REG - Phoenix Group Hldgs - 2022 Annual Financial Report
13/03/2023 07:00
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RNS Number : 6625S Phoenix Group Holdings PLC 13 March 2023
Phoenix Group Holdings plc: 2022 Full Year Results
13 March 2023
Phoenix Group announces strong full year 2022 results and a 5% dividend increase
CASH RESILIENCE GROWTH
Operating companies' + Solvency II Surplus and + Incremental new business long-term cash generation
cash generation
SCCR
£1,233m
£1,504m £4.4bn and 189%
2021: £1,1846m
2021: £1,717m 2021: £5.3bn and 180%
Commenting on the results, Phoenix Group CEO, Andy Briggs said:
"Phoenix has a simple strategy that is focused on the UK long-term savings and
retirement market. We have continued to make excellent progress across all
areas of that strategy in 2022, despite the challenging economic backdrop.
This has enabled us to deliver a strong set of financial results, with cash
generation of £1.5 billion and our resilient balance sheet maintained. We
have also grown our business both organically, with record new business growth
of £1.2 billion, and inorganically, with the cash funded acquisition of Sun
Life of Canada UK. Our strong strategic and financial performance has
therefore enabled the Board to recommend a 5% dividend increase for the year.
At Phoenix, sustainability is embedded across our business and we are
committed to putting the Planet and People at the heart of everything we do.
If we are to live up to our purpose of helping people secure a life of
possibilities, we need to play our part in tackling climate change and making
retirement provision fit for the twenty first century. We have much more to do
on both of these themes but the benefits of getting this right, both
commercially and societally, are huge."
2022 financial highlights
Growing our dependable cash generation
· £1,504m of cash generation(1) in 2022 (FY21: £1,717m), which
exceeds our £1.3bn-to-£1.4bn target range for the year.
· £12.1bn of Group in-force long-term free cash has increased by
c.£0.3bn (FY21: £11.8bn) as our business grew year-on-year. This cash, which
will be released over time, ensures our growing dividend is sustainable over
the very long term.
Maintaining a resilient Solvency balance sheet
· £4.4bn(2) Solvency II Surplus at 31 December 2022 (FY21:
£5.3bn), with our comprehensive risk management approach limiting the
Solvency II Surplus economic impact to £(0.4)bn, in line with our published
sensitivities.
· 189% Solvency II Shareholder Capital Coverage Ratio(2,3) ('SCCR')
(FY21: 180%(3)) is currently above our target range of 140-180%, providing
significant capacity to invest into growth.
Delivering record organic growth
· £1,233m of incremental new business long-term cash generation
(FY21: £1,184m) comprises £934m from our Retirement Solutions business
(FY21: £950m) and £299m from our capital-light fee-based businesses (FY21:
£234m).
· £4.8bn of BPA premiums (FY21: £5.6bn) which generated a broadly
stable level of incremental new business long-term cash generation, but with
20% less capital invested; capital strain reduced further to 5.8%(4) (FY21:
6.5%).
· £2.4bn of Workplace net fund flows (FY21: £0.2bn) and 53% increase
in incremental new business long-term cash generation to £212m (FY21:
£139m), as we retain our existing clients and benefit from new joiners to
existing schemes and increased member contributions.
Strong dividend growth in 2022
· The Group's dividend policy is to 'pay a dividend that is
sustainable and grows over time'.
· 5% increase in the Final 2022 dividend to 26.0 pence per share is
recommended by the Board, comprising:
§ 2.5% organic dividend increase reflecting the Group's strong strategic and
financial performance in 2022; and
§ 2.5% inorganic dividend increase that reflects the value from the Sun Life
of Canada UK acquisition, which is expected to complete in April 2023 with
regulatory approval now received.
· 50.8 pence per share Total 2022 dividend (FY21: 48.9 pence per
share).
Other key financial metrics
· Assets under administration of £259bn (FY21: £310bn) are lower
primarily due to c.£46bn reduction in asset values.
· IFRS adjusted operating profit of £1,245m (FY21: £1,230m); IFRS
loss after tax of £(1,762)m reflects significant adverse investment variances
due to the accounting volatility from our hedging approach and an accounting
mismatch from our own pension schemes that have been subject to a buy-in (with
an offset in Other Comprehensive Income).
· 30% Fitch leverage ratio(5) (FY21: 28%) remains within our target
range of 25-30%, despite the impact of IFRS volatility.
Clear progress made against our strategic priorities and our key ESG themes
Optimising our in-force business
· £739m of Solvency II management actions delivered in 2022,
primarily through BAU actions that included ongoing balance sheet
efficiencies, further illiquid asset origination and optimisation of our
liquid credit portfolio.
· Our comprehensive risk management approach protected both our
capital position and long-term cash, and we comfortably met all collateral
calls on our hedging instruments during the economic turmoil in the second
half of 2022.
· £3.5bn of illiquid assets originated (FY21: £3.0bn), comprising
£1.9bn of illiquid private debt and £1.6 billion of Equity Release
Mortgages, demonstrating our enhanced asset management capabilities.
Growing organically and through M&A
· Delivered sustainable organic growth through our Standard Life
branded Retirement Solutions and Pensions and Savings businesses, reflecting
the investment into our propositions.
· Won 76 new Workplace schemes with an aggregate asset value of
c.£2bn, that will transfer over the next 12-24 months.
· Announced our first ever cash funded acquisition of Sun Life of
Canada UK for £248m, which is expected to generate c.£470m(6) of incremental
long-term cash generation.
Enhancing our operating model and culture
· Successfully migrated all c.400k annuities from Standard Life to the
TCS BaNCS platform, and transferred c.1,200 customer service and IT colleagues
to TCS Diligenta in line with our integration plan.
· Completed the integration of the ReAssure Group Functions and
announced in February the transfer of all c.3m policies from the Alpha
platform to TCS BaNCS, delivering a further £180m of net cost synergies.
· Improved diversity across the organisation, including gender balance
achieved on our Group Board and Executive Committee.
· Ongoing support for colleagues with the cost of living
challenges, including a £1,000 net payment to our colleagues(7).
Our strategic priorities are informed by, and in support of, our key ESG
themes of: Planet and People
· Planet - by transitioning our business to net zero, we aim to
deliver better outcomes for our customers and play our part in tackling the
climate emergency. Key achievements include:
o c.£15bn of assets and c.1.5m members transitioned to Standard Life's
Sustainable Multi-Asset default fund as we begin to decarbonise our investment
portfolios at scale.
o c.£340m of policyholder assets to be invested into an innovative
multi-asset 'climate solutions' mandate as we maximise the opportunity of
investing in climate solutions.
o 82% of key suppliers committed to setting science-based targets or Race
to Zero based.
o c.80% reduction in the carbon emission intensity of our own operations
since 2019.
· People - we want to help people live better longer lives. This means
tackling the pension savings gap and supporting people to have better
financial futures through promoting financial wellness and the role of good
work and skills. Key achievements include:
o Our think tank, Phoenix Insights, published several insightful research
reports raising awareness of under saving, advocating for reform of the
state pension, and contributing to the debate on economic inactivity.
o c.1.2m customers offered the chance to review our digital literacy
materials.
o Improved average colleague engagement eNPS score of +30 (FY21: +23).
Key financial targets and guidance
· Cash: 2023 cash generation target range of £1.3bn-£1.4bn;
3-year 2023-25 cash generation target of £4.1bn, which now includes future
new business reflecting our confidence in delivering sustainable organic
growth.
· Resilience: continue to operate within our target ranges for our
SCCR (140-180%) and Fitch leverage ratio (25-30%).
· Organic growth: deliver further organic growth in 2023 as we
progress towards our 2025 targets of c.£1.5bn of incremental new business
long-term cash generation and c.£5bn of net fund flows in Workplace and
c.£2bn in Retail.
· M&A growth: complete the acquisition of Sun Life of Canada UK
and continue to assess further M&A opportunities.
Enquiries
Investors/analysts:
Claire Hawkins, Director of Corporate Affairs & Investor Relations,
Phoenix Group
+44 (0)20 4559 3161
Andrew Downey, Investor Relations Director, Phoenix Group
+44 (0)20 4559 3145
Media:
Douglas Campbell, Teneo
+44 (0)7753 136 628
Shellie Wells, Corporate Communications Director, Phoenix Group
+44 (0)20 4559 3031
Presentation and 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: Phoenix Group 2022 full year
results
(https://storm-virtual-uk.zoom.us/webinar/register/WN_qktNQUonSgGpOaz6epww8Q)
A replay of the presentation and transcript will also be available on our
website following the event.
Dividend details
The recommended Final 2022 dividend of 26.0 pence per share is expected to be
paid on 10 May 2023.
The ordinary shares will be quoted ex-dividend on the London Stock Exchange as
of 30 March 2023. The record date for eligibility for payment will be 31 March
2023.
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 2022 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 2022 Final shareholder dividend
of £260m. Had the dynamic recalculation not been assumed, the Solvency II
surplus and the Shareholder Capital Coverage Ratio would increase by £0.1bn
and 2% respectively.
3. The Shareholder Capital Coverage Ratio excludes Solvency II Own Funds and
Solvency Capital Requirements of unsupported with-profit funds and unsupported
pension schemes.
4. BPA capital strain is shown on a post Capital Management Policy (CMP) basis
(on a pre-CMP basis it was 3.2%).
5. Current Fitch leverage ratio is estimated by management.
6. As at announcement in August 2022.
7. £1,000 net payment made in August 2022 to all permanent colleagues
excluding our Top 100 leaders.
Legal Disclaimers
This announcement in relation to Phoenix Group Holdings plc and its
subsidiaries (the 'Group') contains, and the Group may make other statements
(verbal or otherwise) containing, forward-looking statements and other
financial and/or statistical data about the Group's current plans, goals,
ambitions, outlook, guidance and expectations relating to future financial
condition, performance, results, strategy and/or objectives.
Statements containing the words: 'believes', 'intends', 'will', 'may',
'should', 'expects', 'plans', 'aims', 'seeks', 'targets', 'continues' and
'anticipates' or other words of similar meaning are forward looking. Such
forward-looking statements and other financial and/or statistical data involve
risk and uncertainty because they relate to future events and circumstances
that are beyond the Group's control. For example, certain insurance risk
disclosures are dependent on the Group's choices about assumptions and models,
which by their nature are estimates. As such, actual future gains and losses
could differ materially from those that the Group has estimated.
Other factors which could cause actual results to differ materially from those
estimated by forward-looking statements include, but are not limited to:
domestic and global economic, political, social, environmental and business
conditions; asset prices; market related risks such as fluctuations in
investment yields, interest rates and exchange rates, the potential for a
sustained low-interest rate or high-interest rate, environment, and the
performance of financial or credit markets generally; the policies and actions
of governmental and/or regulatory authorities, including, for example,
initiatives related to the financial crisis, the COVID-19 pandemic, climate
change and the effect of the UK's version of the "Solvency II" regulations on
the Group's capital maintenance requirements; the impact of changing inflation
rates (including high inflation) and/or deflation; the medium and long-term
political, legal, social and economic effects of the COVID-19 pandemic and the
UK's exit from the European Union; the direct and indirect consequences of the
European and global macroeconomic conditions of the Russia-Ukraine War and
related or other geopolitical conflicts; 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, and implementing
changes in IFRS 17 or any other regulatory solvency and/or accounting
standards, and tax and other legislation and regulations in the jurisdictions
in which members of the Group operate.
As a result, the Group's actual future financial condition, performance and
results may differ materially from the plans, goals, ambitions, outlook,
guidance and expectations set out in the forward-looking statements and other
financial and/or statistical data within this announcement. The Group
undertakes no obligation to update any of the forward-looking statements or
data contained within this announcement or any other forward-looking
statements or data it may make or publish. Nothing in this announcement
constitutes, nor should it be construed as, a profit forecast or estimate.
Chair's statement
A truly purpose-led business
"Phoenix is fully embracing its purpose as we help more people on their
journey to and through retirement, while delivering better outcomes for all of
our stakeholders."
Alastair Barbour, Chair
I am delighted to report that 2022 has been another year in which Phoenix
Group has delivered both clear strategic progress and strong financial
performance.
During the year, Phoenix Group has once again continued to produce the high
levels of predictable cash generation it has always been known for and
maintained its resilient balance sheet despite the economic turbulence. The
Group has also delivered strong organic growth through our Standard Life
branded businesses and M&A growth with the announcement of our first ever
cash-funded acquisition of SLF of Canada UK Limited ('Sun Life of Canada UK').
All of which has enabled the Board to recommend a dividend increase of 5% for
2022.
At the Group's Capital Markets Event in December 2022 the executive team
detailed their clear strategy to meet more of the needs of our existing
customers and to attract new customers, enabling us to continue delivering
cash, resilience and growth going forward. The Group also set its first ever
organic growth target, which reflects both the Board and executive team's
confidence in Phoenix Group's future growth prospects, despite the challenging
economic outlook for 2023.
I am proud to see that the journey Phoenix Group has been on during the ten
years I have served on its Board is delivering such clear value to our
customers, colleagues, shareholders and wider society, as we fully embrace our
purpose of 'helping people secure a life of possibilities'.
Our purpose drives all that we do
As the UK's largest long-term savings and retirement business, managing £259
billion of assets on behalf of our c.12 million customers, we have the
responsibility and opportunity to make a real difference to our customers and
to help drive a low carbon, fair and more secure future. That is why we are
fully embedding ESG considerations across our business. Our strategic
priorities are therefore informed by, and in support of, the key ESG themes
where we can make the most difference, to both the planet, and to people.
If we are really going to help people secure a life of possibilities, we need
to play our part in tackling the climate crisis affecting our planet. This
means managing the financial risks that climate change poses to our customers,
as well as maximising the opportunities it creates. We will do this by
transitioning our business to net zero. And by being a leading voice, in
calling for action, and driving system change.
We have therefore set clear targets for our journey to net zero across our
investment portfolio, supply chain and operations, and with an estimated 24
million tonnes of CO2 emissions from our investment portfolio, we really can
make a difference.
We are taking an active approach to protecting our customers, by decarbonising
our portfolios at scale, and through stewardship engagement. We also want to
take advantage of the substantial investment opportunities, that moving to a
green economy presents, such as renewable energy and sustainable transport. A
great example of which is the £330m of policyholders assets we have invested
into an innovative multi-asset 'climate solutions' mandate.
I am also delighted with the progress we are making to decarbonise our supply
chain and operations, with 82% of our suppliers committed to science-based or
Race to Zero based targets, and an 80% reduction in the emissions intensity of
our own operations since 2019.
Our second key theme is focused on people, through promoting financial
wellness and the role of good work and skills. We are facing a growing pension
savings gap, with research from our think tank, Phoenix Insights, revealing
that only 14% of defined contribution pension savers are on track for a
retirement income that maintains their current standard of living. Engaging
people in their financial futures, and advocating for broader societal action
to tackle under-saving, is a critical part of our commitment to our purpose.
Phoenix is supporting better financial futures by meeting more of our
customers' evolving needs on their journey to and through retirement, through
our range of innovative products and services.
However, for people to have better, longer lives they also need access to good
work and opportunities to upskill throughout their careers, increasing their
incomes and ability to save for retirement. Phoenix Insights advocates for
change in working practices, careers advice and lifelong learning, as
explained in more detail on pages 24-25. And as an employer, Phoenix is
committed to being an exemplar inclusive, age-friendly workplace.
Supporting our colleagues
We also have a broader role to play in society and against the backdrop of
economic uncertainty, a key issue over the past year has been the Cost of
Living Crisis. The Board has therefore been focused on ensuring our colleagues
are supported throughout. Central to this has been a wide-ranging support
package to help colleagues navigate the cost of living challenges, which
included giving all colleagues, except our most senior staff, a net £1,000
payment in August 2022.
Shareholder dividend increase
The Group has a clear dividend policy which is to pay a dividend that is
sustainable and grows over time, with the Board prioritising the Group's
long-term dividend sustainability at all times.
I am delighted to announce that the Board is recommending a 5% increase in the
Group's 2022 Final dividend to 26.0 pence per share, meaning the Group's Total
dividend for 2022 will be 50.8 pence per share. This reflects the Group's
strong performance across a range of strategic and financial performance
measures. It comprises a 2.5% organic dividend increase, and a 2.5% inorganic
increase, reflecting the value from the acquisition of Sun Life of Canada UK.
Going forward, we expect the business to continue growing organically and we
also remain committed to M&A. This in turn is expected to support a
dividend that is sustainable and grows over time.
Board changes
I am delighted to be fulfilling the role of Chair while Nicholas Lyons is on a
14-month sabbatical, which is enabling him to undertake the role of Lord Mayor
of the City of London. Nicholas has resigned from the Board on a temporary
basis for his sabbatical, but remains in contact with myself and our CEO, Andy
Briggs, so that he can seamlessly resume his role as Chair from November 2023.
In line with good corporate governance as it relates to the independence of
Non-Executive Directors, having served ten years on the Phoenix Group Board, I
will sadly be leaving the Board when Nicholas returns in November.
Elsewhere, during 2022 the Board was delighted to welcome Katie Murray as an
independent Non-Executive Director and Chair of the Board Audit Committee, and
Maggie Semple as an independent Non-Executive Director and the Group's
Designated Non-Executive Director for Workforce Engagement. Katie and Maggie
have brought a diversity of experience and new perspectives, and both are
already making valuable contributions. We also wished Wendy Mayall a fond
farewell, as she retired from the Board in 2022, after diligently serving two
three year terms and supporting us in navigating a number of key strategic
initiatives during her time.
Outlook
As we enter a challenging economic environment in 2023, the Board and I are
confident that Phoenix's business model and risk management approach will
ensure that we remain highly resilient to any economic volatility. While our
strategy will support us in delivering future growth, as we meet more of the
needs of our existing customers and acquire new customers.
Thank you
Finally, I would like to take the opportunity to thank the Board, our
colleagues, our partners and all of our wider stakeholders for their hard work
and dedication in delivering what has been another successful year for Phoenix
Group.
Alastair Barbour
Phoenix Group Chair
Group Chief Executive Officer's report
Phoenix is delivering sustainable growth
"2022 has seen us execute against all of our strategic priorities as we
delivered both organic and M&A growth, which demonstrates that Phoenix is
truly a growing business."
Andy Briggs, Group Chief Executive Officer
2022 has been a strong year of delivery for Phoenix Group, despite the
challenging economic environment. As we have made significant progress against
our strategic priorities during the year by continuing to embrace our purpose.
This has supported us in delivering a strong set of financial results, in line
with our financial framework of Cash, Resilience and Growth.
Delivering Cash, Resilience and Growth supports an increased dividend
During 2022, our in-force business delivered cash generation of £1.5 billion,
exceeding our 2021 target range of £1.3-to-£1.4 billion. Our resilient
Solvency II ('SII') capital position was maintained with a SII Surplus of
£4.4 billion (2021: £5.3 billion) and an increased Shareholder Capital
Coverage Ratio ('SCCR') of 189% (2021: 180%), which is currently above our
target range of 140-180%, providing capacity for us to invest into growth.
I am delighted we have delivered a second consecutive year of organic growth
with record incremental new business long-term cash generation of
£1,233 million (2021: £1,184 million). This means that we have once again
more than offset the run-off of our in-force business and firmly established
Phoenix as a business that is growing and sustainable. We are now confident of
growing our incremental new business long-term cash generation going forward
and have set a target of c.£1.5 billion per annum by 2025, which is the first
organic growth target we have ever set, which is a clear signal of our
ambition.
We have also delivered M&A growth in 2022, with the announcement of our
cash funded acquisition of Sun Life of Canada UK. This is expected to complete
in April 2023, with the key regulatory approvals now received. The significant
value that will be generated by this transaction has enabled the Board to
recommend a 2.5% inorganic dividend increase this year, which demonstrates the
significant value to shareholders of smaller, cash funded M&A.
As a result of our strong overall performance, I am pleased that the Board is
recommending a dividend increase of 5%, in line with our dividend policy. This
reflects the Board's determination to reward our shareholders when our
business performs well.
The sustainability of this increased level of dividend is underpinned by the
£0.3 billion increase in our Group in-force long-term free cash to £12.1
billion (2021: £11.8 billion). This is the cash that will emerge from our
in-force business and will be available to our shareholders over time. It
ensures our increased level of dividend remains just as sustainable over the
very long term.
In terms of our IFRS reporting, we have reported an increased adjusted
operating profit of £1,245m for the year (2021: £1,230m), but the impact of
our hedging approach results in an IFRS loss after tax of £(1,762)m (2021:
£(709)m). As a reminder, we hedge our Solvency balance sheet with the aim of
delivering resilient cash generation over the long term, but this does create
IFRS accounting volatility. This impact has been accentuated by the
significant increase in yields last year, driving the large accounting loss,
but this does not impact our cash generation or dividend capacity in any way.
Executing on our clear strategy
Phoenix's role in society is to help our customers journey to and through
retirement by meeting their evolving needs.
Phoenix has a clear and differentiated strategy as outlined on pages 14-15,
which is in support of our purpose of helping people secure a life of
possibilities.
Our strategy is simple. We are the experts in optimising a scale in-force
business for cash and resilience, and we grow this both organically and
through M&A.
Our in-force business is the £259 billion of assets we look after for our
c.12 million existing customers. It is highly cash generative, and provides
surplus cash, that we can reinvest into growth.
Organic growth comes from meeting more of our existing customers' needs as
they save for, transition to, and secure an income in retirement. We also
acquire new customers, who we can then help through their life cycles.
In addition, we have attractive M&A growth opportunities, where we acquire
new customers at scale and deliver better outcomes for customers with legacy
products. In the process, we transform the acquired businesses, to deliver
significant cost and capital synergies.
But what's particularly attractive about our business model, is that the whole
really is more than the sum of the parts. With our organic and M&A growth
generating more in-force business, that we then optimise.
We are confident of delivering our strategy because our scale in-force gives
us three unique competitive advantages.
The first is capital efficiency, where we get greater diversification from the
breadth of in-force products across our £259 billion of customer assets. We
are also highly resilient, through our core capabilities in risk management
and capital optimisation.
Secondly, with c.12 million customers we have an unrivalled level of customer
access, with around 1-in-5 UK adults being a Phoenix Group customer. This
provides us with deep customer insights and clear growth opportunities as we
look to meet more of their evolving needs over time.
And thirdly, we have a significant cost efficiency advantage. This is enabled
through our customer administration and IT partnership with Tata Consultancy
Services ('TCS'), and our focus on delivering a simplified operating model.
Our in-force business therefore gives us real competitive advantages, that are
very hard to replicate. Which means we are confident that we can, and will,
win in our chosen markets.
All of which provides us with the opportunity to drive both organic and
M&A growth through meeting our customers' needs, as outlined in the
spotlight box to the left.
Delivering our strategic priorities
Our strategy is delivered on a day-to-day basis through our three strategic
priorities, which cover the investments and the programmes of work, that will
further enhance our competitive advantages, and enable us to help people
secure a life of possibilities. Our progress this year against each of these
priorities is outlined below.
Optimise our in-force business
Our first strategic priority is all about leveraging our scale in-force
business to deliver capital efficiency and better returns on our capital, with
a strong 2022 performance across our key areas of focus.
Delivering cost and capital synergies, which we refer to as 'management
actions', remains a core capability of Phoenix. In 2022, we have once again
delivered a significant level of management actions, with £739 million of
actions achieved. This was primarily from business-as-usual management
actions, which are not reliant on cost and capital synergies from M&A
transactions, and are therefore sustainable over the long term. This included
the ongoing delivery of a range of balance sheet efficiencies, which remains a
differentiating capability for us, as well as further illiquid asset
origination and optimisation of our liquid credit portfolio.
Our comprehensive risk management framework includes our hedging approach,
which differentiates us from other insurance companies. We hedge the vast
majority of the market risks we are exposed to including equities, interest
rates, inflation and currency, to minimise volatility in our capital position
during volatile economic periods. We also operate a conservative credit
portfolio to manage our exposure to credit risk. This approach enabled us to
limit our SII surplus economic variance to £(0.4) billion during a volatile
economic environment.
We have also continued to enhance our asset management capabilities, to
support our growth ambitions and efficiently oversee the management of our
customer assets, and continued to expand our range of asset management
partners to 21, as we seek to diversify our portfolio globally.
Investing in a sustainable future is the first key pillar of our
sustainability strategy and we have continued our investment into sustainable
assets with c.£1 billion invested to support affordable housing, access to
healthcare, and projects with a positive environmental or social impact.
Last year we also started to integrate decarbonisation strategies into our
listed equity portfolios and we are now in the process of designing
decarbonising equity benchmarks for UK and US listed equity exposures. This
will help manage our customers' exposure to climate risk and reduce the carbon
intensity of our investment portfolio.
I am also delighted that the work Phoenix and our peers have done to influence
the SII reform proposals means the insurance industry should be better placed
to help accelerate the path to net zero by investing to develop a low carbon
economy.
Grow organically and through M&A
Our second strategic priority is focused on meeting more of our existing
customer needs and acquiring new customers, with a significant year of
achievements in 2022.
Our Retirement Solutions business had another strong year. Our focus on
improving our capital efficiency in the Bulk Purchase Annuity ('BPA') business
enabled us to generate a broadly similar amount of incremental new business
long-term cash generation with less capital invested. This in turn enabled us
to deliver an improved mid-teens IRR. It was also great to see the success of
our launch of the Standard Life Home Finance products and the ongoing
development of our open market annuity product, supporting a launch in 2023.
I am also delighted that the significant progress we have made in developing
our Workplace proposition and the investment we have made into the Standard
Life brand is delivering improved performance. We achieved net flows of £2.4
billion, as we retained our existing schemes and saw new members join our
existing schemes. This supported us in delivering a c.50% annual increase in
new business long-term cash generation. We also won 76 new schemes across all
parts of the market including small, medium and large schemes.
Elsewhere, our other fee-based businesses (Retail, Europe and SunLife)
remained resilient during the year.
We are also growing through M&A, having announced our first ever
cash-funded acquisition, of Sun Life of Canada UK for consideration of £248
million. This transaction, which is due to complete in April 2023, is expected
to deliver c.£0.5 billion of incremental long-term cash generation. This
transaction also benefits from a simplified operational integration programme,
as the majority of their policy administration is already being outsourced to
our strategic partner (TCS Diligenta).
Engaging people in better financial futures is the second key pillar of our
sustainability strategy and we have continued to make great progress here. In
2022, we transitioned c.1.5 million customers and c.£15 billion of assets
from our existing default funds to our flagship Sustainable Multi-Asset
default fund, as we seek to support our customers in investing their pension
assets sustainably.
We also continued to use our influence on behalf of our customers and
colleagues. As the UK Government's Business Champion for Ageing Society, I am
passionate about encouraging older workers to stay in work or come back to
work. Good examples of Phoenix leading in this area were our high-profile
initiative to make our job adverts age neutral and the Phoenix Insights 'The
Great Retirement' report which identified some of the key factors driving
rising levels of economic inactivity among the over 50s in the UK.
Enhance our operating model and culture
Our third strategic priority is focused on delivering leading cost efficiency
and a modern organisation.
We continued to make great progress with our integration work, with the
migration of c.400,000 Standard Life annuities to the TCS BaNCS platform and
we transferred the custody and fund accounting services for £90 billion of
assets to HSBC.
We have also recently announced the extension of our partnership with TCS, as
we plan to move all c.3 million ReAssure policies from our Alpha platform to
the TCS BaNCS platform by 2026. This will enable our customers to benefit from
the clear digital focus, consistent customer journeys and proposition provided
by the BaNCS platform. It is also fully aligned with our model of enhancing
long-term cost efficiency, with a further c.£180 million of ReAssure net cost
synergies expected.
As ever, we remain focused on attracting, developing and retaining the best
talent to drive our business forward. With a range of initiatives in the year
that has supported an increase in our colleague engagement eNPS score to +30
(2021: +23). It is also pleasing to see that we have balanced female
representation on our Group Board and Executive Committee, in line with our
diversity and inclusion goals.
Leading as a responsible business is the third key pillar of our
sustainability strategy. Here we are committed to adopting the highest
sustainability standards across our business and will lead by example for the
stakeholders we engage with to drive real world change and deliver positive
impact We are committed to being net zero in our own operations by 2025, which
we remain on track to achieve, with an 80% reduction in emissions intensity
across our own operations since 2019.
We are also leading the industry with our approach to our supply chain, where
we have set our pathway to decarbonisation and launched stretching new ESG
supply chain standards for our partners.
Outlook
Looking forward, it is clear that 2023 will present a challenging economic
backdrop. However, our business model is designed to be resilient throughout
the economic cycle. Our comprehensive hedging approach is designed to protect
our Solvency capital position from the majority of the market risks we are
exposed, while the key areas of structural market growth we are focused on
remain attractive.
In particular, we expect to see a strong year of volumes in the BPA market
during 2023, with the recent yields increase having improved the funding
positions of many schemes, driving increased demand.
Workplace is also a very resilient business during an economic downturn, with
pension contributions being deducted direct from salaries by employers,
leading to stable flows through economic cycles.
Finally, there remains c.£470 billion of UK Heritage assets that we believe
could come to market over time and we expect further opportunities for M&A
consolidation due to the impact of cost inflation on backbook portfolios.
All of which means we expect to see continued organic and M&A growth, to
support us in delivering Cash, Resilience and Growth, enabling us to pay a
dividend that is sustainable and grows over time.
We are confident in our future growth as demonstrated by setting our first
ever organic growth target of c.£1.5 billion of incremental new business
long-term cash generation by 2025.
Thank you
The progress we have made this year is all down to our exceptional people and
I would like to thank my colleagues throughout the Group for their continued
contribution and dedication in 2022.
Andy Briggs
Group Chief Executive Officer
Business review
Delivering cash, resilience and growth
"The strong strategic progress we have made during 2022 has enabled us to
continue delivering on our financial framework and to recommend a 5% dividend
increase for the year."
Rakesh Thakrar, Group Chief Financial Officer
A strong financial performance in 2022
Financial performance metrics: 2022 2021 YOY change
Cash Cash generation £1,504m £1,717m -12%
New Business Incremental long-term cash generation £1,233m £1,184m +4%
Dividends Total dividend per share 50.8p 48.9p +4%
Final dividend per share 26.0p 24.8p +5%
IFRS Adjusted operating profit before tax £1,245m £1,230m +1%
Loss after tax £(1,762)m £(709)m -149%
Other financial metrics: 2022 2021 YOY change
Solvency II Capital PGH Solvency II surplus £4.4bn £5.3bn -17%
PGH Shareholder Capital Coverage Ratio ('SCCR') 189% 180% +9%pts
In-force cash Group in-force long-term free cash £12.1bn £11.8bn +3%
Assets Assets under administration £259bn £310bn -16%
Leverage Fitch leverage ratio 30% 28% +2%pts
I am delighted that we have once again delivered a year of strong financial
performance, as we execute on our strategy and fulfil our purpose.
We have delivered another year of resilient cash generation, with £1.5
billion generated in 2022, exceeding our target range of £1.3-to-£1.4
billion for the year.
We have also maintained our resilient capital position with a Solvency II
('SII') surplus of £4.4 billion and a SCCR of 189%, which is above our target
ratio range of 140% to 180%.
In terms of new business growth, we have delivered record incremental new
business long-term cash generation of £1,233 million. This means that for the
second consecutive year we have more than offset the run-off of our in-force
business.
We have also grown inorganically through M&A, having announced our first
ever cash funded acquisition of Sun Life of Canada UK, which we expect to
complete in April.
Our strong strategic and financial performance this year has therefore enabled
the Board to recommend a dividend increase of 5% for the year.
With £0.3 billion growth in our Group in-force long-term free cash to £12.1
billion, our increased level of dividend remains every bit as sustainable over
the very long term. With this increased long-term free cash, which will be
available to shareholders over time, proof that Phoenix is a sustainable,
growing business.
In terms of our IFRS reporting, the Group's adjusted operating profit remained
strong at £1,245 million, but we have reported an IFRS loss after tax of
£(1,762) million. This primarily reflects £(2,673) million of adverse
investment return variances from accounting volatility in relation to our
hedging instruments and includes economic movements on assets within our
corporate pension schemes that have been subject to a buy-in. Taking into
account the corresponding decrease in our pension scheme liabilities of £940
million, Total Comprehensive Expense for the year was £(1,076) million. This
impact has, in turn, increased our Fitch leverage ratio to 30%, which remains
within our target operating range of 25-30%.
As a reminder, our hedging approach is designed to stabilise our SII Surplus
and Group in-force long-term free cash, which in turn protects our dividend
paying capacity. However, this does cause significant IFRS volatility due to a
mismatch between our IFRS balance sheet, and the Solvency balance sheet that
we are hedging (see page 31 for more detail). However, we accept this as the
trade-off to deliver the resilient cash generation and dividend we are known
for.
I am proud of the strategic progress we have made this year, particularly in
driving forward our organic growth strategy. At our Capital Markets Event in
December we outlined the journey we have been on and our future ambitions.
In Retirement Solutions, we have now firmly established ourself as a key
player in the BPA market, with another really successful year of growing our
BPA business.
We have also been focused on cultivating our fee-based businesses, to develop
more balanced organic growth, in particular in our Pensions and Savings
business. I am therefore delighted to see the progress we are making in our
Workplace business, where we have seen a renewed trust in our proposition,
enabling us to both retain our existing schemes and attract new clients.
Our confidence in our future organic growth strategy has enabled us to set our
first ever incremental new business long-term cash generation target, of
c.£1.5 billion per annum by 2025.
So looking back on 2022, it has been a year of clear strategic progress, that
supported us to deliver a strong set of financial results. Importantly, our
business is growing, as demonstrated by the growth in our Group in-force
long-term free cash to £12.1 billion, which sustains our increased dividend
over the very long term. Our Solvency capital position also remains highly
resilient, despite the unprecedented economic volatility last year, with our
SCCR of 189%. This supports provides us with significant capacity to invest
into growth.
This is Phoenix's financial framework in action, as we deliver resilient and
predictable cash generation, which underpins a dividend that is sustainable
and grows over time.
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 pages 38-39
and the IFRS financial statements are set out from page 168 onwards.
Alternative performance measures
In prioritising the generation of sustainable cash flows from our operating
companies, performance metrics are monitored where they support this strategic
purpose, which includes ensuring that the Solvency II capital strength of the
Group is maintained. We use a range of alternative performance measures
('APMs') to evaluate our business, which are summarised below.
