company) London15 Ordinary Shares 100.00%
PGH (LCA) Limited (dormant company) 1 London15 Ordinary Shares 100.00%
PGH (LCB) Limited (dormant company) 1 London15 Ordinary Shares 100.00%
PGH (MC1) Limited (dormant company) 1 London16 Ordinary Shares 100.00%
PGH (MC2) Limited (dormant company) 1 London16 Ordinary Shares 100.00%
PGH (TC1) Limited (dormant company) London15 Ordinary Shares 100.00%
PGH (TC2) Limited (dormant company) London15 Ordinary Shares 100.00%
PGH Capital plc (finance company - directly owned by the Company) Dublin17 Ordinary Shares 100.00%
PGMS (Glasgow) Limited (investment company) 1 Edinburgh3 Ordinary Shares 100.00%
PGMS (Ireland) Holdings Unlimited Company (holding company) Dublin6 Unlimited with Shares 100.00%
PGS 2 Limited (investment company) 1 Wythall2 Ordinary Shares 100.00%
Phoenix & London Assurance Limited (dormant company) 1 Wythall2 Ordinary Shares 100.00%
Phoenix Advisers Limited (dormant company) 1 Wythall2 Ordinary Shares 100.00%
Phoenix AW Limited (dormant company) 1 Wythall2 Ordinary Shares 100.00%
Phoenix Customer Care Limited (financial services company) 1 Wythall2 Ordinary Shares 100.00%
Phoenix ER1 Limited (finance company) Wythall2 Ordinary Shares 100.00%
Phoenix ER2 Limited (finance company) Wythall2 Ordinary Shares 100.00%
Phoenix ER3 Limited (finance company) Wythall2 Ordinary Shares 100.00%
Phoenix ER4 Limited (finance company) Wythall2 Ordinary Shares 100.00%
Phoenix ER5 Limited (finance company) Wythall2 Ordinary Shares 100.00%
Phoenix ER6 Limited (finance company) Wythall2 Ordinary Shares 100.00%
Phoenix Group Capital Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Phoenix Group Holdings (non-trading company) Cayman Islands18 Private Company 100.00%
Phoenix Life Assurance Europe DAC (dormant company) Dublin19 Ordinary Shares 100.00%
Phoenix Life Holdings Limited (holding company - directly owned Wythall2 Ordinary Shares 100.00%
by the Company)
Phoenix Pension Scheme (Trustees) Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Phoenix Pensions Trustee Services Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Phoenix SCP Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Phoenix SCP Pensions Trustees Limited (trustee company) Wythall2 Ordinary Shares 100.00%
Phoenix SCP Trustees Limited (trustee company) Edinburgh3 Ordinary Shares 100.00%
Phoenix SL Direct Limited (non-trading company) 1 Wythall2 Ordinary Shares 100.00%
Phoenix SPV1 Limited (investment company) 1 Wythall2 Ordinary Shares 100.00%
Phoenix SPV2 Limited (investment company) 1 Wythall2 Ordinary Shares 100.00%
Phoenix SPV3 Limited (investment company) 1 Wythall2 Ordinary Shares 100.00%
Phoenix SPV4 Limited (investment company) 1 Wythall2 Ordinary Shares 100.00%
Phoenix Unit Trust Managers Limited (unit trust manager) Wythall2 Ordinary Shares 100.00%
Phoenix Wealth Holdings Limited (holding company) 1 Wythall2 Ordinary Shares 100.00%
Phoenix Wealth Services Limited (financial services company) Wythall2 Ordinary Shares 100.00%
Phoenix Wealth Trustee Services Limited (trustee company) Wythall2 Ordinary Shares 100.00%
ReAssure FS Limited (dormant company) 1 Telford5 Ordinary Shares 100.00%
ReAssure FSH UK Limited (holding company) 1 Telford5 Ordinary Shares 100.00%
ReAssure Group plc (holding company - directly owned by the Company) Telford5 Ordinary Shares 100.00%
ReAssure Life Pension Trustees Limited (dormant company) Telford5 Ordinary Shares 100.00%
ReAssure LL Limited (dormant company) 1 Telford5 Ordinary Shares 100.00%
ReAssure Midco Limited (holding company) Telford5 Ordinary Shares 100.00%
ReAssure Nominees Limited (dormant company) 1 Telford5 Ordinary Shares 100.00%
ReAssure Pension Trustees Limited (dormant company) Telford5 Ordinary Shares 100.00%
ReAssure PM Limited (dormant company) 1 Telford5 Ordinary Shares 100.00%
ReAssure Trustees Limited (dormant company) Telford5 Ordinary Shares 100.00%
ReAssure Two Limited (dormant company) 1 Telford5 Ordinary Shares 100.00%
ReAssure UK Life Assurance Company Limited (dormant company) 1 Telford5 Ordinary Shares 100.00%
Scottish Mutual Assurance Limited (dormant company) 1 Edinburgh3 Ordinary Shares 100.00%
Scottish Mutual Nominees Limited (dormant company) 1 Edinburgh3 Ordinary Shares 100.00%
Scottish Mutual Pension Funds Investment Limited (trustee company) Edinburgh3 Ordinary Shares 100.00%
SL (NEWCO) Limited (dormant company) Edinburgh3 Ordinary Shares 100.00%
SL Liverpool plc (dormant company) 1 Wythall2 Public Limited Company 100.00%
SLA Belgium No.1 SA (investment company) Brussels20 Société Anonyme 100.00%
SLA Netherlands No.1 B.V. (investment company) Amsterdam21 Ordinary Shares 100.00%
SLACOM (No. 10) Limited (dormant company) Edinburgh3 Ordinary Shares 100.00%
SLACOM (No. 8) Limited (dormant company) Edinburgh3 Ordinary Shares 100.00%
SLACOM (No. 9) Limited (dormant company) Edinburgh3 Ordinary Shares 100.00%
SLIF Property Investment GP Limited (General Partner to Edinburgh7 Ordinary Shares 100.00%
SLIF Property Investment)
Pilangen Logistik AB (investment company) Stockholm22 Ordinary Shares 100.00%
Pilangen Logistik I AB (investment company) Stockholm22 Ordinary Shares 100.00%
SLA Denmark No.1 ApS (investment company) Copenhagen23 Ordinary Shares 100.00%
SLA Denmark No.2 ApS (investment company) Copenhagen23 Ordinary Shares 100.00%
SLA Germany No.1 S.à.r.l. (investment company) Luxembourg24 Ordinary Shares 100.00%
SLA Germany No.2 S.à.r.l. (investment company) Luxembourg24 Ordinary Shares 100.00%
SLA Germany No.3 S.à.r.l. (investment company) Luxembourg24 Ordinary Shares 100.00%
SLA Ireland No.1 S.à.r.l. (investment company) Luxembourg24 Ordinary Shares 100.00%
Standard Life Assurance (HWPF) Luxembourg S.à.r.l. (investment company) Luxembourg24 Ordinary Shares 100.00%
Standard Life Agency Services Limited (dormant company) Edinburgh3 Ordinary Shares 100.00%
Standard Life Investment Funds Limited (dormant company) Edinburgh3 Ordinary Shares 100.00%
Standard Life Lifetime Mortgages Limited (mortgage provider company) Edinburgh3 Ordinary Shares 100.00%
Standard Life Master Trust Co. Limited (dormant company) Wythall2 Ordinary Shares 100.00%
Standard Life Private Equity Trust plc (investment company) Edinburgh7 Ordinary Shares 56.01%
Standard Life Property Company Limited (dormant company) Edinburgh3 Ordinary Shares 100.00%
Standard Life Trustee Company Limited (trustee company) Edinburgh3 Ordinary Shares 100.00%
SunLife Limited (financial services distribution company) Wythall2 Ordinary Shares 100.00%
The Heritable Securities and Mortgage Investment Association Ltd Edinburgh3 Ordinary Shares 100.00%
(dormant company)
The London Life Association Limited (dormant company) Wythall2 Limited by Guarantee 100.00%
The Pathe Building Management Company Limited (dormant company) 1 Telford5 Ordinary Shares 100.00%
The Phoenix Life SCP Institution (dormant company) 1 Edinburgh3 Limited by Guarantee 100.00%
The Scottish Mutual Assurance Society (dormant company) 1 Glasgow8 Limited by Guarantee 100.00%
The Standard Life Assurance Company of Europe B.V. Amsterdam21 Ordinary Shares 100.00%
(financial holding company)
Vebnet (Holdings) Limited (holding company) 1 Wythall2 Ordinary Shares 100.00%
Vebnet Limited (services company) 1 Wythall2 Ordinary Shares 100.00%
Welbrent Property Investment Company Limited (dormant company) London11 Ordinary Shares 100.00%
PC Management Limited (property management company) Dublin25 Ordinary Shares 69.00%
Phoenix Group Employee Benefit Trust Jersey26 Trust 100.00%
330 Avenida de Aragon SL (property management company) Madrid27 Ordinary Shares 100.00%
The Pearl Martineau Limited Partnership Lynch Wood28 Limited Partnership 100.00%
The Pearl Martineau Galleries Limited Partnership Wythall2 Limited Partnership 100.00%
SLIF Property Investment LP Edinburgh7 Limited Partnership 100.00%
Pearl Private Equity LP Edinburgh7 Limited Partnership 100.00%
Pearl Strategic Credit LP Edinburgh7 Limited Partnership 100.00%
European Strategic Partners LP Edinburgh7 Limited Partnership 72.70%
ASI Phoenix Global Private Equity III LP Edinburgh7 Limited Partnership 100.00%
Janus Henderson Institutional Short Duration Bond Fund London29 Unit Trust 100.00%
Janus Henderson Institutional Mainstream UK Equity Trust London29 Unit Trust 100.00%
Janus Henderson Institutional UK Equity Tracker Trust London29 Unit Trust 100.00%
Janus Henderson Institutional High Alpha UK Equity Fund London29 Unit Trust 90.72%
Janus Henderson Global Funds - Janus Henderson Institutional Overseas Bond London29 OEIC, sub fund 96.68%
Fund
Janus Henderson Strategic Investment Funds - Janus Henderson Institutional London29 OEIC, sub fund 85.06%
North American Index Opportunities Fund
Janus Henderson Strategic Investment Funds - Janus Henderson Institutional London29 OEIC, sub fund 88.79%
Asia Pacific ex Japan Index Opportunities Fund
Janus Henderson Diversified Growth Fund London29 OEIC, sub fund 72.35%
Janus Henderson Strategic Investment Funds - Janus Henderson Institutional London29 OEIC, sub fund 80.39%
Japan Index Opportunities Fund
PUTM Far Eastern Unit Trust Wythall2 Unit Trust 99.63%
PUTM UK Stock Market Fund Wythall2 Unit Trust 100.00%
PUTM UK Stock Market Fund (Series 3) Wythall2 Unit Trust 100.00%
PUTM UK All-Share Index Unit Trust Wythall2 Unit Trust 99.89%
PUTM UK Equity Unit Trust Wythall2 Unit Trust 99.91%
PUTM Bothwell Asia Pacific (Excluding Japan) Fund Wythall2 Unit Trust 99.63%
PUTM Bothwell Emerging Market Debt Unconstrained Fund Wythall2 Unit Trust 100.00%
PUTM Bothwell European Credit Fund Wythall2 Unit Trust 99.58%
PUTM Bothwell Global Bond Fund Wythall2 Unit Trust 100.00%
PUTM Bothwell Global Credit Fund Wythall2 Unit Trust 100.00%
PUTM Bothwell Floating Rate ABS Fund Wythall2 Unit Trust 100.00%
PUTM Bothwell Index-Linked Sterling Hedged Fund Wythall2 Unit Trust 100.00%
PUTM Bothwell Japan Tracker Fund Wythall2 Unit Trust 100.00%
PUTM Bothwell Long Gilt Sterling Hedged Fund Wythall2 Unit Trust 100.00%
PUTM Bothwell Emerging Markets Equity Fund Wythall2 Unit Trust 99.95%
PUTM Bothwell North America Fund Wythall2 Unit Trust 99.32%
PUTM Bothwell Sterling Government Bond Fund Wythall2 Unit Trust 99.61%
PUTM Bothwell Euro Sovereign Fund Wythall2 Unit Trust 85.03%
PUTM Bothwell Sterling Credit Fund Wythall2 Unit Trust 99.94%
PUTM Bothwell Tactical Asset Allocation Fund Wythall2 Unit Trust 100.00%
PUTM Bothwell UK All Share Listed Equity Fund Wythall2 Unit Trust 99.63%