Cash generation
Cash generation remains our key performance metric. It represents the net cash
remitted from the operating entities to the Group, supported by the free
surplus above capital requirements in the life companies, which is generated
through margins earned on life and pension products and the release of capital
requirements, and group tax relief.
This cash generation is used by the Group to fund expenses, interest costs and
shareholder dividends, with any surplus then available to reinvest into
organic and inorganic growth opportunities.
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 new business long-term cash generation
Incremental new business long-term cash generation is a key metric for
measuring growth. It represents the operating companies' cash generation that
is expected to arise in future years as a result of new business transacted in
the period. By generating sufficient incremental long-term cash generation to
offset the run-off of our in-force business cash flows, we can bring long-term
sustainability to future cash generation to grow the value of our in-force
business.
Group in-force long-term free cash
This represents the cash expected to be available over time to fund future
dividends from existing business and supports the sustainability of our
dividend over the very long term. It comprises the cash expected to emerge
from our in-force business over its lifetime, plus existing Group holding
company cash, less committed costs associated with our M&A integration
activity, the repayment of all shareholder debt and servicing of interest
costs to maturity.
Assets under Administration
The Group's Assets under Administration ('AUA') 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. Positive net flows
in AUA is another indicator of growth for the Group.
Adjusted operating profit
The Group uses adjusted operating profit as a measure of IFRS performance
based on long-term assumptions. Adjusted operating profit is less affected by
the short-term market volatility driven by Solvency II hedging (as illustrated
on page 31) and non-recurring items than IFRS profit. A more detailed
definition of adjusted operating profit is set out on page 314.
Cash
Cash generation
Operating companies' cash generation represents cash remitted by the Group's
operating companies to the holding companies. Please see the APM section on
page 314 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 M&A 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 2022 2021
Cash and cash equivalents at 1 January 963 1,055
Operating companies cash generation:
Cash receipts from life companies(1) 1,504 1,717
Uses of cash:
Operating expenses (78) (80)
Pension scheme contributions (16) (11)
Debt interest (244) (250)
Non-operating cash outflows (395) (305)
Debt repayments (450) (322)
Shareholder dividend (496) (482)
Total uses of cash (1,679) (1,450)
Support of BPA activity (285) (359)
Closing cash and cash equivalents at 31 December 503 963
1 Total cash receipts include £55 million received by the holding companies
in respect of tax losses surrendered (2021: £95 million).
Cash receipts
Cash generated by the operating companies during 2022 was £1,504 million
(2021: £1,717 million). This exceeded the Group's target range of
£1.3-to-£1.4 billion for the year.
Uses of cash
Operating expenses of £78 million (2021: £80 million) represent corporate
office costs, net of income earned on holding company cash and investment
balances.
Pension scheme contributions of £16 million were made in 2022 (2021: £11
million) with the increase on 2021 due to the inclusion of a £5 million
contribution into the ReAssure pension scheme following a triennial review.
Debt interest of £244 million (2021: £250 million) reflects interest paid in
the period on the Group's debt instruments. The small decrease year-on-year is
due to the repayment of debt in June 2022 and elimination of interest thereon.
Non-operating cash outflows of £395 million (2021: £305 million) primarily
comprises centrally funded projects and investments. £90 million relates to
Group project expenses for the transition activity in relation to the Standard
Life platform migration, £40 million for other ongoing integration programmes
including ReAssure, and £33 million for our Finance Transformation including
implementing the new IFRS 17 accounting standard.
We also incurred £15 million of costs related to our cost of living colleague
support, £12 million of acquisition costs related to the Sun Life of Canada
UK transaction, and made a £15 million equity investment into the open
finance platform Moneyhub.
There was also a further £77 million of other project costs, £68 million
from the close-outs in respect of Group hedging instruments and £45 million
of other items.
Debt repayments
Debt repayments in 2022 reflect the repayment of the £450 million Tier 3
subordinated bond in July (2021: £322 million), as the Group manages its
leverage.
Shareholder dividend
The shareholder dividend of £496 million represents the payment of £248
million in May for the 2021 final dividend and the payment of the 2022 interim
dividend of £248 million in September.
Support of BPA activity
Funding of £285 million (2021: £359 million) has been provided to the life
companies to support a strong year in BPA with £4.8 billion of premiums
written (2021: £5.6 billion).
The decrease relative to 2021 reflects the Group's success in optimising its
capital with a reduction in the Group's capital strain on BPAs to 5.8% in 2022
(2021: 6.5%). This enabled the Group to write a similar amount of incremental
new business long-term cash generation, but with 20% less capital invested.
Future cash targets set
Our business model is designed to deliver high levels of predictable cash
generation, enabling us to set very clear targets. We are therefore setting a
one-year target of £1.3 to £1.4 billion again in 2023.
We have also set an increased three-year cash generation target of £4.1
billion for 2023-2025. This includes £0.1 billion of expected cash emergence
from the Sun Life of Canada UK acquisition and, for the first time, cash
emergence from new business we expect to write in 2023 and 2024 of £0.2
billion.
Future sources and uses of cash
Looking over the period 2023-2025, and after we have invested £248 million to
fund the acquisition of Sun Life of Canada UK, we expect to have surplus cash
of around £1.45 billion available to invest into growth.
We will therefore continue to invest into organic growth through BPA and our
fee-based businesses, and will also continue to assess further M&A
opportunities.
Group in-force long-term free cash
Group in-force Long-Term Free Cash ('LTFC') represents the cash expected to be
available over time to fund future dividends from today's in-force business.
This underpins the sustainability of our c.£0.5 billion annual dividend cost
over the very long term.
Group in-force LTFC was £12.1 billion as at 31 December 2022 (2021: £11.8
billion). It comprises 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 and interest to maturity.
Growing our Group in-force LTFC allows us to demonstrate that we are a
growing, sustainable business. I am therefore pleased that in 2022 we have
increased our Group in-force LTFC by c.£0.3 billion.
The movement in the year is driven by c.£1.2 billion of incremental new
business long-term cash generation written in 2022 from organic growth and
c.£0.3 billion of value-creating Solvency II own funds management actions.
This more than offsets the Group's c.£0.8 billion of annual operating costs,
debt interest and dividends, c.£0.3 billion of capital invested into BPA in
2022, and c.£0.1 billion of net other uses of cash.
Growth in the Group's in-force LTFC supports us in delivering a dividend that
is sustainable and grows over time.
Group in-force long-term free cash
£bn Group in-force Group in-force
LTFC LTFC
Year ended Year ended
31 December 2022 31 December 2021
Long-term in-force cash generation 17.3 17.0
Plus closing Holding Company cash 0.5 1.0
Less M&A and transition costs (0.4) (0.2)
Group in-force long-term cash 17.4 17.8
Less shareholder debt (4.1) (4.6)
Less interest on debt to maturity (1.2) (1.4)
Group in-force Long-Term Free Cash 12.1 11.8
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
£4.4 billion (2021: £5.3 billion), which includes the accrual for the
deduction of our 2022 final dividend of £260 million. Our Shareholder Capital
Coverage Ratio ('SCCR') increased to 189% (2021: 180%). This is currently
above the top-end of our 140%-to-180% target range, providing the capacity to
invest into both organic and M&A growth opportunities.
Change in Group Solvency II surplus and SCCR
Our ongoing surplus emergence and release of capital requirement increased the
SII surplus by £0.7 billion during the year, contributing to an increase in
the SCCR of 16%pts.
We delivered strong management actions in the period, primarily from 'business
as usual' actions as we continue to optimise our in-force business. Management
actions contributed a further £0.7 billion of surplus increase and added
7%pts to the SCCR.
Operating costs, dividends and interest totalled £(0.8) billion, reducing the
SCCR by 16%pts. We also repaid a c.£0.5 billion Tier 3 bond from our own cash
resources in July 2022, reducing the SCCR by 9%pts.
As a result of our comprehensive hedging strategy, designed to stabilise our
capital position, we have minimised the adverse impact from economic variances
to just a £(0.4) billion impact on our Solvency II surplus, despite
unprecedented market turbulence last year. While this surplus movement from
economics was relatively small, a consequence of our hedging approach is that
we do see volatility in the Group's Own Funds, to offset against movements in
the SCR, and this led to an 18%pts increase in the SCCR.
Importantly though, both the SII Surplus and SCCR impacts were broadly in line
with our published sensitivities, which means our hedging operated as we
expected it to.
We also invested £0.3 billion of capital into growth, primarily for the
funding of £4.8 billion of BPA premiums written in the year, which decreased
the SCCR by 7%pts.
Other movements represent project spend to deliver Group initiatives, and a
strengthening of expense assumptions for the IFRS 17 project and integration
delivery. These movements decreased Solvency II surplus by £0.3 billion, but
had a neutral impact on the SCCR, due to other assumption changes providing an
offset.
Sensitivity and scenario analysis
As part of the Group's internal risk management processes, the Own Funds and
regulatory SCR are regularly tested against a number of financial scenarios.
The table provides illustrative impacts of changing one assumption while
keeping others unchanged and reflects the business mix at the balance sheet
date. Extreme markets movements outside of these sensitivities may not be
linear.
While there is no value captured in the Group stress scenarios for recovery
management actions, the Group does proactively manage its risk exposure.
Therefore in the event of a stress, we would expect to recover some of the
loss reflected in the stress impacts shown.
Illustrative risk exposure stress testing
Estimated impact(1) on PGH Solvency II SCCR
Surplus %
£bn
Solvency II base 4.4 189
Equities: 20% fall in markets nil 3
Long-term rates: 80bps rise in interest rates(2) 0.1 5
Long-term rates: 70bps fall in interest rates(2) (0.1) (5)
Long-term inflation: 60bps rise in inflation(3) Nil -
Property: 12% fall in values(4) (0.2) (4)
Credit spreads: 135bps widening with no allowance for downgrades(5) (0.2) (4)
Credit downgrade: immediate full letter downgrade on 20% of portfolio(6) (0.3) (7)
Lapse: 10% increase/decrease in rates(7) (0.1) (1)
Longevity: 6 months increase(8) (0.5) (10)
1 Illustrative impacts as at 1 January 2022 assume changing one assumption
while keeping others unchanged, and reflects the business mix at the balance
sheet date, and that there is no market recovery. Extreme markets movements
outside of these sensitivities may not be linear.
2 Assumes the impact of a dynamic recalculation of transitionals and an
element of dynamic hedging which is performed on a continuous basis to
minimise exposure to the interaction of rates with other correlated risks
including longevity.
3 Stress reflects a structural change in long-term inflation with an
increase of 60bps 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
135bps spread widening. It assumes the impact of a dynamic recalculation of
transitionals and makes no allowance for the cost of defaults/downgrades.
6 Impact of an immediate full letter downgrade across 20% of the shareholder
exposure to the bond portfolio (e.g. from AAA to AA, AA to A, etc). This
sensitivity assumes management actions are taken to rebalance the annuity
portfolio back to the original average credit rating and makes no allowance
for the spread widening which would be associated with a downgrade.
7 Assumes most onerous impact of a 10% increase/decrease in lapse rates
across different product groups.
8 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.
In order to stabilise our SII surplus, we regularly monitor risk exposures and
use a range of hedging instruments to remain within a Board approved target
range.
Equity risk primarily arises from our exposure to a variation in future
management fees on policyholder assets exposed to equities, while our currency
exposure primarily arises from our foreign currency denominated debt.
Our interest rate exposure principally relates to our shareholder credit
portfolio, while our inflation 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.£31 billion shareholder credit
portfolio, and property risk in Equity Release Mortgages, where we see these
risks as rewarded. The shareholder credit assets are primarily used to back
the Group's annuity portfolio. Exposure to these risks is needed to back
growth in the Group's annuity portfolio. Stress testing is used to inform the
level of risk to accept and to monitor exposures against risk appetite.
We also actively manage our portfolio to ensure it remains high quality and
diversified, and to maintain our sensitivities within risk appetite. Our BBB
exposure is just 19% and we also remain conservative in the sector positioning
of our credit portfolio, with only 3% of our credit portfolio exposed to
cyclical sectors, with an average rating of A-.
The key sensitivity we focus on for credit is a full letter downgrade of 20%
of our credit portfolio, which is £0.3 billion and is therefore small
relative to the Group's £4.4 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.
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. We retain a significant Life Company Free Surplus of £2.3 billion
which provides resilience to the Group's long-term cash generation. The table
shown analyses the movements in 2022.
Estimated position as at
31 December 2022
£bn
Opening Free Surplus 2.6
Surplus generation and run-off of capital requirements 0.8
Management actions 0.6
Economics, financing and other (0.2)
Free Surplus before cash remittances 3.8
Cash remittances to holding companies 1.5
Closing Free Surplus 2.3
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 success in
achieving growth from new business.
A reconciliation from the Group's IFRS statement of consolidated financial
position to the Group's AUA is provided on page 309.
Please see the APM section on page 314 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 £1,233 million in 2022 (2021: £1,184 million).
This means that we have once again delivered new business growth which allows
us to more than offset the natural run-off of the in-force business cash
generation of c.£800 million, demonstrating that Phoenix is a business that
is growing organically.
Retirement Solutions
We have written £4.8 billion of BPA premiums in 2022. While this is a
reduction on £5.6 billion written in 2021, we have maintained broadly the
same level of incremental new business cash generation at £934 million (2021:
£950 million) with 20% less capital invested. This in turn supported an
increase in the cash multiple from 2.6x in 2021 to 3.4x in 2022.
We successfully reduced our capital strain from 6.5% in 2021 to 5.8% in 2022,
and maintained our pricing discipline which is evidenced by our delivery of an
increased mid-teens IRR and shorter payback of 5.8 years (2021: 8.6 years).
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.
Fee-based businesses
This comprises our capital-light fee-based businesses of Pensions &
Savings, Europe and SunLife.
Pensions & Savings: Workplace
Our Workplace business has delivered an improved level of incremental
long-term cash generation at £212 million in the year, an increase of 53% on
2021 (2021: £139 million). This reflects the increased new business we get
from retaining our existing corporate customers, through the natural growth
from new members joining existing schemes and the impact of wage inflation on
contributions. In addition, as part of TCS Diligenta's build out of our
Workplace capabilities we have moved to a lower cost per policy, improving our
cost efficiency further. This reduces the expenses accounted for in
incremental long-term cash generation and is therefore a recurring benefit for
all future new business too.
Pensions & Savings: Retail
The 2022 incremental new business long-term cash generation of £37 million
from our Retail business has increased by 28% on 2021 (2021: £29 million).
This increase has been driven by the move to a lower cost per policy with TCS
Diligenta, as with the Workplace business, thereby enhancing cost efficiency
here too.
Europe
There was a small decrease in the incremental new business long-term cash
generation of our European business to £29 million (2021: £31 million), due
to lower margins on new business in 2022.
SunLife
Our incremental long-term cash generation from SunLife of £21 million has
decreased year-on-year (2021: £35 million) reflecting the impact of the cost
of living crisis on our SunLife customer base leading to lower sales.
Group AUA
Group AUA as at 31 December 2022 was £259.0 billion (2021: £310.4 billion).
The decrease in the period is largely driven by £45.7 billion of adverse
market movements, but importantly there is limited impact from these market
movements on the fees we earn, as they are hedged, which results in
predictable cash generation.
Heritage net flows
UK Heritage net outflows of £9.6 billion (2021: £10.8 billion1 ) reflect
policyholder outflows on claims such as maturities and surrenders, net of
total premiums received in the period from in-force contracts.
This improvement year-on-year is due to elevated outflows in 2021 relating to
one-off challenges following the migration of L&G business to ReAssure.
With these challenges all now resolved, outflows are reflective of a more
normalised steady-state run-rate.
Retirement Solutions net flows
Net flows in Retirement Solutions, which encompasses our BPA and individual
annuity businesses, were £2.3 billion (2021: £3.3 billion). This
year-on-year reduction is due to reduced BPA premiums written, as a result of
our improved capital efficiency and the impact of higher rates.
Gross inflows during the period were £5.3 billion (2021: £6.3 billion),
inclusive of £4.8 billion of new BPA premiums written in the year. This
included 12 external transactions accounting for £4.2 billion of premiums and
£0.6 billion for the last tranche of the Pearl Pension Scheme buy-in.
Outflows of £3.0 billion in the period (2021: £2.9 billion) primarily
reflect the natural run-off of our in-payment annuity policies.
Pensions & Savings: Workplace net flows
Net fund flows within our Workplace business were £2.4 billion in 2022 (2021:
£0.2(1) billion), a significant improvement year-on-year. The investment we
have made into our proposition and our Standard Life brand has enabled us to
improve the retention of our existing schemes to benefit from the embedded
growth in Workplace schemes and drive stronger net fund flows in the year.
Gross inflows were £6.2 billion, up 7% on 2021 (£5.8 billion(1)), primarily
reflecting increased flows due to annual salary increases.
2022 outflows of £3.8 billion improved on 2021 (£5.6 billion(1)), as we
retained more customers with our enhanced proposition and the success of our
Standard Life Sustainable Multi-Asset default fund.
Pensions & Savings: Retail net flows
Net fund outflows within our Retail business were £1.4 billion in 2022 (2021:
£1.6 billion net outflow), a slight improvement year-on-year.
Gross inflows during the period were slightly reduced on 2021 at £1.7 billion
(2021: £1.9 billion) due to lower consolidation into our Self Invested
Personal Pension ('SIPP') products.
Importantly, we did see a more significant decrease in outflows of 11% to
£3.1 billion (2021: £3.5 billion). This demonstrates that more customers are
staying with us as our proposition is improving.
Other fee-based businesses net fund flows
We have seen net fund flows of £0.6 billion in 2022 (2021: £0.8 billion net
inflows) from our Europe and SunLife businesses.
Gross inflows were £2.5 billion in the year (2021: £2.8 billion), primarily
reflecting our individual retirement products sold in Europe, while outflows
of £1.9 billion in the year (2021: £2.0 billion) are largely due to the
natural run-off of our European business.
Other movements including markets
AUA decreased by £45.7 billion (2021: £11.6 billion increase) driven by the
net adverse impacts of market movements, largely due to rising yields. This
impact has been seen across the market, but Phoenix is different to other
insurers due to our comprehensive hedging approach which mitigates the impact
on our Annual Management Charge, to deliver predictable fee-based revenues and
underpin our resilient cash generation.
1. The opening AUA position has been restated for a reclassification of £10.1
billon in respect of the Group's Corporate Trustee Investment Plan ('CTIP')
from the Heritage business to the Pensions & Savings: Workplace business,
as this product is open for new business. Subsequent flows on the CTIP
business in 2022 have been captured within the Pensions & Savings:
Workplace business, with 2021 associated flows restated to reflect this
reclassification and provide a more accurate reflection of year-on-year
comparatives.
IFRS results
IFRS (loss)/profit is a GAAP measure of financial performance and is reported
in our statutory financial statements on page 168 onwards.
Adjusted 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 314 for further details of this measure.
IFRS profit and loss statement
£m 2022 2021
Heritage 601 537
Open 761 788
Service company (48) (24)
Group costs (69) (71)
Adjusted operating profit before tax 1,245 1,230
Investment return variances and economic assumption changes (2,673) (1,125)
Amortisation and impairment of intangibles (522) (639)
Other non-operating items (179) (65)
Finance costs (199) (217)
Profit before tax attributable to non-controlling interest 67 128
Loss before tax attributable to owners (2,261) (688)
Tax credit / (charge) attributable to owners 499 (21)
Loss after tax attributable to owners (1,762) (709)
IFRS loss after tax attributable to owners
The Group generated an IFRS loss after tax attributable to owners of £1,762
million (2021: loss of £709 million), which primarily reflects £2,673
million of adverse investment return variances and £522 million of charges
for amortisation and impairment of intangibles.
Investment return variances includes net losses as a result of economic
movements in the value of assets backing Group employee pension schemes, where
they are subject to insurance policies with Group entities. An accounting
mismatch arises as the related decrease in the defined benefit pension
obligation is recognised in 'Other Comprehensive Income' ('OCI'), which has
seen a gain of £686 million in the period that partly offsets the loss.
Basis of adjusted operating profit
Adjusted operating profit 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.
Adjusted 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 adjusted operating profit. Adjusted operating profit is net of
policyholder finance charges and policyholder tax.
Adjusted operating profit
The Group has reported an increased adjusted operating profit of £1,245
million for the year (2021: £1,230 million).
Heritage adjusted 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 adjusted operating profit of £601 million
(2021: £537 million), which increased year-on-year. This was primarily due to
the non-recurrence of adverse one-off assumption changes recognised in 2021.
Open adjusted operating profit
Open adjusted operating profit includes Retirement Solutions, Pensions and
Savings, SunLife, and is shown here inclusive of our Europe business segment.
Our Open business delivered an adjusted operating profit of £761 million
(2021: £788 million). The reduction compared to the prior year primarily
reflects lower new business profit on BPA due to a lower level of premiums.
Service company
The adjusted operating loss from the service company of £48 million (2021:
loss of £24 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 our growth strategy, including the development of
asset management capabilities.
Group costs
Group costs in the period were £69 million (2021: £71 million). They mainly
comprise project recharges from the service companies and the returns on the
scheme surpluses/deficits of the Group staff pension schemes.
Investment return variances and economic assumption changes
Movements in yields, inflation, currency and equity markets are hedged to
protect our Solvency II surplus from volatility, but our IFRS balance sheet
is, in effect, 'over-hedged'. This is because it does not recognise the
additional Solvency II balance sheet items such as certain future profits and
the Solvency Capital Requirements (see diagram on page 31). Therefore, the
movements in the value of certain hedging instruments offset the market
movements in the period, and gives rise to profits or losses in the IFRS
results. However, importantly the Group's cash generation and dividend
capacity are unaffected by this due to the Group's continued resilient
Solvency balance sheet.
As a result, the net adverse investment return variances of £2,673 million
(2021: £1,125 million negative) have primarily arisen as a result of rising
yields, which has been hedged, and a widening of credit spreads. This includes
economic movements on assets within our corporate pension schemes that have
been subject to a buy-in. Taking into account the corresponding decrease in
our pension scheme liabilities of £940 million, Total Comprehensive Expense
for the year was £(1,076)m.
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. The amortisation
and impairment of acquired in-force business during the year of £501 million
(2021: £572 million) has decreased year-on-year reflecting the impact of the
run-off. Amortisation and impairment of other intangible assets totalled £21
million in the period (2021: £67 million).
Other non-operating items
Other non-operating items totalled a £179 million loss (2021: £65 million
loss, inclusive of a £110 million gain on the Standard Life brand
acquisition).
This includes £187 million of integration costs related to the strategic
decision to re-phase our Standard Life customer & IT migration programme
to build out our Open business capabilities on the TCS Diligenta ('TCS')
platform. Also included are costs associated with the implementation of IFRS
17, ongoing costs in relation to the ReAssure integration programme,
acquisition costs relating to Sun Life of Canada UK, as well as other
corporate project costs and other net one-off items.
Finance costs
Finance costs of £199 million (2021: £217 million) reflects the interest
paid on the Group debt instruments. The year-on-year reduction reflects the
removal of interest on instruments settled in 2021, and therefore no cost
incurred this year.
Tax credit attributable to owners
The Group's approach to the management of its tax affairs is set out in its
Tax Strategy document that is available on our website.
The Group tax credit for the period attributable to owners is £499 million
(2021: £21 million tax charge) based on a loss (after policyholder tax) of
£2,261 million (2021: £688 million loss).
The tax credit of £499 million arising on the loss (after policyholder tax)
includes a £119 million tax credit arising from the impact of the 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
2022 is 30% (31 December 2021: 28%).
The increase in leverage year-on-year is predominantly a result of the
material adverse investment return variance following significant movements in
yields and credit spreads. As markets recover in future periods, we would
expect to see positive investment variances to unwind some of this unrealised
loss. In turn this will result in a reduction in leverage.
The leverage ratio is currently within our target range of 25% to 30%, and we
will continue to monitor our leverage and manage it appropriately.
During July 2022, we repaid a £450 million Tier 3 bond from our own cash
resources, which contributed to a reduction in outstanding debt leverage to
£4.1 billion at the end of 2022.
Our business strategy and financial framework are not impacted by IFRS 17
IFRS 17 is a new Financial Reporting Standard that replaces IFRS 4 on
accounting for insurance contracts. IFRS 17 is effective from 1 January 2023.
Our strategy of growing our in-force business over time as we support
customers journey to and through retirement remains unaffected. Our key
metrics continue to focus on cash generation and Solvency II capital
resilience, with our dividend paying capacity and long-term coverage remaining
unchanged.
We expect the introduction of IFRS 17 to result in a broadly neutral impact on
IFRS shareholder equity, with a Contractual Service Margin ('CSM') of at least
£2 billion to be established.
Dividend
Organic growth and M&A supports a sustainable dividend increase
Phoenix has demonstrated a strong dividend track record over the past 12
years, with a 4% compound annual growth rate ('CAGR') since 2011.
2021 was pivotal in evolving our dividend story as, for the first time, our
dividend increase came from the strong organic performance of our new
business. It was a proof of concept that we could deliver dividend increases
outside of M&A.
However, we have always been clear that we are focused on delivering dividend
growth both organically through our new business, and through M&A. Which
is why I am delighted that in 2022 we have achieved both.
Firstly, we announced our first ever cash funded acquisition of Sun Life of
Canada UK, which we expect to complete in April 2023. We said on announcement
that the Board had proposed a dividend increase of 2.5% for this inorganic
growth, funded from the c.£0.5 billion of cash emerging from this business
over its lifetime.
In terms of organic growth, we said we were confident we could deliver new
business long-term cash generation to more than offset the natural run-off of
our business in 2022, and we have.
With a strong strategic and financial performance in 2022 including record new
business long-term cash generation of £1.2 billion, we have delivered organic
growth that supports a 2.5% organic dividend increase.
As a result, the Board has recommended a dividend increase of 5% in the Final
2022 dividend to 26.0 pence per share, This equates to a Total 2022 dividend
of 50.8 pence per share.
Our increased level of dividend remains just as sustainable as it was
previously, thanks to the significant levels of cash generation that will
emerge from our current in-force business, with £12.1 billion of Group
in-force long-term cash that will be available to fund future dividends.
Dividend policy and approach
We operate a dividend policy which is to pay a dividend that is sustainable
and grows over time.
It is important to emphasise that the Board will continue to, above all else,
prioritise the sustainability of our dividend over the very long term.
We have now demonstrated that Phoenix can grow both organically and through
M&A. Therefore, going forward, we will simplify our dividend
communication, with the Board announcing any potential annual dividend
increase at our full year results, which will combine both organic growth and
inorganic M&A growth.
Outlook
Looking ahead
We are helping people secure a life of possibilities through our clear and
differentiated strategy, as we support
our customers on their journey to and through retirement.
The scale of the Group's in-force business brings three key competitive
advantages of capital efficiency, customer access and cost efficiency. We will
leverage these to grow our in-force cash generation over time, both
organically and through M&A.
Clear 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 2023 of £1.3-to-£1.4 billion. The second is a
three-year target of £4.1 billion across 2023-2025, which includes the cash
emergence from the new business we expect to write in 2023 and 2024, of
c.£0.2 billion.
This evolution in how we set our cash targets demonstrates our confidence in
our ability to deliver future organic growth.
In terms of resilience, we will continue to maintain a strong SII surplus
through our comprehensive hedging approach. This will see us continue to
operate within or above our Solvency II SCCR target range of 140%-to-180% and
continue to manage our key individual risk sensitivities on a Solvency II
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 2023.
In addition, we will look to manage the Group's gearing level by operating
within our Fitch financial leverage ratio target our target range of 25%-30%
over the long term.
Turning to growth, Phoenix is now confident of growing its incremental new
business long-term cash generation, and has set a new target of £1.5 billion
per annum by 2025, which is a 25% increase on the Group's strong 2022
performance.
This new target is expected to comprise c.£1.0 billion from Retirement
Solutions and c.£0.5 billion from our Fee-based businesses.
In Retirement Solutions, we will continue our strategy of optimising our
capital and returns, by investing c.£300 million of capital per annum into
BPA and targeting mid-teens IRRs.
While in our Fee-based Pensions and Savings business, we are investing in our
proposition and the Standard Life brand, to support our target for growth in
our net fund flows. With an ambition for c.£5 billion of annual net fund
flows in our Workplace business by 2025 and c.£2 billion in our Retail
business by 2025.
Delivering these new growth targets will enable the Group to generate
significant net growth in our £12.1 billion of Group in-force long-term free
cash, which can support a dividend that is sustainable and grows over time, in
line with our policy.
I look forward to an exciting year in 2023 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 2021 Annual Report and Accounts,
published in March 2022.
A principal risk is a risk or combination of risks that can seriously affect
the performance, future prospects or reputation of the Group, including risks
that would threaten its business model, future performance, solvency or
liquidity. The Board Risk Committee has carried out a robust assessment of
principal risks and emerging risks. As a result of this review, the 13 risks
noted in the Group's 2021 Annual Report and Accounts have been retained. The
description of one risk has been refined to reflect the evolution of the
Group's strategic priorities to focus on organic growth.
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 Grow organically and through M&A
3 Enhance our operating model and culture
Risk Impact Mitigation Strategic priorities Change from 2021 Annual Report and Accounts
Strategic risk
The Group fails 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 This risk was assessed as 'Heightened' in the Group's 2018 Annual Report and
to make further value adding acquisitions or effectively transition acquired growth opportunities, including acquisitions of life and pensions books of and applies a clear set of criteria to assessing these opportunities.
Accounts due to the transformational nature of the Standard Life acquisition.
businesses business.
2 The assessment of the level of exposure to this risk is unchanged from the
The Group's acquisition strategy is supported by the Group's financial
2018 position due to the impact of ongoing acquisition and transition
The transition of acquired businesses into the Group, including customer strength and flexibility, strong regulatory relationships and its track record 3 activity.
migrations, could introduce structural or operational challenges that, without of generating value and delivering good customer outcomes that are in line
sufficient controls, could result in the Group failing to deliver the expected with expectations. The integration of ReAssure Ltd is continuing as planned, with the integration
outcomes for customers or value for shareholders.
of key functions, such as Finance and Actuarial, progressing well.
The financial and operational risks of target businesses are assessed in the
acquisition phase and potential mitigants are identified. The Group continues to develop its partnership with TCS to support its
strategic deliverables. The successful migration of around 400,000 Standard
Integration plans are developed and resourced with appropriately skilled staff Life Assurance customer policies to the TCS BaNCS platform was completed in
to ensure target operating models are delivered in line with expectations. The May 2022, with the migration of a further 130,000 Scottish Mutual customer
Group's priority at all times is on delivering for its customers. Customer policies completed in November 2022. Further customer migrations are planned
migrations are planned thoroughly with robust execution controls in place. through to 2026, which will support delivery of the Group's strategic
Lessons learned from previous migrations are applied to future activity to objectives.
continuously strengthen the Group's processes.
On 7 February 2023 the Group announced that a further c. 3 million policies,
currently administered on the Alpha platform, will be transitioned to the
BaNCS platform by 2026. This will enable all Phoenix policies to benefit from
TCS' significant ongoing investment in the platform.
In August 2022 the Group announced the acquisition of Sun Life of Canada UK, a
closed book UK life insurance company, from Sun Life Assurance Company of
Canada for cash consideration of £248 million. This equates to an attractive
price to shareholder Own Funds ratio of 83%, in line with the Board's
disciplined approach to the deployment of shareholder capital. The acquisition
is expected to complete in April 2023.
Sun Life of Canada UK operates a predominantly outsourced business model with
the majority of its policy administration already undertaken by the Group's
strategic outsourcing partner (TCS Diligenta), which supports a simplified
operational integration programme.
The Sun Life of Canada UK acquisition is expected to deliver c. £500 million
of incremental long-term cash generation, with 30% expected to emerge in the
first three years.
The Group's strategic partnerships fail to deliver the expected benefits Strategic partnerships are a core enabler for delivery of the Group's The Group has in place established engagement processes with abrdn plc to 1 The Group assessed this risk as 'Heightened' in the 2019 Annual Report and
strategy; they allow it to meet the needs of its customers and clients and oversee and develop the strategic partnership. These processes reflect the
Accounts due to the increased dependency it placed on its strategic
deliver value for its shareholders. The Group's end state operating model will simplified and extended strategic partnership between the Group and abrdn plc 2 partnerships, and then 'Improved' in 2020 due to strengthening controls around
leverage the strengths of its strategic partners whilst retaining in-house key that was announced in February 2021.
the operation of those partnerships. Whilst the Group has further strengthened
skills which differentiate it from the market.
3 and simplified its strategic partnerships since that time, its assessment of
The Group's engagement with Diligenta, and its parent TCS, adheres to a
the level of risk exposure is unchanged from the 2020 position, reflecting the
However, there is a risk that the Group's strategic partnerships do not rigorous governance structure, in line with the Group's Supplier Management Group's ongoing reliance on its strategic partners to deliver the volume of
deliver the expected benefits leading to adverse impacts on customer outcomes, Model. As a result, productive and consistent relationships have been change needed to advance the Group's strategic objectives.
strategic objectives, regulatory obligations and the Group's reputation and developed with TCS, which will continue to develop throughout future phases of
brand. the enlarged partnership. The Group continues to develop its partnership with TCS to support its
strategic deliverables. The successful migration of around 400,000 Standard
Some of the Group's key strategic partnerships include: The Group has in place established processes to oversee services provided by Life Assurance customer policies to the TCS BaNCS platform was completed in
HSBC in line with its Supplier Management Model. May 2022, with the migration of a further 130,000 Scottish Mutual customer
abrdn plc: Provides investment management services to the Group including the
policies completed in November 2022. Planning for further migrations in 2023
development of investment solutions for customers. abrdn plc manages c. £145 The Group takes steps to monitor its supplier concentration risks and has and beyond is underway, including the further c. 3 million policies to be
billion of the Group's assets under administration, at February 2023. business continuity plans to deploy should there be a significant failure of a transferred from the Group's Alpha administration platform as the Group
strategic partner. progresses towards BaNCS being the sole administration platform for all
TCS: The Group's enlarged partnership with TCS is expected to support growth
customer policies.
plans for the Retirement Solutions and Pensions and Savings businesses,
enabling further market-leading digital and technology capabilities to be
During 2022 the Group successfully transferred the custody and fund accounting
developed to support enhanced customer outcomes. services for £90 billion of assets to HSBC. This is a key milestone in the
Group's journey towards implementing harmonised investment administration
HSBC: Provides custody and fund accounting services to the Group to manage c. processes, and boosts its strategic partnership with HSBC.