PUTM ACS UK All Share Listed Equity Fund Wythall2 Unit Trust 100.00%
PUTM Bothwell Uk Equity Income Fund Wythall2 Unit Trust 100.00%
PUTM Bothwell Sub-Sovereign A Fund Wythall2 Unit Trust 100.00%
PUTM Bothwell Short Duration Credit Fund Wythall2 Unit Trust 100.00%
PUTM Bothwell Ultra Short Duration Fund Wythall2 Unit Trust 100.00%
PUTM ACS Lothian North American Equity Fund Wythall2 Unit Trust 100.00%
PUTM ACS Lothian European Ex UK Fund Wythall2 Unit Trust 100.00%
PUTM ACS Lothian UK Listed Equity Fund Wythall2 Unit Trust 100.00%
PUTM ACS European ex UK Fund Wythall2 Unit Trust 100.00%
PUTM ACS Japan Equity Fund Wythall2 Unit Trust 100.00%
PUTM ACS Lothian UK Gilt Fund Wythall2 Unit Trust 100.00%
PUTM ACS UK Smaller Companies Fund Wythall2 Unit Trust 100.00%
PUTM ACS North American Fund Wythall2 Unit Trust 100.00%
ASI (SLI) Strategic Bond Fund Edinburgh7 Unit Trust 88.84%
ASI (Standard Life) Multi-Asset Trust Edinburgh7 Unit Trust 99.99%
ASI (Standard Life) European Trust II Edinburgh7 Unit Trust 100.00%
ASI Emerging Markets Income Equity Fund Edinburgh7 OEIC, sub fund 82.22%
ASI (SLI) Emerging Markets Equity Fund Edinburgh7 OEIC, sub fund 96.86%
ASI Emerging Markets Local Currency Bond Tracker Fund Edinburgh7 OEIC, sub fund 75.77%
ASI Europe Europe ex UK Ethical Equity Fund Edinburgh7 OEIC, sub fund 76.15%
ASI (Standard Life) European Trust Edinburgh7 Unit Trust 96.79%
ASI (Standard Life) Japan Trust Edinburgh7 Unit Trust 80.65%
ASI (Standard Life) North American Trust Edinburgh7 Unit Trust 99.52%
ASI (Standard Life) Pacific Basin Trust Edinburgh7 Unit Trust 98.11%
ASI (Standard Life) Short Dated UK Government Bond Trust Edinburgh7 Unit Trust 100.00%
ASI (Standard Life) Global Equity Trust II Edinburgh7 Unit Trust 100.00%
ASI (Standard Life) UK Government Bond Trust Edinburgh7 Unit Trust 100.00%
ASI (Standard Life) UK Corporate Bond Trust Edinburgh7 Unit Trust 100.00%
ASI (Standard Life) Active Plus Bond Trust Edinburgh7 Unit Trust 100.00%
ASI (Standard Life) International Trust Edinburgh7 Unit Trust 99.86%
ASI (Standard Life) UK Equity General Trust Edinburgh7 Unit Trust 99.71%
ASI Short Dated Corporate Bond Fund Edinburgh7 OEIC, sub fund 86.71%
ASI MyFolio Managed I Fund Edinburgh7 OEIC, sub fund 74.49%
ASI MyFolio Managed II Fund Edinburgh7 OEIC, sub fund 74.46%
ASI MyFolio Managed III Fund Edinburgh7 OEIC, sub fund 82.43%
ASI MyFolio Managed V Fund Edinburgh7 OEIC, sub fund 74.34%
ASI Dynamic Multi Asset Growth Fund Edinburgh7 OEIC, sub fund 96.09%
ASI American Income Equity Fund Edinburgh7 OEIC, sub fund 73.43%
Aberdeen Standard SICAV III Global Short Duration Corporate Bond Fund Luxembourg30 SICAV, sub fund 98.12%
Aberdeen Standard SICAV II Absolute Return Global Bond Strategies Fund Luxembourg30 SICAV, sub fund 76.39%
Aberdeen Standard SICAV II European Equities Fund Luxembourg30 SICAV, sub fund 99.06%
Aberdeen Standard SICAV II European Equity Unconstrained Fund Luxembourg30 SICAV, sub fund 97.54%
Aberdeen Standard SICAV II Global Equities Fund Luxembourg30 SICAV, sub fund 81.65%
Aberdeen Standard SICAV II European Government All Stocks Fund Luxembourg30 SICAV, sub fund 99.99%
Aberdeen Standard SICAV II Japanese Equities Fund Luxembourg30 SICAV, sub fund 93.93%
Aberdeen Standard SICAV II Global Bond Fund Luxembourg30 SICAV, sub fund 94.19%
Aberdeen Standard SICAV II Global High Yield Bond Fund Luxembourg30 SICAV, sub fund 82.95%
Aberdeen Standard SICAV II Global REIT Focus Fund Luxembourg30 SICAV, sub fund 93.41%
Aberdeen Standard SICAV II China Equities Fund Luxembourg30 SICAV, sub fund 78.71%
Aberdeen Standard SICAV II Global Emerging Markets Unconstrained Fund Luxembourg30 SICAV, sub fund 100.07%
Aberdeen Standard SICAV II Global Emerging Markets Local CCY Debt Fund Luxembourg30 SICAV, sub fund 91.43%
Aberdeen Standard SICAV II Emerging Market Debt Fund Luxembourg30 SICAV, sub fund 98.39%
Aberdeen Standard SICAV III Dynamic Multi Asset Growth Fund Luxembourg30 SICAV, sub fund 79.28%
ASIMT American Equity Unconstrained Fund Edinburgh7 Unit Trust 79.70%
ASIMT Japan Fund Edinburgh7 Unit Trust 76.69%
ASIMT Global REIT Fund Edinburgh7 Unit Trust 81.94%
ASIMT Sterling Intermediate Credit Fund Launch Fund Edinburgh7 Unit Trust 92.67%
Aberdeen Standard Liquidity Fund (Lux) - Seabury Sterling Liquidity 3 Fund Luxembourg31 UCITS, sub fund 100.00%
Aberdeen Standard Liquidity Fund (Lux) - Seabury Sterling Liquidity 2 Fund Luxembourg31 UCITS, sub fund 100.00%
Aberdeen Standard Liquidity Fund (Lux) - Seabury Euro Liquidity 1 Fund Luxembourg31 UCITS, sub fund 100.00%
Ignis Private Equity Fund LP Cayman Islands18 Limited Partnership 100.00%
Ignis Strategic Credit Fund LP Cayman Islands18 Limited Partnership 100.00%
ASI Phoenix Fund Financing SCSp (PLFF) Luxembourg31 Special Limited Partnership 100.00%
North American Strategic Partners 2008 L.P. Delaware9 Limited Partnership 100.00%
North American Strategic Partners (Feeder) 2008 Limited Partnership Edinburgh7 Limited Partnership 100.00%
Crawley Unit Trust Jersey32 Unit Trust 100.00%
Ignis Strategic Solutions Funds plc - Fundamental Strategies Fund Dublin33 OEIC, sub fund 100.00%
Ignis Strategic Solutions Funds plc - Systematic Strategies Fund Dublin33 OEIC, sub fund 100.00%
HSBC Investment Funds - Balanced Fund London34 OEIC, sub fund 82.18%
IFSL AMR OEIC - IFSL AMR Diversified Portfolio Bolton35 OEIC, sub fund 70.08%
iShares 350 UK Equity Index Fund UK London36 OEIC, sub fund 90.96%
Legal & General European Equity Income Fund London37 Unit Trust 88.43%
Legal & General Growth Trust London37 Unit Trust 71.19%
ASI Sustainable Index World Equity Fund Edinburgh7 Unit Trust 100.00%
ASI Sustainable Index UK Equity Fund Edinburgh7 Unit Trust 79.36%
ASI Phoenix Venture Capital Partners LP Edinburgh7 Limited Partnership 100.00%
CF Macquaries Global Infrastructure Securities Fund London38 OEIC, sub fund 77.08%
Quilter Investors Diversified Portfolio Fund London39 OEIC, sub fund 93.01%
Quilter Investors UK Equity Large-Cap Value Fund London39 OEIC, sub fund 97.59%
Amundi Index Solutions - Amundi MSCI Emerging Ex China ESG Leaders Select Luxembourg40 SICAV, sub fund 61.30%
Associates:
UK Commercial Property Estates Limited (property investment company) Guernsey41 Ordinary Shares 44.46%
UK Commercial Property GP Limited (dormant company) London42 Ordinary Shares 44.46%
UK Commercial Property Holdings Limited (property investment company) Guernsey41 Ordinary Shares 44.46%
UK Commercial Property Nominee Limited (dormant company) London42 Ordinary Shares 44.46%
Moor House General Partner Limited London43 Limited Partnership 33.30%
UK Commercial Property REIT Limited (property investment company) Guernsey41 Ordinary Shares 44.46%
UK Commercial Property Estates Holdings Limited Guernsey41 Ordinary Shares 44.46%
(property investment company)
UKCPT Limited Partnership (dormant company) London42 Limited Partnership 44.46%
UK Commercial Property Finance Holdings Limited Guernsey41 Ordinary Shares 44.46%
(property investment company)
UK Commercial Property Estates (Reading) Limited (dormant company) London42 Ordinary Shares 44.46%
Brixton Radlett Property Limited (dormant company) London42 Ordinary Shares 44.46%
Duke Distribution Centres S.à.r.l. (investment company) Luxembourg44 Ordinary Shares 44.46%
Duke Offices & Developments S.à.r.l. (investment company) Luxembourg44 Ordinary Shares 44.46%
Significant holdings:
Janus Henderson Institutional Global Responsible Managed Fund London29 OEIC, sub fund 38.18%
Janus Henderson Institutional UK Index Opportunities Fund London29 OEIC, sub fund 60.29%
Standard Life Capital Infrastructure I LP Edinburgh7 Limited Partnership 26.30%
ASI (SLI) Corporate Bond Fund Edinburgh7 OEIC, sub fund 30.28%
ASI Global Absolute Return Strategies Retail Acc Edinburgh7 Unit Trust 60.78%
ASI Dynamic Distribution Fund Edinburgh7 Unit Trust 62.43%
Standard Life Investments UK Real Estate Accumulation Feeder Fund Edinburgh7 Unit Trust 47.85%
ASI Global Smaller Company Fund Edinburgh7 Unit Trust 20.29%
Aberdeen Standard Global SICAV III Global Equity Impact Fund Luxembourg30 SICAV, sub fund 46.90%
Aberdeen Standard SICAV II Total Return Credit Fund Luxembourg30 SICAV, sub fund 24.22%
Aberdeen Standard Liquidity Fund (Lux) Sterling Fund Luxembourg31 UCITS, sub fund 21.85%
ASI UK High Income Equity Fund Edinburgh7 OEIC, sub fund 52.37%
ASI Global Unconstrained Equity Fund Edinburgh7 OEIC, sub fund 44.98%
ASI High Yield Bond Fund Edinburgh7 OEIC, sub fund 38.14%
ASI UK Opportunities Equity Fund Edinburgh7 OEIC, sub fund 51.66%
ASI Investment Grade Corporate Bond Fund Edinburgh7 OEIC, sub fund 31.98%
ASI UK Smaller Companies Fund Edinburgh7 OEIC, sub fund 31.29%
ASI Europe ex UK Growth Equity Fund Edinburgh7 OEIC, sub fund 31.58%
ASI Short Duration Global Inflation-Linked Bond Fund Edinburgh7 OEIC, sub fund 27.06%
ASI UK Unconstrained Equity Fund Edinburgh7 OEIC, sub fund 54.87%
ASI Ethical Corporate Bond Fund Edinburgh7 OEIC, sub fund 52.72%
ASI Global Real Estate Share Fund Edinburgh7 OEIC, sub fund 45.32%
ASI Global Real Estate Fund Edinburgh7 Unit Trust 46.22%
ASI MyFolio Market I Fund Edinburgh7 OEIC, sub fund 43.60%
ASI MyFolio Market II Fund Edinburgh7 OEIC, sub fund 45.66%
ASI MyFolio Market III Fund Edinburgh7 OEIC, sub fund 54.48%
ASI MyFolio Market IV Fund Edinburgh7 OEIC, sub fund 52.83%
ASI MyFolio Market V Fund Edinburgh7 OEIC, sub fund 60.55%
ASI MyFolio Multi-Manager I Fund Edinburgh7 OEIC, sub fund 53.32%
ASI MyFolio Multi-Manager II Fund Edinburgh7 OEIC, sub fund 53.40%
ASI MyFolio Multi-Manager III Fund Edinburgh7 OEIC, sub fund 62.97%
ASI MyFolio Multi-Manager IV Fund Edinburgh7 OEIC, sub fund 57.45%
ASI MyFolio Multi-Manager V Fund Edinburgh7 OEIC, sub fund 60.48%
ASI MyFolio Managed IV Fund Edinburgh7 OEIC, sub fund 67.17%
Aberdeen Standard SICAV II Euro Smaller Companies Fund Luxembourg30 SICAV, sub fund 23.29%
Aberdeen Standard SICAV II European Corporate Bond Fund Luxembourg30 SICAV, sub fund 35.97%
Aberdeen Standard SICAV II Global Absolute Return Strategies Fund Luxembourg30 SICAV, sub fund 42.94%
Aberdeen Standard SICAV II Global Corporate Bond Fund Luxembourg30 SICAV, sub fund 71.23%
ASI American Unconstained Equity Fund Edinburgh7 OEIC, sub fund 21.55%
Aberdeen Standard Liquidity Fund (Lux) Euro Fund Luxembourg31 UCITS, sub fund 28.60%
ASI Europe ex UK Income Equity Fund Edinburgh7 OEIC, sub fund 37.71%
ASI UK Income Unconstrained Equity Fund Edinburgh7 OEIC, sub fund 52.60%
Brent Cross Partnership London43 Limited Partnership 23.83%
Castlepoint LP Birmingham45 Limited Partnership 34.81%
Gallions Reach Shopping Park Unit Trust Jersey32 Unit Trust 100.00%
Aberdeen Standard UK Retail Park Trust Jersey46 Unit Trust 56.60%
Standard Life Investments UK Shopping Centre Trust Jersey46 Unit Trust 40.13%
Gallions Reach Shopping Park Limited Partnership London11 Unit Trust 100.00%
Standard Life Investments Brent Cross LP Edinburgh7 Unit Trust 40.13%
AXA Fixed Interest Investment ICVC - Sterling Strategic Bond Fund London47 UCITS, sub fund 48.50%
AXA Global High Income Fund London48 OEIC, sub fund 23.67%
AQR Global Risk Premium UCITS Fund USA49 UCITS, sub fund 100.00%
Threadneedle Investment Funds ICVC - American Select Fund London50 OEIC, sub fund 21.43%
Vanguard Investment Series plc - Vanguard Global Short-Term Corporate Bond Dublin51 UCITS, sub fund 38.99%
Index Fund
Vanguard FTSE U.K. All Share Index Unit Trust London52 Unit Trust 25.38%
Vanguard Investment Series plc - Vanguard U.K. Short-Term Investment Grade Dublin51 UCITS, sub fund 61.57%
Bond Index Fund
Vanguard Common Contractual Fund - Vanguard U.S. Equity Index Common Dublin51 UCITS, sub fund 99.47%
Contractual Fund
Vanguard Investment Series plc - Vanguard Global Corporate Bond Index Fund Dublin51 UCITS, sub fund 31.10%
Vanguard Investments Common Contractual Fund - Vanguard FTST Developed World Dublin51 UCITS, sub fund 99.84%
ex UK Common Contractual Fund
MI Somerset Global Emerging Markets Fund London53 OEIC, sub fund 53.84%
ASI Emerging Markets Equity Enhanced Index Fund Edinburgh7 OEIC, sub fund 22.06%
Amundi UCITS Funds - Amundi Global Multi-Factor Equity Fund Luxembourg40 UCITS, sub fund 65.07%
AB SICAV I - Emerging Markets Low Volatility Equity Portfolio Luxembourg30 SICAV, sub fund 87.52%
Aberdeen Standard SICAV I - GDP Weighted Global Government Bond Fund Luxembourg31 SICAV, sub fund 84.51%
Aberdeen Standard SICAV I - Global Bond Fund Luxembourg31 SICAV, sub fund 91.69%
Aberdeen Standard SICAV I - Global Government Bond Fund Luxembourg31 SICAV, sub fund 37.28%
Fidelity Multi Asset Open Adventurous Fund Surrey54 OEIC, sub fund 55.92%
Goldman Sachs SICAV - Emerging Markets Total Return Bond Portfolio Luxembourg55 SICAV, sub fund 96.48%
HSBC ETFs PLC - HSBC FTSE EPRA NAREIT Developed UCITS ETF Dublin19 UCITS, sub fund 42.34%
Invesco US Equity Fund Oxfordshire56 OEIC, sub fund 27.68%
Legal & General Real Capital Builder Fund London37 Unit Trust 67.38%
L&G Absolute Return Bond Plus Fund Luxembourg57 SICAV, sub fund 57.79%
L&G Emerging Markets Bond Fund Luxembourg57 SICAV, sub fund 33.89%
L&G Multi-Asset Target Return Fund Luxembourg57 SICAV, sub fund 32.93%
Legal & General Asian Income Trust London37 Unit Trust 60.75%
Legal & General Dynamic Bond Fund London37 Unit Trust 52.43%
Legal & General Emerging Markets Government Bond (Local Currency) London37 Unit Trust 22.03%
Index Fund
Legal & General Emerging Markets Government Bond USD Index Fund London37 Unit Trust 28.93%
Legal & General European Index Trust London37 Unit Trust 24.25%
Legal & General Global Real Estate Dividend Index Fund London37 Unit Trust 22.36%
Legal & General High Income Trust London37 Unit Trust 47.75%
L&G Euro High Alpha Corporate Bond Fund Luxembourg57 SICAV, sub fund 45.92%
Legal & General UK Equity Income Fund London37 Unit Trust 24.97%
Legal & General UK Smaller Companies Trust London37 Unit Trust 31.88%
Legal & General UK Special Situations Trust London37 Unit Trust 58.68%
LGIM Sterling Liquidity Plus Fund Dublin51 UCITS, sub fund 35.72%
Blackrock ICS Sterling Government Liquidity Fund Dublin58 UCITS, sub fund 30.87%
Marks and Spencer Worldwide Managed Fund London34 Unit Trust 42.05%
Quilter Investors Bond 2 Fund London39 OEIC, sub fund 45.71%
Quilter Investors China Equity Fund London39 OEIC, sub fund 22.00%
Quilter Investors Cirilium Moderate Blend Portfolio Fund London39 OEIC, sub fund 34.30%
Quilter Investors Ethical Equity Fund London39 Unit Trust 50.55%
Quilter Investors Global Equity Growth Fund London39 OEIC, sub fund 42.26%
Quilter Investors Global Dynamic Equity Fund London39 OEIC, sub fund 22.86%
Quilter Investors UK Equity Index Fund London39 OEIC, sub fund 31.83%
BlackRock Market Advantage X London36 UCITS, sub fund 42.68%
Vanguard Investments Common Contractual Fund - Vanguard FTSE Developed Europe Dublin51 UCITS, sub fund 100.00%
ex UK Common Contractual Fund
Vanguard Investments Common Contractual Fund - Vanguard FTSE Developed World Dublin51 UCITS, sub fund 40.50%
Common Contractual Fund
Vanguard Investment Series plc - Vanguard U.K. Investment Grade Bond Index Dublin51 UCITS, sub fund 20.59%
Fund
Baillie Gifford UK & Balanced Funds ICVC - Baillie Gifford UK and Edinburgh59 OEIC, sub fund 27.14%
Worldwide Equity Fund
Baillie Gifford Investment Funds II ICVC - Baillie Gifford UK Equity Core Fund Edinburgh59 OEIC, sub fund 33.61%
ASI Short Dated Sterling Corporate Bond Tracker Fund Edinburgh7 OEIC, sub fund 41.08%
ASI Global Inflation-Linked Bond Tracker Fund Edinburgh7 OEIC, sub fund 24.02%
ASI Multi-Asset Fund Edinburgh7 OEIC, sub fund 28.22%
Aberdeen Standard SICAV I - Diversified Income Fund Luxembourg31 SICAV, sub fund 32.69%
ASI Diversified Growth Fund London11 Unit Trust 26.01%
Amundi Index Solutions - Amundi MSCI China ESG Leaders Select Luxembourg40 SICAV, sub fund 47.71%
Amundi Index Solutions - Amundi Global Corp SRI 1-5Y Luxembourg40 SICAV, sub fund 29.32%
BNY Mellon Multi-Asset Global Balanced Fund London60 UCITS, sub fund 22.65%
Aberdeen Japan Equity Fund Edinburgh7 OEIC, sub fund 21.56%
ASI European Equity Tracker Fund Edinburgh7 OEIC, sub fund 20.68%
ASI UK Responsible Equity Fund Edinburgh7 OEIC, sub fund 27.26%
Central Saint Giles Unit Trust Jersey61 Unit Trust 25.66%
Performance Retail Unit Trust Jersey62 Unit Trust 50.10%
1 These subsidiaries have been granted audit exemption by parental
guarantee.
2 1 Wythall Green Way, Wythall, Birmingham, West Midlands, B47 6WG,
United Kingdom
3 Standard Life House, 30 Lothian Road, Edinburgh, EH1 2DH, United
Kingdom
4 90 St. Stephen's Green, Dublin, D2, Ireland
5 Windsor House, Telford Centre, Telford, Shropshire, TF3 4NB, United
Kingdom
6 Goodbody Secretarial Limited, International Financial Services Centre,
25/28 North Wall Quay, Dublin 1, Ireland
7 1 George Street, Edinburgh, EH2 2LL, United Kingdom
8 301 St Vincent Street, Glasgow, G2 5HN, United Kingdom
9 Corporation Service Company, 2711 Centerville Rd Suite 400, Wilmington,
DE 19808, United States
10 Suite 202, 103 Foulk Road, Wilmington,
Delaware, 19803, United States
11 Bow Bells House, 1 Bread Street,
London, EC4M 9HH, United Kingdom
12 22-24 New Street, St Pauls Gate, 4th
Floor, JE1 4TR, Jersey
13 8 Boulevard Royal, L-2449, Luxembourg,
Luxembourg
14 20 Old Bailey, London, England, EC4M
7AN, United Kingdom
15 30 Finsbury Square, London, EC2A 1AG,
United Kingdom
16 33 Finsbury Square, London, EC2A 1AG,
United Kingdom
17 Arthur Cox Building, 10 Earlsfort
Terrace, Dublin 2, Dublin, Ireland
18 Ugland House, Grand Cayman, KY1-1104,
Cayman Islands
19 25/28 North Wall Quay, Dublin 1,
Dublin, Ireland
20 Avenue Louise 326, bte 33 1050
Brussels, Belgium
21 Telestone 8, Teleport, Naritaweg 165,
1043 BW, Amsterdam, Netherlands
22 Citco (Sweden) Ab, Stureplan 4c, 4 Tr,
114 35 Stockholm, Sweden
23 c/o Citco (Denmark) ApS, Holbergsgade 14, 2 .tv, 1057 København K
Denmark
24 6B, rue Gabriel Lippmann, Parc
d'Activité Syrdall 2, L-5365 Münsbach, Luxembourg
25 5th Floor Beaux Lane House, Mercer
Street Lower, Dublin 2, Dublin, Ireland
26 32 Commercial Street, St Helier,
Jersey, Channel Islands, JE2 3RU, Jersey
27 Avenida de Aragon 330 - Building 5,
3rd Floor, Parque Empresarial Las Mercedes, 28022 - Madrid, Spain
28 The Pearl Centre, Lynch Wood,
Peterborough, PE2 6FY, United Kingdom
29 201 Bishopsgate, London, EC2M 3AE,
United Kingdom
30 88 2-4, Rue Eugène Ruppert, L-2453
Luxembourg, Luxembourg
31 35a Avenue J.F. Kennedy, L-1855,
Luxembourg
32 Ogier House, The Esplanade, St Helier,
JE4 9WG, Jersey
33 32 Molesworth Street, Dublin 2,
Dublin, D02 Y512, Ireland
34 8 Canada Square, London, E14 5HQ,
United Kingdom
35 Marlborough House, 59 Chorley New
Road, Bolton, BL1 4QP, United Kingdom
36 12 Throgmorton Avenue, London EC2N 2DL, United Kingdom
37 One Coleman Street, London, EC2R 5AA,
United Kingdom
38 6th Floor, 65 Gresham Street, London,
EC2V 7NQ, United Kingdom
39 Senator House, 85 Queen Victoria
Street, London, EC4V 4AB, United Kingdom
40 5, Allée Scheffer, L-2520 Luxembourg,
Luxembourg
41 Trafalgar Court, Les Banques, St Peter
Port, GY1 3QL, Guernsey
42 1 More London Place, London, SE1 2AF,
United Kingdom
43 Kings Place, 90 York Way, London, N1
9GE, United Kingdom
44 1, Allée Scheffer, L-2520 Luxembourg,
Luxembourg
45 2 Snowhill, Birmingham, B4 6WR, United
Kingdom
46 Elizabeth House, 9 Castle Street, St
Helier, JE4 2QP, Jersey
47 155 Bishopsgate, London, EX2M 3JX,
United Kingdom
48 22 Bishopsgate, London, EC2N 4BQ,
United Kingdom
49 Aqr Capital Management LLC, Greenwich,
06830, United States
50 Cannon Place, 78 Cannon Street,
London, EC4N 6AG, United Kingdom
51 70 Sir John Rogerson's Quay, Dublin 2,
Ireland
52 4th Floor, The Walbrook Building, 25
Walbrook, London, EC4N 8AF, United Kingdom
53 Manning House, 22 Carlisle Place,
London, SWIP 1JA, United Kingdom
54 Beech Gate, Millfield Lane, Lower
Kingswood, Tadworth, Surrey, KT20 6RP, United Kingdom
55 49, Avenue J.F. Kennedy, L-1855
Luxembourg, Grand Duchy of Luxembourg
56 Perpetual Park, Perpetual Park Drive,
Henley-on-Thames, Oxfordshire, RG9 1HH, United Kingdom
57 10, Château d'Eau, L-3364 Leudelange,
Grand Duchy of Luxembourg
58 1st Floor, 2 Ballsbridge Park,
Ballsbridge, Dublin, D04 YW83, Ireland
59 Calton Square, 1 Greenside Row,
Edinburgh, EH1 3AN, United Kingdom
60 160 Queen Victoria Street, London,
EC4V 4LA, United Kingdom
61 Grove House, Green Street, St Helier,
JE1 2ST, Jersey
62 44-47 Esplanade, St Helier, JE4 9WG,
Jersey
The following subsidiaries were dissolved during the period. The subsidiaries
were deconsolidated from the date of dissolution:
• PUTM European Unit Trust
• PUTM Bothwell Europe Fund
• ASI Financial Equity Fund A Inc
The following subsidiaries were either fully disposed of or holdings became
insignificant to the Group. The subsidiaries were deconsolidated from either
the date of disposal or from the date when the holdings became insignificant:
• Ark Life Assurance Company DAC
• ASI Japanese Growth Equity Fund
• North American Strategic Partners 2006 L.P.