£148 billion of its unit linked operations.
The simplified and extended partnership with abrdn plc continues to advance
towards the Target Operating Model with significant progress towards the
transfer of Wrap platform products expected in 2023 ahead of the transfer
occurring in subsequent years.
The Group fails to deliver long-term organic growth The Group aims to deliver sustainable cash generation by achieving organic The Group's Business Unit structure brings renewed focus and accountability. 2 Improving
growth in excess of the run-off from its in-force business. The key areas of growth are Pensions & Savings and Retirement Solutions.
3
Confidence in the Group might be diminished if it fails to deliver organic Each Business Unit holds an annual strategy setting exercise to consider
growth in line with targets shared, particularly as the Group seeks to promote customer needs, the interests of shareholders, the competitive landscape and For the second consecutive year the Group has delivered sustainable organic
a 'customer obsessed' mind-set underpinned by strong retention and the Group's overall purpose and objectives. growth which more than offset the run-off of in-force business. At its Capital
consolidation as customers journey to and through retirement.
Markets Event the Group set its first incremental new business long-term cash
The Group's Annual Operating Plan commits it to making significant investment generation target as a result of the significant progress made by both
in its Pensions & Savings and Retirement Solutions businesses, which will Pensions & Savings and Retirement Solutions. As a result of this
include propositions that are driven by customer insight. development, the Group views this risk as 'Improving', which reflects both the
demonstrated success of the strategy to pursue organic and inorganic growth,
The Group is established in the Bulk Purchase Annuities ('BPA') market and and the challenging nature of the target set.
continues to invest in its operating model to further strengthen its
capability to support its growth plans. During 2022, the Group completed BPA transactions with a combined premium of
£4.8 billion. This continues to demonstrate that the Group has the ability to
For new BPA business, the Group continues to be selective and proportionate, compete and win in the BPA market.
focusing on value not volume, by applying its rigorous Capital Allocation
Framework. The Pensions and Savings Business, operating under the Standard Life brand,
has developed its operating model to centre around three Trading Channels:
Workplace, Retail Intermediated and Retail Direct.
In Workplace, the Group continues to make progress in the market, launching
new propositional features such as Workplace ISA. The Group continues to
recruit to increase its capability in terms of proposition and distribution;
76 new scheme wins have been confirmed during 2022 (compared with 41 for
2021), and the Group is actively managing a number of enquiries.
The operating model and organisational design are being developed and
implemented for the Retail businesses, with the aim of maximising
opportunities for growth, both directly with customers and through advisers.
The Group is looking to expand the current offering of financial guidance and
advice to support customers in better preparing for their retirement. The
Pensions and Savings business has established, alongside the Workplace
Business, a Retail Direct Function to mobilise this.
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 defines a clear set of prioritisation There has been no change to the assessment of exposure to this risk, which
its significant change agenda which is required to execute the Group's adversely impacted by insufficient resource and capabilities as well as criteria and scheduling principles for new projects. This is to support the reflects the potential impact of failing to deliver the Group's significant
strategic objectives inefficient prioritisation, scheduling and oversight of projects. The risk safe and controlled mobilisation of new change in line with capacity and risk strategic and regulatory change agenda, since its introduction in the 2020
could materialise both within the Group and its strategic partners. appetite and to strengthen business readiness processes to deliver change Annual Report and Accounts.
safely into the operational environment.
This could result in the benefits of change not being realised by the Group
The Group strengthened its Change Management Framework during 2022, and
in the time frame assumed in its business plans and may result in the Group Information setting out the current and forecast levels of resource supply and expects to see an improving trend in this risk as those enhancements are seen
being unable to deliver its strategic objectives. Poor change delivery demand continues to be provided to accountable senior management to enable in project delivery. In September 2022 the Group appointed Jackie Noakes as
could affect the Group's ability to operate its core processes in a controlled informed decision-making to take place. This aims to ensure that all Group Chief Transformation Officer and, subsequently, as Group Chief Operating
and timely manner. material risks to project delivery are appropriately identified, assessed, Officer. Jackie will drive further enhancements to evolve and mature the
managed, monitored and reported. Group's change operating model that are planned in 2023. These should also
have a positive impact on this risk. However, exposure remains until this work
is complete.
The Group fails The Group is exposed to the risk of failing to respond to Environmental, Sustainability risk and Climate risk are both embedded into the Group's RMF. 1 There has been no change to the assessment of the overall level of this risk
to appropriately prepare for and manage the effects of climate change and Social and Governance ('ESG') risks and delivering on its social purpose; for Its approach to climate risk management is in line with the requirements
since its introduction in the 2019 Annual Report and Accounts. While
wider ESG risks example, failing to meet its sustainability commitments. A failure to deliver
of the PRA Supervisory Statement 3/19 ('SS3/19'). 2 significant progress is being made to deliver against the Group's Net-Zero
could result in adverse customer outcomes, reduced colleague engagement,
targets and social purpose, the assessment is driven by the Group's
reduced proposition attractiveness, reputational risks and litigation. The Group publishes an annual Sustainability Report and an annual Climate 3 recognition that significant work, over a number of years, is required to
Report, the latter of which is prepared in line with the Task Force on deliver on these targets.
The Group is exposed to market risk and credit risk related to climate change Climate-related Financial Disclosures ('TCFD') guidance.
as a result of the potential implications of a transition to a low carbon
The Group is committed to a 50% reduction in the carbon economic emissions
economy. A failure to manage these risks could result in a loss in the value A Sustainability Risk Policy is in place and updated annually. Consideration intensity of all assets within its investment portfolio over which it has
of policyholder and shareholder assets. of material climate-related risks is embedded across the Group's risk control and influence by 2030. The Group is also committed to a 25% reduction
policies, with regular reporting undertaken to ensure ongoing visibility of in the carbon economic emissions intensity of all listed equity and credit
In addition, there are long-term market, credit, insurance, reputational, its exposure to these risks. investments over which it has control and influence by 2025. The Group has
propositional and operational implications of physical risks resulting from
been working with its key partners and suppliers to encourage them to adopt
climate change (e.g. the impact of physical risks on the prospects of current The Group undertakes annual climate-related stress and scenario testing and Science Based Targets initiative carbon reduction targets.
and future investment holdings, along with potential impacts on future continues to build its climate scenario modelling capabilities.
actuarial assumptions).
A Net-Zero Transition Plan, which reflects potential future management actions
The Group continues to evolve its sustainability strategy in response to the and forward-looking investee company emission objectives, is in development.
changing needs of stakeholders and sets targets to monitor progress towards
its sustainability commitments. Further details are available in the The Group is in the process of piloting the Task Force on Nature-related
Sustainability Report. Financial Disclosures guidance ahead of the launch of the framework in 2023.
The Group continues to actively engage with regulators, suppliers and asset The TCFD disclosures in the Group's Climate Report provide an overview of how
managers on progress with all climate change and sustainability-related it is compliant with SS3/19
deliverables.
and its planned future priorities across each of the TCFD focus areas.
Customer risk
The Group fails 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 1 Since the introduction of this risk in the 2018 Annual Report and Accounts
to deliver fair outcomes for its customers or fails to deliver propositions its customers, leading to adverse customer experience and potential customer expects customer outcomes to be managed.
there has been no change to the assessment of the overall level of this risk,
that continue to meet the evolving needs of customers harm. This could also lead to reputational damage for the Group and/or
2 reflecting ongoing improvements and challenges.
financial losses. The Group's Conduct Strategy, which overarches the Risk Universe and all risk
policies, is designed to detect where customers are at risk of poor outcomes, In 2022, the Group continued to make significant investments in its
In addition, a failure to deliver propositions that meet the evolving needs of minimise conduct risks, and respond with timely and appropriate mitigating propositions, and completed embedding a range of responsibly invested,
customers may result in the Group's failure to deliver its purpose of helping actions. sustainable multi asset funds for Standard Life's 1.5 million workplace
people secure a life of possibilities.
pension scheme members, with assets of circa £15 billion now invested in
The Group has a suite of customer policies which set out key customer risks sustainable solutions on their behalf. The programme to introduce sustainable
and the Control Objectives that determine the Key Controls required to investment strategies that are designed to help employers and trustees meet
mitigate them. their member and regulatory needs, and pension customers to achieve good
outcomes, was completed two months earlier than the end-of-year timeline
The Group maintains a strong and open relationship with the FCA and other previously announced in January 2022. The Group is preparing for the
regulators, particularly on matters involving customer outcomes. introduction of the FCA's Consumer Duty requirements which set higher and
clearer standards of consumer protection across financial services and require
The Group's Proposition Development Process ensures consideration of customer firms to prioritise their customers' needs. The Consumer Duty initial
needs and conduct risk when developing propositions. implementation plan was agreed by the Group.
The Group is monitoring the impacts of the cost of living crisis on its
customers, using customer behaviour research and analysis, to ensure that it
provides them with the support and help that they need during this period of
economic uncertainty. The Group continues to provide support to customers both
when paying out on their protection plans and when making decisions about
their life savings. Proactive action to support customers, including those
most vulnerable, is a priority.
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's Operational Resilience Framework enhances the protection of 1 This risk was assessed as 'Heightened' in the Group's 2020 Annual Report and
to its customers and stakeholders if it cannot maintain the provision of customers and stakeholders, preventing intolerable harm, and supports
Accounts due to COVID-19 uncertainty and strategic customer transformation
important business services when faced with a major operational disruption. compliance with the regulations. The Group works closely with its outsourcers 2 activity. These factors remain the key drivers of the current assessment of
This could occur either in-house or within the Group's primary and downstream to ensure that the level of resilience delivered is aligned to the Group's
the level of exposure to this risk, which is unchanged since the 2020
outsourcers and be triggered by a range of environmental and climatic factors impact tolerances. 3 position.
such as the cost of living crisis and adverse weather phenomena.
The Group and its outsourcers have well established business continuity Whilst uncertainty regarding further COVID-19 related implications for the
The Group regularly conducts customer migrations as part of transition management and disaster recovery frameworks that are subject to an annual Group's operational resilience has continued to reduce, the Group has a
activities in delivering against its strategic objectives. In doing so, it refresh and regular testing. For example, extensive testing of the power significant change and customer migration agenda, effective completion of
faces the risk of interruption to its customer services, which may result in capabilities of the Group and its critical suppliers has shown they are which is required to deliver planned strengthening of its operational
the failure to deliver expected customer outcomes. resilient to power cuts from the National Grid. resilience both internally and with some outsourced service providers.
Regulatory requirements for operational resilience, and a timetable to achieve The Group continues to actively manage operational capacity and monitor The Group has a programme of work to strengthen operational resilience ahead
full compliance, were published in March 2021. Whilst the specific requirement service continuity required to deliver its strategy, including transition of the next key regulatory deadline of March 2025. Where this is dependent
to work within set impact tolerances takes effect in March 2025, the Group is activities. Rigorous planning and stress testing is in place to identify and upon customer migration to an alternative administration platform, the risk of
already exposed to regulatory censure in the event of operational disruption develop pre-emptive management strategies should services be impacted as a late delivery is actively managed by both the relevant change programme and
should the regulator determines that result of customer migrations. separate operational resilience remediation governance and reporting.
the cause was a breach of existing regulation.
The Group and its outsourcers have a flexible working model in place. This As noted in the Group's 2021 Annual Report and Accounts, whilst many potential
significantly reduces exposure to intolerable disruption for its customers. exposures to COVID-19 can now be effectively mitigated, a large-scale loss of
colleagues due to illness or incapacity, in the UK or globally, is more
challenging to resolve in the short-term as there remains uncertainty around
the efficacy of vaccines against future COVID-19 variants.
The Group aims to deliver considerable customer transformation activity in
2023. Although the scale of change exposes the Group to significant risk, this
is mitigated through strengthened Resilience and
Change Management Frameworks.
The Group has taken action through previous strategic transformation activity
to reduce exposure to technological redundancy and key person dependency risk,
increasing the resilience of its 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 quality of customer outcomes, lead to regulatory sanction, changes to the regulatory and legislative landscape. This allows the Group to
impact financial performance or cause reputational damage. These could require understand the potential impact of these changes to amend working practices to 2 This risk was assessed as 'Heightened' in the Group's 2021 Annual Report and
changes to working practices and have an adverse impact on resources and meet the new requirements by the deadline.
Accounts due to the uncertainty around Solvency II Reforms and the FCA's
financial performance. 3 proposed Consumer Duty. These, and the significant undertaking to achieve
compliance with IFRS 17 in 2023, are the key drivers of the assessment of risk
Political uncertainty or changes in the government could see changes in policy as further 'Heightened' from that position.
that could impact the industry in which the Group operates.
The volatile political environment following the UK Government's 'mini-budget'
has stabilised with the election of Rishi Sunak as Prime Minister, but remains
'heightened' due to the economic headwinds facing the new administration and
the implications for the Group's customer base, including the cost of living,
energy crisis and the potential increase in vulnerability.
In November 2022, HM Treasury issued a consultation response that confirmed
the UK Government's intended Solvency II reforms. The Group supports the PRA
and HM Treasury's objectives to reform the regulations to better suit the UK
market whilst maintaining the right safeguards for policyholders. These
regulations are an important component of the changes needed to the wider UK
investment landscape which will enable the Group to meet its ambition to
invest more in the future. However, uncertainty remains over when the reforms
will be implemented and the quantitative impacts will depend on the exact
detail of the final legislation. The Group will therefore remain actively
involved in industry lobbying on Solvency II.
The FCA's proposed new Consumer Duty's objectives are to deliver a higher and
more consistent level of consumer protection and for the industry to do more
to foresee and prevent harm before it happens. In July 2022 the FCA published
final rules and guidance, the impact of which the Group has assessed. As part
of Phoenix's implementation plan, key priorities have been identified that
must be addressed to ensure compliance with the Consumer Duty requirements
within the relevant timescales. This plan has been approved by the Board and
shared with the FCA.
IFRS 17 aims to standardise insurance accounting across the industry.
Compliance with IFRS 17 is a significant undertaking, and a complex programme
of work to deliver the Group's 2023 interim accounts is ongoing and reliant on
the successful completion of significant workstreams across the Group,
resulting in a number of delivery risks. The Group recognises that, should it
not deliver IFRS 17 reporting for the interim accounts, certain reputational,
regulatory and other market consequences would arise that could be material.
Management has considered the risks to executing the Group's delivery plans
and identified actions that could be taken should these risks materialise. The
Group expects to continue its finance transformation programme beyond delivery
of the 2023 interim accounts to further streamline and automate IFRS 17
processes to support efficient financial reporting in the future.
Following the UK's Supreme Court judgement in November 2022 not to allow the
Scottish Government to call a referendum without consent from Westminster, and
the decision of Nicola Sturgeon to resign as Scotland's First Minister and
leader of the Scottish National Party, the Group continues to keep a watching
brief on how this issue progresses. As it is not yet clear what impact the
death of Her Majesty Queen Elizabeth II and the succession of His Majesty King
Charles III will have on public sentiment to the Union, the risk remains under
review in the Emerging Risk and Opportunities Framework.
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 This risk was assessed as 'Heightened' in the Group's 2021 Annual Report and
increased interest from cyber criminals and a greater risk of cyber-attack detection and response processes, identifying weaknesses through ongoing
Accounts due to the conflict in Ukraine. This remains the key driver for the
which could have significant impact on customer outcomes, strategic assessment and review. 3 assessment of the exposure to this risk, which is unchanged from the 2021
objectives, regulatory obligations and the Group's reputation and brand.
position. The ongoing conflict in Ukraine has resulted in increased cyber
The Information/Cyber Security Strategy includes a continuous Information threat levels and the increased likelihood of a cyber-attack from a State
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 actor; this would most likely be against the UK's Critical National
breach remains high and the complexity of the Group's increasingly Annual Cyber Risk Assessment and external threat intelligence sources. Infrastructure, particularly on supply chains and the wider Financial Services
interconnected digital ecosystem exposes it to multiple attack vectors. These
industry which the Group relies upon. The Group improved its Threat
include phishing and business email compromise, hacking, data breach and The Group continues to consolidate its cyber security tools and capabilities. Intelligence capabilities in 2022 and monitors National Cyber Security Centre
supply chain compromise. The specialist Line 2 Information Security & Cyber Risk team provides guidance and other threat intelligence sources on a daily basis. To date, the
independent oversight and challenge of information security controls; Group has not seen a material increase in cyber-attacks since the conflict
Increased use of online functionality to meet customer preferences and identifying trends, internal and external threats and advising on appropriate started.
flexible ways of working, including remote access to business systems, adds mitigation solutions.
additional challenges to cyber resilience and could impact service provision
The Group's cyber controls are designed and maintained to repel the full range
and customer security. The Group continues to enhance and strengthen its outsourced service provider of the cyber-attack scenarios; although the Group's main threat is considered
and third party oversight and assurance processes. Regular Board, Executive, to be Cyber Crime, from Individuals or Organised Crime Groups, the same
Risk and Audit Committee engagement occurs within the Group. controls are utilised to defend against a Nation-State level cyber-attack.
Having strengthened and consolidated its cyber controls, including in areas
such as Vulnerability and Patch Management, Detect and Respond and
infrastructure scanning capabilities in the first half of 2022, the main
improvement in the second half of the year was strengthening the Supply Chain
Security Oversight and Assurance framework. New Cyber Bandings, Processes and
Controls have been implemented and will continue to be embedded and matured in
2023.
Following a Final Stage Assessment in late June 2022
and recommendation by the British Standards Institution, Phoenix Group now
holds ISO 27001 Information Security Management Certification for its
Workplace Pension and Benefits schemes.
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 The Group aims to attract and retain colleagues, building a sense of belonging 1 Whilst there have been strong engagement scores in colleague surveys during
skills needed to deliver its strategy engaged workforce. by providing timely communications to colleagues that aim to provide clarity
2021 and 2022, there has been no change to the overall level of exposure to
and support employee engagement for corporate activities, including details of 2 this risk since it was introduced in the 2018 Annual Report and Accounts. This
This risk is inherent in the Group's business model given the nature of key milestones to deliver against the Group's plans.
is driven by acknowledgement of the significant amount of integration activity
acquisition activity and specialist skill sets.
3 within the Group and uncertainty regarding the longer-term social and
In addition, the Group regularly benchmarks terms and conditions against the
marketplace impacts of the pandemic and cost of living crisis on colleague
Potential areas of uncertainty include: the ongoing transition of ReAssure market and maintains dynamic succession plans for key individuals, ensuring attrition, sickness, motivation and engagement. Skills essential to the Group
businesses into the Group, the expanded strategic partnership with TCS and the successors bring appropriate diversity of thought, capability and experience. continue to be in high-demand in the wider marketplace and recruitment and
introduction of the flexible working model. Every six months, the Group's CEO and HR Director meet with the Executive retention still has the potential to be impacted by post-Brexit, COVID-19 and
Committee to discuss talent, succession and diversity. inflationary factors. The Group monitors this closely and continues to remain
Potential periods of uncertainty could result in a loss of critical corporate
confident in the attractiveness of its colleague proposition.
knowledge, unplanned departures of key individuals, or the failure to attract Monthly colleague surveys help to improve engagement whilst promoting
and retain individuals with the appropriate skills to help deliver the Group's continuous listening and rapid identification of concerns and actions. The Group continues to leverage apprenticeships to support workforce diversity
strategy.
and to fill key skills, creating bespoke graduate and early careers programmes
The Group continues to actively manage operational capacity required to for specialist technical areas.
This could ultimately impact the Group's operational capability, its customer deliver its strategy with ongoing focus on senior bandwidth, attrition and
relationships and financial performance. sickness. The Group continues to successfully operate a flexible working model, with
strategic investments in technology and other resources maximising its
Flexible working offers colleagues greater flexibility in their working effectiveness. The model focuses on empowerment by enabling leaders and
practices. colleagues to agree working arrangements that meet individual, team and
business needs.
The Group looks to proactively respond to external social, economic and
marketplace events that impact colleagues. The increased scale and presence of the Group, and success in multi-site and
remote working, gives greater access to a larger talent pool to attract and
retain in the future. In addition, the Group's Graduate Programmes helps to
support the talent pipeline.
Market risk
Adverse investment market movements or broader economic forces can impact the 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 This risk was assessed as 'Heightened' in the Group's 2019 Annual Report and
Group's ability to meet its cash flow targets, along with the potential to movements. This can impact the Group's capital, solvency, profitability and exposure, including limits in each asset class, cash flow forecasting and
Accounts, and then again in 2020 due to ongoing economic uncertainty,
negatively impact customer investments or sentiment 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 geopolitical tensions, the impacts of COVID-19 and uncertainty around interest
future cash flows and long-term investment performance for shareholders and to residential property and private investments, as a result of its BPA
rates. These remain the key drivers for the current assessment of exposure to
customers. investment strategy, is actively monitored. 3 this risk, which is unchanged from the 2020 position.
There are a number of drivers for market movements including government and The Group continues to implement de-risking strategies and control The global macro-economic environment remains highly uncertain, as it did
central bank policies, geopolitical events, market sentiment, sector specific enhancements to mitigate unwanted customer and shareholder outcomes from throughout 2022.
sentiment, global pandemics and financial risks of climate change, including certain market movements, such as equities, interest rates, inflation and
risks from the transition to a low carbon economy. foreign currencies. The Ukraine conflict and rapid increase in inflation increased market
volatility throughout 2022, with recession expected throughout Europe and
The Group maintains cash buffers in its holding companies and has access to a possibly the wider world. The longer-term impacts of the conflict have
credit facility to reduce reliance on emerging cash flows. affected the cost and availability of food and vital commodities such as oil
and gas, driving inflationary pressures.
The Group closely monitors and manages its excess capital position and it
regularly discusses market outlook with its asset managers. Inflation is considered a material short to medium-term risk. Pressures
continue and the UK Consumer Price Index hit 11.1% in October 2022, before
retreating slightly to 10.1% in January 2023. The Bank of England base rate
increased from 0.1% in December 2021 to 4% at the time of writing, with
further rate rises expected during 2023. Higher interest rates, coupled with
cost of living rises, are likely to suppress property prices over the coming
year.
The UK mini-budget added further pressure to yield rises, squeezing liquidity
throughout the long-term savings sector. The tax increases and government
spending cuts announced in the Chancellor's Autumn statement helped to
stabilise markets but have the potential to worsen customer sentiment, which
may deepen the expected recession in the UK and affect the ability of
households to save.
The Group continues to monitor and manage its market risk exposures, including
to interest rates and inflation, and to markets affected by the conflict in
Ukraine. The Group's strategy continues to involve hedging the major market
risks and in 2022 the Group's Stress and Scenario Testing Programme continued
to demonstrate the resilience of its balance sheet to market stresses.
Contingency actions remain available to help manage the Group's capital and
liquidity position in the event of unanticipated market movements such as
those following the mini-budget.
As noted in the 'Customer' risk above, work is underway across the Group to
ensure customers are supported as the impacts of the cost of living crisis
continue to crystallise.
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 This risk was assessed as 'Heightened' in the Group's 2020 Annual Report and
line with expectations sensitive to future longevity, persistency and mortality rates. For example, checks to identify any trends or variances in assumptions.
Accounts due to the uncertainty around future demographic experience as a
if annuity policyholders live for longer than expected, then the Group will
2 result of COVID-19 impacts. The residual risks from COVID-19, in addition to
need to pay their benefits for longer. The Group regularly reviews assumptions to reflect the continued trend of
the implications arising from the cost of living crisis, are key drivers of
reductions in future mortality improvements. the assessment of the level of exposure to this risk, which is unchanged from
The amount of additional capital required to meet additional liabilities could
the 2020 position.
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
targets. use of longevity swaps and reinsurance contracts to maintain this risk within Demographic experience and the latest views on future trends continue to be
appetite. considered in regular assumption reviews although, for most products,
experience over the COVID-19 pandemic has still been given little weight given
The Group actively monitors persistency risk metrics and exposures against its anomalous nature.
appetite across the Open and
Heritage businesses. The Group is actively monitoring customer behaviour as a result of the cost of
living crisis; this includes the impact that any change in behaviour could
Where required, the have on demographic assumptions. As noted elsewhere in this section, work is
Group continues to take capital management actions to mitigate adverse underway to ensure support is provided to customers as the impacts from the
demographic experience. cost of living crisis continue to materialise.
The Group completed BPA transactions with a combined premium of £4.8 billion
in 2022. Consistent with previous transactions, the Group continues to
reinsure the vast majority of the longevity risk with existing arrangements
that are reviewed regularly.
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 This risk was assessed as 'Heightened' in the Group's 2020 Annual Report and
line with expectations sensitive to future longevity, persistency and mortality rates. For example, checks to identify any trends or variances in assumptions.
Accounts due to the uncertainty around future demographic experience as a
if annuity policyholders live for longer than expected, then the Group will
2 result of COVID-19 impacts. The residual risks from COVID-19, in addition to
need to pay their benefits for longer. The Group regularly reviews assumptions to reflect the continued trend of
the implications arising from the cost of living crisis, are key drivers of
reductions in future mortality improvements. the assessment of the level of exposure to this risk, which is unchanged from
The amount of additional capital required to meet additional liabilities could
the 2020 position.
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
targets. use of longevity swaps and reinsurance contracts to maintain this risk within Demographic experience and the latest views on future trends continue to be
appetite. considered in regular assumption reviews although, for most products,
experience over the COVID-19 pandemic has still been given little weight given
The Group actively monitors persistency risk metrics and exposures against its anomalous nature.
appetite across the Open and Heritage businesses.
The Group is actively monitoring customer behaviour as a result of the cost of
Where required, the Group continues to take capital management actions to living crisis; this includes the impact that any change in behaviour could
mitigate adverse demographic experience. have on demographic assumptions. As noted elsewhere in this section, work is
underway to ensure support is provided to customers as the impacts from the
cost of living crisis continue to materialise.
The Group completed BPA transactions with a combined premium of £4.8 billion
in 2022. Consistent with previous transactions, the Group continues to
reinsure the vast majority of the longevity risk with existing arrangements
that are reviewed regularly.
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 In the Group's 2020 Annual Report and Accounts, this risk was assessed as
counterparty creditworthiness or default of investment, derivatives or banking limits in place relating to individual counterparties (with sub-limits for
'Heightened' as a result of the market volatility and wider economic and
counterparties. This could cause immediate financial loss, or a reduction in each credit risk exposure), sector concentration and geographies. 2 social impacts arising from COVID-19. The residual risks from COVID-19 are a
future profits.
driver of the current assessment of the level of exposure to this risk, which
The Group undertakes regular stress and scenario testing of the credit 3 is unchanged from the 2020 position, in addition to ongoing geopolitical
The Group is also exposed to trading counterparties, such as reinsurers or portfolio. Where possible, exposures are diversified using a range of
tensions and economic uncertainty.
service providers, failing to meet all or part of their obligations. This counterparty providers. All material reinsurance and derivative positions are
would negatively impact the Group's operations which may in turn have adverse appropriately collateralised. Over 2022 the Group continued to undertake actions to increase the overall
effects on customer relationships and
credit quality of its portfolio and mitigate the impact on risk capital of
may lead to financial loss. The Group regularly discusses market outlook with its asset managers in future downgrades. Furthermore, the Group Credit Limit framework was updated
addition to the Line 2 Risk oversight provided. to better manage counterparty failure risk. This positive progress, and the
easing of the economic and social impacts of COVID-19, is balanced by risks
For mitigation of risks associated with stock-lending, additional protection arising from the Ukraine conflict and UK Government policy. Uncertainties over
is provided through collateral and indemnity insurance. the global economic outlook and high inflation present an increased risk of
downgrades and defaults. In addition, a UK sovereign downgrade, which is now
more probable, would have a negative impact on UK-related assets including
Gilts, Housing Associations and Local Authority Loans.
The Group has no direct shareholder credit exposure to Russia or Ukraine and
no exposure to sanctioned entities.
The Group continues to increase investment in illiquid credit assets as a
result of BPA transactions. This is within appetite and in line with the
Group's strategic asset allocation plans. The growth in illiquid assets will
be met by growth in the overall Group credit portfolio.
Emerging risks and opportunities
The Group's senior management and Board take emerging risks and opportunities
into account when considering potential outcomes. This determines if
appropriate management actions are in place to manage the risk or take
advantage of the opportunity. Two examples of key risks and opportunities
discussed by senior management and the Board during 2022 are:
Risk Title Description Risk universe category
ESG Litigation The growth of ESG-related litigation is becoming a risk. Given the growing Environmental
prominence of ESG on government, regulator and corporate agendas, it is
increasingly important that all businesses understand and take steps to
mitigate the risks of ESG-related litigation. ESG-related litigation covers a
broad range of potential actions, including those that result from
climate-related issues (such as claims of "Greenwashing"), where claimants see
the potential to drive an increase in climate change mitigation activity, and
those that are brought by diversity campaigners seeking to drive faster
progress by corporations towards their stated commitments. These actions could
result in legal penalties and reputational damage to the Group if the
underlying risks are not mitigated.
The Group has undertaken a risk assessment exercise to identify and collate
all potential ESG-related litigation risks. SMEs are currently assessing these
and will report back with recommendations on those risks that are either not
mitigated, have a higher chance of occurring or a greater impact if they do
occur. The Group views these risks as cross-cutting the risk universe, with
strategic, financial, operational, reputational and customer implications.
Ethical Data Driven Decisions As computing power advances, the use of automated decision making (be that Strategic
machine learning, Artificial Intelligence or complex decision trees) has
increased throughout the industry, including the use of algorithms to help
customers make decisions about their future. There is a risk that the data
used to drive these decisions contains biases which are not identified or the
implications not understood and that, as a result, there is artificial
discrimination in the recommended outcomes. For Phoenix Group, this could
manifest through customers failing to achieve good outcomes and expose the
Group to reputational damage and the need to remediate for inappropriate
decisions made following the use of such tools. There is also the risk of
regulatory sanction, most notably from the Information Commissioner's Office
but also from the FCA.
The Group's priority in this area is in establishing the ethical guardrails
and controls which are essential to setting both expectations and culture of
how data is consumed and processed. The principles of the FCA's new Consumer
Duty, and the Group's Code of Conduct, will be placed at the heart of the
framework.
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 2022, 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,
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 10 March 2023.
By order of the Board
Andy Briggs Rakesh Thakrar
Group Chief Group Chief
Executive Officer Financial Officer
10 March 2023
Financials
Consolidated income statement
For the year ended 31 December 2022
Notes 2022 2021
£m
£m
Gross premiums written 7,094 7,455
Less: premiums ceded to reinsurers F3 (1,727) (2,079)
Net premiums written 5,367 5,376
Fees and commissions C1 951 1,001
Total revenue, net of reinsurance payable 6,318 6,377
Net investment income C2 (38,149) 18,001
Other operating income 82 76
Gain on completion of abrdn plc transaction A6.1 - 110
Loss on disposal of Ark Life A6.2 - (23)
Net income (31,749) 24,541
Policyholder claims (9,392) (9,656)
Less: reinsurance recoveries 1,693 1,597
Change in insurance contract liabilities 27,645 3,076
Change in reinsurers' share of insurance contract liabilities (2,450) (177)
Transfer from unallocated surplus F2 378 106
Net policyholder claims and benefits incurred 17,874 (5,054)
Change in investment contract liabilities 13,366 (16,812)
Amortisation and impairment of acquired in-force business G2 (505) (577)
Amortisation of other intangibles G2 (21) (20)
Impairment of goodwill G2 - (47)
Administrative expenses C3 (2,412) (2,056)
Net income under arrangements with reinsurers F3.3 427 22
Net income attributable to unitholders 410 (185)
Total operating expenses 29,139 (24,729)
Loss before finance costs and tax (2,610) (188)
Finance costs C5 (230) (242)
Loss for the year before tax (2,840) (430)
Tax credit/(charge) attributable to policyholders' returns C6 579 (258)
Loss before the tax attributable to owners (2,261) (688)
Tax credit/(charge) C6 1,078 (279)
Less: tax attributable to policyholders' returns C6 (579) 258
Tax credit/(charge) attributable to owners C6 499 (21)
Loss for the year attributable to owners (1,762) (709)
Attributable to:
Owners of the parent (1,829) (837)
Non-controlling interests D5 67 128
(1,762) (709)
Earnings per ordinary share
Basic (pence per share) B3 (185.2)p (86.4)p
Diluted (pence per share) B3 (185.2)p (86.4)p
Statement of comprehensive income
For the year ended 31 December 2022
Notes 2022 2021
£m
£m
Loss for the year (1,762) (709)
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 D3 181 44
Reclassification adjustments for amounts recognised in profit or loss D3 (186) (36)
Exchange differences on translating foreign operations 36 (45)
Reclassification of foreign currency translation reserve on disposal of Ark A6.2 - 14
Life
Items that will not be reclassified to profit or loss:
Remeasurement of owner-occupied property G3 (5) -
Remeasurements of net defined benefit asset/liability G1 940 281
Tax charge relating to other comprehensive income items C6 (280) (138)
Total other comprehensive income for the year 686 120
Total comprehensive expense for the year (1,076) (589)
Attributable to:
Owners of the parent (1,143) (717)
Non-controlling interests D5 67 128
(1,076) (589)
Statement of consolidated financial position
As at 31 December 2022
Notes 2022 2021
£m
£m
ASSETS
Pension scheme asset G1 14 36
Reimbursement rights G1 205 212
Intangible assets
Goodwill 10 10
Acquired in-force business 3,835 4,323
Other intangibles 211 232
G2 4,056 4,565
Property, plant and equipment G3 125 130
Investment property G4 3,727 5,283
Financial assets
Loans and deposits 279 475
Derivatives E3 4,068 4,567
Equities 76,737 86,981
Investment in associate 329 431
Debt securities 83,116 104,761
Collective investment schemes 75,389 85,995
Reinsurers' share of investment contract liabilities 9,063 9,982
E1 248,981 293,192
Insurance assets
Reinsurers' share of insurance contract liabilities F1 6,142 8,587
Reinsurance receivables 89 69
Insurance contract receivables 66 70
6,297 8,726
Deferred tax asset G8 158 -
Current tax receivable G8 519 419
Prepayments and accrued income 432 373
Other receivables G5 4,611 1,805
Cash and cash equivalents G6 8,839 9,112
Assets classified as held for sale A6.1 7,205 9,946
Total assets 285,169 333,799
Approved by the Board on 10 March 2023.
Andy Briggs
Rakesh Thakrar
Chief Executive
Officer
Chief Financial Officer
Company registration number 11606773.