• North American Strategic Partners (Feeder) 2006
• Standard Life Investments Global SICAV II - MyFolio Multi-Manager II
Fund
• Standard Life Investments Global SICAV II - MyFolio Multi-Manager III
Fund
• Standard Life Investments Global SICAV II - MyFolio Multi-Manager IV
Fund
• Standard Life Investments Global SICAV II - MyFolio Multi-Manager V Fund
• Beresford Funds ICAV - Indexed Emerging Market Equity Fund
• Beresford Funds ICAV - Indexed Euro Large Cap Corporate Bond Fund
• Quilter Investors High Yield Bond Fund
• Legal & General Real Capital B L ACC
The Group no longer has significant holdings in the following undertakings:
• Standard Life UK Investments Real Estate Income Feeder Fund.
• BlackRock Market Advantage X
• AXA Sterling Index Linked Bond Fund
• AQR UCITS Funds - AQR Global Risk Parity C5 GBP (Acc)
• Legal & General European Trust
• Aviva Investors UK Property Feeder Inc Fund
• Jupiter Asset Management Series PLC - Jupiter Merian Global Equity
Income Fund (IRL)
• Quilter Investors Monthly Income and Growth Portfolio Fund
• Quilter Investors Sterling Corporate Bond Fund
• Legal & General Ethical Trust
• L&G Emerging Markets Short Duration Bond Fund
• AXA Framlington FinTech Fund
• Quilter Investors Global Equity Index Fund
• Legal & General Authorised Contractual Scheme - L&G Real Income
Builder Fund
I. Other notes
I1. Share-based payment
Equity-settled share-based payments to employees and others providing services
are measured at the fair value of the equity instruments at the grant date.
The fair value excludes the effect of non-market-based vesting conditions.
Further details regarding the determination of the fair value of
equity-settled share-based transactions are set 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:
2021 2020
£m
£m
Expense arising from equity-settled share-based payment transactions 14 13
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 2019 LTIP awards are subject to performance conditions tied to the
Group's performance in respect of cumulative cash generation, return on
Adjusted Shareholder Solvency II Own Funds and Total Shareholder Return
('TSR'). The 2020 and 2021 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 TSR.
For all LTIP awards, a holding period applies so that any LTIP awards to
Executive Committee members for which the performance vesting requirements are
satisfied will not be released for a further two years from the third
anniversary of the original award date. Dividends will accrue on LTIP awards
until the end of the holding period. There are no cash settlement
alternatives. All awards have a contractual life of ten years from the date of
grant.
2021 LTIP awards were granted on 12 March 2021 and 17 August 2021, and are
expected to vest on 12 March 2024 and 17 August 2024 respectively. The 2018
LTIP awards vested on 21 March 2021. The 2019 awards will vest on 11 March
2022 and the 2020 awards will vest on 13 March 2023. The number of shares for
all outstanding LTIP awards was increased in July 2018 to take account of the
impact of the 2018 Group rights issue.
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 2019, 2020 and 2021 TSR
elements of the LTIP awards has been calculated using a Monte Carlo model. The
inputs to this model are shown below:
2021 2020 2019
TSR performance condition
TSR performance condition
TSR performance condition
Share price (p) 738.6 586.3 694.0
Expected term (years) 3.0 3.0 3.0
Expected volatility (%) 30 20 20
Risk-free interest rate (%) 0.14 0.28 0.74
Expected dividend yield (%) Dividends are received by holders of the awards therefore
no adjustment to fair value is required
On 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 2020 LTIP awards.
LTIP Buy Out awards were granted to the Group Chief Executive Officer in 2019,
and finalised in 2020, following forfeiture of a proportion of his long-term
incentive awards held with Aviva plc that had been awarded in March 2017 and
May 2018. The Aviva March 2017 LTIP vested on 27 March 2020 with a performance
outturn of 50% and the Aviva May 2018 LTIP vested on 26 March 2021 with a
performance outturn of 0%.
On 12 March 2021 and 17 August 2021 LTIP Buy-out awards were granted to
certain senior management employees. There are discreet 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.
On 14 August 2020, LTIP awards were granted to certain senior management
employees. The vesting periods and performance conditions for these awards are
linked to the Group's core 2018, 2019 and 2020 LTIP awards.
On 21 December 2018 LTIP awards were granted to certain employees under the
terms of the new PGH plc scheme rules. There are discreet vesting periods for
these awards and the final tranche of awards vested on 28 March 2021. These
grants of shares were conditional on the employees remaining in employment
with the Group for the vesting period.
Each year, the Group issues a Chairman's share award under the terms of the
LTIP which is granted to a small number of employees in recognition of their
outstanding contribution in the previous year. The awards are granted on the
same dates as the core 2019, 2020 and 2021 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 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 number of
shares for all outstanding DBSS awards was increased in July 2018 to take
account of the impact of the 2018 Group rights issue.
The 2021 DBSS was granted on 12 March 2021 and is expected to vest on 12 March
2024. The 2018 DBSS awards vested on 15 March 2021. The 2019 awards are
expected to vest on 11 March 2022 and the 2020 awards are expected to vest on
13 March 2023.
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. All awards have a contractual
life of three years and six months from the date of grant.
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 2021 sharesave options were
granted on 9 April 2021.
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. All awards are required to be
exercised within six months of the vesting date.
In 2018, following the scheme of arrangement, participants in the sharesave
plans at this time exchanged their options over shares in the previous parent
company for equivalent options over PGH plc ordinary shares. All sharesave
options were increased in November 2016 and again in July 2018 following the
Group's rights issues and the exercise price of these awards was also amended
as a result of these issues.
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 2017 to 2021 UK sharesave options:
2021 sharesave 2020 sharesave 2019 sharesave 2018 sharesave 2017 sharesave
Share price (£) 7.486 5.664 6.800 7.685 7.470
Exercise price (£) (Revised) 5.890 4.970 5.610 5.629 5.674
Expected life (years) 3.25 and 5.25 3.25 and 5.25 3.25 and 5.25 3.25 and 5.25 3.25 and 5.25
Risk-free rate (%) - based on UK government gilts commensurate with the 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) 1.0 (for 3.25 year scheme) and 1.1 (for 5.25 year scheme) 0.2 (for 3.25 year scheme) and 0.4 (for 5.25 year scheme)
expected term of the award
Expected volatility (%) based on the Company's share price volatility to date 30.0 30.0 30.0 30.0 30.0
Dividend yield (%) 6.3 8.2 6.8 6.5 6.3
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 (2020: 6.462)
• Exercise price (€): 6.880 (2020: 5.650)
• Risk-free rate (%): (0.4) (for 3.25 year scheme) and (0.3) (for 5.25
year scheme) (2020: (0.3) (for 3.25 year scheme) and (0.2) (for 5.25 year
scheme))
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 2021, 471,543 Matching shares
(including unrestricted shares) were conditionally awarded to employees (2020:
287,547).
I1.3 Movements in the year
The following tables illustrate the number of, and movements in, LTIP,
Sharesave and DBSS share options during the year:
Number of share options 2021
LTIP Sharesave DBSS
Outstanding at the beginning of the year 5,488,995 3,569,159 1,267,852
Granted during the year 2,984,144 1,729,022 601,944
Forfeited/cancelled during the year (290,064) (240,130) (5,236)
Exercised during the year (882,043) (307,229) (314,267)
Outstanding at the end of the year 7,301,032 4,750,822 1,550,293
Number of share options 2020
LTIP Sharesave DBSS
Outstanding at the beginning of the year 4,637,555 2,542,764 905,867
Granted during the year 2,634,386 2,233,597 588,925
Forfeited/cancelled during the year (1,030,017) (767,140) -
Exercised during the year (752,929) (440,062) (226,940)
Outstanding at the end of the year 5,488,995 3,569,159 1,267,852
The weighted average fair value of options granted during the year was £4.98
(2020: £3.88).
The weighted average share price at the date of exercise for the rewards
exercised is £7.06 (2020: £6.74).
The weighted average remaining contractual life for the rewards outstanding as
at 31 December 2021 is 5.5 years (2020: 5.6 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 2021 2020
£m
£m
(Loss)/profit for the year before tax (430) 1,270
Non-cash movements in (loss)/profit for the period before tax
Gain on completion of abrdn plc transaction A6.1 (110) -
Loss on disposal of Ark Life, excluding transaction costs H3 17 -
Gain on acquisition - (372)
Gain on L&G Part VII portfolio transfer H2.2 - (85)
Fair value (gains)/losses on:
Investment property G4 (1,195) 52
Financial assets and derivative liabilities (9,436) (10,806)
Change in fair value of borrowings (9) (39)
Amortisation and impairment of intangible assets G2 644 487
Change in unallocated surplus F2 (106) 113
Share-based payment charge I1.1 14 13
Finance costs C5 242 234
Net interest expense on Group defined benefit pension scheme liability/asset G1 37 29
Pension past service costs - 2
Other costs of pension schemes G1 6 5
Decrease in investment assets 6,738 8,254
(Increase)/decrease in reinsurance assets (227) 708
Decrease in assets classified as held for sale 286 -
Increase in insurance contract and investment contract liabilities 6,354 6,261
Decrease in deposits received from reinsurers (521) (236)
(Decrease)/increase in obligation for repayment of collateral received (1,762) 1,146
Decrease in liabilities classified as held for sale (264) -
Net (increase)/decrease in working capital (1,100) 211
Other items:
Contributions to defined benefit pension schemes G1 (49) (77)
Cash transferred under L&G Part VII portfolio transfer - 146
Cash (utilised)/generated by operations (871) 7,316
I3. Capital management
The Group's capital management is based on the Solvency II framework. This
involves a valuation in line with Solvency II principles of the Group's Own
Funds and risk-based assessment of the Group's Solvency Capital Requirement
('SCR').
This note sets out the Group's approach to managing capital and provides an
analysis of Own Funds and SCR.
Risk and capital management objectives
The risk management objectives and policies of the Group are based on the
requirement to protect the Group's regulatory capital position, thereby
safeguarding policyholders' guaranteed benefits whilst also ensuring the Group
can meet its various cash flow requirements. Subject to this, the Group seeks
to use available capital to achieve increased returns, balancing risk and
reward, to generate additional value for policyholders and shareholders.