Notes 2022 2021
£m
£m
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital D1 100 100
Share premium 10 6
Shares held by employee benefit trust D2 (13) (12)
Foreign currency translation reserve 107 71
Merger relief reserve D1 1,819 1,819
Other reserves D3 46 56
Retained earnings 2,092 3,775
Total equity attributable to owners of the parent 4,161 5,815
Tier 1 Notes D4 494 494
Non-controlling interests D5 532 460
Total equity 5,187 6,769
Liabilities
Pension scheme liability G1 2,520 3,103
Insurance contract liabilities
Liabilities under insurance contracts F1 102,016 128,864
Unallocated surplus F2 1,344 1,801
103,360 130,665
Financial liabilities
Investment contracts 143,845 160,417
Borrowings E5 3,980 4,225
Deposits received from reinsurers 2,598 3,569
Derivatives E3 5,875 1,248
Net asset value attributable to unitholders 2,978 3,568
Obligations for repayment of collateral received 1,706 3,442
E1 160,982 176,469
Provisions G7 234 235
Deferred tax liabilities G8 660 1,399
Reinsurance payables 245 143
Payables related to direct insurance contracts G9 1,964 1,864
Current tax payable G8 34 19
Lease liabilities G10 92 99
Accruals and deferred income G11 566 567
Other payables G12 965 721
Liabilities classified as held for sale A6.1 8,360 11,746
Total liabilities 279,982 327,030
Total equity and liabilities 285,169 333,799
Statement of consolidated changes in equity
As at 31 December 2022
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
by the employee benefit trust
£m £m
(note D2) £m £m £m £m £m £m £m £m
£m
At 1 January 2022 100 6 (12) 71 1,819 56 3,775 5,815 494 460 6,769
(Loss)/profit for the year - - - - - - (1,829) (1,829) - 67 (1,762)
Other comprehensive income/(expense) for the year - - - 36 - (10) 660 686 - - 686
Total comprehensive income/(expense) for the year - - - 36 - (10) (1,169) (1,143) - 67 (1,076)
Issue of ordinary share capital, - 4 - - - - - 4 - - 4
net of associated commissions
and expenses
Dividends paid on ordinary shares - - - - - - (496) (496) - - (496)
Dividends paid to non-controlling interests - - - - - - - - - (10) (10)
Credit to equity for equity-settled share-based payments - - - - - - 16 16 - - 16
Shares distributed by the employee benefit trust - - 12 - - - (12) - - - -
Shares acquired by the employee benefit trust - - (13) - - - - (13) - - (13)
Increase in non-controlling interests - - - - - - - - - 15 15
Coupon paid on Tier 1 Notes, - - - - - - (22) (22) - - (22)
net of tax relief
At 31 December 2022 100 10 (13) 107 1,819 46 2,092 4,161 494 532 5,187
Statement of consolidated changes in equity
As at 31 December 2021
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
(note D2)
relief
£m £m
£m
reserve £m £m £m £m £m £m
£m
(note D1)
£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, - 2 - - - - - 2 - - 2
net of associated commissions
and expenses
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 employee benefit trust - - 10 - - - (10) - - - -
Shares acquired by employee benefit trust - - (16) - - - - (16) - - (16)
Coupon paid on Tier 1 Notes, - - - - - - (23) (23) - - (23)
net of tax relief
At 31 December 2021 100 6 (12) 71 1,819 56 3,775 5,815 494 460 6,769
Statement of consolidated cash flows
For the year ended 31 December 2022
Notes 2022 2021
£m
£m
Cash flows from operating activities
Cash generated/(utilised) by operations I2 1,019 (871)
Taxation paid (153) (149)
Net cash flows from operating activities 866 (1,020)
Cash flows from investing activities
Proceeds from completion of abrdn plc transaction A6.1 – 115
Disposal of Ark Life, net of cash disposed A6.2 – 189
Net cash flows from investing activities – 304
Cash flows from financing activities
Proceeds from issuing ordinary shares, net of associated commission and 4 2
expenses
Ordinary share dividends paid B4 (496) (482)
Dividends paid to non-controlling interests D5 (10) (9)
Repayment of policyholder borrowings E5.2 (32) (18)
Repayment of shareholder borrowings E5.2 (450) (322)
Repayment of lease liabilities G10 (14) (16)
Proceeds from new policyholder borrowings, net of associated expenses E5.2 61 17
Coupon paid on Tier 1 Notes (29) (29)
Interest paid on policyholder borrowings (1) –
Interest paid on shareholder borrowings (215) (237)
Net cash flows from financing activities (1,182) (1,094)
Net decrease in cash and cash equivalents (316) (1,810)
Cash and cash equivalents at the beginning of the year 9,188 10,998
(before reclassification of cash and cash equivalents to held for sale)
Less : cash and cash equivalents of operations classified as held for sale A6.1 (33) (76)
Cash and cash equivalents at the end of the year 8,839 9,112
Notes to the consolidated financial statements
A. Significant accounting policies
A1. Basis of preparation
The consolidated financial statements for the year ended 31 December 2022 set
out on pages 168 to 289 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 10
March 2023.
The consolidated financial statements have been prepared under the historical
cost convention except for investment property, owner-occupied property and
those financial assets and financial liabilities (including derivative
instruments) that have been measured at fair value.
The consolidated financial statements are presented in sterling (£) rounded
to the nearest million except where otherwise stated.
Assets and liabilities are offset and the net amount reported in the statement
of consolidated financial position only when there is a legally enforceable
right to offset the recognised amounts and there is an intention to settle on
a net basis, or to realise the assets and settle the liability simultaneously.
Income and expenses are not offset in the consolidated income statement unless
required or permitted by an International Financial Reporting Standard
('IFRS') or interpretation, as specifically disclosed in the accounting
policies of the Group.
Statement of compliance
The consolidated financial statements have been prepared in accordance with
UK-adopted international accounting standards ('IASs').
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'). The considerations and approach are consistent with the provisions of
the FRC's Guidance on risk Management, Internal control and Related Financial
and Business Reporting issued in September 2014. Further details of the going
concern assessment for the period to 31 March 2024 are included in the
Directors' Report on page 149.
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.
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.
A2.2. Other operating income
Other operating income includes income from all other operating activities which are incidental to the principal activities of the Group.
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 adjusted operating
profit, 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 235 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 Adjusted operating profit
Adjusted operating profit is the Group's non-GAAP measure of performance and
provides stakeholders with a comparable measure of the underlying performance
of the Group. The Group is required to make judgements as to the appropriate
longer-term rates of investment return for the determination of adjusted
operating profit based on risk-free yields at the start of the financial year,
as detailed in note B2, and as to whether items are included within adjusted
operating profit or excluded as an adjustment to adjusted operating profit in
accordance with the accounting policy detailed in note B1. Items excluded from
adjusted operating profit are referred to as 'non-operating items'.
A3.6 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.
A3.7 How Climate risk affects our accounting judgments and estimates
In preparation of these financial statements, the Group has considered the
impact of climate change across a number of areas, predominantly in respect of
the valuation of financial instruments, insurance and investment contract
liabilities and goodwill and other intangible assets.
Many of the effects arising from climate change will be longer term in nature,
with an inherent level of uncertainty, and have been assessed as having a
limited effect on accounting judgments and estimates for the current period.
The majority of the Group's financial assets are held at fair value and use
quoted market prices or observable market inputs in their valuation. The use
of quoted market prices and market inputs to determine fair value reflects
current information and market sentiment regarding the effect of climate risk.
For the valuation of level 3 financial instruments, there are no material
unobservable inputs in relation to climate risk. Note E6 provides further risk
management disclosures in relation to financial risks including sensitivities
in relation to credit and market risk. In addition, further details on
managing the related climate change risks are provided in the Task Force for
Climate-related Financial Disclosures ('TCFD') on page 48 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 2022 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 intangible assets is based on
value in use calculations. Value in use represents the value of future cash
flows and uses the Group's three year annual operating plan and the
expectation of long-term economic growth beyond this period. The three year
annual operating plan reflects management's current expectations on
competitiveness and profitability, and reflects the expected impacts of the
process of moving towards a low-carbon economy. Note G2 provides further
details on goodwill and other intangible assets and on impairment testing
performed.
A4. Adoption of new accounting pronouncements in 2022
In preparing the consolidated financial statements, the Group has adopted the
following amendments effective from 1 January 2022:
• Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS
37): The amendments clarify that when performing an onerous contracts
assessment both incremental costs to fulfil a contract and an allocation of
other direct costs should be included when determining whether that contract
is onerous.
• Reference to the Conceptual Framework (Amendments to IFRS 3): In
addition to updating references to the conceptual framework within IFRS 3, the
amendments also add a requirement for obligations within the scope of IAS 37
Provisions, Contingent Liabilities and Contingent Assets to determine whether
at the acquisition date a present obligation exists as a result of past
events.
• Property, Plant and Equipment: Proceeds before Intended Use (Amendments
to IAS 16): The amendments prohibit deducting from the cost of an item of
property, plant and equipment any proceeds from selling items produced before
that asset is available for use. Such sales proceeds and related costs are
recognised in profit or loss; and
• Annual Improvements (2018-2020 Cycle):
- Subsidiary as a First-time Adopter (Amendments to IFRS 1);
- Fees in the '10 per cent' Test for De-recognition of Financial Liabilities
(Amendments to IFRS 9);
- Lease Incentives (Amendments to IFRS 16); and
- Taxation in Fair Value Measurements (Amendments to IAS 41).
None of the above amendments to standards are considered to have a material
effect on these consolidated financial statements.
A5. New accounting pronouncements not yet effective
The IASB has issued the following standards or amended standards which apply
from the dates shown. The Group has decided not to early adopt any of these
standards or amendments where this is permitted.
IFRS 17 Insurance Contracts (1 January 2023)
IFRS 17 was issued by the International Standards Board in May 2017 and
amended in June 2020. The standard was endorsed by the UK Endorsement Board in
May 2022. IFRS 17 is effective from 1 January 2023.
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.
In June 2022, the IFRS Interpretations Committee ('IFRIC') provided its final
agenda decision on the 'Transfer of Insurance Coverage under a Group of
Annuity Contracts - IFRS 17', a non-objection from the International
Accounting Standards Board was provided in July 2022. The methodology for
coverage units determined by the Group and set out in the 'Coverage units'
section below is compliant with this IFRIC final agenda decision.
Identifying contracts in scope of IFRS 17
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 without discretionary
participation features ('DPF') will be measured under IFRS 9. The following
requirements apply to reinsurance contracts unless stated otherwise.
IFRS 17 sets out criteria for when an investment component is distinct and may
be separated from the host insurance contract. Following the application of
these criteria the Group has concluded for the majority of its hybrid
investment contracts with DPF within the scope of IFRS 17, the unit-linked
component does not meet the definition of a distinct investment component so
will no longer be accounted for as a financial instrument and will fall within
the scope of IFRS 17. Hybrid investment contracts with DPF are those contracts
which allow policyholders to invest in both with-profit and unit-linked fund
options within a single contract.
Level of aggregation
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 cohorts 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 cohort,
although there is some relief from this requirement for business in-force at
the date of transition under the transitional arrangements.
Measurement
The standard introduces three measurement approaches, of which two, the
general model and the variable fee 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'). Reinsurance contracts held are measured using the general
model, irrespective of the measurement model applied to the underlying
contracts reinsured.
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 and/or investment 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 consolidated income statement.
If a group of contracts becomes loss-making after inception the loss is
recognised immediately in the consolidated 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. For
reinsurance contracts held, the CSM represents the net gain or net loss of the
contract and is recognised in profit or loss as the service is provided using
coverage units.
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.
Significant judgements and estimates
Contract boundaries
Under IFRS 17, the measurement of a group of contracts includes all future
cash flows within the boundary of each contract in the group. Cash flows are
within the boundary if they arise from substantive rights and obligations that
exist during the reporting period in which the Group can compel the
policyholder to pay premiums or in which the Group has a substantive
obligation to provide services to the policyholder.
The adoption of IFRS 17 results in three main areas where contract boundaries
differ from current practice:
• Some unit-linked and with-profit contracts contain a guaranteed annuity
option, which allows the policyholder to convert the maturity benefit to an
immediate annuity at a predetermined rate. The Group currently places a value
on the guaranteed annuity option at maturity, but does not include within its
measurement the cash flows associated with immediate annuity until the option
is exercised. Under IFRS 17, the cash flows related to the immediate annuity
will fall within the boundary of the contract as the Group does not have the
practical ability to reprice the contract on maturity.
• The Group has issued renewable term assurance policies with varying
terms. Where the Group has the practical ability to reassess the risks of the
policyholders at individual contract or portfolio level the contract boundary
ends at the earliest renewal date and the renewal will be treated as a new
contract. Where the Group does not have the practical ability to reassess the
risk, future renewals of these contracts on their guaranteed terms will be
within the contract boundary.
• Some of the Group's reinsurance contracts cover underlying contracts
issued on a risk-attaching basis and provide unilateral rights to both the
Group and the reinsurer to terminate the attachment of new contracts at any
time by giving notice within a specified time period, for example three
months. Currently the cash flows included in the measurement of reinsurance
contracts considers only the underlying contracts ceded at the valuation date.
However, under IFRS 17, the contract boundary includes underlying contracts
expected to be issued and ceded during the period from the valuation date to
the end of the reinsurance notice period.
Discount rates
The Group will determine risk-free discount rates using the current market
prices of interest rate swaps in each currency where the market is deep,
liquid and transparent. The Group primarily writes contracts denominated in
Pounds Sterling and Euros. The yield curve will be interpolated between the
last available market data point and an ultimate forward rate, which reflects
long-term real interest rate and inflation expectations.
The discount rates for annuity business will be determined by a 'top-down'
approach using a reference portfolio of assets to determine an uplift to be
applied to the risk-free discount rate curve.
The discount rates for unit-linked business and with-profit business will be
determined by a 'bottom-up' approach, using a risk-free discount rate curve
adjusted to reflect the characteristics of the liabilities such as
illiquidity.
With-profit inherited estate
The Group has a number of with-profit funds where surpluses are shared between
the policyholders and the shareholders. All such funds are closed to new
business. These funds typically have an inherited estate, being a surplus of
assets over those needed to meet the liabilities of current policyholders. As
these funds are closed to new business the surplus will be allocated to
existing policyholders and the Group has determined it appropriate to allocate
the expected future payments from the inherited estate to specific groups of
contracts within the measurement of the best estimate cash flows. This results
in the shareholders share of the inherited estate being recognised through the
CSM. At transition, to the extent that services have been provided in previous
periods, an element of the inherited estate will be recognised in Retained
Earnings, with the remainder recognised within the CSM and released to the
consolidated income statement in future periods in line with coverage units.
The adoption of IFRS 17 will not change the point at which the shareholder
will become entitled to receive its share of the inherited estate, which will
continue to be at the point where bonuses are declared to policyholders.
Risk adjustment
The risk adjustment for non-financial risk will reflect the compensation that
the Group requires for bearing non-financial risk. The Group will apply a
confidence level technique. The risk adjustment will be allocated to groups of
contracts based on an analysis of the risk profiles of the groups, reflecting
the effects of the diversification benefits between Group entities. The Group
will determine the risk adjustment using a one year time horizon, consistent
with the time horizon used for Solvency II, the key metric underlying how the
Group is managed.
To determine the risk adjustment for reinsurance contracts, the Group will
apply its approach both gross and net of reinsurance and determine the amount
of risk being transferred to the reinsurer as the difference between the two
results.
Coverage units
The CSM of a group of contracts is recognised in profit or loss to reflect
services provided in the period. The number of coverage units is updated at
each valuation date and reflects the quantity of services provided by the
contracts within a group considering both quantity of benefits provided and
the length of the expected coverage period.
The Group will determine the quantity of benefits, and therefore the coverage
units as follows:
Type of business Coverage unit (quantity of benefits)
Term life Sum assured in-force
Endowment Sum assured in-force
Whole of life Sum assured in-force
Other protection products Sum assured in-force
Immediate annuity Annuity payments in each period
Unit linked Annual Management Charge plus insurance charges
Conventional with-profit ('CWP') & Unitised with-profit ('UWP') Maximum of the guaranteed benefit and asset share
Reinsurance contracts held will use coverage units consistent with the
underlying policies reinsured.
Transition
IFRS 17 requires the standard to be applied retrospectively. Where this is
assessed as impracticable the standard allows the application of a modified
retrospective approach or a fair value approach to determine the contractual
service margin.
The primary books of business that will be measured using the fully
retrospective approach are:
• External Bulk Purchase Annuities written since 2018, and their
associated reinsurance contracts. Bulk Purchase Annuities, and their
associated reinsurance contracts, related to the Group's pension schemes will
continue to be eliminated on consolidation and the liabilities of the scheme
reported under IAS 19.
• Annuity and conventional non-profit business acquired as part of the
purchase of the ReAssure business in 2020, with the date of inception of these
contracts being the acquisition date.
• New business within the scope of IFRS 17 written by the Group's SunLife
business from 2018, and the Group's remaining new business from 1 January
2021.
The remainder of the Group's business will be transitioned using the fair
value approach.
Key factors considered in determining whether the fully retrospective approach
is impracticable include:
• The ability to obtain assumptions and data at the required level of
granularity, without the introduction of material use of hindsight,
particularly in relation to contracts within acquired businesses and where the
Group's financial reporting metrics did not require such information.
• The availability and usability of historic data given the significant
integration work performed by the Group on both its policy administration and
actuarial modelling systems where re-platforming from legacy systems onto a
unified platform has been carried out.
• The significant level of regulatory change experienced by the insurance
industry, such as Solvency II, which impacts on the level of change undergone
by both legacy and current policy administration and actuarial modelling
systems.
Fair value approach
The fair value approach determines the CSM (or loss component) at 1 January
2022 as the difference between the fair value of a group of contracts and the
present value of expected future cash flows including acquisition costs, plus
an explicit risk adjustment.
The fair value determined by the Group will use cash flows with contract
boundaries consistent with IFRS 17 requirements and be broadly consistent with
those used to determine the IFRS 17 liabilities. The measurement of the fair
value of contracts will include items taken into consideration by a market
participant but which are not included in the IFRS 17 measurement of
contracts, such as a risk premium to reflect a market participant's view of
uncertainty inherent in the contract cash flows being valued and a profit
margin.
For groups of contracts measured using the fair value approach, the cohorts
will contain contracts issued more than one year apart.
Presentation and disclosure
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. All rights and obligations arising from a portfolio of
contracts will be presented within the insurance or reinsurance contract
balance, as such, balances such as payables related to direct insurance
contracts and reinsurance receivables will no longer be presented separately.
The presentation of the consolidated 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/expense. The insurance service result reflects the
consideration earned in exchange for the provision of services in relation to
the group of IFRS 17 contracts issued. The insurance financial income/expense
reflects changes in the carrying amount of the group of insurance contracts
that relate to financial risks. It comprises the effect of the time value of
money as well as the effect of financial risks and changes in financial risks.
IFRS 17 also requires extensive disclosures, both quantitative and
qualitative, in relation to:
• Amounts recognised in the financial statements, including
reconciliations showing how the net carrying amounts of contracts changed
during the period;
• Significant judgements and changes in these judgements; and
• The nature and extent of risks that arise from contracts within the
scope of IFRS 17.
Impact assessment
The total profit recognised over the lifetime of contracts within the scope of
IFRS 17 will not change from the total profit recognised under IFRS 4 and will
continue to be recognised in profit and loss. The pattern of profit emergence
under IFRS 17 will primarily be driven by the timing of the recognition of the
risk adjustment and CSM. The risk adjustment is released to profit and loss as
the related risk expires and the CSM is released as services are provided.
The estimated impact of adopting IFRS 17 as at 1 January 2022 is total equity
attributable to owners of the parent remains broadly neutral when compared
with the reported value at 1 January 2022 of £5.8 billion, and a CSM (net of
reinsurance) of at least £2.0 billion is established.
The broadly neutral impact to total equity attributable to owners of the
parent is a result of a number of offsetting factors. This includes the
following factors which have a positive impact on equity:
• By moving to an IFRS 17 best estimate of future cash flows, prudent
margins currently recognised on insurance contract liabilities under IFRS 4
are released.
• Under IFRS 4, an unallocated surplus liability is held in respect of
future transfers to shareholders from the Group's with-profit funds. On
application of IFRS 17, shareholder earnings on with-profit and unit-linked
business are recognised by reflecting only cash flows due to policyholders
within the best estimate of liabilities.
The reduction in best estimate liabilities arising from the above factors is
offset by the following items, which reduce equity:
• The recognition of a risk adjustment and CSM.
• The derecognition of the separate acquired value of in-force business
(AVIF) asset associated with insurance contracts previously recognised under
IFRS 4.
The impact provided above is preliminary as not all transition work has been
finalised at the date of issuing these consolidated financial statements. The
actual impact of adopting IFRS 17 on 1 January 2023 with a transition date of
1 January 2022 may change as the Group continues to embed and refine the new
systems, processes and controls required. This impact assessment has been
estimated under an interim control environment with models that continue to
undergo validation. The implementation of the end state control environment
will continue as the Group introduces business as usual controls throughout
2023. The new accounting policies, assumptions, judgements and estimations
employed in producing IFRS 17 results are subject to change until the Group
finalises its first IFRS 17 financial statements for 2023 reporting.
At the date of issuing these consolidated financial statements, the Group
continues its preparation of the year end 31 December 2022 comparative
financial information applying IFRS 17. As a result it was not practicable to
reliably quantify the impact of IFRS 17 on the results for the year ended 31
December 2022.
Implementation project status
The Group's implementation project continued throughout 2022 with a focus on
continuing to develop and embed the operational capabilities required to
implement IFRS 17 including data, systems and business processes, and
determining the transition balance sheet as at 1 January 2022. The focus for
2023 is on finalising the transition balance sheet and the 2022 comparatives
required for 2023 reporting, and implementation of the end state control
environment.
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. In addition,
the general hedge accounting requirements have been updated under IFRS 9 to
better reflect risk management activities of the Group.
The Group has to date 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 completed its assessment of the impacts of adopting IFRS
9. The classification of the Group's financial assets has been reviewed and it
has been determined that financial assets backing insurance liabilities will
continue to be measured at fair value through profit or loss ('FVTPL'). The
business model assessment concluded that these assets are actively managed and
evaluated on a fair value basis and as such would be mandatorily classified at
FVTPL. It is not expected that use of the fair value option, as permitted by
IFRS 9, to designate assets as FVTPL to avoid an accounting mismatch will be
required.
The new standard replaces the incurred loss model with an expected credit loss
model for financial assets measured at amortised cost or at FVOCI. The
proportion of financial assets classified at amortised cost is relatively
small as a proportion of the total and due to the credit risk profile of these
assets being investment grade, the expected credit loss on these assets is not
expected to be material and therefore there will be limited financial impact
on the Group.
The Group will be adopting the revised general hedge accounting requirements
of IFRS 9. The existing hedging relationships for which hedge accounting is
currently adopted (Tier 1/Tier 2 notes and cross currency swaps) will continue
to be accounted for as cash flow hedges. The effectiveness testing processes
will be revised to include qualitative testing on a prospective basis.
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.
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.
Classification of Liabilities as Current and Non-current (Amendments to IAS 1 Presentation of Financial Statements) (1 January 2024)
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.
Lease Liability in a Sale and Leaseback (Amendments to IFRS 16 Leases) (1 January 2024)
The amendments relate to how a seller-lessee accounts for variable lease
payments that arise in a sale and leaseback transaction. On initial
recognition, the seller-lessee is required to include variable lease payments
when measuring a lease liability arising from a sale-and-leaseback
transaction. After initial recognition, they are required to apply the general
requirements for subsequent accounting of the lease liability such that no
gain or loss relating to the retained right of use is recognised.
Seller-lessees are required to reassess and potentially restate
sale-and-leaseback transactions entered into since the implementation. These
amendments are not expected to have any impact on the Group.
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 no longer endorses IFRSs for use in the UK. UK legislation
provides that all IFRSs that had been endorsed by the EU on or before the 31
December 2020 became UK-adopted international accounting standards. New or
amended IFRSs are now endorsed by the UK Endorsement Board following
delegation of powers to endorse and adopt IFRSs for the UK by the Secretary of
State in May 2021.
The following amendments to standards listed above have been endorsed for use
in the UK by the UK Endorsement Board:
• IFRS 17 Insurance Contracts;
• Amendments to IFRS 17;
• Initial Application of IFRS 17 and IFRS 9 - Comparative Information;
• Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice
Statement 2);
• Definition of Accounting Estimates (Amendments to IAS 8); and
• Deferred Tax related to Assets and Liabilities arising from a Single
Transaction (Amendments to IAS 12).
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
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 Agreement with abrdn plc
On 23 February 2021, the Group entered into a new agreement with abrdn plc to
simplify the arrangements of their Strategic Partnership, enabling the Group
to control its own distribution, marketing and brands, and focusing the
Strategic Partnership on using abrdn plc's asset management services in
support of Phoenix'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, transferred the economic benefit of
this business to abrdn plc. The Group 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,
was dissolved and the CSPA intangible asset was fully impaired. 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 was deferred as detailed below. On completion
of the agreement the Group recognised a net gain on the transaction of £89
million, net of tax of £21 million, which was recognised in the consolidated
income statement.
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 2024. The economic risk and rewards for this
business transferred to abrdn plc effective from 1 January 2021 via a profit
transfer arrangement. Consideration received of £62 million in respect of
this business was deferred until completion of the Part VII and the payments
to abrdn plc in respect of the profit transfer arrangement are being offset
against the deferred consideration balance.
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'). A further impairment charge of £17 million has
been recognised in the year (2021: £8 million). The major classes of assets
and liabilities classified as held for sale are as follows:
31 December 31 December
2022
2021
£m
£m
Acquired in-force business 37 54
Investment property 2,506 3,309
Financial assets 4,629 6,507
Cash and cash equivalents 33 76
Assets classified as held for sale 7,205 9,946
Assets in consolidated funds1 1,147 1,788
Total assets of the disposal group 8,352 11,734
Investment contract liabilities (8,312) (11,676)
Other financial liabilities (4) (4)
Provisions - (2)
Deferred tax liabilities (7) (10)
Accruals and deferred income (37) (54)
Liabilities classified as held for sale (8,360) (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 2022 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 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.
31 December
2021
£m
Cash consideration received 198
Less: transaction costs (6)
Net Consideration received 192
Net assets disposed of(1) (201)
Foreign currency translation reserve recycled to the consolidated income (14)
statement
Loss on disposal (23)
1 Includes cash and cash equivalents of £9 million.
B. Earnings performance
B1. Segmental analysis
The Group defines and presents operating segments in accordance with IFRS 8
'Operating Segments' which requires such segments to be based on the
information which is provided to the Board, and therefore segmental
information in this note is presented on a different basis from profit or loss
in the consolidated financial statements.
An operating segment is a component of the Group that engages in business
activities from which it may earn revenues and incur expenses, including
revenues and expenses relating to transactions with other components of the
Group.
For management purposes, the Group is organised into business units based on
their products and services. The Group has four reportable segments comprising
UK Heritage, UK Open, Europe and Management 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 in November 2021 (see note
A6.2), was allocated to the UK Heritage operating segment. The Wrap SIPP,
Onshore Bond and TIP business that has been classified as a disposal group
held for sale (see note A6.1) is allocated to the UK Open operating segment.
Segmental measure of performance: Adjusted operating profit
The Group uses a non-GAAP measure of performance, being adjusted operating
profit, to evaluate segment performance. Adjusted operating profit is
considered to provide a comparable measure of the underlying performance of
the business as it excludes the impact of short-term economic volatility and
other one-off items. 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 adjusted operating profit using valuation assumptions
consistent with the pricing of the business (including the Group's expected
longer-term asset allocation backing the business).
Adjusted 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). Adjusted operating profit is reported net of policyholder finance
charges and policyholder tax.
Adjusted 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 excluded from
adjusted operating profit 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.
Items excluded from adjusted operating profit are referred to as
'non-operating items'. Whilst the excluded items are important to an
assessment of the consolidated financial performance of the Group, management
considers that the presentation of the adjusted 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 adjusted
operating profit metric.
Certain of the Group's pension schemes have executed buy-in transactions with
a Group life company (see note G1 for further details) and these arrangements
can create volatility in the IFRS result which is excluded from adjusted
operating profit. Investment return variances and economic assumption changes
includes impacts arising as a result of economic movements in the value of
financial assets backing Group employee pension schemes. The related movement
in the defined benefit pension obligation is recognised in 'Other
Comprehensive Income'.
The Group therefore considers that adjusted 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.
B1.1 Segmental result
Notes 2022 2021
£m
£m
Adjusted operating profit
UK Heritage 601 537
UK Open 731 701
Europe 30 87
Management Services (48) (24)
Unallocated Group (69) (71)
Total segmental adjusted operating profit 1,245 1,230
Investment return variances and economic assumption changes B2.2 (2,673) (1,125)
on long-term business and owners' funds
Amortisation and impairment of acquired in-force business (501) (572)
Amortisation and impairment of other intangibles and goodwill G2 (21) (67)
Other non-operating items (179) (65)
Finance costs on borrowing attributable to owners (199) (217)
Loss before the tax attributable to owners of the parent (2,328) (816)
Profit before tax attributable to non-controlling interests 67 128
Loss before the tax attributable to owners (2,261) (688)
Other non-operating items in respect of 2022 include:
• a £329 million benefit attributable to harmonising the calibration of
prudential margins included within liabilities under insurance contracts in
the ReAssure life companies with the rest of the Group;
• £187 million related to the increase in expected costs associated with
the delivery of the Group Target Operating Model for IT and Operations,
following a strategic decision to re-phase the programme, together with the
costs of migrating policyholder administration onto the TCS platform for
certain legacy portfolios of business;
• £76 million of costs associated with the implementation of IFRS 17,
which will be effective from 1 January 2023;
• £37 million costs associated with a strategic initiative to enhance
capabilities which will support the move towards the Group's strategic asset
allocation alongside growth delivered through bulk purchase annuity
transactions;
• costs of £31 million associated with the ongoing ReAssure integration
programme;
• £15 million of past service costs in relation to a Group pension
scheme. Further details are included in note G1.1;
• £15 million of costs associated with finance transformation activities,
including the migration to cloud-based systems;
• £14 million related to a support package to help colleagues navigate
cost of living challenges, which included giving all colleagues, except the
most senior staff, a one-off net of tax payment of £1,000 in August 2022;
• £12 million costs associated with the forthcoming acquisition of SLF of
Canada UK Limited;
• £73 million of other corporate project costs; and
• net other one-off items totalling a cost of £48 million.
Other non-operating items in respect of 2021 include:
• 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 A6.2 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
transferred to the Group in 2020;
• £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.
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
2022 UK Heritage UK Open Europe Management Services Unallocated Group Total
£m
£m
£m
£m
£m
£m
Revenue from external customers:
Gross premiums written 802 5,038 1,254 - - 7,094
Less: premiums ceded to reinsurers (267) (1,440) (20) - - (1,727)
Net premiums written 535 3,598 1,234 - - 5,367
Fees and commissions 590 298 63 - - 951
Income from other segments - - - 1,432 (1,432) -
Total segmental revenue 1,125 3,896 1,297 1,432 (1,432) 6,318
2021 UK Heritage UK Open Europe Management Services Unallocated Group Total
£m £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
Of the revenue from external customers presented in the table above, £5,417
million (2021: £5,448 million) is attributable to customers in the United
Kingdom ('UK') and £901 million (2021: £929 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.
During the year ended 31 December 2022, the Group generated revenue of £1,070
million with a single customer under a bulk purchase annuity transaction. This
was a single premium transaction that is not expected to recur. The revenue
with this external customer is included in the UK Open segment.
During the year ended 31 December 2021, the Group generated revenue of £1,706
million and £1,791 million respectively with single customers under bulk
purchase annuity transactions. These were single premium transactions that are
not expected to recur. The revenue with these external customers has been
included in the UK Open segment.
The Group has total non-current assets (other than financial assets, deferred
tax assets, pension schemes and rights arising under insurance contracts) of
£3,721 million (2021: £5,245 million) located in the UK and £352 million
(2021: £410 million) located in the rest of the world.
B2. Investment return variances and economic assumption changes
The long-term nature of much of the Group's operations means that, for
internal performance management, the effects of short-term economic volatility
are treated as non-operating items. The Group focuses instead on an adjusted
operating profit measure that incorporates an expected return on investments
supporting its long-term business. The accounting policy adopted in the
calculation of adjusted operating profit is detailed in note B1. The
methodology for the determination of the expected investment return is
explained below together with an analysis of investment return variances and
economic assumption changes recognised outside of adjusted operating profit.
B2.1 Calculation of the long-term investment return
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 36bps at the start of the year (2021: 10bps). A risk premium of
334bps is added to the risk-free yield for equities (2021: 349bps), 244bps for
properties (2021: 249bps) and 59bps for corporate bonds (2021: 55bps). The
overall increase in expected returns for these assets primarily reflects the
increase in the risk-free rate experienced in 2021.
The principal assumptions underlying the calculation of the long-term
investment return are:
2022 2021
% %
Equities 4.6 4.1
Properties 3.7 3.1
Corporate bonds 1.9 1.2
B2.2 Life assurance business
Adjusted 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. Adjusted 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 adjusted
operating profit.
The movement in liabilities included in adjusted 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 adjusted 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
adjusted operating profit are as follows:
2022 2021
£m £m
Investment return variances and economic assumption changes (2,673) (1,125)
on long-term business and owners' funds
The net adverse investment return variances and economic assumption changes on
long-term business and owners' funds of £2,673 million in 2022 (2021: adverse
£1,125 million) reflect IFRS losses arising as a result of rising yields and
inflation, and a widening of credit spreads.
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 or Solvency Capital Requirements is not. Such items 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.
Losses have been experienced on hedging positions held by the life companies
principally as a result of rising yields and increasing inflation in the year.
Continued strategic asset allocation initiatives undertaken by the Group,
including investment in higher yielding assets, together with gains arising on
equity hedges as markets fell over the period, provided a partial offset to
the adverse variances experienced.
Investment return variances and economic assumption changes also includes net
losses in the value of assets backing Group employee pension schemes. This
arises where those liabilities have been subject to insurance policies with
Group entities (see note G1). The related decrease in the defined benefit
pension obligation is recognised in other comprehensive income.
B3. Earnings per share
The Group calculates its basic earnings per share based on the present shares
in issue using the earnings attributable to ordinary equity holders of the
parent, divided by the weighted average number of ordinary shares in issue
during the year.
Diluted earnings per share are calculated based on the potential future shares
in issue assuming the conversion of all potentially dilutive ordinary shares.
The weighted average number of ordinary shares in issue is adjusted to assume
conversion of dilutive share awards granted to employees.
The basic and diluted earnings per share calculations are also presented based
on the Group's adjusted operating earnings net of financing costs. Adjusted
operating profit is a non-GAAP performance measure that is considered to
provide a comparable measure of the underlying performance of the business as
it excludes the impact of short-term economic volatility and other one-off
items.
The result attributable to ordinary equity holders of the parent for the
purposes of determining earnings per share has been calculated as set out
below.
2022 Adjusted Operating Financing Adjusted operating earnings net Other Total
profit
costs
of financing costs
non-operating items
£m
£m
£m
£m
£m
Profit/(loss) before the tax attributable to owners 1,245 (199) 1,046 (3,307) (2,261)
Tax (charge)/credit attributable to owners (253) 42 (211) 710 499
Profit/(loss) for the year attributable to owners 992 (157) 835 (2,597) (1,762)
Coupon paid on Tier 1 notes, net of tax relief - (22) (22) - (22)
Deduct: Share of result attributable to non-controlling interests - - - (67) (67)
Profit/(loss) for the year attributable to ordinary equity holders of the 992 (179) 813 (2,664) (1,851)
parent
2021 Adjusted Operating Financing Adjusted operating earnings net Other Total
profit
costs
of financing costs
non-operating items
£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
The weighted average number of ordinary shares outstanding during the period
is calculated as follows:
2022 2021
Number
Number
million
million
Issued ordinary shares at beginning of the year 1,000 999
Effect of non-contingently issuable shares in respect of Group's long-term 1 -
incentive plan
Own shares held by the employee benefit trust (2) (1)
Weighted average number of ordinary shares 999 998
The diluted weighted average number of ordinary shares outstanding during the
period is 1,001 million (2021: 1,001 million). The Group's long-term incentive
plan, deferred bonus share scheme and sharesave schemes increased the weighted
average number of shares on a diluted basis by 1,841,988 shares for the year
ended 31 December 2022 (2021: 2,702,934 shares). As losses have an
anti-dilutive effect, none of the share-based awards had a dilutive effect in
the calculation of basic earnings per share for either of the years ended 31
December 2021 or 31 December 2022.
Earnings per share disclosures are as follows:
2022 2021
pence pence
Basic earnings per share (185.2) (86.4)
Diluted earnings per share (185.2) (86.4)
Basic adjusted operating earnings net of financing costs per share 81.5 79.2
Diluted adjusted operating earnings net of financing costs per share 81.3 79.0
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.
2022 2021
£m £m
Dividends declared and paid in the year 496 482
On 11 March 2022, the Board recommended a final dividend of 24.8p per share in
respect of the year ended 31 December 2021. The dividend was approved at the
Group's Annual General Meeting, which was held on 5 May 2022. The dividend
amounted to £248 million and was paid on 9 May 2022.
On 12 August 2022, the Board declared an interim dividend of 24.8p per share
for the half year ended 30 June 2022. The dividend amounted to £248 million
and was paid on 12 September 2022.
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.
2022 UK Heritage UK Open Europe Total
£m £m £m £m
Fee income from investment contracts without DPF 561 293 72 926
Initial fees deferred during the year - - (9) (9)
Revenue from investment contracts without DPF 561 293 63 917
Other revenue from contracts with customers 29 5 - 34
Fees and commissions 590 298 63 951
2021 UK Heritage UK Open Europe Total
£m £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
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.
2022 2021
£m £m
Investment income
Interest income on financial assets at amortised cost 21 1
Interest income on financial assets designated at FVTPL on initial recognition 2,888 2,647
Dividend income 5,409 4,384
Rental income 343 365
Net interest expense on Group defined benefit pension scheme (liability)/asset (64) (37)
8,597 7,360
Fair value gains/(losses)
Financial assets and financial liabilities at FVTPL:
Designated upon initial recognition (38,676) 12,354
Held for trading - derivatives (6,707) (2,908)
Investment property (1,363) 1,195
(46,746) 10,641
Net investment income (38,149) 18,001
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.
2022 2021
£m £m
Employee costs 611 531
Outsourcer expenses 247 209
Professional fees 441 321
Commission expenses 145 178
Office and IT costs 172 150
Investment management expenses and transaction costs 569 528
Direct costs of collective investment schemes 25 28
Depreciation 19 18
Pension past service costs 15 -
Pension administrative expenses 7 6
Advertising and sponsorship 63 58
Movement in reinsurance payables(1) 93 -
Other 26 59
2,433 2,086
Acquisition costs deferred during the year (32) (38)
Amortisation of deferred acquisition costs 11 8
Total administrative expenses 2,412 2,056
Employee costs comprise:
2022 2021
£m £m
Wages and salaries 554 483
Social security contributions 57 48
611 531
2022 2021
Number
Number
Average number of persons employed 8,165 7,885
1 Reflects an increase of £93 million (2021: £nil) in the amounts payable to
reinsurers in respect of certain product features of the Group's German
business. There is a corresponding reduction in the gross liabilities under
insurance contracts.
C4. Auditor's remuneration
During the year the Group obtained the following services from its auditor at
costs as detailed in the table below.
2022 2021
£m £m
Audit of the consolidated financial statements 4.8 1.8
Audit of the Company's subsidiaries 10.7 9.8
15.5 11.6
Audit-related assurance services 2.4 2.3
Total fee for assurance services 17.9 13.9
Total auditor's remuneration 17.9 13.9
No services were provided by the Company's auditors to the Group's pension
schemes in either 2022 or 2021.
The increase in the audit fee during 2022 principally reflects the additional
work undertaken in connection with the transition to IFRS 17.
Audit related assurance services includes fees payable for services where the
reporting is required by law or regulation to be provided by the auditor, such
as reporting on regulatory returns. It also includes fees payable in respect
of reviews of interim financial information and services where the work is
integrated with the audit itself.
There were no other non-audit services provided during the year (2021: £nil).
Further information on auditor's remuneration and the assessment of the
independence of the external auditor is set out in the Audit Committee report
on pages 96 to 101.
C5. Finance costs
Interest payable is recognised in the consolidated income statement as it
accrues and is calculated using the effective interest method.
2022 2021
£m £m
Interest expense
On financial liabilities at amortised cost 227 239
On leases 3 3
230 242
Attributable to:
• policyholders 3 2
• owners 227 240
230 242
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
2022 2021
£m £m
Current tax:
UK corporation tax 36 (9)
Overseas tax 85 114
121 105
Adjustment in respect of prior years (23) (66)
Total current tax charge 98 39
Deferred tax:
Origination and reversal of temporary differences (1,067) 120
Change in the rate of UK corporation tax (123) 147
Adjustments in respect of prior years 14 (27)
Total deferred tax (credit)/charge (1,176) 240
Total tax (credit)/charge (1,078) 279
Attributable to:
• policyholders (579) 258
• owners (499) 21
Total tax (credit)/charge (1,078) 279
The Group, as a proxy for policyholders in the UK, is required to pay taxes on
investment income and gains each year. Accordingly, the tax credit or expense
attributable to UK life assurance policyholder earnings is included in income
tax expense. The tax credit attributable to policyholder earnings was £579
million (2021: £258 million charge).
The 2022 current tax prior year adjustment relates principally to a tax
dispute with HMRC in relation to the tax treatment of an asset formerly held
by Guardian Assurance Limited (before the business was transferred to ReAssure
Limited). This was resolved in the period in favour of the Group. The 2021
current tax liability included an accrual for the total tax under dispute. The
matter was heard before the First Tier Tribunal in May 2022 and the Court
found in favour of ReAssure Limited. HMRC are not appealing against this
decision and so the accrual for the potential tax liability has been released.
C6.2 Tax charged to other comprehensive income
2022 2021
£m £m
Current tax charge - 1
Deferred tax charge on defined benefit schemes 280 137
280 138
C6.3 Tax (credited)/charged to equity
2022 2021
£m £m
Current tax credit on Tier 1 Notes (7) (6)
Deferred tax charge/(credit) on share schemes 2 (1)
Total tax credit (5) (7)
C6.4 Reconciliation of tax charge
2022 2021
£m £m
Loss for the year before tax (2,840) (430)
Policyholder tax credit/(charge) 579 (258)
Loss before the tax attributable to owners (2,261) (688)
Tax credit at standard UK rate of 19% (2021: 19%)1 (429) (131)
Non-taxable income (4) (10)
Disallowable expenses 2 19
Prior year tax credit for shareholders2 (17) (7)
Movement on acquired in-force amortisation at less than 19% (2021: 19%) 26 34
Profits taxed at rates other than 19% (2021: 19%)3 18 (22)
Derecognition/(recognition) of previously recognised/(unrecognised) deferred 14 (13)
tax assets4
Deferred tax rate change5 (119) 147
Current year losses not valued6 16 1
Other(7) (6) 3
Owners' tax (credit)/charge (499) 21
Policyholder tax (credit)/charge (579) 258
Total tax (credit)/charge for the year (1,078) 279
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 prior year tax credit relates to true-ups from the 2021 tax reporting
provisions in various entities within the Group and the resolution of the
ReAssure Limited tax dispute with HMRC, described above
3 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
4 Relates primarily to reduction in the future value of capital losses in
ReAssure Limited, arising from further policyholder losses accrued in the
period
5 Deferred tax rate change relates primarily to movements in deferred tax
liabilities on non-refundable pension scheme surplus which are expected to
unwind, and deferred tax assets on losses expected to be relieved, at rates in
excess of the current year rate of 19%
6 Relates primarily to tax losses in Standard Life International DAC, in
relation to which a deferred tax asset cannot be recognised
7 Principally relates to UK tax relief available in relation to foreign
withholding tax incurred
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.
2022 2021
£m £m
Issued and fully paid:
1,000.4 million ordinary shares of £0.10 each (2021: 999.5 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:
2022 2022 2021 2021
Number £ Number £
Shares in issue at 1 January 999,536,058 99,953,605 999,232,144 99,923,214
Ordinary shares issued in the year 816,419 81,642 303,914 30,391
Shares in issue at 31 December 1,000,352,477 100,035,247 999,536,058 99,953,605
During the year, 816,419 shares (2021: 303,914) were issued at a premium £4
million (2021: £2 million) in order to satisfy obligations to employees under
the Group's sharesave schemes (see note I1).
The balance in the merger reserve arose upon the issuance of equity shares in
2020 as part consideration for the acquisition of the entire share capital of
ReAssure Group plc. The Group has applied the relief in section 612 of the
Companies Act 2006 to present the difference between the consideration
received and the nominal value of the shares issued of £1,819 million in a
merger reserve as opposed to in share premium.
D2. Shares held by the employee benefit trust
Where the Phoenix Group Employee Benefit Trust ('EBT') acquires shares in the
Company or obtains rights to purchase its shares, the consideration paid
(including any attributable transaction costs, net of tax) is shown as a
deduction from owners' equity. Gains and losses on sales of shares held by the
EBT are charged or credited to the own shares account in equity.
The EBT holds shares to satisfy awards granted to employees under the Group's
share-based payment schemes.
2022 2021
£m £m
At 1 January 12 6
Shares acquired by the EBT 13 16
Shares awarded to employees by the EBT (12) (10)
At 31 December 13 12
During the year 1,764,660 (2021: 1,490,492) shares were awarded to employees
by the EBT and 1,970,764 (2021: 2,423,407) shares were purchased. The number
of shares held by the EBT at 31 December 2022 was 2,092,022 (2021: 1,885,918).
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.
2022 Owner-occupied property revaluation Cash flow hedging Total other reserves
reserve
reserve
£m
£m
£m
At 1 January 2022 5 51 56
Other comprehensive expense for the year (5) (5) (10)
At 31 December 2022 - 46 46
2021 Owner-occupied property revaluation Cash flow hedging Total other reserves
reserve
reserve
£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
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.
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.
2022 2021
£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 (2021: £29 million).
At the issue date, the Tier 1 Notes were unsecured and subordinated
obligations of Old PGH. On 12 December 2018, the Company was substituted in
place of Old PGH as issuer.
The Tier 1 Notes have no fixed maturity date and interest is payable only at
the sole and absolute discretion of the Company; accordingly the Tier 1 Notes
meet the definition of equity for financial reporting purposes and are
disclosed as such in the consolidated financial statements. If an interest
payment is not made, it is cancelled and it shall not accumulate or be payable
at any time thereafter.
The Tier 1 Notes may be redeemed at par on the First Call Date or on any
interest payment date thereafter at the option of the Company and also in
other limited circumstances. If such redemption occurs prior to the fifth
anniversary of the Issue Date, such redemption must be funded out of the
proceeds of a new issuance of, or exchanged into, Tier 1 Own Funds of the same
or a higher quality than the Tier 1 Notes. In respect of any redemption or
purchase of the Tier 1 Notes, such redemption or purchase is subject to the
receipt of permission to do so from the PRA.
On 27 October 2020, the terms of the Tier 1 Notes were amended and the
consequence of a trigger event, linked to the Solvency II capital position,
was changed. Previously, the Tier 1 Notes were subject to a permanent
write-down in value to zero. The amended terms require that the Tier 1 Notes
would automatically be subject to conversion to ordinary shares of the Company
at the conversion price of £1,000 per share, subject to adjustment in
accordance with the terms and conditions of the notes and all accrued and
unpaid interest would be cancelled. Following any such conversion there would
be no reinstatement of any part of the principal amount of, or interest on,
the Tier 1 Notes at any time.
D5. Non-controlling interests
Non-controlling interests are stated at the share of net assets attributed to
the non-controlling interest holder at the time of acquisition, adjusted for
the relevant share of subsequent changes in equity.
APEOT APEOT
2022 2021
£m
£m
At 1 January 460 341
Profit for the year 67 128
Dividends paid (10) (9)
Increase in non-controlling interests 15 -
At 31 December 532 460
The non-controlling interests of £532 million (2021: £460 million) reflects
third party ownership of abrdn Private Equity Opportunities Trust plc
('APEOT') determined at the proportionate value of the third party interest in
the underlying assets and liabilities. APEOT is a UK Investment Trust listed
and traded on the London Stock Exchange. As at 31 December 2022, the Group
held 53.6% (2021: 55.2%) of the issued share capital of APEOT.
The Group's interest in APEOT is held in the with-profit and unit-linked funds
of the Group's life companies. Therefore, the shareholder exposure to the
results of APEOT is limited to the impact of those results on the shareholder
share of distributed profits of the relevant fund.
Summary financial information showing the interest that non-controlling
interests have in the Group's activities and cash flows is shown below:
APEOT 2022 2021
£m £m
Statement of financial position:
Financial assets 554 452
Other assets 12 19
Total assets 566 471
Total liabilities 34 11
Income statement:
Net income 74 134
Profit after tax 67 128
Comprehensive income 67 128
Cash flows:
Net (decrease)/increase in cash and cash equivalents (7) 10
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.
The Group has treaties in place with third party insurance companies to
provide reinsurance in respect of liabilities that are linked to the
performance of funds maintained by those companies. The contracts in question
do not transfer significant insurance risk and therefore are classified as
financial instruments and are valued at fair value through profit and loss.
These contracts are disclosed under Reinsurers' share of investment contract
liabilities in the statement of consolidated financial position.
Impairment of financial assets
The Group assesses 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, instead of 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 2022:
Carrying value
2022 Total Amounts due for settlement after 12 months Fair value
£m
£m £m
Financial assets
Financial assets at fair value through profit or loss:
Held for trading - derivatives 4,071 3,353 4,071
Designated upon initial recognition:
Equities1 76,780 - 76,780
Investment in associate (see note H2)1 329 - 329
Debt securities 84,710 70,115 84,710
Collective investment schemes1 78,353 - 78,353
Reinsurers' share of investment contract liabilities1 9,088 - 9,088
Financial assets measured at amortised cost:
Loans and deposits 279 99 279
Total financial assets 253,610 253,610
Less amounts classified as financial assets held for sale (see note A6.1)2 (4,629) (4,629)
Total financial assets less financial assets classified as held for sale 248,981 248,981
Carrying value
2022 Total Amounts due for settlement after 12 months Fair value
£m
£m £m
Financial liabilities
Financial liabilities at fair value through profit or loss:
Held for trading - derivatives 5,879 5,118 5,879
Designated upon initial recognition:
Borrowings 64 64 64
Net asset value attributable to unitholders1 2,978 - 2,978
Investment contract liabilities1 152,157 - 152,157
Financial liabilities measured at amortised cost:
Borrowings 3,916 3,648 3,644
Deposits received from reinsurers 2,598 2,221 2,598
Obligations for repayment of collateral received 1,706 - 1,706
Total financial liabilities 169,298 169,026
Less amounts classified as financial liabilities held for sale (see note (8,316) (8,316)
A6.1)3
Total financial liabilities less financial liabilities held for sale 160,982 160,710
1 These assets and liabilities have no specified settlement date.
2 Amounts classified as financial assets held for sale include derivatives
of £3 million, equities of £43 million, debt securities of £1,594 million,
collective investment schemes of £2,964 million and reinsurers' share of
investment contract liabilities of £25 million.
3 Amounts classified as financial liabilities held for sale include
derivative liabilities of £4 million and investment contract liabilities of
£8,312 million.
Carrying value
2021 Total Amounts due for settlement after 12 months Fair value
£m
£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:
Equities(1) 87,059 - 87,059
Investment in associate (see note H2)(1) 431 - 431
Debt securities 106,990 88,965 106,990
Collective investment schemes(1) 90,164 - 90,164
Reinsurers' share of investment contract liabilities(1) 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 due for settlement after 12 months Total
£m
£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 unitholders(1) 3,568 - 3,568
Investment contract liabilities(1) 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 sale(3) (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.
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.
2022 2021
£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 279 475
Cash and cash equivalents(1) 8,839 9,112
Accrued income 330 282
Other receivables(2) 4,478 1,697
All other financial assets that are measured at fair value through profit or 248,702 292,717
loss(3)
1 Cash and cash equivalents excludes assets classified as held for sale of
£33 million (2021: £76 million).
2 Other receivables excludes deferred acquisition costs.
3 The change in fair value during 2022 of all other financial assets that
are measured at fair value through profit or loss is a £ 43,834 million loss
(2021: £5,881 million loss). The balance excludes £4,629 million (2021:
£6,507 million) 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:
2022 AAA AA A BBB BB and below Non-rated(1) Unit-linked Total Less amounts classified as held for sale Total
Carrying value £m £m £m £m £m £m £m £m £m £m
Loans and deposits - 4 - - - 204 71 279 - 279
Cash and cash equivalents 339 1,160 5,749 63 - 5 1,556 8,872 (33) 8,839
Accrued income - - - - - 330 - 330 - 330
Other receivables - - - - - 4,478 - 4,478 - 4,478
339 1,164 5,749 63 - 5,017 1,627 13,959 (33) 13,926
2021 AAA AA A BBB BB and below Non-rated1 Unit-linked Total Less Total
amounts classified as held for sale
Carrying value £m £m £m £m £m £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
1 The Group has assessed its non-rated assets as having a low credit risk.
E2. Fair value hierarchy
E2.1 Determination of fair value and fair value hierarchy of financial
instruments
Level 1 financial instruments
The fair value of financial instruments traded in active markets (such as
exchange traded securities and derivatives) is based on quoted market prices
at the period end provided by recognised pricing services. Market depth and
bid-ask spreads are used to corroborate whether an active market exists for an
instrument. Greater depth and narrower bid-ask spread indicate higher
liquidity in the instrument and are classed as Level 1 inputs. For collective
investment schemes and reinsurers' share of investment contract liabilities,
fair value is by reference to published bid prices.
Level 2 financial instruments
Financial instruments traded in active markets with less depth or wider
bid-ask spreads which do not meet the classification as Level 1 inputs, are
classified as Level 2. The fair values of financial instruments not traded in
active markets are determined using broker quotes or valuation techniques with
observable market inputs. Financial instruments valued using broker quotes are
classified as Level 2, only where there is a sufficient range of available
quotes. The fair value of over the counter derivatives is estimated using
pricing models or discounted cash flow techniques. Collective investment
schemes where the underlying assets are not priced using active market prices
are determined to be Level 2 instruments. Where pricing models are used,
inputs are based on market related data at the period end. Where discounted
cash flows are used, estimated future cash flows are based on management's
best estimates and the discount rate used is a market related rate for a
similar instrument. The fair value of investment contract liabilities reflects
the fair value of the underlying assets and liabilities in the funds plus an
additional amount to cover the present value of the excess of future policy
costs over future charges. The liabilities are consequently determined to be
Level 2 instruments.
Level 3 financial instruments
The Group's financial instruments determined by valuation techniques using
non-observable market inputs are based on a combination of independent third
party evidence and internally developed models. In relation to investments in
hedge funds and private equity investments, non-observable third party
evidence in the form of net asset valuation statements is used as the basis
for the valuation. Adjustments may be made to the net asset valuation where
other evidence, for example recent sales of the underlying investments in the
fund, indicates this is required. Securities that are valued using broker
quotes which could not be corroborated across a sufficient range of quotes are
considered as Level 3. For a small number of investment vehicles and debt
securities, standard valuation models are used, as due to their nature and
complexity they have no external market. Inputs into such models are based on
observable market data where applicable. The fair value of loans, derivatives
and some borrowings with no external market is determined by internally
developed discounted cash flow models using appropriate assumptions
corroborated with external market data where possible.
For financial instruments that are recognised at fair value on a recurring
basis, the Group determines whether transfers have occurred between levels in
the hierarchy by re-assessing categorisation (based on the lowest level input
that is significant to the fair value measurement as a whole) during each
reporting period.
Fair value hierarchy information for non-financial assets measured at fair
value is included in note G3 for owner-occupied property and in note G4 for
investment property.
E2.2 Fair value hierarchy of financial instruments
The tables below separately identify financial instruments carried at fair
value from those measured on another basis but for which fair value is
disclosed.
2022 Level 1 Level 2 Level 3 Total fair value
£m
£m
£m
£m
Financial assets measured at fair value
Derivatives 165 3,754 152 4,071
Financial assets designated at FVTPL upon initial recognition:
Equities 74,464 124 2,192 76,780
Investment in associate 329 - - 329
Debt securities 48,151 25,094 11,465 84,710
Collective investment schemes 75,962 2,079 312 78,353
Reinsurers' share of investment contract liabilities 9,088 - - 9,088
207,994 27,297 13,969 249,260
Total financial assets measured at fair value 208,159 31,051 14,121 253,331
Less amounts classified as held for sale (3,661) (179) (789) (4,629)
Total financial assets measured at fair value, excluding amounts classified as 204,498 30,872 13,332 248,702
held for sale
Financial assets for which fair values are disclosed
Loans and deposits at amortised cost - 272 7 279
204,498 31,144 13,339 248,981
2022 Level 1 Level 2 Level 3 Total fair value
£m
£m
£m
£m
Financial liabilities measured at fair value
Derivatives 98 5,538 243 5,879
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings - - 64 64
Net asset value attributable to unit-holders 2,978 - - 2,978
Investment contract liabilities - 152,157 - 152,157
2,978 152,157 64 155,199
Total financial liabilities measured at fair value 3,076 157,695 307 161,078
Less amounts classified as held for sale - (8,316) - (8,316)
Total financial liabilities measured at fair value, excluding amounts 3,076 149,379 307 152,762
classified as held for sale
Financial liabilities for which fair values are disclosed
Borrowings at amortised cost - 3,644 - 3,644
Deposits received from reinsurers - 2,542 56 2,598
Obligations for repayment of collateral received - 1,706 - 1,706
Total financial liabilities for which fair values are disclosed - 7,892 56 7,948
3,076 157,271 363 160,710
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 unitholders 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
E2.3 Significant inputs and input values for Level 3 financial instruments
Key unobservable input value
Description Valuation technique Significant inputs 2022 2021
Equities Single broker(1) and net asset value(2) Single broker N/A N/A
indicative price
Debt securities (see E2.3.1 for further details)
Loans guaranteed by export credit agencies & supranationals DCF model(3) Credit spread 111bps 53bps
(weighted average)
(weighted average)
Private corporate credit DCF model(3) Credit spread 169bps 129bps
(weighted average)
(weighted average)
Infrastructure loans DCF model(3) Credit spread 220bps 207bps
(weighted average)
(weighted average)
Loans to housing associations DCF model(3) Credit spread 164bps 128bps
(weighted average)
(weighted average)
Local authority loans DCF model(3) Credit spread 137bps 105 bps
(weighted average)
(weighted average)
Equity Release Mortgage loans ('ERM') DCF model and Black-Scholes model(4) Spread 260bps over the IFRS reference curve 170bps over the IFRS reference curve
House price inflation +75bps adjustment +75bps adjustment
to RPI
to RPI
House prices £304,088 (average) £291,599 (average)
Mortality Average life expectancy of a male and female currently aged 75 is 14.5 years Average life expectancy of a male and female currently aged 76 is 13.7 years
and 15.9 years respectively and 15.0 years respectively
Voluntary redemption rate 150bps to 700bps 150bps to 700bps
Commercial real estate loans DCF model(3) Credit spread 253bps 228bps
(weighted average)
(weighted average)
Income strips5 Income capitalisation Credit spread 661bps 487bps
Collective investment schemes Net asset value statements2 N/A N/A N/A
Borrowings
Property reversions loans (see note E5) Internally developed model Mortality rate 130% IFL92C15 (Female)(6) 130% IFL92C15 (Female)6
130% IML92C15 130% IML92C15
(Male)(6)
(Male)6
House price inflation 3 year RPI rate 3 year RPI rate
plus 75bps
plus 75bps
Discount rate 3 year swap rate plus 3 year swap rate plus
170bps 170bps
Deferred possession rate 370bps 370bps
Derivative assets and liabilities
Forward private placements, infrastructure DCF model(3) Credit spread 145bps 110bps
and local authority loans(7)
(weighted average)
(weighted average)
Longevity swaps(8) DCF model(3) Swap curve swap curve + 36bps swap curve + 36bps
Equity Release Income Plan total return swap(9) DCF model(3) Credit spread 500bps 500bps
1 Broker indicative prices: Although such valuations are sensitive to
estimates, it is believed that changing one or more of the assumptions to
reasonably possible alternative assumptions would not change the fair value
significantly.
2 Net asset value statements: Net asset statements are provided by
independent third parties, and therefore no significant non-observable input
or sensitivity information has been prepared for those instruments valued on
this basis.
3 Discounted cash flow ('DCF') model: Except where otherwise stated, the
discount rate used is based on a risk-free curve and a credit spread. The
risk-free rate is taken from an appropriate gilt of comparable duration. The
spread is derived from a basket of comparable securities.
4 ERM loans: The loans are valued using a DCF model and a Black-Scholes
model for valuation of the No-Negative Equity Guarantee ('NNEG'). The NNEG
caps the loan repayment in the event of death or entry into long-term care to
be no greater than the sales proceeds from the property. The future cash flows
are estimated based on assumed levels of mortality derived from published
mortality tables, entry into long-term care rates and voluntary redemption
rates. Cash flows include an allowance for the expected cost of providing a
NNEG assessed under a real world approach using a closed form model including
an assumed level of property value volatility. For the NNEG assessment,
property values are indexed from the latest property valuation point and then
assumed to grow in line with an RPI based assumption. Cash flows are
discounted using a risk free curve plus a spread, where the spread is based on
recent originations, with margins to allow for the different risk profiles of
ERM loans.
5 Income strips are transactions where an owner-occupier of a property has
sold a freehold or long leasehold interest to the Group, and has signed a long
lease (typically 30-45 years) or a ground lease (typically 45-175 years) and
retains the right to repurchase the property at the end of the lease for a
nominal sum (usually £1). The income strips are valued using an income
capitalisation approach, where the annual rental income is capitalised using
an appropriate yield. The yield is determined by considering recent
transactions involving similar income strips.
6 IFL92C15 and IML92C15 relate to immediate annuitant female and male lives
and refer to the 92 series mortality tables produced by the Continuous
Mortality Investigation ('CMI').
7 Derivative liabilities include forward investments of £146 million (2021:
£7 million derivative assets) which include a commitment to acquire or
provide funding for fixed rate debt instruments at specified future dates.
8 Included within derivative assets and liabilities are longevity swap
contracts with corporate pension schemes with a fair value of £152 million
(2021: £230 million) and £34 million (2021: £49 million) respectively.
9 Included within derivative liabilities is the Equity Release Income Plan
('ERIP') total return swap with a value of £63 million (2021: £67 million),
under which a share of the disposal proceeds arising on a portfolio of
property reversions is payable to a third party (see note E.3.3 for further
details).
E2.3.1 Debt securities
Analysis of Level 3 debt securities 2022 2021 restated 1
£m £m
Unquoted corporate bonds:
Loans guaranteed by export credit agencies & supranationals 402 219
Private corporate credit 1,422 1,488
Infrastructure loans - project finance 882 967
Infrastructure loans - corporate 1,175 1,074
Loans to housing associations 691 1,022
Local authority loans 596 917
Equity release mortgages 3,934 4,214
Commercial real estate loans 1,104 1,317
Income strips 786 886
Bridging loans to private equity funds 462 339
Other 11 9
Total Level 3 debt securities 11,465 12,452
Less amounts classified as held for sale (786) (892)
Total Level 3 debt securities excluding amounts classified as held for sale 10,679 11,560
1 At 31 December 2021 £1,632 million of private corporate credit assets
have been reclassified as loans guaranteed by export credit agencies &
supranationals (£60 million), infrastructure loans (£550 million) and loans
to housing associations (£1,022 million).
Sensitivities of level 3 financial instruments 2022 2021
£m
£m
Debt securities - Loans guaranteed by export credit agencies &
supranationals
65bps increase in spread (9) (9)
65bps decrease in spread 11 10
Debt securities - Private corporate credit
65bps increase in spread (98) (124)
65bps decrease in spread 112 143
Debt securities - Infrastructure loans
65bps increase in spread (103) (124)
65bps decrease in spread 107 128
Debt securities - Loans to housing associations
65bps increase in spread (54) (102)
65bps decrease in spread 58 112
Debt securities - Local authority loans
65bps increase in spread (51) (109)
65bps decrease in spread 55 121
Debt securities - ERM loans
100bps increase in spread (329) (443)
100bps decrease in spread 370 512
5% increase in mortality 13 (10)
5% decrease in mortality (14) 9
15% increase in voluntary redemption rate 49 (22)
15% decrease in voluntary redemption rate (52) 23
1% increase in house price inflation 27 26
1% decrease in house price inflation (42) (43)
10% increase in house prices 22 13
10% decrease in house prices (38) (23)
Debt securities - CRELs
65bps increase in spread (18) (24)
65bps decrease in spread 19 24
Debt securities - Income strips
35bps increase in spread (76) (94)
35bps decrease in spread 88 121
Derivatives - Forward private placements, infrastructure and local authority
loans1
65bps increase in spread (30) (25)
65bps decrease in spread 31 27
Derivatives - Longevity swap contracts
100bps increase in swap curve (17) (28)
100bps decrease in swap curve 21 35
Derivatives - Equity Release Income Plan total return swap
100bps increase in spread (2) (2)
100bps decrease in spread 2 2
For the property reversions loans and bridging loans to equity funds, there
are no reasonably possible movements in unobservable input values which would
result in a significant movement in the fair value of the financial
instruments.
For those assets valued using net asset value statements (equities and
collective investment schemes) no sensitivity information has been prepared as
the net asset statements are provided by independent third parties.
E2.4 Transfers of financial instruments between Level 1 and Level 2
2022 From From
Level 1 to
Level 2 to
Level 2
Level 1
£m
£m
Financial assets measured at fair value
Derivatives 48 -
Financial assets designated at FVTPL upon initial recognition:
Equities 73 5
Debt securities 1,478 1,267
Collective investment schemes 28 -
1,579 1,272
Total financial assets measured at fair value 1,627 1,272
2021 From From
Level 1 to
Level 2 to
Level 2
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
Consistent with the prior year, all the Group's Level 1 and Level 2 assets
have been valued using standard market pricing sources.
The application of the Group's fair value hierarchy classification methodology
at an individual security level, in particular observations with regard to
measures of market depth and bid-ask spreads, resulted in an overall net
movement of debt securities from Level 1 to Level 2 in both the current and
prior period.
E2.5 Movement in Level 3 financial instruments measured at fair value
2022 At 1 Net (losses)/ Purchases Sales Transfers from Transfers to Level 1 and Level 2 At 31 Unrealised
January 2022
gains in income statement
£m
£m
Level 1 and Level 2
£m
December 2022(1)
(losses)/
£m
£m
£m
£m
gains on assets held at end of period
£m
Financial assets
Derivatives 237 (85) - - - - 152 (85)
Financial assets designated at FVTPL upon initial recognition:
Equities 1,899 177 438 (369) 47 - 2,192 12
Debt securities 12,452 (3,544) 6,838 (4,277) 2 (6) 11,465 (3,595)
Collective investment schemes 286 (79) 108 (3) - - 312 (73)
14,637 (3,446) 7,384 (4,649) 49 (6) 13,969 (3,656)
Total financial assets 14,874 (3,531) 7,384 (4,649) 49 (6) 14,121 (3,741)
1 Total financial assets of £14,121 million includes £789 million of
assets classified as held for sale.
2022 At 1 Net losses in income statement Purchases Sales/ repayments Transfers from Transfers to Level 1 and Level 2 At 31 Unrealised
January 2022
£m
£m
£m
Level 1 and Level 2
£m
December 2022
losses on liabilities held at end of period
£m
£m
£m
£m
Financial liabilities
Derivatives 125 130 - (12) - - 243 123
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings 70 9 - (15) - - 64 9
Total financial liabilities 195 139 - (27) - - 307 132
2021 At 1 Net (losses)/gains in income statement Purchases Sales Transfers Transfers to Level 1 and Level 2 At 31 December 2021(1) Unrealised (losses)/gains on assets held at end of period
January
£m
£m
£m
from
£m
£m
£m
2021
Level 1
£m
and Level 2
£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
classified as held for sale.