In pursuing these objectives, the Group deploys financial and other assets and
incurs insurance contract liabilities and financial and other liabilities.
Financial and other assets principally comprise investments in equity
securities, 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 unit holders.
The Group's risk management framework is described in the risk management
commentary on pages 54 to 65 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 F4: 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;
• to ensure sufficient liquidity to meet obligations to policyholders and
other creditors;
• to optimise the Fitch Ratings financial leverage to maintain an
investment grade credit rating; and
• to maintain a dividend policy to pay an ordinary dividend that is
sustainable grows over time.
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'.
In accordance with the approvals received from the PRA, the Group currently
operates a partial Internal Model to calculate Group SCR and following the
approval of the harmonised internal model by the PRA during the year, all
Group companies are within the scope of a single harmonised internal model,
with the exception of the acquired ReAssure businesses and the Irish life
entity, Standard Life International Designated Activity Company, which
determines their capital requirements in accordance with the Standard Formula.
Group capital resources - unaudited
The Group capital resources are based on the Group's Eligible Own Funds
adjusted to remove amounts pertaining to unsupported with-profit funds and
Group pension schemes:
Unaudited 2021 2020
£bn
£bn
PGH plc Eligible Own Funds 14.8 16.8
Remove Own Funds pertaining to unsupported with-profit funds and pension (2.9) (3.2)
schemes
Group capital resources 11.9 13.6
Solvency II surplus - unaudited
An analysis of the PGH plc Solvency II surplus as at 31 December 2021 is
provided in the business review section on pages 34 and 35. The Group has
complied with all externally imposed capital requirements during the year.
Additional information on the PGH plc Own Funds, SCR and MCR is included in
the additional capital disclosures on pages 318 and 319.
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.
I4.1 Related party transactions
On 23 February 2021, the Group entered into a new agreement with abrdn plc to
simplify the arrangements of their Strategic Partnership (see note A6.1 for
further details). As part of the acquisition of the brand, the relevant
marketing, distribution and data team members transferred to the Group.
Consequently, the Client Service and Proposition Agreement ('CSPA') entered
into between the two groups following the acquisition of the Standard Life
businesses in 2018, has been significantly amended prior to being dissolved.
As a consequence of this transaction, it has been assessed that abrdn plc no
longer has significant influence over the Group and as a result is no longer
considered to be a related party of the Group from the date that the Group
entered into the new agreement.
Transactions 20211 Balances outstanding 2021 Transactions 2020 Balances outstanding 2020
£m
£m
£m
£m
Pearl Group Staff Pension Scheme
Payment of administrative expenses (4) - (3) -
UK Commercial Property Trust Limited
Dividend income 17 - 13 -
abrdn plc
Investment management fees (20) (125) (54)
Fees under Transitional Services Arrangement and material outsource agreements (4) (6) (2)
Receipts under Transitional Services Arrangement - 64 19
Net receipts under Client Service Proposition Agreement - 16 36
Net payments under deed of indemnity - 6 (68)
Dividend paid - (67) -
1 Transactions with abrdn plc only include those that took place prior
to 23 February 2021. Balances outstanding as at the date abrdn plc ceased to
be a related party of the Group have all been settled prior to 31 December
2021.
I4.2 Transactions with key management personnel
The total compensation of key management personnel, being those having
authority and responsibility for planning, directing and controlling the
activities of the Group, including the Executive and Non-Executive Directors,
are as follows:
2021 2020
£m
£m
Salary and other short-term benefits 5 5
Equity compensation plans 3 5
Details of the shareholdings and emoluments of individual Directors are
provided in the Remuneration report on pages 106 to 136.
During the year to 31 December 2021 key management personnel and their close
family members contributed £291,546 (2020: £9,100) to Pensions and Savings
products sold by the Group. At 31 December 2021, the total value of key
management personnel's investments in Group Pensions and Savings products was
£3,443,658 (2020: £2,842,300).
I5. Commitments
This note analyses the Group's other commitments.
2021 2020
£m
£m
To subscribe to private equity funds and other unlisted assets 710 565
To purchase, construct or develop investment property and income strips 206 89
For repairs, maintenance or enhancements of investment property 12 26
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 period 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 11 March 2022, the Board recommended a final dividend of 24.8p per share
for the year ended 31 December 2021 (2020: 24.1p). 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 2021 and will be charged to the statement of consolidated
changes in equity in 2022.
The Group is continuing to monitor developments regarding the conflict between
Russia and Ukraine. As at 31 December 2021, the Group had £23 million of
shareholder exposure to Russia and Ukraine, which represents less than 0.1% of
total shareholder assets. The exposure relating to assets held to back
policyholder liabilities at 31 December 2021 is not considered to be material
and the associated indirect shareholder exposure is minimal.
Nicholas Lyons
Andy Briggs
Rakesh Thakrar
Alastair Barbour
Karen Green
Hiroyuki Iioka
Wendy Mayall
John Pollock
Belinda Richards
Nicholas Shott
Kory Sorenson
Mike Tumilty
12 March 2022
Parent company financial statements
Statement of financial position
As at 31 December 2021
Notes 2021 2020
£m
£m
Assets
Property, plant and equipment 10 21 -
Investments in Group entities 11 10,031 10,090
Financial assets
Loans and deposits 12 1,234 2,119
Derivatives 6 69 -
Debt securities 13 1 1
Collective investment schemes 13 690 194
Deferred tax 14 82 16
Prepayments and accrued income 58 -
Other amounts due from Group entities 20 616 295
Cash and cash equivalents 15 95 4
Total assets 12,897 12,719
Equity and liabilities
Equity attributable to ordinary shareholders
Share capital 3 100 100
Share premium 3 6 4
Merger relief reserve 3 1,819 1,819
Other reserve 3 (4) (4)
Retained earnings 5,448 5,211
Total equity attributable to ordinary shareholders 7,369 7,130
Tier 1 Notes 4 411 411
Total equity 7,780 7,541
Liabilities
Financial liabilities
Borrowings 5 4,387 4,521
Derivatives 6 5 -
Obligations for repayment of collateral received 6 66 -
Other amounts due to Group entities 20 415 448
Provisions 7 92 122
Lease liabilities 8 21 -
Accruals and deferred income 9 131 87
Total liabilities 5,117 5,178
Total equity and liabilities 12,897 12,719
The notes identified numerically on pages 297 to 312 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 163 to 293.
Statement of changes in equity
For the year ended 31 December 2021
Share capital (note 3) Share premium (note 3) Merger relief reserve Other reserve Retained earnings Total Tier 1 Notes Total
£m
£m
(note 3)
(note 3)
£m
£m
(note 4)
equity
£m
£m
£m
£m
At 1 January 2021 100 4 1,819 (4) 5,211 7,130 411 7,541
Total comprehensive income for the year attributable to owners - - - - 728 728 - 728
Issue of ordinary share capital, net of associated commissions and expenses - 2 - - - 2 - 2
Dividends paid on ordinary shares (note B4) - - - - (482) (482) - (482)
Coupon paid on Tier 1 Notes, net of tax relief - - - - (23) (23) - (23)
Credit to equity for equity-settled share-based payments (note I1) - - - - 14 14 - 14
At 31 December 2021 100 6 1,819 (4) 5,448 7,369 411 7,780
For the year ended 31 December 2020
Share capital Share premium (note 3) Merger Other Retained earnings Total Tier 1 Total
(note 3)
£m
relief reserve
reserve
£m
£m
Notes (note 4)
equity
£m
(note 3)
(note 3)
£m
£m
£m
£m
At 1 January 2020 72 2 - (4) 5,368 5,438 411 5,849
Total comprehensive income for the period attributable to owners - - - - 256 256 - 256
Issue of ordinary share capital, net of associated commissions and expenses 28 2 1,819 - - 1,849 - 1,849
Dividends paid on ordinary shares (note B4) - - - - (403) (403) - (403)
Coupon paid on Tier 1 Notes, net of tax relief - - - - (23) (23) - (23)
Credit to equity for equity-settled share-based payments (note I1) - - - - 13 13 - 13
At 31 December 2020 100 4 1,819 (4) 5,211 7,130 411 7,541
Statement of cash flows
For the year ended 31 December 2021
Notes 2021 2020
£m
£m
Cash flows from operating activities
Cash generated/(utilised) by operations 16 897 (71)
Net cash flows from operating activities 897 (71)
Cash flows from investing activities
Acquisition of ReAssure subsidiaries - (1,265)
Investment income - 5
Interest received from Group entities 111 74
Capital contribution to subsidiary (63) (50)
Repayment of amounts due from Group entities - 400
Net cash flows from investing activities 48 (836)
Cash flows from financing activities
Proceeds from issuing ordinary shares 3 2 2
Proceeds from new shareholder borrowings, net of associated expenses 5 - 1,445
Repayment of shareholder borrowings 5 (122) -
Ordinary share dividends paid (482) (403)
Interest paid on borrowings (222) (149)
Lease payments (1) -
Coupon paid on Tier 1 Notes (29) (29)
Net cash flows from financing activities (854) 866
Net increase/(decrease) in cash and cash equivalents 91 (41)
Cash and cash equivalents at the beginning of the year 4 45
Cash and cash equivalents at the end of the year 95 4
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 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 2021
was £728 million (2020: £256 million).
Statement of compliance
The Company's financial statements have been prepared in accordance with UK-
adopted international accounting as applied in accordance with 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 163 to 293, with the exception of the two policies detailed below.
The Company's accounting policy for financial assets is in accordance with the
requirements of IFRS 9 Financial Instruments. As the Group has applied the
temporary exemption from IFRS 9 available for entities whose activities are
predominantly connected with insurance contracts, a different accounting
policy has been adopted in the preparation of the consolidated financial
statements. In addition, the Company has not adopted the Group's policy of
hedge accounting.
Where an accounting policy can be directly attributed to a specific note to
the consolidated financial statements, the policy is presented within that
note. Each note within the Company financial statements makes reference to the
note to the consolidated financial statements containing the applicable
accounting policy. The accounting policy in relation to foreign currency
transactions is included within note A2.1 to the consolidated financial
statements.
Investments in Group entities
Investments in Group entities are carried in the statement of financial
position at cost less impairment.
The Company assesses at each reporting date whether an investment is impaired
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.
Financial assets
Classification of Financial assets
Financial assets are measured at amortised cost where they have:
• contractual terms that give rise to cash flows on specified dates, that
represent solely payments of principal and interest on the principal amount
outstanding; and
• are held within a business model whose objective is achieved by holding
to collect contractual cash flows.
These financial assets are initially recognised at cost, being the fair value
of the consideration paid for the acquisition of the financial asset. All
transaction costs directly attributable to the acquisition are also included
in the cost of the financial asset. Subsequent to initial recognition, these
financial assets are carried at amortised cost, using the effective interest
method.
Financial assets measured at amortised cost are included in notes 12 and 15.
Equities, debt securities, collective investment schemes and derivatives are
measured at FVTPL as they are managed on a fair value basis.
Impairment of financial assets
The Company assesses the expected credit losses associated with its loans and
deposits, other amounts due from Group entities and cash carried at amortised
cost. The measurement of credit impairment is based on an Expected Credit Loss
('ECL') model and depends upon whether there has been a significant increase
in credit risk.
For those credit exposures for which credit risk has not increased
significantly since initial recognition, the Company measures loss allowances
at an amount equal to the total expected credit losses resulting from default
events that are possible within 12 months after the reporting date ('12-month
ECL'). For those credit exposures for which there has been a significant
increase in credit risk since initial recognition, the Company measures and
recognises an allowance at an amount equal to the expected credit losses over
the remaining life of the exposure, irrespective of the timing of the default
('Lifetime ECL'). If the financial asset becomes 'credit-impaired' (following
significant financial difficulty of issuer/borrower, or a default/breach of a
covenant), the Company will recognise a Lifetime ECL. ECLs are derived from
unbiased and probability-weighted estimates of expected loss.
See note 17 for detail of how the Company assesses whether the credit risk of
a financial asset has increased since initial recognition and the approach to
estimating ECLs.
The loss allowance reduces the carrying value of the financial asset and is
reassessed at each reporting date. ECLs and subsequent remeasurements of the
ECL, are recognised in the income statement. For other receivables, the ECL
rate is recalculated each reporting period with reference to the
counterparties of each balance.
2. Financial information
New accounting pronouncements not yet effective
Details of the standards, interpretations and amendments to be adopted in
future periods are detailed in note A5 to the consolidated financial
statements, none of which are expected to have a significant impact on the
Company's financial statements.
Note A5 outlines that the Group has taken advantage of the temporary exemption
granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 until
1 January 2023 as a result of meeting the exemption criteria as at 31 December
2015. As detailed above, the Company did not meet the eligibility criteria to
defer the application of IFRS 9 and the standard has therefore been adopted by
the Company. The relevant disclosures are included in these financial
statements.
3. Share capital, share premium, merger relief reserve and other reserve
During 2021, the Company issued 303,914 shares (2020: 440,062 shares) with a
premium of £2 million (2020: £2 million) in order to satisfy its
obligations to employees under the Group's sharesave schemes.
On 22 July 2020, the Company acquired ReAssure Group plc and as part
consideration for the acquisition issued 277,277,138 new ordinary shares at
par to Swiss Re Group, of which 144,877,304 shares were subsequently
transferred to MS&AD Insurance Group Holdings ('MS&AD'). The equity
stake in the Company held by Swiss Re Group and MS&AD was valued at
£1,847 million, based on the share price at that date.
The Company has used the relief in section 612 of the Companies Act 2006 to
represent the difference between the consideration and the nominal value of
the shares issued of £1,819 million in a merger relief reserve as opposed to
in share premium. A merger relief reserve is required to be used as a result
of the company having issued equity shares as partial consideration for the
shares of the ReAssure plc Group 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.
2021 2020
£m
£m
Issued and fully paid:
999.5 million ordinary shares of £0.10 each (2020: 999.2 million) 100 100
2021 Number £
Shares in issue at 1 January 2021 999,232,144 99,923,214
Ordinary shares issued in the period 303,914 30,391
Ordinary shares in issue at 31 December 2021 999,536,058 99,953,605
2020 Number £
Shares in issue at 1 January 2020 721,514,944 72,151,494
Ordinary shares issued to Swiss Re and MS&AD 277,277,138 27,727,714
Other ordinary shares issued in the period 440,062 44,006
Ordinary shares in issue at 31 December 2020 999,232,144 99,923,214
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.
2021 2020
£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, following
a trigger event linked to Solvency II, the capital position was revised.
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 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
2021 2020 2021 2020
£m
£m
£m
£m
£428 million subordinated loans (note a) 435 436 498 517
£450 million Tier 3 subordinated notes (note b) 449 449 457 470
US $500 million Tier 2 bonds (note c) 337 329 408 416
€500 million Tier 2 notes (note d) 389 410 490 516
£300 million senior unsecured bond (note e) - 123 - 125
Loan due to Standard Life Assurance Limited (note f) 300 294 300 294
US $750 million Contingent Convertible Tier 1 notes (note g) 551 545 581 585
£500 million Tier 2 notes (note h) 485 484 593 622
US $500 million Fixed Rate Reset Tier 2 notes (note i) 368 364 389 395
£500 million 5.867% Tier 2 subordinated notes (note j) 550 556 598 620
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes (note k) 266 272 269 280
£250 million 4.016% Tier 3 subordinated notes (note l) 257 259 264 266
Total borrowings 4,387 4,521 4,847 5,106
Amount due for settlement after 12 months 4,387 4,398
a. On 12 December 2018, the Company was substituted in place of Old PGH as
issuer of the £428 million subordinated notes due 2025 at a coupon of 6.625%,
which were initially recognised at fair value of £439 million.
b. On 12 December 2018, the Company was substituted in place of Old PGH as
issuer of the £450 million Tier 3 subordinated notes due 2022 at a coupon of
4.125%, which were initially recognised at fair value of £447 million.
c. On 12 December 2018, the Company was substituted in place of Old PGH as
issuer of the US $500 million Tier 2 bonds due 2027 with a coupon of 5.375%,
which were initially recognised at fair value of £349 million.
d. On 12 December 2018, the Company was substituted in place of Old PGH as
issuer of the €500 million Tier 2 notes due 2029 with a coupon of 4.375%,
which were initially recognised at fair value of £407 million.
e. On 18 June 2019, the Company was substituted in place of Old PGH as
issuer of the £300 million 7 year senior unsecured bond due 2021 at an
annual coupon of 5.75% with principal outstanding of £122 million, which was
initially recognised at fair value of £131 million. On 7 July 2021, the
senior unsecured bond matured and the outstanding balance of £122 million was
repaid in full along with the final coupon of £7 million.
f. 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 during the year interest of £6 million (2020: £6 million)
was capitalised.
g. 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. Further details are contained in note E5
to the consolidated financial statements.
h. 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.
i. 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.
j. 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 will be
amortised over the remaining life of the notes. Interest is payable
semi-annually in arrears on 13 June and 13 December.
k. 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
will be 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.
l. 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.
m. The Company has in place a £1.25 billion unsecured revolving credit
facility, maturing in June 2026. The facility accrues interest at a margin
over SONIA that is based on credit rating and non-cumulative compounded
risk-free rate. The facility remains undrawn as at 31 December 2021.
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.
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 movements Non-cash movements
At Repayments £m Movement in foreign exchange Amortisation £m Capitalised interest Movement in fair value At
1 January 2021
£m
£m
£m
31 December 2021
£m
£m
£428 million subordinated notes 436 - - (1) - - 435
£450 million Tier 3 subordinated notes 449 - - - - - 449
US $500 million Tier 2 bonds 329 - 3 5 - - 337
€500 million Tier 2 notes 410 - (24) 3 - - 389
£300 million senior unsecured bond 123 (122) - (1) - - -
Loan due to Standard Life Assurance Limited 294 - - - 6 - 300
US $750 million Contingent Convertible Tier 1 notes 545 - 5 1 - - 551
£500 million Tier 2 notes 484 - - 1 - - 485
US $500 million Fixed Rate Reset Tier 2 notes 364 - 4 - - - 368
£500 million 5.867% Tier 2 subordinated notes 556 - - (6) - - 550
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes 272 - - (6) - - 266
£250 million 4.016% Tier 3 subordinated notes 259 - - (2) - - 257
Derivative assets1 - - - - - 48 48
Derivative liabilities1 - - - - - (5) (5)
4,521 (122) (12) (6) 6 43 4,430
1 Cross currency swaps to hedge against adverse currency movements in
respect of Group's Euro and US Dollar denominated borrowings (see note 6 for
further details).
Cash movements Non-cash movements
At Repayments £m Movement in foreign exchange Amortisation £m Capitalised interest Movement At
1 January 2021
£m
£m
in fair
31 December 2021
£m
value
£m
£m
£428 million subordinated notes 437 - - - (1) - 436
£450 million Tier 3 subordinated notes 448 - - - 1 - 449
US $500 million Tier 2 bonds 334 - - (10) 5 - 329
€500 million Tier 2 notes 385 - - 22 3 - 410
£300 million senior unsecured bond 128 - - - (5) - 123
Loan due to Standard Life Assurance Limited 288 - - - - 6 294
US $750 million Contingent Convertible Tier 1 notes - 566 - (23) 2 - 545
£500 million Tier 2 notes - 483 - - 1 - 484
US $500 million Fixed Rate Reset Tier 2 notes - 396 - (32) - - 364
£500 million 5.867% Tier 2 subordinated notes - - 559 - (3) - 556
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes - - 275 - (3) - 272
£250 million 4.016% Tier 3 subordinated notes - - 259 - - - 259
2,020 1,445 1,093 (43) - 6 4,521
1 Loans issued via substitution are a non-cash flow item as
consideration was the transfer of loans and deposits (refer to note 12).
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 and US Dollar
exposures to adverse foreign currency movements in respect of underlying
business within two of its subsidiaries, SLAL and SLIDAC.
The fair value of the derivative financial instruments are as follows:
Asset Liability
2021 2020 2021 2020
£m £m £m £m
Cross currency swaps 48 - 5 -
Foreign currency swaps 21 - - -
69 - 5 -
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 OTC derivative assets is
£69 million (2020: £nil) of which credit risk of £66 million (2020: £nil)
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
In 2019, the Company recognised a Standard Life transition restructuring
provision of £159 million, of which £31 million was subsequently released in
2020. During the year, £17 million (2020: £19 million) of the restructuring
provision was utilised, resulting in a provision as at 31 December 2021 of
£92 million (2020: £109 million). The remaining provision is expected to be
utilised within the next two years.
A further provision of £13 million was recognised for amounts payable to
abrdn plc, in respect of obligations arising under agreements entered into in
relation to the acquisition of the Standard Life Assurance businesses in 2018.
Following completion of the agreement with abrdn plc to simplify the
arrangements of the Strategic Partnership, the balance of £13 million was
released during the year.
Further details are included in note G7 to the consolidated financial
statements.
8. Lease liabilities
The accounting policy for lease liabilities is included in note G10 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.
2021
£m
At 1 January -
Inception of lease 22
Lease payments (1)
At 31 December 21
Amount due within 12 months 2
Amount due after 12 months 19
9. Accruals and deferred income
The accounting policy for accruals and deferred income is included in note G11
to the consolidated financial statements.
2021 2020
£m
£m
Accruals and deferred income 131 87
Amount due for settlement after 12 months - -
10. Property, plant and equipment
The accounting policy is included in note G3 to the consolidated financial
statements.
The right-of-use asset relates to office premises leased at 20 Old Bailey,
London. Depreciation is being charged on a straight-line basis over the term
of the lease.
Property Right-of-use asset Total Property, Plant and Equipment 2021
2021
£m
£m
Cost or valuation
At 1 January 2021 - -
Additions 22 22
At 31 December 2021 22 22
Depreciation
At 1 January 2021 - -
Depreciation (1) (1)
At 31 December 2021 (1) (1)
Carrying amount at 31 December 2021 21 21
11. Investments in Group entities
2021 2020
£m
£m
Cost
At 1 January 14,236 11,074
Additions 63 3,162
Acquisition Price Adjustment (79) -
At 31 December 14,220 14,236
Impairment
At 1 January (4,146) (4,146)
Charge for the year (43) -
At 31 December (4,189) (4,146)
Carrying amount
At 31 December 10,031 10,090
On 23 February 2021, the Group entered into a new agreement with abrdn plc to
simplify the arrangements of the Strategic Partnership, as described further
in note A6.1 to the consolidated financial statements. As part of this
transaction, settlement of amounts due under the deed of indemnity by Old PGH
resulted in a reduction in the cost of investment in SLAL of £79 million and
payment of a capital contribution of £55 million to Old PGH.
In March 2021, the Company subscribed for 850 million ordinary shares in SLAL
at par for a consideration of £8 million.
On 22 July 2020, the Company acquired ReAssure Group plc from Swiss Re Finance
Midco (Jersey) Limited, an indirect subsidiary of Swiss Re Limited, for a
total consideration of £3,112 million. The consideration consisted of £1,265
million cash and the issue of 277,277,138 shares to Swiss Re Group on 23 July
2020, of which 144,877,304 shares were subsequently transferred to MS&AD
Insurance Group Holdings. The equity stake in the Group held by Swiss Re Group
and MS&AD was valued at £1,847 million, based on the share price at
that date.
During the year ended 31 December 2020, a capital contribution of £50 million
was paid into SLIDAC which was provided in order to strengthen its capital
position following adverse market conditions experienced during that year.
This increased the carrying value of the Company's investment in SLIDAC to
£582 million.
Where indicators of impairment are identified, the carrying value of the
Company's investments in its subsidiaries is tested for impairment at the
period end. The value in use is the recoverable amount determined by using the
present value of the future cash flows of the Company's subsidiaries including
the in-force long-term business, the asset management business and the service
company. The cash flows used in an impairment calculation are consistent with
those adopted by management in the operating plan and, beyond the period of
this plan, reflect the anticipated run-off of the in-force life insurance
business. Future cash flows are valued using discount rates which reflect the
risks inherent to each cash flow. For other subsidiaries, the value in use is
determined using net asset values.
As at 31 December 2021 and 31 December 2020, 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. During the year ended 31 December 2021, an impairment charge of
£43 million (2020: £nil) was recognised to align the carrying amount of
certain investments in subsidiaries to their recoverable amount.
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
2021 2020 2021 2020
£m
£m
£m
£m
Loans due from Phoenix Life Holdings Limited (note a) 1,221 1,214 1,370 1,403
Loan due from Phoenix Group Employee Benefit Trust (note b) 13 6 13 6
Loan due from ReAssure Group plc (note c) - 704 - 710
Loans and deposits due from Group entities 1,234 1,924 1,383 2,119
Fixed term deposits (note d) - 195 - 195
Total loans and deposits 1,234 2,119 1,383 2,314
Amounts due after 12 months 784 1,924
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 accreted to par
over the period to 2025. At 31 December 2021, the carrying value of the loan
was £435 million (2020: £437 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
matures on 20 July 2022. This loan was initially recognised at fair value of
£447 million and is accreted to par over the period to 2022. At 31 December
2021, the carrying value of the loan was £450 million (2020: £449 million).