2021 At 1 Net (gains)/losses in income statement Purchases Sales/ Transfers from Transfers to Level 1 and Level 2 At 31 Unrealised (gains)losses on liabilities held at end of period
January
£m
£m
Repayments
Level 1 and Level 2
£m
December 2021(1)
£m
2021
£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)
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 Assets Liabilities
2022 2022 2021 2021
£m £m £m £m
Forward currency 327 221 180 58
Credit default swaps 4 18 63 39
Contracts for difference 3 3 8 2
Interest rate swaps 2,281 4,313 1,509 506
Total return bond swaps - - 3 -
Swaptions 187 46 1,722 11
Inflation swaps 295 104 232 98
Equity options 334 147 408 254
Stock index futures 162 36 41 122
Fixed income futures 95 231 46 33
Longevity swap contracts 152 34 230 49
Currency futures 4 8 7 1
Cross-currency swaps 227 653 122 12
Equity Release Income Plan total return swap - 63 - 67
Other - 2 - -
4,071 5,879 4,571 1,252
Less amounts classified as held for sale (3) (4) (4) (4)
4,068 5,875 4,567 1,248
E3.2 Longevity swap contracts
The Group has in place longevity swap arrangements with corporate pension
schemes which do not meet the definition of insurance contracts under the
Group's accounting policies. Under these arrangements the majority of the
longevity risk has been passed to third parties. Derivative assets of £152
million and derivative liabilities of £34 million have been recognised as at
31 December 2022 (2021: £230 million and £49 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.
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
2022 (2021: 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
2022 Gross and net amounts of recognised Financial instruments and cash collateral received Derivative Net
£m
liabilities
amount
financial assets
£m
£m
£m
Financial assets
OTC derivatives 3,747 1,055 2,293 399
Exchange traded derivatives 324 193 28 103
Stock lending 1,451 1,451 - -
Total 5,522 2,699 2,321 502
Related amounts not offset
Gross and net amounts of recognised Financial instruments and cash collateral pledged Derivative Net
£m
assets
financial liabilities
£m Amount
£m
£m
Financial liabilities
OTC derivatives 5,606 2,206 2,293 1,107
Exchange traded derivatives 273 36 28 209
Total 5,879 2,242 2,321 1,316
E4 Collateral arrangements
Related amounts not offset
2021 Gross and net amounts of recognised Financial instruments and cash collateral received Derivative Net
£m
liabilities
amount
financial assets
£m
£m
£m
Financial assets
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
Gross and net amounts of recognised Financial instruments and cash collateral pledged Derivative Net
£m
assets
amount
financial liabilities
£m
£m
£m
Financial liabilities
OTC derivatives 1,096 319 487 290
Exchange traded derivatives 156 24 6 126
Total 1,252 343 493 416
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 £471 million (2021: £945 million).
The amounts recognised as financial assets and liabilities from cash
collateral received at 31 December 2022 are set out below.
OTC derivatives
2022 2021
£m
£m
Financial assets 1,513 3,442
Financial liabilities (1,513) (3,442)
The maximum exposure to credit risk in respect of OTC derivative assets is
£3,747 million (2021: £4,394 million) of which credit risk of £3,348
million (2021: £4,087 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 £324 million (2021: £177
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 2022 in respect of OTC derivative
liabilities of £5,606 million (2021: £1,096 million) amounted to £3,228
million (2021: £942 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
£1,586 million (2021: £1,749 million).
The maximum exposure to credit risk in respect of stock lending transactions
is £1,451 million (2021: £1,587 million) of which credit risk of £1,451
million (2021: £1,587 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
2022 2021 2022 2021
£m £m £m £m
£300 million multi-currency revolving credit facility (note a) 62 17 62 17
Property reversions loan (note b) 64 70 64 70
Total policyholder borrowings 126 87 126 87
£428 million Tier 2 subordinated notes (note c) 427 427 429 498
£450 million Tier 3 subordinated notes (note d) - 450 - 457
US $500 million Tier 2 notes (note e) 413 368 390 408
€500 million Tier 2 bonds (note f) 439 416 416 490
US $750 million Contingent Convertible Tier 1 notes (note g) 618 551 580 581
£500 million Tier 2 notes (note h) 487 485 445 593
US $500 million Fixed Rate Reset Tier 2 notes (note i) 412 368 382 389
£500 million 5.867% Tier 2 subordinated notes (note j) 543 550 465 598
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes (note k) 259 266 244 269
£250 million 4.016% Tier 3 subordinated notes (note l) 256 257 231 264
Total shareholder borrowings 3,854 4,138 3,582 4,547
Total borrowings 3,980 4,225 3,708 4,634
Amount due for settlement after 12 months 3,918 3,758
a. abrdn Private Equity Opportunities Trust plc ('APEOT') has in place a
syndicated multi-currency revolving credit facility, of which £61 million
(2021: £17 million) had been drawn down as at 31 December 2022. During the
year, the amount of the facility was increased from £200 million to £300
million and its term maturity was extended by one year to December 2025.
Interest accrues on this facility at a margin over the reference rate of the
currency drawn.
b. The Property Reversions loan from Santander UK plc ('Santander') was
recognised in the consolidated financial statements at fair value. It relates
to the sale of Extra-Income Plan policies that Santander finances to the value
of the associated property reversions. As part of the arrangement Santander
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 2022, repayments
totalling £15 million were made (2021: £18 million). Note G4 contains
details of the assets that support this loan.
c. On 23 January 2015, PGH Capital plc ('PGHC') issued £428 million of
subordinated notes due 2025 at a coupon of 6.625%. Fees associated with these
notes of £3 million were deferred and are being amortised over the life of
the notes in the statement of consolidated financial position. Upon exchange
£32 million of these notes were held by Group companies. During 2017, the
internal holdings were sold to third parties, thereby increasing external
borrowings by £32 million. On 20 March 2017, Old PGH (the Group's ultimate
parent company up to December 2018) was substituted in place of PGHC as issuer
of the £428 million subordinated notes and then on 12 December 2018 the
Company was substituted in place of Old PGH as issuer.
d. On 20 July 2022, the Group redeemed its £450 million Tier 3 subordinated
notes in full at their principal amount, together with interest accrued to the
repayment date.
e. 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.
f. 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.
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.
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.
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 each year.
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 each year.
j. 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.
k. 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.
l. 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.
m. 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 2022.
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 1 New borrowings, net of costs Repayments Changes in fair value Movement in foreign exchange Other movements1 At 31 December 2022
January
2022 £m £m £m £m £m £m
£m
APEOT multi-currency 17 61 (17) - 1 - 62
revolving credit facility
Property Reversions loan 70 - (15) 9 - - 64
£428 million Tier 2 subordinated notes 427 - - - - - 427
£450 million Tier 3 subordinated notes 450 - (450) - - - -
US $500 million Tier 2 bonds 368 - - - 45 - 413
€500 million Tier 2 notes 416 - - - 22 1 439
US $750 million Contingent Convertible Tier 1 notes 551 - - - 66 1 618
£500 million Tier 2 notes 485 - - - - 2 487
US $500 million Fixed Rate Reset Tier 2 notes 368 - - - 44 - 412
£500 million 5.867% Tier 2 subordinated notes 550 - - - - (7) 543
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes 266 - - - - (7) 259
£250 million 4.016% Tier 3 subordinated notes 257 - - - - (1) 256
Derivative assets(2) (48) - - (177) - - (225)
Derivative liabilities(2) 5 - - (5) - - -
4,182 61 (482) (173) 178 (11) 3,755
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 1 New borrowings, net of costs Repayments Changes in fair value Movement in foreign exchange Movement in foreign exchange At 31
January
December 2021
2021 £m £m £m £m £m
£m
£m
APEOT 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 545 - - - 5 1 551
Tier 1 notes
£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 assets² - - - (48) - - (48)
Derivative liabilities² - - - 5 - - 5
4,567 17 (340) (39) (13) (10) 4,182
1 Comprises amortisation under the effective interest method applied to
borrowings held at amortised cost.
2 Cross currency swaps to hedge against adverse currency movements in
respect of Group's Euro and US Dollar denominated borrowings.
E6. Risk management - financial and other risks
This note forms one part of the risk management disclosures in the
consolidated financial statements. An overview of the Group's approach to risk
management is outlined in note I3 and the Group's management of insurance risk
is detailed in note 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/Chief Actuary
as to the potential implications of that risk profile with regard to the
probability of both realistic insolvency and of failing to meet the regulatory
Minimum Capital Requirement. The Chief Actuary will also advise the extent to
which the investment risk taken is consistent with the Group's commitment to
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
In 2021, the Group largely completed its transition from LIBOR to the
replacement Risk Free Rates. The programme completed a systematic process to
identify and address balance sheet exposures with LIBOR dependencies. All
derivative exposures and the majority of non-derivative asset exposures were
successfully transitioned over the course of the programme in 2021. Insurance
contract liabilities and related items transitioned to the SONIA Solvency II
curve published by the PRA with an adjustment of 36bps. The remaining residual
exposures as at 31 December 2021 related 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 have largely been transitioned during the year and at
31 December 2022 a small amount of indirect illiquid credit exposure remains.
This 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.
E6.2 Financial risk analysis
Transactions in financial instruments result in the Group assuming financial
risks. These include credit risk, market risk and financial soundness risk.
Each of these are described below, together with a summary of how the Group
manages the risk, along with sensitivity analysis where appropriate. The
sensitivity analysis does not take into account the impact in the Group's
pension schemes, including any impact arising as a result of the elimination
of intra-group buy-in transactions between the life companies and the Group's
pension schemes. It also does not include second order impacts of market
movements, for example, where a market movement may give rise to potential
indicators of impairment for the Group's intangible balances.
Climate Risk
The Group is exposed to financial risks (in particular market and credit risk)
related to the transition to a low carbon economy, and the physical impacts
resulting from climate change which could result in long-term market, credit,
insurance, reputation, proposition and operational implications. As such, this
risk is treated as a cross-cutting risk in the Group's Risk Universe.
Identification of climate related risks has been embedded into the Group's
Risk Management Framework. Significant progress has been made in recent years
in developing a risk metrics and targets framework, and establishing
appropriate governance and risk management processes. The Group has adopted a
proactive approach towards combatting climate change, with key net-zero
targets. Further details on these targets and on managing the related climate
change risks are provided in the Climate Report and Task Force for
Climate-related Financial Disclosures ('TCFD') within the Annual Report and
Accounts.
E6.2.1 Credit risk
Credit risk is defined as the risk of reductions in earnings and/or value,
through financial or reputational loss, as a result of the default of a
counterparty or an associate of such a counterparty to a financial transaction
(i.e. failure to honour their financial obligations, or failing to perform
them in a timely manner), whether on or off balance sheet.
There are two principal sources of credit risk for the Group:
• credit risk which results from direct investment activities, including
investments in debt securities, derivatives counterparties, collective
investment schemes, hedge funds and the placing of cash deposits; and
• credit risk which results indirectly from activities undertaken in the
normal course of business. Such activities include premium payments,
outsourcing contracts, reinsurance agreements, exposure from material
suppliers and the lending of securities.
The amount disclosed in the statement of consolidated financial position in
respect of all financial assets, together with rights secured under off
balance sheet collateral arrangements, but excluding the minority interest in
consolidated collective investment schemes and those assets that back
policyholder liabilities, represents the Group's maximum exposure to credit
risk. The credit risk borne by the shareholder on with-profit policies is
dependent on the extent to which the underlying insurance fund is relying on
shareholder support.
The impact of non-government debt securities and, inter alia, the change in
market credit spreads during the year is fully reflected in the values shown
in these consolidated financial statements. Credit spreads are the excess of
corporate bond yields over gilt yields to reflect the higher level of risk.
Similarly, the value of derivatives that the Group holds takes into account
fully the changes in swap rates.
There is an exposure to spread changes affecting the prices of corporate bonds
and derivatives. This exposure applies to supported with-profit funds (where
risks and rewards fall wholly to shareholders), non-profit funds and
shareholders' funds.
The Group holds £15,814 million (2021: £21,668 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 £796 million
(2021: £1,036 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 £23
million (2021: £28 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 £36
million (2021: £37 million).
Credit risk is managed by the monitoring of aggregate Group exposures to
individual counterparties and by appropriate credit risk diversification. The
Group manages the level of credit risk it accepts through credit risk
tolerances and limits (including asset class, industry and geography limits).
Additional controls for illiquid asset concentration risk are set out via
specific risk limits within the risk appetite framework. Credit risk on
derivatives and securities lending is mitigated through the use of collateral
with appropriate haircuts.
Credit quality of assets
An indication of the Group's exposure to credit risk is the quality of the
investments and counterparties with which it transacts. The following table
provides information regarding the aggregate credit exposure split by credit
rating.
2022 AAA AA A BBB BB and below Non-rated Unit-linked Total Less amounts classified as held for sale Total
£m £m £m £m £m £m £m £m £m £m
Loans and deposits - 4 - - - 204 71 279 - 279
Derivatives - 1,500 1,060 28 - 1,370 113 4,071 (3) 4,068
Debt securities(1,2) 6,834 26,095 19,045 16,238 1,929 7,182 7,387 84,710 (1,594) 83,116
Reinsurers' share of insurance contract liabilities - 4,920 1,148 - - 74 - 6,142 - 6,142
Reinsurers' share of investment contract liabilities - - - - - - 9,088 9,088 (25) 9,063
Cash and cash equivalents 339 1,160 5,749 63 - 5 1,556 8,872 (33) 8,839
7,173 33,679 27,002 16,329 1,929 8,835 18,215 113,162 (1,655) 111,507
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. £149 million of AAA, £1,083 million of AA,
£1,742 million of A, £2,766 million of BBB and £367 million of BB and below
debt securities are internally rated. If a financial asset is neither rated by
an external agency nor internally rated, it is classified as 'non-rated'.
2 Non-rated debt securities includes equity release mortgages with a value
of £3,934 million (further details are set out in note E2.3) and non-rated
bonds.
2021 AAA AA A BBB BB and below Non-rated Unit-linked Total Less amounts classified as held for sale Total
£m £m £m £m £m £m £m £m £m £m
Loans and deposits - 6 - - - 414 55 475 - 475
Derivatives - 965 1,737 388 - 1,343 138 4,571 (4) 4,567
Debt securities(1,2) 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.
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, a Rating Committee and
a Portfolio Credit Committee to monitor and perform oversight of internal
credit ratings for externally rated and internally rated assets. A variety of
methods are used to validate the appropriateness of credit assessments from
external institutions and fund managers. Internally rated assets do not have a
public rating from an external credit assessment institution. Instead internal
credit ratings are used by the Group which are provided by fund managers or
for certain assets (in particular, equity release mortgages and illiquid
assets) are determined by the Life Companies. The Committees review the
policies, processes and practices to ensure the appropriateness of the
internal ratings, and to ensure they are in line with regulatory requirements.
Throughout 2022, the Group has taken de-risking action to increase the overall
credit quality of its asset portfolio and mitigate the impact of future
downgrades on risk capital. Further details are included in the Risk
Management section of the Strategic Report.
The Group has increased exposure to an array of illiquid credit assets such as
equity release mortgages, local authority loans, social housing,
infrastructure and commercial real estate loans with the aim of achieving
greater diversification and investment returns, consistent with the Strategic
Asset Allocation approved by the Board.
A further indicator of the quality of the Group's financial assets is the
extent to which they are neither past due nor impaired. All of the amounts in
the table above for the current and prior year are neither past due nor
impaired.
Additional life company asset disclosures are included on page 307 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 the
continuing conflict in Russia-Ukraine, this includes the shareholders' credit
exposure to Russia and Ukraine. The Group shareholder exposure to Russia and
Ukraine was £nil at 31 December 2022 (31 December 2021: £23 million).
Concentration of credit risk
Concentration of credit risk might exist where the Group has significant
exposure to an individual counterparty or a group of counterparties with
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic and
other conditions. The Group has most of its counterparty risk within its life
business and is monitored by the Group Counterparty Credit Risk Framework
contained within the Group Credit Risk Policy. It is further provided for in
investment management agreements, overlaid by regulatory requirements and the
monitoring of aggregate counterparty exposures across the Group against
additional Group counterparty limits. Counterparty risk in respect of OTC
derivative counterparties is monitored using a Potential Future Exposure
('PFE') value metric.
The Group is also exposed to concentration risk with outsource partners. 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 (minimum rating requirement of A-). The Group
restricts concentration with individual external reinsurers by specifying
limits on ceding and minimum conditions for acceptance and retention of
reinsurers. In recent years the Group has made progress in increasing the
number of reinsurers it transacts with, however, an element of concentration
remains due to the nature of the reinsurance market and the restricted range
of reinsurers available. The Group manages its exposure to reinsurance credit
risk through the operation of a credit policy, collateralisation, and regular
monitoring of exposures at the Reinsurance Management Committee.
Collateral
The credit risk of the Group is mitigated, in certain circumstances, by
entering into collateral agreements. The amount and type of collateral
required depends on an assessment of the credit risk of the counterparty.
Guidelines are implemented regarding the acceptability of types of collateral
and the valuation parameters. Collateral is mainly obtained in respect of
stock lending, certain reinsurance arrangements and to provide security
against the daily mark to model value of derivative financial instruments.
Management monitors the market value of the collateral received, requests
additional collateral when needed, and performs an impairment valuation when
impairment indicators exist and the asset is not fully secured and is not
carried at fair value. See note E4 for further information on collateral
arrangements.
E6.2.2 Market risk
Market risk is defined as the risk of reductions in earnings and/or value,
through financial or reputational loss, from unfavourable market movements.
The risk typically arises from exposure to equity, property and fixed income
asset classes and the impact of changes in interest rates, inflation rates and
currency exchange rates.
The Group is mainly exposed to market risk as a result of:
• the mismatch between liability profiles and the related asset investment
portfolios;
• the investment of surplus assets including shareholder reserves yet to
be distributed, surplus assets within the with-profit funds and assets held to
meet regulatory capital and solvency requirements; and
• the income flow of management charges derived from the value of invested
assets of the business.
The Group manages the levels of market risk that it accepts through the
operation of a market risk policy using a number of controls and techniques
including:
• Defined lists of permitted securities and/or application of investment
constraints and portfolio limits;
• Clearly defined investment benchmarks for policyholder and shareholder
funds;
• Stochastic and deterministic asset/liability modelling;
• Active use of derivatives to improve the matching characteristics of
assets and liabilities and to reduce the risk exposure of a portfolio; and
• Setting risk limits for main market risks and managing exposures against
these appetites.
All operations comply with regulatory requirements relating to the taking of
market risk.
Assets in the shareholder funds are managed against benchmarks that ensure
they are diversified across a range of asset classes, instruments and
geographies that are appropriate to the liabilities of the funds or are held
to match the cash flows anticipated to arise in the business. A combination of
limits by name of issuer, sector, geographical region and credit rating are
used where relevant to reduce concentration risk among the assets held.
The assets of the participating business are principally managed to support
the liabilities of the participating business and are appropriately
diversified by both asset class and geography, considering:
• The economic liability and how this varies with market conditions;
• The need to invest assets supporting participating business in a manner
consistent with the participating policyholders' reasonable expectations and
Principles and Practices of Financial Management ('PPFM'); and
• The need to ensure that regulatory and capital requirements are met.
In practice, an element of market risk arises as a consequence of the need to
balance these considerations, for example, in certain instances participating
policyholders may expect that equity market risk will be taken on their
behalf, and derivative instruments may be used to manage these risks.
Markets remain volatile particularly given geopolitical tensions, increased
inflation, and action by central banks to reduce inflationary pressures on
economies whilst balancing the need to aid post pandemic recovery. This is
noted in the Strategic Report principal risk section.
Interest rate and inflation risk
Interest rate risk is the risk that the fair value of future cash flows of a
financial instrument will fluctuate relative to the respective liability due
to the impact of changes in market interest rates on the value of
interest-bearing assets and on the value of future guarantees provided under
certain contracts of insurance. The paragraphs in this section also apply to
inflation risk, but references to fixed rate assets and liabilities would be
replaced with index-linked assets and liabilities.
The Group is required to manage its interest rate exposures in line with
qualitative risk appetite statements, quantitative risk metrics and any
additional hedging benchmarks. Interest rate risk is managed by matching
assets and liabilities where practicable and by entering into derivative
arrangements for hedging purposes where appropriate. This is particularly the
case for the non-participating funds and supported participating funds. For
unsupported participating business, some element of investment mismatching is
permitted where it is consistent with the principles of treating customers
fairly. The with-profit funds of the Group provide capital to allow such
mismatching to be effected. In practice, the life companies of the Group
maintain an appropriate mix of fixed and variable rate instruments according
to the underlying insurance or investment contracts and will review this at
regular intervals to ensure that overall exposure is kept within the risk
profile agreed for each particular fund. This also requires the maturity
profile of these assets to be managed in line with the liabilities to
policyholders.
The sensitivity analysis for interest rate and inflation risk indicates how
changes in the fair value or future cash flows of a financial instrument
arising from changes in market interest and inflation rates at the reporting
date result in a change in profit after tax 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 the result of time decay or changes to interest rate volatility
are not captured in the sensitivity analysis.
With-profit business and non-participating business within the with-profit
funds are exposed to interest rate risk as guaranteed liabilities are valued
relative to market interest rates and investments include fixed interest
securities and derivatives. For unsupported with-profit business the profit or
loss arising from mismatches between such assets and liabilities is largely
offset by increased or reduced discretionary policyholder benefits dependent
on the existence of policyholder guarantees. The contribution of unsupported
participating business to the Group result is largely limited to the
shareholders' share of the declared annual bonus. The contribution of the
supported participating business to the Group result is determined by the
shareholders' interest in any change in value in the capital advanced to the
with-profit funds.
In the non-participating funds, policy liabilities' sensitivity to interest
rates are matched primarily with 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.
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 £25 million (2021:
£364 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 £128 million
(2021: £415 million).
Equity and property risk
The Group is exposed to the risk of reductions in the valuation of equities
(or changes in the volatility) or property investments which could result in
reductions in asset values and losses for policyholders or shareholders. In
this context, equity assets should be taken to include shares, equity
derivatives, equity collectives and unlisted equities. Property assets include
direct property investment, shares in property companies, property collectives
and structured property assets.
The portfolio of marketable equity securities and property investments which
is carried in the statement of consolidated financial position at fair value,
has exposure to price risk. The Group's objective in holding these assets is
to earn higher long-term returns by investing in a diverse portfolio of
equities and properties. Portfolio characteristics are analysed regularly and
price risks are actively managed in line with investment mandates. The Group's
holdings are diversified across industries and concentrations in any one
company or industry are limited.
Equity and property price risk is primarily borne in respect of assets held in
with-profit funds, unit-linked funds or equity release mortgages in the
non-profit funds. For unit-linked funds this risk is borne by policyholders
and asset movements directly impact unit prices and hence policy values. For
with-profit funds policyholders' future bonuses will be impacted by the
investment returns achieved and hence the price risk, whilst the Group also
has exposure to the value of guarantees provided to with-profit policyholders.
In addition some equity investments are held in respect of shareholders'
funds. For the non-profit fund property price risk from equity release
mortgages is borne by the Group with the aim of achieving greater
diversification and investment returns, consistent with the Strategic Asset
Allocation approved by the Board. The Group as a whole is exposed to price
risk fluctuations impacting the income flow of management charges from the
invested assets of all funds; this is primarily managed through the use of
derivatives.
Equity and property price risk is managed through the agreement and monitoring
of financial risk profiles that are appropriate for each of the Group's life
funds in respect of maintaining adequate regulatory capital and treating
customers fairly. This is largely achieved through asset class diversification
and within the Group's ALM framework through the holding of derivatives or
physical positions in relevant assets where appropriate.
The shareholders' exposure to equity risk principally arises from the Group's
hedging strategy to protect the regulatory capital position, which results in
an adverse impact on profit on an increase in equity prices.
The sensitivity analysis for equity and property price risk illustrates how a
change in the fair value of equities and properties affects the Group result.
It takes into account the effect of such changes in equity and property prices
on all assets and liabilities that contribute to the Group's reported profit
after tax and in equity (but excludes the impact on the Group's pension
schemes).
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 £324 million (2021: £294 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 £269 million (2021: £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 £11 million (2021: £6 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 £10 million (2021: £4 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 and some historic business written in
the Republic of Ireland, the Group's principal transactions are carried out in
sterling. The assets for these books of business are generally held in the
same currency denomination as their liabilities, therefore, any foreign
currency mismatch is largely mitigated. Consequently, the foreign currency
risk relating to this business mainly arises when the assets and liabilities
are translated into sterling.
The Group's financial assets are primarily denominated in the same currencies
as its insurance and investment liabilities. Thus, the main foreign exchange
risk arises from recognised assets and liabilities denominated in currencies
other than those in which insurance and investment liabilities are expected to
be settled and, indirectly, from the non-UK earnings of UK companies.
Some of the Group's with-profit funds have an exposure to overseas assets
which is not driven by liability considerations. The purpose of this exposure
is to reduce overall risk whilst maximising returns by diversification. This
exposure is limited and managed through investment mandates which are subject
to the oversight of the investment committees of the boards of each life
company. Fluctuations in exchange rates from certain holdings in overseas
assets are hedged against currency risks.
During 2021, the Group entered into four hedging relationships to hedge the
currency risk on its Euro and US dollar denominated hybrid debt (US $500
million Tier 2 bonds, €500 million Tier 2 notes, US $750 million contingent
convertible Tier 1 notes and US $500 million Fixed Rate Reset Tier 2 notes as
set out in note E5) through cross currency rate swaps.
E6.2.3 Financial soundness risk
Financial soundness risk is a broad risk category encompassing capital
management risk, tax risk and liquidity and funding risk.
Capital management risk is defined as the failure of the Group, or one of its
separately regulated subsidiaries, to maintain sufficient capital to provide
appropriate security for policyholders and meet all regulatory capital
requirements whilst not retaining unnecessary capital. The Group has exposure
to capital management risk through the requirements of the Solvency II capital
regime, as implemented by the PRA, to calculate regulatory capital adequacy at
a Group level. The Group's UK life subsidiaries have exposure to capital
management risk through the Solvency II regulatory capital requirements
mandated by the PRA at the solo level. The Group's approach to managing
capital management risk is described in detail in note I3.
Tax risk
Tax risk is defined as the risk of reductions in earnings and/or value,
through financial or reputational loss, due to an unforeseen tax cost, or by
the inappropriate reporting and disclosure of information in relation to
taxation. Tax risk can be caused by:
• the Group, or one of its subsidiaries, making a material error in its
tax reporting;
• incorrect calculation of tax provisions;
• failure to implement the optimum financial arrangements to underpin a
commercial transaction; and
• incorrect operation of policyholder tax requirements.
Tax risk is managed by maintaining an appropriately-staffed tax team who have
the qualifications and experience to make judgements on tax issues, augmented
by advice from external specialists where required. In addition, the Group has
a formal tax risk policy, which sets out its risk appetite in relation to
specific aspects of tax risk, and which details the controls the Group has in
place to manage those risks.
Liquidity risk
Liquidity risk is defined as failure to maintain adequate levels of financial
resources to meet obligations as they fall due. Funding risk relates to the
potential inability to raise additional capital or liquidity when required in
order to maintain the resilience of the balance sheet. The Group has exposure
to liquidity risk as a result of servicing its external debt and equity
investors, and from the operating requirements of its subsidiaries. The
Group's subsidiaries have exposure to liquidity risk as a result of normal
business activities, specifically the risk arising from an inability to meet
short-term cash flow requirements and to meet obligations to policy
liabilities. The Board of Phoenix Group Holdings plc has defined a number of
governance objectives and principles and the liquidity risk frameworks of each
subsidiary are designed to ensure that:
• liquidity risk is managed in a manner consistent with the subsidiary
company boards' strategic objectives, risk appetite and PPFM;
• cash flows are appropriately managed and the reputation of the Group is
safeguarded; and
• appropriate information on liquidity risk is available to those making
decisions.
The Group's liquidity risk management strategy is based on a risk appetite of
less than a 1 in 200 chance of having insufficient liquid or tangible assets
to meet financial obligations as they fall due and is supported by:
• holding appropriate assets to meet liquidity buffers;
• holding high quality liquid assets to support day to day operations;
• an effective stress testing framework to ensure survival horizons are
met under different 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 organic and inorganic growth
ambitions, while maintaining sufficient headroom for hybrid capital under
Solvency II rules.
Liquidity forecasts showing headroom against liquidity buffers are prepared
regularly to predict required liquidity levels over both the short and
medium-term allowing management to respond appropriately to changes in
circumstances. In the event of a liquidity shortfall, 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:
2022 1 year or less or on demand 1-5 years Greater than 5 years No fixed term Total Less amounts classified as held for sale Total
(see note A6.1)
£m £m £m £m £m
£m £m
Liabilities under insurance contracts 12,898 29,818 59,300 - 102,016 - 102,016
Investment contracts 152,157 - - - 152,157 (8,312) 143,845
Borrowings(1) 268 1,326 2,357 64 4,015 - 4,015
Deposits received from reinsurers(1) 377 687 1,626 - 2,690 - 2,690
Derivatives(1) 757 794 9,335 - 10,886 (4) 10,882
Net asset value attributable to unitholders 2,978 - - - 2,978 - 2,978
Obligations for repayment of collateral received 1,706 - - - 1,706 - 1,706
Reinsurance payables 95 20 130 - 245 - 245
Payables related to direct insurance contracts 1,964 - - - 1,964 - 1,964
Lease liabilities(1) 11 37 95 - 143 - 143
Accruals and deferred income 549 42 12 - 603 (37) 566
Other payables 965 - - - 965 - 965
2021 1 year or less or on 1-5 years Greater than 5 years No fixed term Total Less amounts classified as held for sale (see note A6.1) Total
demand
£m £m £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
Borrowings(1) 664 1,380 2,772 70 4,886 - 4,886
Deposits received from reinsurers(1) 419 834 2,355 - 3,608 - 3,608
Derivatives(1) 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 liabilities(1) 11 59 72 - 142 - 142
Accruals and deferred income 548 59 7 7 621 (54) 567
Other payables 721 - - - 721 - 721
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.
The Group has a set of established policies and processes to manage its
exposure to liquidity risk, including impacts arising from the economic
environment, business developments and funding changes. Where liquidity risk
is heightened, such as during the market volatility following the UK
mini-budget, triggers are in place to enhance the frequency of liquidity
monitoring and to implement available contingency actions to ensure sufficient
liquidity is maintained.
E6.2.4 Strategic risk
Strategic risks threaten the achievement of the Group strategy through poor
strategic decision-making, implementation or response to changing
circumstances. The Group recognises that core strategic activity brings with
it exposure to strategic risk. However, the Group seeks to proactively review,
manage and control these exposures.
The Group's strategy and business plan are exposed to external events that
could prevent or impact the achievement of the strategy; events relating to
how the strategy and business plan are executed; and events that arise as a
consequence of following the specific strategy chosen. The identification and
assessment of strategic risks is an integrated part of the Risk Management
Framework. Strategic risk should be considered in parallel with the Risk
Universe as each of the risks within the Risk Universe can impact the Group's
strategy.
A Strategic Risk Policy is maintained and reported against regularly, with a
particular focus on risk management, stakeholder management, corporate
activity and overall reporting against the Group's strategic ambitions.
E6.2.5 Operational risk
Operational risk is the risk of reductions in earnings and/or value, through
financial or reputational loss, from inadequate or failed internal processes
and systems, or from people related or external events. Operational risk
arises due to failures in one or more of the following aspects of our
business:
• indirect exposures through outsourcing service providers and suppliers;
• direct exposures through internal practices, actions or omissions;
• external threats from individuals or groups focused on malicious or
criminal activities, or on external events occurring which are not within the
Group's control; and
• negligence, mal-practice or failure of employees, or suppliers to follow
good practice in delivering operational processes and practices.
It is accepted that it is neither possible, appropriate nor cost effective to
eliminate 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.
The Group also has a set of operational risk policies that set out the nature
of the 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: Failings in the design and execution of the support
and service interactions with customers leads to poor customer outcomes.
• Customer Transformation: The design, governance and oversight of
Strategic Customer Transformation Activity in retained functions and service
providers, fails to deliver on reasonable customer expectations, taking
account of the Phoenix Group customer treatment risk appetites and regulatory
requirements.
• Product and Propositions: Products/propositions are not designed and
managed appropriates leading to poor customer outcomes.
• Sales and Distribution: Inappropriate (unclear, unfair or misleading)
financial promotions, sales practices and/or distribution agreements resulting
in poor customer outcomes.
The Group's Conduct Risk Appetite, sets the boundaries within which the Group
expect customer outcomes to be managed. In addition, the Group Conduct
Strategy, which overarches our Risk Universe and all risk policies is designed
to detect where our customers are at risk of poor outcome, minimise conduct
risks, and respond with timely and appropriate mitigating actions.
The Group also has a suite of customer polices which set out the key customer
risks and control objectives in place to mitigate them. The customer risks for
the Group are regularly reported to management oversight committees.
F. Insurance contracts, investment contracts with DPF and reinsurance
F1. Liabilities under insurance contracts
Classification 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 of future trends.
The realistic liability for any contract is equal to the sum of the WPBR and
the cost of future policy-related liabilities. The cost of future
policy-related liabilities includes the unallocated surplus attributable to
policyholders in relation to closed 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.
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. Further details of net income
under arrangements with reinsurers are given in note F3.3.
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 Reinsurers' share
2022 2022 2021 2021
£m £m £m £m
Life assurance business:
Insurance contracts 77,499 6,142 99,169 8,587
Investment contracts with DPF 24,517 - 29,695 -
102,016 6,142 128,864 8,587
Amounts due for settlement after 12 months 89,117 5,194 114,545 7,472
Gross liabilities Reinsurers' share Gross liabilities Reinsurers' share
2022 2022 2021 2021
£m £m £m £m
At 1 January 128,864 8,587 133,907 9,542
Premiums 7,094 1,727 7,455 2,079
Claims (9,392) (1,693) (9,656) (1,597)
Foreign exchange adjustments 797 5 (1,168) (48)
Disposal of Ark Life - - (799) (730)
Other changes in liabilities(1) (25,347) (2,484) (875) (659)
At 31 December 102,016 6,142 128,864 8,587
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.
2022 2021
£m £m
At 1 January 1,801 1,768
Transfer to consolidated income statement (378) (106)
Foreign exchange movements (79) 139
At 31 December 1,344 1,801
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 £1,727 million (2021:
£2,079 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 £4,002 million (2021: £4,882 million).
Where the Group receives collateral on reinsurance transactions in the form of
cash it is recognised in the statement of consolidated financial position
along with a corresponding liability to repay the amount of collateral
received, disclosed as 'Deposits received from reinsurers'. Where there is
interest payable on such collateral, it is recognised within 'Net income under
arrangements with reinsurers' (see note F3.3). The amounts recognised as
financial assets and liabilities from cash collateral received at 31 December
2022 are set out below.
Reinsurance transactions
2022 2021
£m £m
Financial assets 267 373
Financial liabilities 267 373
F3.3 Net income under arrangements with reinsurers
The Group has reinsured the longevity and investment risk related to a
portfolio of annuity contracts held within the HWPF. At inception of the
reinsurance contract the reinsurer was required to deposit an amount equal to
the reinsurance premium with the Group. The amount recognised in the statement
of consolidated financial position in respect of this deposit is £2.3 billion
as at 31 December 2022 (31 December 2021: £3.2 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 income under arrangements with reinsurers.
2022 2021
£m £m
Interest payable on deposits from reinsurers (46) (11)
Premium adjustments 473 33
Net income under arrangements with reinsurers 427 22
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 pre-defined
appetite limits. If a risk is moving out of appetite, the Group can choose to
mitigate it via reinsurance in the case of longevity, mortality and morbidity
risks, or by taking other risk reducing actions.
This is supported by additional methods to assess and monitor insurance risk
exposures for both individual types of risks insured and overall risks. These
methods include internal risk measurement models, experience analyses,
external data comparisons, sensitivity analyses, scenario analyses and stress
testing. Assumptions that are deemed to be financially significant are
reviewed at least annually for pricing and reporting purposes.
The profitability of the run-off of the 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, where little weight has been given to experience for most products
over the pandemic given its anomalous nature, in addition to the implications
arising from the cost of living crisis, as outlined in page 66 - Principal
Risks and Uncertainties section of the Annual Report and Accounts. Demographic
experience and the latest views on future trends continue to be considered in
regular assumption reviews although, for most products, experience over the
COVID-19 pandemic has still been given little weight given its anomalous
nature.
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 £60 million (2021: £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 £61 million (2021: £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 296 million (2021: £517 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 £290 million (2021: £530 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 £47 million (2021: £27 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 £48 million (2021: £27 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 (2021: 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 £905 million (2021: £1,968 million)
and £59 million (2021: £111 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 £197
million (2021: £349 million) and £2 million (2021: £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)/increase in insurance liabilities (Decrease)/increase in insurance liabilities
2022 2021
£m £m
Change in longevity assumptions (135) (272)
Change in persistency assumptions 9 (12)
Change in mortality assumptions 5 (7)
Change in expenses assumptions 200 275
Change in other assumptions (376) -
2022:
The £135 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 2021
projection tables.
The £9 million and £5 million negative impact of changes in persistency and
mortality assumptions respectively reflects the results of the latest
experience investigations.
The £200 million negative impact from changes in expense assumptions includes
an increase in reserves of £77 million in respect of the anticipated costs
associated with the implementation of IFRS 17 and £102 million in respect of
the delivery of the Group Target Operating Model for IT and Operations. To the
extent that the recognition criteria have been met, the Group has also
recognised accounting provisions in respect of the anticipated costs of
restructuring activity (see note G7 for further details).
Other assumptions includes a £329 million positive impact of harmonising the
calibration of prudential margins included within liabilities under insurance
contracts in the ReAssure life companies with the rest of the Group and a £47
million positive impact from updating the married rates assumption in respect
of reversionary annuities.
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.
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.
Gross(1) Reinsurance
2022 Insurance Investment Insurance contracts Investment contracts with DPF
contracts
contracts with
DPF £m £m
£m
£m
With-profit funds:
Pensions:
Deferred annuities - with guarantees 5,627 36 413 -
Deferred annuities - without guarantees 1,445 289 - -
Immediate annuities 4,968 - 2,881 -
Unitised with-profit 10,438 22,337 - -
Total pensions 22,478 22,662 3,294 -
Life:
Immediate annuities 261 - 1 -
Unitised with-profit 7,687 930 - -
Life with-profit 1,681 - 9 -
Total life 9,629 930 10 -
Other 1,020 (1) 159 -
Non-profit funds:
Deferred annuities - with guarantees 310 - - -
Deferred annuities - without guarantees 2,851 - 156 -
Immediate annuities 27,279 - 2,137 -
Protection 1,018 - 439 -
Unit-linked 13,096 921 28 -
Other (182) 5 (81) -
77,499 24,517 6,142 -
1 £11,753 million (2021: £9,864 million) of liabilities are subject to
longevity swap arrangements.
Gross Reinsurance
2021 Insurance Investment Insurance Investment
contracts
contracts with
contracts
contracts with
DPF
DPF
£m
£m
£m £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 -
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.
Whilst there has been an increase in interest rates recently, long-term rates
remain relatively low compared to historical levels and life expectancy has
increased more rapidly than originally anticipated. The guaranteed terms on
GAR policies are more favourable than the annuity rates currently available in
the market available for cash benefits. The guaranteed terms on GCO policies
are currently not valuable. Deferred annuity policies which are written to
provide annuity benefits are managed in a similar manner to immediate
annuities and are exposed to the same risks.
The option provisions on GAR policies are particularly sensitive to downward
movements in interest rates, increasing life expectancy and the proportion of
customers exercising their option. Adverse movements in these factors could
lead to a requirement to increase reserves which could adversely impact profit
and potentially require additional capital. In order to address the interest
rate risk (but not the risk of increasing life expectancy or changing customer
behaviour with regard to exercise of the option), insurance subsidiaries
within the Group have purchased derivatives that provide protection against an
increase in liabilities and have thus reduced the sensitivity of profit to
movements in interest rates (see note E6.2.2).
The Group seeks to manage this risk in accordance with both the terms of the
issued policies and the interests of customers, and has obtained external
advice supporting the manner in which it operates the long-term funds in this
respect.
Immediate annuities
This type of annuity is purchased with a single premium at the outset, and is
paid to the policyholder for the remainder of their lifetime. Payments may
also continue for the benefit of a surviving spouse or partner after the
annuitant's death. Annuities may be level, or escalate at a fixed rate, or may
escalate in line with a price index and may be payable for a minimum period
irrespective of whether the policyholder remains alive.
The main risks associated with this product are longevity and investment
risks. Longevity risk arises where the annuities are paid for the lifetime of
the policyholder, and is managed through the initial pricing of the annuity
and through reinsurance (appropriately collateralised) or transfer of existing
liabilities. Annuities may also be a partial 'natural hedge' against losses
incurred in protection business in the event of increased mortality (and vice
versa) although the extent to which this occurs will depend on the similarity
of the demographic profile of each book of business. In addition, the Group
has in place longevity swaps that provide downside protection over longevity
risk.
The pricing assumption for mortality risk is based on both historic internal
information and externally-generated information on mortality experience,
including allowances for future mortality improvements. Pricing will also
include a contingency margin for adverse deviations in assumptions.
Market and credit risk is influenced by the extent to which the cash flows
under the contracts have been matched by suitable assets which is managed
under the ALM framework. Asset/liability modelling is used to monitor this
position on a regular basis.
Protection
These contracts are typically secured by the payment of a regular premium
payable for a period of years providing benefits payable on certain events
occurring within the period. The benefits may be a single lump sum or a series
of payments and may be payable on death, serious illness or sickness.
The main risk associated with this product is the claims experience and this
risk is managed through the initial pricing of the policy (based on actuarial
principles), the use of reinsurance and a clear process for administering
claims.
Market and credit risk is influenced by the extent to which the cash flows
under the contracts have been matched by suitable assets which is managed
under the ALM framework. Asset/liability modelling is used to monitor this
position on a regular basis.
G. Other statement of consolidated financial position notes
G1. Pension schemes
Defined contribution pension schemes
Obligations for contributions to defined contribution pension schemes are
recognised as an expense in the consolidated income statement as incurred.
Defined benefit pension schemes
The net surplus or deficit (the economic surplus or deficit) in respect of the
defined benefit pension schemes is calculated by estimating the amount of
future benefit that employees have earned in return for their service in the
current and prior years; that benefit is discounted to determine its present
value and the fair value of any scheme assets is deducted.
The economic surplus or deficit is subsequently adjusted to eliminate on
consolidation the carrying value of insurance policies issued by Group
entities to the defined benefit pension schemes (the reported surplus or
deficit). A corresponding adjustment is made to the carrying values of
insurance contract liabilities and investment contract liabilities.
As required by IFRIC 14, IAS 19 -'The limit on a Defined Benefit Asset,
Minimum Funding Requirements and their Interaction', to the extent that the
economic surplus (prior to the elimination of the insurance policies issued by
Group entities) will be available as a refund, the economic surplus is stated
after a provision for tax that would be borne by the scheme administrators
when the refund is made. The Group recognises a pension surplus on the basis
that it is entitled to the surplus of each scheme in the event of a gradual
settlement of the liabilities, due to its ability to order a winding up of the
Trust.
Additionally under IFRIC 14 pension funding contributions are considered to be
a minimum funding requirement and, to the extent that the contributions
payable will not be available to the Group after they are paid into the
Scheme, a liability is recognised when the obligation arises. The net pension
scheme asset/liability represents the economic surplus net of all adjustments
noted above.
The Group determines the net interest expense or income on the net pension
scheme asset/liability for the period by applying the discount rate used to
measure the defined benefit obligation at the beginning of the annual period
to the opening net pension scheme asset/liability. The discount rate is the
yield at the period end on AA credit rated bonds that have maturity dates
approximating to the terms of the Group's obligations. The calculation is
performed by a qualified actuary using the projected unit credit method.
The movement in the net pension scheme asset/liability is analysed between the
service cost, past service cost, curtailments and settlements (all recognised
within administrative expenses in the consolidated income statement), the net
interest cost on the net pension scheme asset/liability, including any
reimbursement assets (recognised within net investment income in the
consolidated income statement), remeasurements of the net pension scheme
asset/liability (recognised in other comprehensive income) and employer
contributions.
This note describes the Group's 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 unfunded unapproved retirement benefit scheme
('ReAssure Private Retirement Trust'):
2022 2021
£m £m
Pearl Group Staff Pension Scheme
Economic surplus 46 263
Adjustment for insurance policies eliminated on consolidation (1,501) (1,680)
Net economic deficit (1,455) (1,417)
Provision for tax on that part of the economic surplus available as a refund - (92)
on a winding-up of the Scheme
Net pension scheme liability, as reported (1,455) (1,509)
Reimbursement right in respect of reinsurance, as reported 205 212
Add: value attributed to assets held by PLL within financial assets(1) 1,576 1,896
Adjusted net pension scheme asset 326 599
PGL Pension Scheme
Economic surplus 23 26
Adjustment for insurance policies eliminated on consolidation (1,079) (1,618)
Net pension scheme liability, as reported (1,056) (1,592)
Add: assets held by PLL within financial assets(1) 1,246 2,084
Adjusted net pension scheme asset 190 492
Abbey Life Staff Pension Scheme
Economic (deficit)/surplus (5) 12
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 (3) (7)
Net pension scheme (liability)/asset (8) 1
ReAssure Staff Pension Scheme
Economic surplus 22 54
Provision for tax on that part of the economic surplus available as a refund (8) (19)
on a winding-up of the Scheme
Net pension scheme asset 14 35
ReAssure Private Retirement Trust
Net pension scheme liability (1) (2)
1 The Pearl Scheme and the PGL Pension Scheme have both executed buy-in
transactions with a Group life company and subsequently assets supporting the
Group's actuarial liabilities are recognised on a line by line basis within
financial assets in the statement of consolidated financial position. Further
details are included in notes G1.1 and G1.2 below.
In the current and prior periods an adjusted net pension scheme asset has been
presented in relation to both these pension schemes. The value of the assets
held by PLL within financial assets in respect of the PGL Pension Scheme
buy-ins is equal to the assets posted to a ring-fenced collateral account. For
the Pearl Scheme the assets held by PLL supporting the buy-ins are not
ring-fenced and the value has been determined as the value of the insurance
contract liability within the PLL financial statements less the value of the
associated reinsurance asset. .
Movements in these financial assets are reflected in the consolidated income
statement within Net investment income, however as noted in the accounting
policy, the movement in the net pension scheme liability (as shown in notes
G1.1 and G1.2) is primarily reflected in other comprehensive income.
Risks
The Group's defined benefit schemes typically expose the Group to a number of
risks, the most significant of which are:
Asset volatility - the value of the schemes' assets will vary as market
conditions change and as such is subject to considerable volatility. The
liabilities are calculated using a discount rate set with reference to
corporate bond yields; if assets underperform this yield, this will create a
deficit. The majority of the assets are held within a liability driven
investment strategy which is linked to the funding basis of the schemes (set
with reference to government bond yields). As such, to the extent that
movements in corporate bond yields are out of line with movements in
government bond yields, volatility will arise.
Inflation risk - a significant proportion of the schemes' benefit obligations
are linked to inflation, and higher inflation will lead to higher liabilities
(although in most cases, caps on the level of inflationary increases are in
place to protect against extreme inflation). The majority of the assets are
held within a liability driven investment strategy which allows for movements
in inflation, meaning that changes in inflation should not materially affect
the surplus.
Life expectancy - the majority of the schemes' obligations are to provide
benefits for the life of the member therefore increases in life expectancy
will result in an increase in the liabilities. For the Pearl and PGL schemes,
this is 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 the Group's pension schemes is set out below.
G1.1 Pearl Group Staff Pension Scheme
Scheme details
The Pearl Scheme comprises a final salary section, a money purchase section
and a hybrid section (a mix of final salary and money purchase). The Pearl
Scheme is closed to new members and has no active members.
Defined benefit scheme
The Pearl Scheme is established under, and governed by, the trust deeds and
rules and has been funded by payment of contributions to a separately
administered trust fund. A Group company, Pearl 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 borne 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 2022, undertaken by independent qualified actuaries.
The present values of the defined benefit obligation and the related interest
costs have been measured using the projected unit credit method.
A triennial funding valuation of the Pearl Scheme as at 30 June 2021 was
completed in 2022 by a qualified actuary. This showed a surplus as at 30 June
2021 of £67 million, on the agreed technical provisions basis. The funding
and IFRS accounting bases of valuation can give rise to different results for
a number of reasons. The funding basis of valuation is based on general
principles of prudence whereas the accounting valuation is based on best
estimates. Discount rates are gilt-based for the funding valuation whereas the
rate used for IFRS valuation purposes is based on a yield curve for high
quality AA-rated corporate bonds. In addition the values are prepared at
different dates which will result in differences arising from changes in
market conditions and employer contributions made in the subsequent period.
Pension Scheme Commitment Agreement and buy-in transactions
On 17 November 2020, the Pearl Scheme entered into a Commitment Agreement with
PGH2 to complete a series of buy-ins. At the same time, the Pearl Scheme
completed the first buy-in with Phoenix Life Limited ('PLL') covering 25% of
the Scheme's pensioner and deferred member liabilities, transferring the
associated risks, including longevity improvement risk, to PLL effective from
30 September 2020.
Two further buy-in transactions were completed in July 2021 and October 2021
covering 35% and 15% respectively of the Scheme's pensioner and deferred
member liabilities and the final buy-in transaction was completed in November
2022. Risks, including longevity improvement risk, were transferred to PLL
effective from 28 May 2021 and 31 August 2021 and 30 September 2022
respectively.
Upon completion of each buy-in transaction the Scheme transferred the
following plan assets to PLL:
• In November 2020, £731 million of plan assets were transferred to PLL
in satisfaction of the premium of £735 million and was net of a £4 million
payment by PLL to the Scheme in respect of members' benefits for October and
November 2020;
• In July 2021, £1,049 million of plan assets were transferred to PLL in
satisfaction of the premium and a further £12 million cash payment was paid
by the Scheme in August 2021. PLL paid £5 million to the Scheme in respect of
members' benefits for June and July 2021; and
• In October 2021, £433 million of plan assets were transferred to PLL in
satisfaction of the premium of £435 million and was net of a £2 million
payment by PLL to the Scheme in respect of members' benefits for September and
October 2021. A further £1 million cash payment in respect of the premium was
paid by the Scheme in December 2021.
• In November 2022, £556 million of plan assets were transferred to PLL
in satisfaction of the premium of £560 million and was net of a £4 million
payment by PLL to the Scheme in respect of members' benefits for October and
November 2022.
The assets transferred to PLL are recognised in the relevant line within
financial assets in the consolidated statement of financial position. The
economic effect of the buy-in transactions in the Scheme is to replace the
plan assets transferred with a single line insurance policy reimbursement
right asset which is subsequently eliminated on consolidation. The value of
this insurance policy at 31 December 2022 was £1,501 million (2021: £1,680
million) which includes an amount owed by PLL of £2 million (2021: £12
million).
The Commitment agreement contained provisions under which payments by PGH2 to
the Scheme were required in the event that the Group did not meet the minimum
buy-in completion schedule the details of which are as follows:
• Gilts Deficit Recovery Contributions: Contributions calculated as
amounts required to reach full funding on a gilts-basis by 30 June 2027.
Following the completion of the recent buy-in transactions, the Group has no
further obligation to pay these contributions; and
• Contingent Contributions: These represented 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 now
£nil (2021: £50 million).
The new agreement also introduced a new form of security provided by PGH2 to
the trustee. The share charges over certain Group entities were replaced by a
new surety bond arrangement, whereby two external third-party insurers, each
provided £100 million of cover payable to the Scheme following certain
trigger events. This cover provided by the surety bond guarantee was fully
released upon completion of the final buy-in transaction in November 2022.
No contributions were paid to the Pearl Scheme in either the current or prior
periods. PGH2 continues to meet the administrative and non-investment running
expenses of the Scheme as set out in the schedule of contributions.
During the year, the Company reached an agreement for the removal of a trustee
discretion to pay some pension increases in excess of the 5% cap. The trustee
has agreed to give up this discretion in exchange for a single 1.6% uplift for
current pensions in payment effective from 1 April 2022 and a 1.3% future
increase to eligible benefits of both pension and deferred members. The
financial impact of the 1.6% uplift has been to recognise an increase in the
defined benefit obligation of £15 million and a past service cost in the
consolidated income statement.
Reimbursement right asset in respect of Reinsurance arrangement
In March 2022, PLL entered into a quota share reinsurance arrangement with an
external insurer to reinsure a further 27% of the risks transferred to PLL
as part of the third buy-in transaction with the Pearl Scheme. A total of
approximately 91% of these liabilities have now been reinsured. A premium of
£104 million was paid by PLL to the reinsurer. As PLL expects to use the
claims received to pay for its obligations under the insurance contract
between it and the Pearl scheme (i.e. to settle the defined benefit
obligation) the reinsurance arrangement is considered to be a non-qualifying
insurance policy and is classified as a reimbursement right. The reinsurance
arrangement is expected to match a proportion of the defined benefit
obligation of the Pearl Scheme therefore the valuation of the reimbursement
right is consistent with the valuation of the associated defined benefit
obligation. The value of the reimbursement right asset amounted to £205
million (31 December 2021: £212 million).
Summary of amounts recognised in the consolidated financial statements
The amounts recognised in the consolidated financial statements are as
follows:
2022 Fair value of scheme Defined Provision for Pension Reimbursement right
assets
benefit obligation
tax on the economic surplus available as a refund
Scheme
Liability £m
£m £m £m
£m
At 1 January 807 (2,224) (92) (1,509) 212
Interest income/(expense) 16 (52) (2) (38) 4
Past service cost - (15) - (15) -
Included in profit or loss 16 (67) (2) (53) 4
Remeasurements:
Return on plan assets excluding amounts included in interest income (208) - - (208) (101)
Gain from changes in demographic assumptions - 3 - 3 -
Gain from changes in financial assumptions - 805 - 805 -
Experience loss - (116) - (116) -
Change in provision for tax on economic surplus available as a refund - - 94 94 -
Included in other comprehensive income (208) 692 94 578 (101)
Income received from insurance policies 89 - - 89 -
Benefit payments (98) 98 - - (14)
Assets transferred as premium for Scheme buy-in (560) - - (560) -
Assets transferred as premium for reinsurance arrangement 104
At 31 December 46 (1,501) - (1,455) 205
2021 Fair value of scheme Defined Provision for Pension Reimbursement right asset
assets
benefit obligation
tax on the economic surplus available as a refund
Scheme
Liability £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 -
Loss from changes in financial assumptions - 89 - 89 -
Experience gain - (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
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
2022 2021
Total Of which not quoted in an Total Of which not
active market
quoted in an
£m
£m
active market
£m
£m
Hedging portfolio - - 438 23
Other debt securities - - 349 -
Properties 5 5 104 104
Private equities 4 4 4 4
Hedge funds 3 3 4 4
Cash and other 34 - 67 -
Obligations for repayment of stock lending collateral received - - (159) -
Reported scheme assets 46 12 807 135
Add back:
Insurance policies eliminated on consolidation 1,501 1,501 1,680 1,680
Economic value of assets 1,547 1,513 2,487 1,815
Defined benefit obligation
The calculation of the defined benefit obligation can be allocated to the
scheme's members as follows:
• Deferred scheme members: 40% (2021: 40%); and
• Pensioners: 60% (2021: 60%)
The weighted average duration of the defined benefit obligation at 31 December
2022 is 13.5 years (2021: 16 years).
Principal assumptions
The principal financial assumptions of the Pearl Scheme are set out in the
table below:
2022 2021
% %
Rate of increase for pensions in payment (5% per annum or RPI if lower) 3.05 3.20
Rate of increase for deferred pensions (CPI) 2.70 2.70
Discount rate 4.95 2.00
Inflation - RPI 3.30 3.30
Inflation - CPI 2.70 2.70
The discount rate and inflation rate assumptions have been determined by
considering the shape of the appropriate yield curves and the duration of the
Pearl Scheme's liabilities. This method determines an equivalent single rate
for each of the discount and inflation rates, which is derived from the
profile of projected benefit payments.
The post-retirement mortality assumptions are in line with a scheme-specific
table which was derived from the actual mortality experience in recent years
based on the SAPS standard tables for males and for females based on year of
use. Future longevity improvements from 1 January 2021 are based on amended
CMI 2021 Core Projections (2021: From 1 January 2021 based on amended CMI 2020
Core Projections) and a long-term rate of improvement of 1.5% (2021: 1.7%) per
annum for males and 1.2% (2021: 1.2%) per annum for females. Under these
assumptions, the average life expectancy from retirement for a member
currently aged 40 retiring at age 60 is 29.2 years and 30.5 years for male and
female members respectively (2021: 29.8 years and 30.6 years respectively).
A quantitative sensitivity analysis for significant actuarial assumptions is
shown below:
2022
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps 25bps 25bps 25bps 1 year 1 year
increase decrease increase decrease increase decrease
Impact on the defined benefit obligation (£m) 1,501 (40) 42 26 (25) 37 (37)
2021
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps 25bps 25bps 25bps 1 year 1 year
increase decrease increase decrease increase decrease
Impact on the defined benefit obligation (£m) 2,224 (87) 93 70 (68) 80 (80)
The above sensitivity analyses are based on a change in an assumption while
holding all other assumptions constant. In practice, this is unlikely to
occur, and changes in some of the assumptions may be correlated. When
calculating the sensitivity of the defined benefit obligation to significant
actuarial assumptions the same method has been applied as when calculating the
pension asset recognised within the statement of consolidated financial
position.
G1.2 PGL Pension Scheme
The PGL Pension Scheme comprises a final salary section and a defined
contribution section.
Scheme details
Defined contribution scheme
On 1 July 2020 the Group closed the defined contribution section of the PGL
Scheme and ceased making contributions from this date.
Defined benefit scheme
The defined benefit section of the PGL Pension Scheme is a final salary
arrangement which is closed to new entrants and has no active members.
The PGL Scheme is administered by a separate trustee company, PGL Pension
Trustee Ltd. The trustee company is comprised of two representatives from the
Group, three member nominated representatives and one independent trustee in
accordance with the trustee company's articles of association. The trustee is
required by law to act in the interest of all relevant beneficiaries and is
responsible for the day to day administration of the benefits.
The valuation has been based on an assessment of the liabilities of the PGL
Pension Scheme as at 31 December 2022, undertaken by independent qualified
actuaries.
To the extent that an economic surplus will be available as a refund, the
economic surplus is stated after a provision for tax that would be borne by
the scheme administrators when the refund is made.
A triennial funding valuation of the PGL Pension Scheme as at 30 June 2021 was
completed in 2022 by a qualified actuary and finalised in January 2023. This
showed a surplus as at 30 June 2021 of £2 million. The IFRS valuation cash
flows reflect the latest available data and are not limited to being updated
following the completion of each funding valuation.
There are no further committed contributions to pay in respect of the defined
benefit section of the Scheme.
Insurance policies with Group entities
In March 2019, the PGL Pension Scheme entered into a 'buy-in' agreement with
PLL which covered the remaining pensioner and deferred members of the Scheme
not covered by the first such agreement concluded in December 2016. The plan
assets transferred to PLL as premium are held in a collateral account and are
recognised in the relevant line within financial assets in the statement of
consolidated financial position. The economic effect of these transactions in
the Scheme is to replace the plan assets transferred with a single line
insurance policy reimbursement asset which is eliminated on consolidation
along with the relevant insurance contract liabilities in PLL.
The value of the insurance policies with Group entities at 31 December 2022 is
£1,079 million (2021: £1,618 million).
Summary of amounts recognised in the consolidated financial statements
The amounts recognised in the consolidated financial statements are as
follows:
2022 Fair value of scheme assets Defined benefit obligation Total
£m £m £m
At 1 January 31 (1,623) (1,592)
Interest income/(expense) 1 (32) (31)
Administrative expenses (4) - (4)
Included in profit or loss (3) (32) (35)
Remeasurements:
Return on plan assets excluding amounts included in interest income (1) - (1)
Gain from changes in demographic assumptions - 5 5
Gain from changes in financial assumptions - 531 531
Experience loss - (36) (36)
Included in other comprehensive income (1) 500 499
Income received from insurance policies 72 - 72
Benefit payments (72) 72 -
At 31 December 27 (1,083) (1,056)
2021 Fair value of scheme assets Defined benefit obligation Total
£m £m £m
At 1 January 35 (1,754) (1,719)
Interest expense - (25) (25)
Administrative expenses (4) - (4)
Included in profit or loss (4) (25) (29)
Remeasurements:
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)
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
2022 2021
Total Of which not quoted in an active market Total Of which not quoted in an active market
£m £m £m £m
Cash and other 27 - 31 -
Reported scheme assets 27 - 31 -
Add back:
Insurance policies eliminated on consolidation 1,079 1,079 1,618 1,610
Economic value of assets 1,106 1,079 1,649 1,610
Defined benefit obligation
The calculation of the defined benefit obligation can be allocated to the
scheme's members as follows:
• Deferred scheme members: 36% (2021: 36%); and
• Pensioners: 64% (2021: 64%)
The weighted average duration of the defined benefit obligation at 31 December
2022 is 13.5 years (2021: 16 years).
Principal assumptions
The principal financial assumptions of the PGL Pension Scheme are set out in
the table below:
2022 2021
% %
Rate of increase for pensions in payment (7.5% per annum or RPI if lower) 3.30 3.30
Rate of increase for deferred pensions (CPI) 2.70 2.70
Discount rate 4.95 2.00
Inflation - RPI 3.30 3.30
Inflation - CPI 2.70 2.70
The discount rate and inflation assumptions have been determined by
considering the shape of the appropriate yield curves and the duration of the
PGL Pension Scheme liabilities. This method determines an equivalent single
rate for each of the discount and inflation rates, which is derived from the
profile of projected benefit payments.
The post-retirement mortality assumptions are in line with 86%/94% of S1P
Light base tables for males and females. Future longevity improvements from 1
January 2021 are based on amended CMI 2021 Core Projections (2021: From 1
January 2021 based on amended CMI 2020 Core Projections) with a long-term rate
of improvement of 1.5% (2021: 1.7%) per annum for males and 1.2% (2021: 1.2%)
per annum for females. Under these assumptions, the average life expectancy
from retirement for a member currently aged 40 retiring at age 62 is 27.7
years (2021: 28.0 years) and 29.1 years (2021: 28.9 years) for male and female
members respectively.
A quantitative sensitivity analysis for significant actuarial assumptions is
shown below:
2022
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps 25bps 25bps 25bps 1 year 1 year
increase decrease increase decrease increase decrease
Impact on the defined benefit obligation (£m) 1,083 (31) 33 23 (22) 30 (30)
2021
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps 25bps 25bps 25bps 1 year 1 year
increase decrease increase decrease increase decrease
Impact on the defined benefit obligation (£m) 1,623 (62) 66 54 (52) 60 (60)
The above sensitivity analyses are based on a change in an assumption while
holding all other assumptions constant. In practice, this is unlikely to
occur, and changes in some of the assumptions may be correlated. When
calculating the sensitivity of the defined benefit obligation to significant
actuarial assumptions the same method has been applied as when calculating the
pension liability recognised within the statement of consolidated financial
position.
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 2022 undertaken by independent qualified
actuaries. The present values of the defined benefit obligation and the
related interest costs have been measured using the projected unit credit
method.
Funding
The last funding valuation of the Abbey Life Scheme was carried out by a
qualified actuary as at 31 March 2021 and showed a deficit of £86 million.
Following completion of the funding valuation a recovery plan was agreed
between the Group and the trustee of the Abbey Life Scheme for PeLHL to pay
monthly contributions of £400,000 into the Scheme until 31 July 2025 to
eliminate the funding shortfall.
A new schedule of contributions was agreed effective from November 2021, for
PeLHL to pay the following amounts in respect of deficit contributions in
addition to the amounts payable under the recovery plan:
• fixed monthly contributions of £400,000 payable from 1 August 2025 to
30 June 2026;
• monthly contributions in respect of administration expenses of £106,295
payable up to 31 March 2022, then increasing annually in line with the Retail
Prices Index assumption to 30 June 2028; and
• annual payments of £4 million into the New 2016 Charged Account by 31
July each year, with the next payment being made 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 £3 million (2021: £7 million) has been recognised
reflecting a charge on any refund of the resultant IAS 19 surplus that arises
after adjustment for discounted future contributions of £15 million (2021:
£21 million) in accordance with the minimum funding requirement. A deferred
tax asset of £nil (2021: £4 million) 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:
2022 Fair value of scheme Defined Provision for Minimum funding requirement obligation Total
assets
benefit obligation
tax on the economic surplus available as a refund
£m £m
£m £m £m
At 1 January 330 (318) (4) (7) 1
Interest income/(expense) 7 (6) - - 1
Administration expenses (2) - - - (2)
Included in profit or loss 5 (6) - - (1)
Remeasurements:
Return on plan assets excluding amounts included in interest income (123) - - - (123)
Experience loss - (9) - - (9)
Gain from changes in financial assumptions - 110 - - 110
Change in minimum funding requirement obligation - - - 4 4
Change in provision for tax on economic surplus available as a refund - - 4 - 4
Included in other comprehensive income (123) 101 4 4 (14)
Employer's contributions 6 - - - 6
Benefit payments (12) 12 - - -
At 31 December 206 (211) - (3) (8)
2021 Fair value of scheme Defined Provision for Minimum funding requirement obligation Total
assets
benefit obligation
tax on the economic surplus available as a refund
£m £m
£m £m £m
At 1 January 280 (341) - - (61)
- -
Interest income/(expense) 4 (5) - - (1)
Administrative expenses (1) - - - (1)
Included in profit or loss 3 (5) - - (2)
Return on plan assets excluding amounts included in interest income 11 - - - 11
Experience Loss - (5) - - (5)
Gain from changes in demographic assumptions - 6 - - 6
Loss 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
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
2022 2021
Total Of which not quoted in an active market Total Of which not quoted in an active market
£m £m £m £m
Diversified income fund 44 - 139 -
Fixed interest government bonds 86 - 68 -
Corporate bonds 87 - 118 -
Derivatives (15) (15) 1 1
Cash and cash equivalents 4 - 4 -
Pension scheme assets 206 (15) 330 1
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% (2021: 44%); and
• Pensioners: 56% (2021: 56%)
The weighted average duration of the defined benefit obligation at 31 December
2022 is 13.5 years (2021: 16 years).
Principal assumptions
The principal financial assumptions of the Abbey Life Scheme are set out in
the table below:
2022 2021
% %
Rate of increase for pensions in payment (5% per annum or RPI if lower) 3.05 3.20
Rate of increase for deferred pensions (CPI subject to caps) 2.70 2.70
Discount rate 4.95 2.00
Inflation - RPI 3.30 3.30
Inflation - CPI 2.70 2.70
The discount rate and inflation assumptions have been determined by
considering the shape of the appropriate yield curves and the duration of the
Abbey Life Scheme liabilities. This method determines an equivalent single
rate for each of the discount and inflation rates, which is derived from the
profile of projected benefit payments.
The post-retirement mortality assumptions are in line with a scheme-specific
table which was derived from the actual mortality experience in recent years,
performed as part of the actuarial funding valuation as at 31 March 2021,
using the SAPS S3 'Light' tables for males and for females based on year of
use. Future longevity improvements from 1 January 2021 are based on amended
CMI 2021 Core Projections (2021: From 1 January 2021 based on amended CMI 2020
Core Projections) and a long-term rate of improvement of 1.5% (2021: 1.7%) per
annum for males and 1.2% (2021: 1.2%) per annum for females. Under these
assumptions the average life expectancy from retirement for a member currently
aged 45 retiring at age 65 is 24.8 years and 25.9 years for male and female
members respectively (2021: 24.9 years and 25.7 years respectively).
Defined benefit obligation
A quantitative sensitivity analysis for significant actuarial assumptions is
shown below:
2022
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps 25bps 25bps 25bps 1 year 1 year
increase decrease increase decrease increase decrease
Impact on the defined benefit obligation (£m) 211 (7) 7 4 (4) 7 (7)
2021
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps 25bps 25bps 25bps 1 year 1 year
increase decrease increase decrease increase decrease
Impact on the defined benefit obligation (£m) 318 (12) 13 8 (9) 12 (12)
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 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 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 are 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 £2 million (2021:£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:
2022 Fair value Defined Provision for Total
of scheme assets
benefit obligation
tax on the economic surplus available as a refund
£m
£m £m £m
At 1 January 492 (438) (19) 35
Interest income/(expense) 9 (9) - -
Administrative expenses (1) - - (1)
Included in profit or loss 8 (9) - (1)
Remeasurements:
Return on plan assets excluding amounts included in interest income (203) - - (203)
Gain from changes in financial assumptions - 188 - 188
Experience loss - (19) - (19)
Change in provision for tax on economic surplus available as a refund - - 11 11
Included in other comprehensive income (203) 169 11 (23)
Employer's contributions 3 - - 3
Benefit payments (12) 12 - -
At 31 December 288 (266) (8) 14
2021 Fair value Defined Provision for Total
of scheme
benefit obligation
tax on the economic surplus available as a refund
assets
£m
£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
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
2022 2021
Total Of which not quoted in an active market Total Of which not quoted in an active market
£m £m £m £m
Equities 31 - 62 -
Government bonds 121 - 151 -
Corporate bonds 83 - 173 -
Managed funds - - 60 -
Other quoted securities 45 - 43 -
Cash and cash equivalents 8 - 3 -
Pension scheme assets 288 - 492 -
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% (2021: 66%); and
• Pensioners: 34% (2021: 34%).