On 12 December 2018, the Company was assigned a US $500 million
loan by PLHL due 2027 with a coupon of 5.375%. This loan was initially
recognised at fair value of £349 million and is accreted to par over the
period to 2027. Movement in foreign exchange during the period decreased the
carrying value by £4 million (2020: £10 million). At 31 December 2021, the
carrying value of the loan was £336 million (2020: £328 million).
b) On 18 June 2019, the Company was assigned an interest free facility
arrangement with Phoenix Group Employee Benefit Trust ('EBT'). As at 31
December 2021, the carrying value of the loan was £13 million (2020: £6
million). In 2021, an additional £17 million (2020: £7 million) was drawn
down against this facility. 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. Following the vesting of
awards in 2021, £10 million (2020: £8 million) of the loan was written off.
c) On 22 July 2020, the Company entered into a £1,099 million loan
agreement with ReAssure Group plc, a subsidiary undertaking, as consideration
for the transfer of subordinated loan notes into the Company. The loan accrued
interest at a rate of 6 month LIBOR plus 1.30% and was due to mature on 31
December 2025. During the year, the Company received full repayment of the
outstanding loan balance of £699 million plus interest capitalised to date.
As at 31 December 2021, the carrying value of the loan was £nil (2020: £704
million which also included £5 million of interest previously capitalised).
d) Fixed term deposits include holdings in bank deposits with an initial
maturity of more than 3 months at the date the deposit was made.
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
2021 2020
£m
£m
Financial assets at fair value through profit or loss
Derivatives 69 -
Debt securities 1 1
Collective investment schemes 690 194
760 195
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 2021 Level 1 Level 2 Level 3 Total
£m
£m
£m
£m
Financial assets at fair value through profit or loss
Derivatives - 69 - 69
Debt securities - - 1 1
Collective investment schemes 690 - - 690
690 69 1 760
Year ended 31 December 2020 Level 1 Level 2 Level 3 Total
£m
£m
£m
£m
Financial assets at fair value through profit or loss
Debt securities - - 1 1
Collective investment schemes 194 - - 194
194 - 1 195
There were no transfers between levels in either 2021 or 2020.
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 2021 Credit for the year 31 December 2021
£m
£m
£m
Provisions and other temporary differences 16 66 82
1 January 2020 Credit for the year 31 December 2020
£m
£m
£m
Provisions and other temporary differences 15 1 16
The standard rate of UK corporation tax for the accounting period is 19%
(2020: 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 1 April 2023 was announced in the Budget of 3 March 2021.
Deferred tax assets are provided at the rate of 19% for tax losses carried
forward to the extent that realisation of the related tax benefit is probable
before 1 April 2023; otherwise a rate of 25% has been applied.
15. Cash and cash equivalents
The accounting policy for cash and cash equivalents is included in note G6 to
the consolidated financial statements.
2021 2020
£m
£m
Bank and cash balances 95 4
16. Cash flows from operating activities
2021 2020
£m
£m
Profit for the year before tax 661 222
Non-cash movements in profit for the year before tax:
Impairment of loan due from subsidiary 10 8
Impairment of investment in subsidiaries 43 -
Investment income (111) (78)
Finance costs 274 189
Fair value gains on financial assets (62) (45)
Foreign exchange movement on borrowings at amortised cost (11) (43)
Share-based payment charge 14 13
Depreciation 1 -
Decrease/(increase) in investment assets 385 (116)
Net increase in working capital (307) (221)
Cash generated/(utilised) by operations 897 (71)
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.
At 31 December 2021, total capital was £7,780 million (2020: £7,541
million). The movement in capital in the period comprises the total
comprehensive income for the period attributable to owners of £728 million
(2020: £256 million), dividends paid of £482 million (2020: £403 million),
coupon paid on Tier 1 Notes, net of tax relief of £23 million (2020:
£23 million), credit to equity for equity-settled share-based payments of
£14 million (2020 £13 million) and issue of ordinary share capital of £2
million (2020: £1,849 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:
2021 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 1,234 - 1,234
Other amounts due from Group entities (note 20) N/A Performing 12 month ECL 616 - 616
Cash and cash equivalents (note 15) A N/A 12 month ECL 95 - 95
2020 External credit Internal 12 month or lifetime Gross carrying amount Loss allowance Net
rating
credit
ECL
£m
£m
carrying amount
rating
£m
Loans and deposits (note 12) N/A Performing 12 month ECL 2,119 - 2,119
Other amounts due from Group entities (note 20) N/A Performing 12 month ECL 295 - 295
Cash and cash equivalents (note 15) A N/A 12 month ECL 4 - 4
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 also, 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 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 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 106 to 136 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.
On 23 February 2021, the Group entered into a new agreement with abrdn plc to
simplify the arrangements of the strategic partnership. As part of the
acquisition of the brand, the relevant marketing, distribution and data team
members were transferred to the Group. Consequently, the Client Service and
Proposition Agreement entered into between the two groups following the
acquisition of the Standard Life businesses in 2018 has been significantly
amended prior to being dissolved. It has been assessed that abrdn plc no
longer has significant influence over the Group and as a result is no longer
considered to be a related party of the Group from the date that the Group
entered into the new agreement.
During the year ended 31 December 2021, the Company entered into the following
transactions with related parties, including transactions with abrdn plc to 23
February 2021.
2021 2020
£m
£m
Dividend income from other Group entities 957 400
Interest income from other Group entities 111 73
1,068 473
Impairment of loan due from subsidiary - 8
Impairment of investment in subsidiaries 43 -
Expense to other Group entities 205 119
Interest expense to other Group entities 43 7
248 134
Dividends paid to abrdn plc - 67
Amounts due from related parties at the end of the year:
2021 2020
£m
£m
Loans due from Group entities 1,234 1,924
Interest accrued on loans due from Group entities 35 -
Other amounts due from Group entities 616 295
1,885 2,219
Amount due for settlement after 12 months 784 1,924
Amounts due to related parties at the end of the year:
2021 2020
£m
£m
Loans due to Group entities 300 294
Interest accrued on loans due to Group entities 14 -
Other amounts due to Group entities 415 448
729 742
Amount due for settlement after 12 months 300 294
21. Auditor's remuneration
Details of auditor's remuneration for Phoenix Group Holdings plc and its
subsidiaries is included in note C4 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.
Nicholas Lyons
Andy Briggs
Rakesh Thakrar
Alastair Barbour
Karen Green
Hiroyuki Iioka
Wendy Mayall
John Pollock
Belinda Richards
Nicholas Shott
Kory Sorenson
Mike Tumilty
12 March 2022
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, the assets held by the non-controlling interests in
consolidated collective investment schemes and assets in consolidated funds
held within the disposal group.
The following table provides an overview of the exposure by asset category of
the Group's life companies' shareholder and policyholder funds:
31 December 2021
Carrying value Shareholder and non-profit funds1 Participating supported1 Participating non-supported2 £m Unit-linked2 Total3
£m
£m
£m
£m
Cash and cash equivalents 5,437 1,644 7,103 9,691 23,875
Debt securities - gilts and foreign government bonds 8,687 311 20,623 14,170 43,791
Debt securities - other government and supranational 2,381 318 2,088 3,051 7,838
Debt securities - infrastructure loans4 1,491 - - - 1,491
Debt securities - UK local authority loans and US municipal bonds5 1,069 - 10 3 1,082
Debt securities - private placements6 3,978 1 179 33 4,191
Debt securities - loans guaranteed by export credit agencies7 208 - - - 208
Debt securities - equity release mortgages4 4,214 - - - 4,214
Debt securities - commercial real estate loans4 1,317 - - - 1,317
Debt securities - other debt securities 16,713 1,432 16,274 28,218 62,637
40,058 2,062 39,174 45,475 126,769
Equity securities 122 61 20,386 113,779 134,348
Property investments 76 26 2,248 7,906 10,256
Income strips4 - - - 886 886
Other investments8 623 341 3,098 10,119 14,181
Total Life Company assets 46,316 4,134 72,009 187,856 310,315
Less assets held by disposal group9 - - - (11,676) (11,676)
At 31 December 2021 46,316 4,134 72,009 176,180 298,639
Cash and cash equivalents in Group holding companies 964
Cash and financial assets in other Group companies 793
Financial assets held by the non-controlling interest in consolidated 4,155
collective investment schemes
Financial assets in consolidated funds held by disposal group9 1,788
Total Group consolidated assets excluding amounts classified as held for sale 306,339
Comprised of:
Investment property 5,283
Financial assets 293,192
Cash and cash equivalents 9,112
Derivative liabilities (1,248)
306,339
1 Includes assets where shareholders of the life companies bear the
investment risk.
2 Includes assets where policyholders bear most of the investment risk.
3 This information is presented on a look-through basis to underlying
funds where available.
4 All infrastructure and commercial real estate loans, equity release
mortgages and income strips are classified as Level 3 debt securities in the
fair value hierarchy.
5 Total UK local authority loans and US municipal bonds of £1,082
million include £917 million classified as Level 3 debt securities in the
fair value hierarchy.
6 Total private placements of £4,191 million include £3,120 million
classified as Level 3 debt securities in the fair value hierarchy.
7 Total loans guaranteed by export credit agencies of £208 million
include £159 million classified as Level 3 debt securities in the fair value
hierarchy.
8 Includes policy loans of £11 million, other loans of £248 million,
net derivative assets of £3,309 million, reinsurers' share of investment
contracts of £10,009 million and other investments of £604 million.
9 See note A6.1 to the consolidated financial statements for further
details.
31 December 2020
Carrying value Shareholder and non-profit Participating supported1 £m Participating non-supported2 £m Unit- Total3
funds1
linked2
£m
£m
£m
Cash and cash equivalents 5,908 1,854 8,336 10,246 26,344
Debt securities - gilts and foreign government bonds 6,999 386 22,295 14,458 44,138
Debt securities - other government and supranational 2,257 294 2,220 7,815 12,586
Debt securities - infrastructure loans4 1,564 - - - 1,564
Debt securities - UK local authority loans and US municipal bonds5 696 - - - 696
Debt securities - private placements6 3,276 1 262 51 3,590
Debt securities - loans guaranteed by export credit agencies4 54 - - - 54
Debt securities - equity release mortgages4 3,484 - - - 3,484
Debt securities - commercial real estate loans4 1,075 - - - 1,075
Debt securities - other debt securities 20,371 1,587 18,322 24,412 64,692
39,776 2,268 43,099 46,736 131,879
Equity securities 113 45 19,621 106,120 125,899
Property investments 81 30 2,054 6,409 8,574
Income strips4 - - - 692 692
Other investments7 923 711 4,916 10,009 16,559
At 31 December 2020 46,801 4,908 78,026 180,212 309,947
Cash and cash equivalents in Group holding companies 1,055
Cash and financial assets in other Group companies 776
Financial assets held by the non-controlling interest in consolidated 4,170
collective investment schemes
Total Group consolidated assets 315,948
Comprised of:
Investment property 7,128
Financial assets 298,823
Cash and cash equivalents 10,998
Derivative liabilities (1,001)
315,948
1 Includes assets where shareholders of the life companies bear the
investment risk.
2 Includes assets where policyholders bear most of the investment risk.
3 This information is presented on a look-through basis to underlying
funds where available.
4 All infrastructure loans, commercial real estate loans, equity release
mortgages, income strips and loans guaranteed by export credit agencies are
classified as Level 3 debt securities in the fair value hierarchy.
5 Total UK local authority loans of £696 million include £646 million
classified as Level 3 debt securities in the fair value hierarchy.
6 Total private placements of £3,590 million include £2,297 million
classified as Level 3 debt securities in the fair value hierarchy.
7 Includes policy loans of £10 million, other loans of £344 million,
net derivative assets of £6,083 million, reinsurers' share of investment
contracts of £9,559 million and other investments of £563 million.
The following table provides a reconciliation of the total life company assets
to the Assets under Administration ('AUA') as at 31 December 2021 detailed in
the Business Review on page 37:
2021 2020
£bn
£bn
Total Life Company assets excluding amounts classified as held for sale 298.6 309.9
Off-balance sheet AUA1 11.8 37.5
Less: Standard Life Trustee Investment Plan assets2 - (9.7)
Assets Under Administration 310.4 337.7
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 within the Standard Life Trustee Investment Plan product
are excluded from AUA as materially all profits accrue to third party
investment managers. As at 31 December 2021, these assets form part of the
disposal group classified as held for sale (see note A6.1 for further
details).
All of the life companies' debt securities are held at fair value through
profit or loss under IAS 39, and therefore already reflect any reduction in
value between the date of purchase and the reporting date.
The life companies have in place a comprehensive database that consolidates
credit exposures across counterparties, geographies and business lines. This
database is used for credit monitoring, stress testing and scenario planning.
The life companies continue to manage their balance sheets prudently and have
taken extra measures to ensure their market exposures remain within risk
appetite.
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 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
2021
Industrials - 177 354 970 43 1,544
Basic materials - 1 166 29 - 196
Consumer, cyclical 11 438 461 302 148 1,360
Technology and telecoms 165 268 592 735 3 1,763
Consumer, non-cyclical 258 315 986 352 - 1,911
Structured finance - - 52 - - 52
Banks2 662 769 2,750 578 19 4,778
Financial services 51 281 382 147 5 866
Diversified - 6 28 - - 34
Utilities 25 121 1,345 1,562 2 3,055
Sovereign, sub-sovereign and supranational3 1,465 9,983 827 109 - 12,384
Real estate 27 211 3,386 727 254 4,605
Investment companies 30 200 2 - - 232
Insurance 16 428 426 38 22 930
Oil and gas - 147 381 81 - 609
Collateralised debt obligations - 8 - - - 8
Private equity loans - - - 26 - 26
Infrastructure - - 128 1,196 167 1,491
Equity release mortgages4 2,085 1,144 963 - 22 4,214
At 31 December 2021 4,795 14,497 13,229 6,852 685 40,058
1 Includes unrated holdings of £113 million.
2 The £4,778 million total shareholder exposure to bank debt comprised
£3,732 million senior debt and £1,046 million subordinated debt.
3 Includes £1,082 million reported as UK local authority loans and US
municipal bonds, £165 million reported as private placements and £82 million
reported as loans guaranteed by export credit agencies in the summary table on
page 313.
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
2020
Industrials - 148 426 1,104 47 1,725
Basic materials - - 201 40 - 241
Consumer, cyclical 12 484 656 347 97 1,596
Technology and telecoms 175 288 719 782 - 1,964
Consumer, non-cyclical 270 309 1,239 549 - 2,367
Structured finance - - 56 - - 56
Banks2 857 805 3,328 695 66 5,751
Financial services 92 279 350 246 2 969
Diversified - 7 31 - - 38
Utilities 28 130 2,153 1,660 - 3,971
Sovereign, sub-sovereign and supranational3 1,421 8,149 483 85 11 10,149
Real estate 37 171 3,016 509 126 3,859
Investment companies 33 193 - 4 - 230
Insurance - 573 463 84 12 1,132
Oil and gas - 212 350 83 - 645
Collateralised debt obligations - 8 - - - 8
Private equity loans - - 22 5 - 27
Infrastructure - 25 388 1,004 147 1,564
Equity release mortgages4 2,034 657 626 149 18 3,484
At 31 December 2020 4,959 12,438 14,507 7,346 526 39,776
1 Includes non-rated holdings of £117 million which have been assessed
as having a low credit risk.
2 The £5,751 million total shareholder exposure to bank debt comprised
£4,316 million senior debt and £1,435 million subordinated debt.
3 Includes £696 million reported as UK local authority loans, £171
million reported as private placements and £26 million reported as loans
guaranteed by export credit agencies in the summary table on page 314.
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 2021 Corporate and other Total Sovereign, sub- Corporate and other Total
£m
2021
sovereign
2020
2020
2021
£m
and supranational
£m
£m
£m
2020
£m
UK 10,216 17,076 27,292 8,077 17,577 25,654
Supranationals 800 - 800 660 - 660
USA 340 4,881 5,221 217 5,614 5,831
Germany 112 418 530 188 962 1,150
France 230 1,207 1,437 339 1,440 1,779
Netherlands 117 769 886 182 728 910
Italy - 171 171 - 213 213
Ireland - 57 57 - 155 155
Spain 26 105 131 - 183 183
Luxembourg 60 22 82 86 1 87
Belgium 39 111 150 31 152 183
Australia 1 503 504 - 577 577
Canada 99 303 402 65 275 340
Mexico 2 192 194 6 219 225
Other - non-Eurozone1 288 1,579 1,867 189 1,238 1,427
Other - Eurozone 54 280 334 109 293 402
Total shareholder debt securities 12,384 27,674 40,058 10,149 29,627 39,776
1 Includes £2 million sovereign debt and £21 million corporate and
other debt with exposure to Russia. There was no exposure to either Ukraine or
Belarus.
Additional capital disclosures
PGH PLC Solvency II Surplus
The PGH plc surplus at 31 December 2021 is £5.3 billion (2020: £5.3
billion).
31 December 31
2021
December
Estimated
2020
£bn
£bn
Own Funds 14.8 16.8
SCR (9.5) (11.5)
Surplus 5.3 5.3
Calculation of group solvency
In 2020, the Group used two methods for calculating Group solvency, 'Method 1'
(being the default accounting based consolidation method) and 'Method 2' (the
deduction and aggregation method). Method 2 was used for all entities within
the Standard Life Assurance businesses acquired in 2018 and Method 1 was used
for all other entities of the Group (including the ReAssure entities acquired
in 2020). Following the approval of the harmonised internal model by the PRA
during the year and as referred to in Article 230 of the Solvency II
directive, the Group now wholly uses Method 1 to calculate Group solvency. The
Group continues to determine its capital requirements on a partial internal
model basis.
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 2021 31 December 2020
Estimated
£bn £bn
Tier 1 - Unrestricted 9.9 11.7
Tier 1 - Restricted 1.1 1.1
Tier 2 2.9 3.2
Tier 3 0.9 0.8
Total Own Funds 14.8 16.8
PGH plc's unrestricted Tier 1 capital accounts for 67% (2020: 70%) 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 £0.7 billion (2020:
£0.7 billion) and the deferred tax asset of £0.2 billion (2020:
£0.1 billion).
Breakdown of SCR
The Group operates one single harmonised PRA approved Internal Model covering
all the Group entities, with the exception of the Irish entity, Standard Life
International Designated Activity Company ('SLIDAC') and the acquired ReAssure
businesses. SLIDAC and the ReAssure 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 2021 Estimated 31 December 2020
Harmonised ReAssure and SLIDAC Phoenix Internal Model Standard Life Internal Model ReAssure and SLIDAC
Internal Model
Standard Formula
%
Standard Formula
%
%
% %
Longevity 22 21 27 18 21
Credit 18 21 23 12 24
Persistency 20 22 12 25 20
Interest rates 9 8 7 6 10
Operational 6 3 4 8 4
Swap spreads 3 - 3 1 -
Property 4 1 10 1 -
Other market risks 12 14 3 16 10
Other non-market risks 6 10 11 13 11
Total pre-diversified SCR 100 100 100 100 100
The principal risks of the Group are described in detail in note E6 and F4 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 €3.7 million,
whichever is higher, and a cap of 45% of the SCR. The MCR formula is based on
factors applied to technical provisions and capital at risk.
The MGSCR represents the sum of the underlying insurance companies' MCRs of
the Group. The Group wholly uses Method 1 (the default accounting based
consolidation method) to calculate Group solvency following the approval of
the harmonised internal model by the PRA during the year.
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 2021 is £2.9 billion (2019: Method 1 £1.9
billion and Method 2 £1.4 billion).
PGH plc's Eligible Own Funds to cover MGSCR is £11.5 billion (2020: Method 1
£8.3 billion and Method 2 £4.9 billion) leaving an excess of Eligible Own
Funds over MGSCR of £8.6 billion (2020: Method 1 £6.4 billion and Method 2
£3.5 billion), which translates to an MGSCR coverage ratio of 393% (2020:
Method 1: 431% and Method 2: 359%).
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 28.
APM Definition Why this measure is used Reconciliation to
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 consolidated statement of 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 314.
assets. It includes assets recognised in the Group's IFRS consolidated ability to deliver new business growth.
statement of financial position together with certain assets administered by
the Group for which beneficial ownership resides with customers.
Fitch 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 debt and equity figures
leverage ratio methodology) as debt as a percentage of the sum of debt and equity. Debt is its financial leverage ratio. This is to ensure the Group maintains its
are directly sourced from the Group's IFRS consolidated statement of financial
defined as the IFRS carrying value of shareholder borrowings. Equity is investment grade credit rating as issued by Fitch Ratings and optimises its position on pages 158 and 159 and
defined as the sum of equity attributable to the owners of the parent, funding costs and financial flexibility for future acquisitions.
the analysis of borrowings
non-controlling interests, the unallocated surplus and the Tier 1 Notes.
note on page 206.
Incremental Incremental long-term cash generation represents the operating companies' cash This measure provides an indication of the Group's performance in delivering Incremental long-term cash generation is not directly reconcilable to the
long-term cash generation generation that is expected to arise in future years as a result of new new business growth to offset the impact of run-off of the Group's Heritage financial statements as it relates to
business transacted in the current period within our UK Open and Europe business and to bring sustainability to future cash generation.
cash generation expected
segments. It excludes any costs associated with the acquisition of the
to arise in the future.
new business.
Life Company The Solvency II surplus of the Life This figure provides a view of the level of surplus capital in the Life Please see business review section on page 35 for
Free Surplus
Companies that is in excess of their Board approved capital management Companies that is available for distribution to the holding companies, and the
further analysis of the
policies. generation of Free Surplus underpins future operating cash generation.
solvency positions of the
Life Companies.
Long-term Free Cash ('LTFC') Long-term Free Cash ('LTFC') is comprised of long-term cash to emerge from 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
in-force business, plus holding company cash, less an allowance for costs operating costs, interest, growth and shareholder returns. Increases in LTFC includes a significant component relating to cash that is expected to emerge
associated with in-flight mergers and acquisitions and the related transition will be driven by sources in the future. Holding company cash included within LTFC is consistent with
activities, and a deduction for shareholder debt outstanding.
of long-term cash i.e. new business and the holding company cash and cash equivalents as disclosed in the cash section
over-delivery of management actions. Decreases in LTFC will reflect the uses of the business review. Shareholder debt outstanding reflects the face value
of cash at holding company level, including expenses, interest, investment in of the shareholder borrowings disclosed on
BPA and dividends.
page 206.
New business contribution Represents the increase in Solvency II shareholder Own funds arising from new This measure provides an assessment of the day one value arising on the New business contribution is not directly reconcilable to
business written in the year, adjusted to exclude the associated risk margin writing of new business in the UK Open and Europe segments, and is stated
the Group's Solvency II metrics as it represents an in-year movement. Further
and any restrictions in respect of contract boundaries and stated on a net of after applicable taxation and acquisition costs. analysis
tax basis.
is provided on page 36.
Operating Cash remitted by the Group's operating companies to the Group's holding The statement of consolidated cash flows prepared in accordance with IFRS Operating companies' cash generation is not directly reconcilable to an
companies' companies. combines cash flows relating to shareholders with cash flows relating to equivalent GAAP measure (IFRS statement of consolidated
cash generation policyholders, but the practical management of cash within the Group maintains
cash flows) as it includes amounts 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 Further details of holding companies' cash flows are included within the
are considered more representative of the cash generation that could business review on pages 28 to 41, and a breakdown of the Group's cash
potentially be distributed as dividends or used for debt repayment and position by type of entity is provided in the additional life company asset
servicing, Group expenses and pension contributions. disclosures section on page 313.
Operating companies' cash generation
is a key performance indicator used by management for planning, reporting and
executive remuneration.
Operating profit 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 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
including amortisation and impairments of intangibles, finance costs information unaffected by
review on page 38.
attributable to owners and other non-operating items which in the Director's
short-term economic volatility and one-off items, and is stated net of
view should be excluded by their nature or incidence to enable a full policyholder finance charges and tax.
understanding of financial performance.
It helps give stakeholders a better understanding of the underlying
Further details of the components of this measure and the assumptions inherent performance of the Group by identifying and analysing
in the calculation of the long-term investment return are included in note
non-operating items.
B2.1 to the consolidated financial statements.
Shareholder Represents total Eligible Own Funds divided by the Solvency Capital The unsupported with-profit funds and Further details of the Shareholder Capital Coverage Ratio and its calculation
Capital Requirements ('SCR'), adjusted to a shareholder view through the exclusion of
Group pension funds do not contribute to the Group Solvency II surplus. are included in the business
Coverage Ratio amounts relating to those ring-fenced with-profit funds and Group pension However, the inclusion of related Own Funds and SCR amounts dampens the
review on page 34.
schemes whose Own Funds exceed their SCR. 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.
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