The weighted average duration of the defined benefit obligation at 31 December
2022 is 17 years (2021: 21 years).
Principal assumptions
The principal assumptions of the ReAssure Scheme are set out in the table
below:
2022 2021
% %
Rate of increase for pensions in payment (5% per annum or RPI if lower) 3.05 3.20
Rate of increase for deferred pensions 2.70 2.70
Rate of increase in salaries 3.70 3.70
Discount rate 4.95 2.00
Inflation - RPI 3.30 3.30
Inflation - CPI 2.70 2.70
The discount rate and inflation assumptions have been determined by
considering the shape of the appropriate yield curves and the duration of the
ReAssure Scheme liabilities. This method determines an equivalent single rate
for each of the discount and inflation rates, which is derived from the
profile of projected benefit payments.
The post-retirement mortality assumptions are in line with SAPS Series 3 light
base tables with a 102% (2021: 102%) multiplier for males and a 95% (2021:
95%) multiplier for females, with CMI 2019 projections in line with a 1.5% pa
long term trend up to and including 31 December 2020. Future longevity
improvements from 1 January 2021 onwards are in line with amended CMI 2021
Core Projections (2021: From 1 January 2021 in line with amended CMI 2020 Core
Projections) with a long-term trend of 1.5% pa (2021: 1.7%) for males and 1.2%
(2021: 1.2%) for females.
Under these assumptions the average life expectancy from retirement for a
member currently aged 45 retiring at age 60 is 30.0 years and 31.6 years for
male and female members respectively (2021: 30.1 years and 31.4 years for male
and female members respectively).
A quantitative sensitivity analysis for significant actuarial assumptions is
shown below:
2022
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps 25bps 25bps 25bps 1 year 1 year
increase decrease increase decrease increase decrease
Impact on the defined benefit obligation (£m) 266 (10) 11 8 (8) 7 (7)
2021
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps 25bps 25bps 25bps 1 year 1 year
increase decrease increase decrease increase decrease
Impact on the defined benefit obligation (£m) 438 (21) 23 18 (17) 18 (17)
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.
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
2022 Goodwill Acquired in-force business Customer relationships Brands and other Total other intangibles Total
£m
£m £m £m £m £m
Cost or valuation at 1 January and 31 December 57 7,007 297 131 428 7,492
Amortisation and impairment
At 1 January (47) (2,630) (183) (13) (196) (2,873)
Amortisation charge for the year - (488) (15) (6) (21) (509)
Impairment charge for the year - (17) - - - (17)
At 31 December (47) (3,135) (198) (19) (217) (3,399)
Carrying amount 10 3,872 99 112 211 4,093
Less amounts classified as held for sale (see note A6.1) - (37) - - - (37)
Carrying amount at 31 December 10 3,835 99 112 211 4,056
Amount recoverable after 12 months 10 3,382 84 106 190 3,582
Other intangibles
2021 Goodwill Acquired in-force business Customer relationships Brands and other Total other intangibles Total
£m
£m £m £m £m £m
Cost or valuation
At 1 January 57 7,028 297 56 353 7,438
Acquisition of ReAssure businesses - - - 111 111 111
Disposal of Ark Life - (21) - - - (21)
Termination of Client Services 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 year(1) (47) (99) - - - (146)
Disposal of Ark Life - 21 - - - 21
Termination of Client Services 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 in 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.
G2.1 Goodwill
The carrying value of goodwill has been tested for impairment at the year end
and the results of this exercise are detailed below.
Goodwill with a carrying value of £10 million (2021: £10 million) was
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 operating plan, and for the period 2028 and beyond,
assume a zero growth rate. The underlying assumptions of these projections
include market share, customer numbers, commission rates and expense
inflation. The cash flows have been valued at a risk adjusted discount rate of
14% (2021: 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.
Goodwill with a cost of £47 million attributed to the Management Services
segment was fully impaired during the year ended 31 December 2021.
The Management Services segment generated 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 was
anticipated that the Management Services segment would generate short-term
losses in the period until service agreements could 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 of the
recoverable amount of the goodwill to be £nil as at 31 December 2021 and
consequently a £47 million impairment charge was recognised.
Value in use was determined as the present value of certain future cash flows
associated with this business. The cash flows used in this calculation were
valued using a risk adjusted discount rate of 9.5% and were consistent with
those adopted by management in the Group's three year operating plan and, for
the period 2027 and beyond, reflected 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.
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 A6.1 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 in 2021 on classification of the AVIF balance as held
for sale. This charge was included within the 'gain on completion of abrdn plc
transaction' in the consolidated income statement. A further impairment of
£17 million has been recognised during the year (2021: £8 million). 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. In 2021, an impairment charge
of £18 million was 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.
In 2021, updates to the reserving methodology in respect of certain blocks of
European insurance contracts 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.
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 was recognised. The resultant
net carrying value of this component of the Standard Life Assurance AVIF at 31
December 2021 was £49 million.
G2.3 Customer relationships
The customer relationships intangible at 31 December 2022 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 2022 of 6.9 years (2021: 7.9 years).
G2.4 Brands and other intangibles
An intangible asset is recognised at cost on acquisition of the AXA Wealth and
represents the value attributable to the SunLife brand as at 1 November 2016.
The intangible asset was valued on a 'multi-period excess earnings' basis and
was recognised at a cost of £20 million. Impairment testing was performed in
a combined test with the AXA goodwill (see section G2.1). The value in use
continues to exceed its carrying value. This brand intangible is being
amortised over a 10 year period. The carrying value of the AXA Wealth brand as
at 31 December 2022 is £8 million.
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. The Standard Life brand was initially
recognised at a value of £111 million which represented the fair value
attributable to the brand as at the transaction date. The intangible asset was
valued on a 'multi-period excess earnings' basis and is being amortised over a
period of 30 years. The carrying value of the Standard Life brand as at 31
December 2022 is £104 million.
As part of the transaction with abrdn plc, the CSPA was significantly amended
prior to being dissolved. As a consequence, the CSPA intangible included
within 'other intangibles' was derecognised. At that time, its carrying value
was £30 million and this was included in the calculation of the 'gain on
completion of abrdn plc transaction' recognised in the consolidated income
statement in the year ended 31 December 2021.
G3. Property, plant and equipment
Owner-occupied property is stated at its revalued amount, being its fair value
at the date of the revaluation less any subsequent accumulated depreciation
and impairment. Owner-occupied property is depreciated over its estimated
useful life, which is taken as 20 - 50 years. Land is not depreciated.
Accumulated depreciation as at the revaluation date is eliminated against the
gross carrying amount of the owner-occupied property and the net amount is
restated to the revalued amount of the asset. Gains and losses on
owner-occupied property are recognised in other comprehensive income.
The right-of-use assets are initially measured at cost, and subsequently at
cost less any accumulated depreciation and impairments, and adjusted for
certain remeasurements of the lease liability. The right-of-use assets are
depreciated over the remaining lease term which is between 1 and 11 years
(2021: 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.
2022 Owner-occupied properties Right-of-use assets - property Right-of-use assets - equipment Equipment Total
£m £m £m £m £m
Cost or valuation
At 1 January 29 94 2 59 184
Additions 9 3 - 8 20
Revaluation losses (6) - - - (6)
Disposals - (1) - (2) (3)
At 31 December 32 96 2 65 195
Depreciation
At 1 January - (24) (1) (29) (54)
Depreciation - (9) - (10) (19)
Disposals - 1 - 2 3
At 31 December - (32) (1) (37) (70)
Carrying amount at 31 December 32 64 1 28 125
2021 Owner-occupied properties Right-of-use assets - property Right-of-use assets - equipment Equipment Total
£m £m £m £m £m
Cost or valuation
At 1 January 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 29 94 2 59 184
Depreciation
At 1 January - (23) - (25) (48)
Depreciation - (9) (1) (8) (18)
Disposals - 8 - 4 12
At 31 December - (24) (1) (29) (54)
Carrying amount at 31 December 29 70 1 30 130
Owner-occupied properties have been valued by accredited independent valuers
at 31 December 2022 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 £32 million
(2021: £29 million) has been categorised as Level 3 based on the
non-observable inputs to the valuation technique used. Unrealised loss for the
current year is £6 million (2021: £nil).
G3. Property, plant and equipment
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 asset, 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.
2022 2021
£m £m
At 1 January 8,592 7,128
Additions 104 819
Improvements 27 22
Disposals (1,141) (550)
Remeasurement of right-of-use asset 2 (1)
Movement in foreign exchange 12 (22)
(Losses)/gains on adjustments to fair value (recognised in consolidated income (1,363) 1,196
statement)
6,233 8,592
Less amounts classified as held for sale (see note A6.1) (2,506) (3,309)
At 31 December 3,727 5,283
Unrealised (losses)/gains on properties held at end of year (1,582) 529
As at 31 December 2022, a property portfolio including amounts classified held
for sale of £6,070 million (2021: £8,412 million) is held by the life
companies in a mix of commercial sectors, spread geographically throughout the
UK and Europe.
Investment properties also includes £62 million (2021: £73 million) of
property reversions arising from sales of the NPI Extra Income Plan (see note
E5 for further details) and £80 million (2021: £86 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
2022 was £21 million (2021: £21 million). The remeasurement gives rise to an
increase of £2 million (2021: reduction of £1 million). There were £2
million additions (2021: £4 million) and £4 million disposals (2021: £nil)
of ground rent right-of-use assets during the period.
Commercial investment property is measured at fair value by independent
property valuers having appropriate recognised professional qualifications and
recent experiences in the location and category of the property being valued.
The valuations are carried out in accordance with the Royal Institute of
Chartered Surveyors ('RICS') guidelines with expected income and
capitalisation rate as the key non-observable inputs.
The NPI residential property reversions, an interest in customers' properties
which the Group will realise upon their death, are valued using a discounted
cash flow model based on the Group's proportion of the current open market
value, and discounted for the expected lifetime of the policyholder derived
from published mortality tables. The 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% (2021: 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% (2021: 5%).
The fair value measurement of the investment properties has been categorised
as Level 3 based on the inputs to the valuation techniques used. The following
table shows the valuation techniques used in measuring the fair value of the
investment properties, the significant non-observable inputs used, the
inter-relationship between the key non-observable inputs and the fair value
measurement of the investment properties:
Description Valuation techniques Significant non-observable inputs Weighted average Weighted average
2022 2021
Commercial Investment Property RICS valuation Expected income per sq. ft. £22.41 £21.36
Estimated rental value per hotel room £7,043 £8,534
Estimated rental value per parking space £1,115 £1,097
Capitalisation rate 5.01% 4.65%
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 £27 million (2021: £41 million). The
direct operating expenses arising from investment property that did not
generate rental income during the year amounted to £5 million (2021: £1
million).
Future minimum lease rental receivables in respect of non-cancellable
operating leases on investment properties were as follows:
2022 2021
£m £m
Not later than 1 year 356 323
Later than 1 year and not later than 5 years 1,131 1,032
Later than 5 years 3,345 3,128
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.
2022 2021
£m £m
Investment broker balances 312 249
Cash collateral pledged and initial margins posted 3,698 958
Property related receivables 145 177
Deferred acquisition costs 133 108
Other debtors 323 313
4,611 1,805
Amount recoverable after 12 months 122 100
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.
2022 2021
£m £m
Bank and cash balances 2,716 5,246
Short-term deposits (including notice accounts and term deposits) 6,156 3,942
8,872 9,188
Less amounts classified as held for sale (33) (76)
At 31 December 8,839 9,112
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 £8,597 million (2021: £8,707 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
2022 Leasehold properties Staff related Known incidents Input VAT recovery provision Operational tax provision Transition and Transformation provision Transfer of policy administration provision ReAssure provision Other(1) Total(1)
£m £m £m £m £m £m £m £m £m £m
At 1 January 8 9 46 17 12 92 35 2 14 235
Additions in the year 1 - 25 - - 33 13 - 11 83
Utilised during the year - - (8) - - (28) (15) (2) (13) (66)
Released during the year - (2) (15) - - - - - (1) (18)
At 31 December 9 7 48 17 12 97 33 - 11 234
1 Other and total provisions excludes amounts classified as held for sale as
at 31 December 2022 of £nil (2021: £2 million).
Leasehold properties
The leasehold properties provision includes a £7 million (2021: £7 million)
dilapidations provision in respect of obligations under operating leases and
£2 million (2021: £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 £4
million (2021: £5 million), and private medical and other insurance costs for
former employees of £3 million (2021: £4 million).
Known incidents
The known incidents provision was created for historical data quality,
administration systems problems and process deficiencies on the policy
administration, financial reconciliations and operational finance aspects of
business outsourced. These balances represent the best estimates of costs
payable to customers. Additional information has been given below in respect
of the more significant balances within this provision.
During 2021, a £15 million provision was recognised in relation to errors in
final encashment calculations for With Profits Trustee Investment Plans.
During 2022, this provision was increased to £29 million following a review
of the calculations which have now been finalised and agreed. An £11 million
provision was also recognised in April 2021 following identification that
certain customers who have a Protected Pension Age or a Protected Tax Free
Lump Sum may not have had their benefits settled correctly. During 2022, this
provision reduced to £7 million following the release of £4 million after
further investigation deemed that one population of customers were no longer
impacted. These provisions will be utilised within 2 to 5 years.
In 2020, following completion of the Part VII transfer of the Legal &
General business, a £12 million provision was recognised in respect of
amounts owed to customers due to various system and processing errors
resulting in incorrect rules having been applied to policies. During the year,
£3 million (2021: £2 million), of the remaining £9 million provision was
utilised and a further £4 million (2021: £1 million) was released. It is
expected that the remaining balance of £2 million (2021: £9 million) will be
fully utilised within one year.
The remaining provisions of £10 million as at 31 December 2022 (2021: £10
million) are expected to be utilised within one to five years. As at 31
December 2022, there are no significant uncertainties which could give rise to
a material change to the value of the provisions held for current known
incidents.
Input VAT recovery provision
The provision of £17 million (2021: £17 million) reflects the potential
outcome of on-going 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 Standard Life Assets & Employee Services Limited
('SLAESL') to be fair and reasonable, the revised PESM remains to be agreed
and HMRC may take a different view. The current provision reflects the Group's
maximum exposure as at the reporting date, and was increased by £nil million
(2021: £2 million) in the year. It is currently expected that the provision
will be utilised within one to two years.
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
2022 of £12 million (2021: £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. There was an
increase in costs during 2022 following on from a strategic decision to
re-phase the programme. The severance costs are subject to uncertainty and
will be impacted by the number of staff that transfer to TCS, and the average
salaries and number of years' service of those affected. 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, the provision was increased by £33 million (2021: £nil) and
a further £28 million (2021: £17 million) was utilised. The remaining
£97 million (2021: £92 million) is expected to be utilised within one to
three years.
Transfer of policy administration
A significant proportion of the Group's policy administration is outsourced to
Diligenta Limited ('Diligenta'), a UK-based subsidiary of Tata Consultancy
Services ('TCS'). Diligenta provide life and pension business process services
to a large number of the Group's policyholders. During 2018, the Group
announced its intention to move to a single outsourcer platform and to
transfer a further £2 million of the Group's legacy policies to Diligenta 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 £13 million (2021: £9 million) and a further £15 million
(2021: £9 million) was utilised. The remaining provision of £33 million
(2021: £35 million) is expected to be utilised within two years.
ReAssure restructuring provision
During 2020 a £7 million restructuring provision was established in respect
of ReAssure Life Limited ('RLL') to cover severance costs. The remaining
provision of £2 million was fully utilised during the year.
Other provisions
Other provisions includes £4 million (2021: £4 million) of obligations
arising under a gift voucher scheme operated by the SunLife business and a
commission clawback provision which represents the expected future clawback of
commission income earned by the SunLife business as a result of assumed lapses
of policies or associated benefits.
The remaining other provisions of £7 million (2021: £10 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 the 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.
2022 2021
£m £m
Current tax:
Current tax receivable 519 419
Current tax payable (34) (19)
Deferred tax:
Deferred tax assets 158 -
Deferred tax liabilities (660) (1,399)
Movement in deferred tax liabilities
2022 1 January Recognised Recognised Other movements Less amounts classified as held for sale 31 December
in consolidated income statement
in other comprehensive income
£m
£m £m £m
£m £m
Trading losses 109 81 - 8 - 198
Capital losses 32 (8) - - - 24
Expenses and deferred acquisition costs carried forward 57 315 - (1) - 371
Provisions and other temporary differences 135 (10) - (2) - 123
Non refundable pension scheme surplus (255) 391 (287) - - (151)
Committed future pension contributions - 5 4 - - 9
Accelerated capital allowances 16 1 - - - 17
Intangibles 35 (5) - 2 - 32
Acquired in-force business (878) 68 - - (3) (813)
Customer relationships (57) 4 - - - (53)
Unrealised gains (593) 333 1 (2) - (261)
IFRS transitional adjustments (5) 5 - - - -
Other 5 (4) - 1 - 2
(1,399) 1,176 (282) 6 (3) (502)
2021 1 January Recognised Recognised Other movements Less amounts classified as held for sale 31 December
in consolidated income statement
in other comprehensive income
£m
£m £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)
The standard rate of UK Corporation tax for the year ended 31 December 2022 is
19% (year ended 31 December 2021: 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.
2022 2021
£m £m
Deferred tax assets have not been recognised in respect of:
Tax losses carried forward 73 55
Excess expenses and deferred acquisition costs 112 9
Intangibles 11 9
Deferred tax assets not recognised on capital losses(1) 40 29
Other 6 -
1 These can only be recognised against future capital gains and have no
expiry date.
The Group also has £456 million (2021: £109 million) of BLAGAB (life
business) trading losses carried forward as at 31 December 2022 across across
ReAssure Limited, Phoenix Life Limited and Phoenix Life Assurance Limited.
£291 million of gross losses are projected to be utilised within these
entities, however no value has been attributed to these deferred tax assets
given the interaction with other deductible temporary differences (2021: £109
million of gross losses were projected to be utilised and deferred tax assets
of £5 million were recognised). Deferred tax assets have not been recognised
in respect of the remaining £165 million (2021: £nil) losses due to the
uncertainty of future BLAGAB trading profits arising against which the losses
could be offset (at entity level).
Deferred tax assets valued at £7 million have been recognised in respect of
£156 million (2021: £nil) arising from the interaction with other deductible
timing differences on consolidation.
There is a technical matter which is currently being discussed with HMRC in
relation to the L&G insurance business transfer to ReAssure Limited. These
discussions are not sufficiently progressed at this stage for recognition of
any potential tax benefit arising.
A tax dispute with HMRC in relation to the tax treatment of an asset formerly
held by Guardian Assurance Limited (before the business was transferred to
ReAssure Limited) was resolved in the period in favour of the Group. The 2021
current tax liability included an accrual for the total tax under dispute on
the basis that there was sufficient risk that the tax treatment of the Group
would not then be accepted. In 2022 this tax liability was released.
The Group in conjunction with a number of other companies has challenged
HMRC's position on the corporation tax treatment of overseas portfolio
dividends from companies resident in the EU ('EU dividends') using a Group
Litigation Order ('GLO'). The issue relates to whether the UK tax rules, which
taxed EU dividends received prior to 1 July 2009, was contrary to EU law given
that dividends received from UK companies were exempt from tax. In 2009 UK tax
law was changed with both overseas and UK dividends being treated as exempt
from corporation tax.
In July 2018, the Supreme Court concluded in favour of the tax payer and a tax
benefit of £13 million was recognised at the end of 2018 in relation to
enhanced double tax relief claims which the Group is entitled to in accordance
with the Court judgement. As a result of the insurance business transfer from
Legal and General Assurance Society during 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
discussing the claims with HMRC during the course of 2022, 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 2022.
Some companies of the Group were late joiners or not members of the GLO but
have made statutory protective tax claims totalling circa £14 million for the
benefit of unit linked life funds based on the Supreme Court decision. HMRC
has challenged the validity of such claims and is currently considering
further tax litigation in this area against other third parties. Some progress
through the courts has been made in the course of 2022, 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.
2022 2021
£m £m
Payables related to direct insurance contracts 1,964 1,864
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.
2022 2021
£m
£m
At 1 January 99 84
Leases incepted during the year 6 27
Termination of leases following the disposal of associated investment (4) (1)
properties
Interest expense 3 3
Lease payments (14) (16)
Remeasurement of leases 2 2
At 31 December 92 99
Amount due within twelve months 11 10
Amount due after twelve months 81 89
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.
2022 2021
£m £m
Accruals 498 498
Deferred income 105 123
Accruals and deferred income including amounts classified as held for sale 603 621
Less amounts classified as held for sale (37) (54)
At 31 December 566 567
Amount due for settlement after 12 months 35 26
Deferred income includes consideration deferred as a result of the abrdn
transaction pending the Part VII transfer (including amounts offset as a
result of the profit share).
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.
2022 2021
£m £m
Investment broker balances 513 228
Property related payables 53 73
Investment management fees 48 77
Other payables 351 343
965 721
Amount due for settlement after 12 months - -
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 2022,
PeLHL held £9 million (2021: £11 million) within debt securities and £18
million (2021: £14 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 2022, RML held £40 million (2021: £57 million) within
debt securities and £nil (2021: £1 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.
H2. Associates: investment in UK Commercial Property REIT ('UKCPR')
UKCPR is a property investment company which is domiciled in Guernsey and is
admitted to the official list of the UK Listing Authority and to trading on
the London Stock Exchange.
The Group's interest in UKCPR is held in the with-profit funds of the Group's
life companies. Therefore, the shareholder exposure to fair value movements in
the Group's investment in UKCPR is limited to the impact of those movements on
the shareholder share of distributed profits of the relevant fund.
As at 31 December 2022, the Group held 44.6% (2021: 44.5%) of the issued share
capital of UKCPR and the value of this investment, measured at fair value and
included within financial assets, was £329 million (2021: £431 million).
Management has concluded that the Group did not control UKCPR in either the
current or comparative periods. The Group does not hold a unilateral power of
veto in general meetings and voting is subject to certain restrictions in
accordance with the terms of an existing relationship agreement it has with
UKCPR.
Summary consolidated financial information (at 100%) for UKCPR group is shown
below:
2022 2021
£m £m
Non-current assets 1,276 1,508
Current assets 83 90
Non-current liabilities (291) (248)
Current liabilities (32) (25)
1,036 1,325
Revenue 71 58
(Loss)/profit for the year after tax (222) 236
H3. Structured entities
A structured entity is an entity that has been designed so that voting or
similar rights are not the dominant factor in deciding who controls the
entity, such as when any voting rights relate to administrative tasks only,
and the relevant activities are directed by means of contractual arrangements.
A structured entity often has some or all of the following features or
attributes: (a) restricted activities; (b) a narrow and well-defined
objective, such as to provide investment opportunities for investors by
passing on risks and rewards associated with the assets of the structured
entity to investors; (c) insufficient equity to permit the structured entity
to finance its activities without subordinated financial support; and (d)
financing in the form of multiple contractually linked instruments to
investors that create concentrations of credit or other risks (tranches).
The Group has determined that all of its investments in collective investment
schemes are structured entities. In addition, a number of debt security
structures and private equity funds have been identified as structured
entities. The Group has assessed that it has interests in both consolidated
and unconsolidated structured entities as shown below:
• Unit trusts;
• OEICs;
• SICAVs;
• Private Equity Funds;
• Asset backed securities;
• Collateralised Debt Obligations ('CDOs');
• Other debt structures; and
• Phoenix Group Employee Benefit Trust ('EBT').
The Group's holdings in the investments listed above are susceptible to market
price risk arising from uncertainties about future values. Holdings in
investment funds are subject to the terms and conditions of the respective
fund's prospectus and the Group holds redeemable shares or units in each of
the funds. The funds are managed by internal and external fund managers who
apply various investment strategies to accomplish their respective investment
objectives. All of the funds are managed by fund managers who are compensated
by the respective funds for their services. Such compensation generally
consists of an asset-based fee and a performance-based incentive fee and is
reflected in the valuation of each fund.
H3.1 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 £13 million
(2021: £16 million).
As at the reporting date, the Group has no intention to provide financial or
other support to any other consolidated structured entity.
H3.2 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.
2022 2021
Carrying value of financial assets Carrying value of financial assets
£m £m
Equities 968 871
Collective investment schemes 75,389 85,995
Debt securities 8,062 10,991
84,419 97,857
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.
H. Interests in subsidiaries and associates continued
H4. Group entities
The table below sets out the Group's subsidiaries (including consolidated
collective investment schemes), associates and significant holdings in
undertakings (including undertakings in which the holding amounts to 20% or
more of the nominal value of the shares or units and they are not classified
as a subsidiary or associate).
Registered address of incorporated entities If unincorporated, address of principal place of business Type of investment (including class of shares held) % of shares/
units held
Subsidiaries:
Phoenix Life Limited (life assurance company) 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)(1) 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%
28 Riberia de Loira SL Madrid64 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%
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) 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%
Phoenix Holdings (Bermuda) Limited (non-trading company) Bermuda(63) Ordinary Shares 100.00%
Phoenix Group Holdings (Bermuda) Limited (non-trading company) Bermuda(63) Ordinary Shares 100.00%
Phoenix Management Services (Bermuda) Limited (non-trading company) Bermuda(63) Ordinary Shares 100.00%
Phoenix Management Services Holdings (Bermuda) Limited Bermuda(63) Ordinary Shares 100.00%
(non-trading company)
Phoenix Re Limited Bermuda(63) Ordinary Shares 100.00%
Standard Life Mortgages Limited Wythall2 Ordinary Shares 100.00%
Clyde Gateway Management Company Limited Edinburgh7 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)(1) Wythall2 Ordinary Shares 100.00%
Phoenix ER2 Limited (finance company) Wythall2 Ordinary Shares 100.00%
Phoenix ER3 Limited (finance company)(1) 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 Dublin19 Ordinary Shares 100.00%
Phoenix Life Holdings Limited (holding company - directly owned by the Wythall2 Ordinary Shares 100.00%
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 SLIF Property Edinburgh7 Ordinary Shares 100.00%
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 (dormant Edinburgh3 Ordinary Shares 100.00%
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. (financial holding company) Amsterdam21 Ordinary Shares 100.00%
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%
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 85.82%
Janus Henderson Global Funds - Janus Henderson Institutional Overseas Bond London29 OEIC, sub fund 97.93%
Fund
Janus Henderson Strategic Investment Funds - Janus Henderson Institutional London29 OEIC, sub fund 83.06%
North American Index Opportunities Fund
Janus Henderson Strategic Investment Funds - Janus Henderson Institutional London29 OEIC, sub fund 85.70%
Asia Pacific ex Japan Index Opportunities Fund
Janus Henderson Strategic Investment Funds - Janus Henderson Institutional London29 OEIC, sub fund 79.82%
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 Long Gilt Sterling Hedged Fund Wythall2 Unit Trust 100.00%
PUTM Bothwell Emerging Markets Equity Fund Wythall2 Unit Trust 99.95%
PUTM Bothwell Sterling Government Bond Fund Wythall2 Unit Trust 99.61%
PUTM Bothwell Euro Sovereign Fund Wythall2 Unit Trust 82.16%
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 Sustainable Index Asia Pacific ex Japan Equity Fund Wythall2 Unit Trust 100.00%
PUTM ACS Sustainable Index European Equity Fund Wythall2 Unit Trust 100.00%
PUTM ACS Emerging Market Equity Fund Wythall2 Unit Trust 100.00%
PUTM ACS Sustainable Index Japan Equity Fund Wythall2 Unit Trust 100.00%
PUTM ACS Sustainable Index US Equity Fund Wythall2 Unit Trust 100.00%
PUTM ACS Sustainable Index UK Equity Fund Wythall2 Unit Trust 100.00%
PUTM ACS North American 2 Fund Wythall2 Unit Trust 100.00%
PUTM ACS Sustainable Index Emerging Markets Equity 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%
abrdn Strategic Bond Fund Edinburgh⁷ Unit Trust 89.91%
abrdn European Trust II Edinburgh⁷ Unit Trust 100.00%
abrdn Emerging Markets Income Equity Fund Edinburgh⁷ OEIC, sub fund 78.04%
abrdn Emerging Markets Equity Fund Edinburgh⁷ OEIC, sub fund 96.86%
abrdn Europe ex UK Ethical Equity Fund Edinburgh⁷ OEIC, sub fund 80.53%
abrdn European Trust Edinburgh⁷ Unit Trust 96.78%
abrdn Japan Trust Edinburgh⁷ Unit Trust 80.67%
abrdn North American Trust Edinburgh⁷ Unit Trust 99.63%
abrdn Pacific Basin Trust Edinburgh⁷ Unit Trust 98.39%
abrdn Short Dated UK Government Bond Trust Edinburgh⁷ Unit Trust 99.96%
abrdn UK Government Bond Trust Edinburgh⁷ Unit Trust 99.91%
abrdn UK Corporate Bond Trust Edinburgh⁷ Unit Trust 99.89%
abrdn Active Plus Bond Trust Edinburgh⁷ Unit Trust 100.00%
abrdn International Trust Edinburgh⁷ Unit Trust 99.86%
abrdn UK Equity General Trust Edinburgh⁷ Unit Trust 99.94%
abrdn Short Dated Corporate Bond Fund Edinburgh⁷ OEIC, sub fund 80.55%
abrdn MyFolio Managed I Fund Edinburgh⁷ OEIC, sub fund 75.49%
abrdn MyFolio Managed II Fund Edinburgh⁷ OEIC, sub fund 75.37%
abrdn MyFolio Managed III Fund Edinburgh⁷ OEIC, sub fund 83.05%
abrdn MyFolio Managed V Fund Edinburgh⁷ OEIC, sub fund 75.09%
abrdn Dynamic Multi Asset Growth Fund Edinburgh⁷ OEIC, sub fund 95.47%
abrdn American Income Equity Fund Edinburgh⁷ OEIC, sub fund 74.41%
abrdn Standard SICAV II Absolute Return Global Bond Strategies Fund Luxembourg30 SICAV, sub fund 74.22%
abrdn Standard SICAV II European Equities Fund Luxembourg30 SICAV, sub fund 99.30%
abrdn Standard SICAV II Global Equities Fund Luxembourg30 SICAV, sub fund 88.67%
abrdn Standard SICAV II European Government All Stocks Fund Luxembourg30 SICAV, sub fund 100.00%
abrdn Standard SICAV II Japanese Equities Fund Luxembourg30 SICAV, sub fund 97.45%
abrdn Standard SICAV II Global High Yield Bond Fund Luxembourg30 SICAV, sub fund 54.53%
abrdn Standard SICAV II Global REIT Focus Fund Luxembourg30 SICAV, sub fund 93.22%
abrdn Standard SICAV II China Equities Fund Luxembourg30 SICAV, sub fund 68.15%
abrdn Standard SICAV II Global Emerging Markets Local CCY Debt Fund Luxembourg30 SICAV, sub fund 83.14%
abrdn Standard SICAV II Emerging Market Debt Fund Luxembourg30 SICAV, sub fund 97.87%
ASIMT American Equity Unconstrained Fund Edinburgh7 Unit Trust 78.87%
ASIMT Japan Fund Edinburgh7 Unit Trust 78.81%
ASIMT Global REIT Fund Edinburgh7 Unit Trust 81.32%
ASIMT Sterling Intermediate Credit Fund Launch Fund Edinburgh7 Unit Trust 89.33%
abrdn Liquidity Fund (Lux) - Seabury Sterling Liquidity 3 Fund Luxembourg31 UCITS, sub fund 100.00%
abrdn Standard Liquidity Fund (Lux) - Seabury Sterling Liquidity 2 Fund Luxembourg31 UCITS, sub fund 99.99%
abrdn Standard Liquidity Fund (Lux) - Seabury Euro Liquidity 1 Fund Luxembourg³¹ UCITS, sub fund 99.99%
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 96.83%
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 71.78%
iShares 350 UK Equity Index Fund UK London36 OEIC, sub fund 94.08%
Legal & General European Equity Income Fund London37 Unit Trust 85.74%
Legal & General Growth Trust London37 Unit Trust 75.60%
abrdn Sustainable Index World Equity Fund Edinburgh7 Unit Trust 100.00%
abrdn Sustainable Index UK Equity Fund Edinburgh7 Unit Trust 77.28%
CF Macquaries Global Infrastructure Securities Fund London38 OEIC, sub fund 70.77%
Quilter Investors Global Equity Index Fund London39 OEIC, sub fund 76.55%
Quilter Investors UK Equity Index Fund London39 OEIC, sub fund 84.30%
Associates:
UK Commercial Property REIT Limited (property investment company) Guernsey41 Ordinary Shares 44.46%
UK Commercial Property Estates Holdings Limited (property investment company) Guernsey41 Ordinary Shares 44.46%
UKCPT Limited Partnership (dormant company) London42 Limited Partnership 44.46%
UK Commercial Property Finance Holdings Limited (property investment company) Guernsey41 Ordinary Shares 44.46%
UK Commercial Property Estates (Reading) 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 33.39%
Janus Henderson Institutional UK Index Opportunities Fund London29 OEIC, sub fund 56.15%
Standard Life Capital Infrastructure I LP Edinburgh7 Limited Partnership 48.00%
abrdn (SLI) Corporate Bond Fund Edinburgh7 OEIC, sub fund 40.46%
abrdn Emerging Markets Local Currency Bond Tracker Fund Edinburgh7 OEIC, sub fund 44.51%
abrdn Global Absolute Return Strategies Retail Acc Edinburgh7 Unit Trust 62.31%
abrdn Dynamic Distribution Fund Edinburgh7 Unit Trust 63.43%
AB SICAV I - Diversified Yield Plus Portfolio Luxembourg30 SICAV, sub fund 36.98%
Standard Life Investments UK Real Estate Accumulation Feeder Fund Edinburgh7 Unit Trust 53.89%
abrdn Global Smaller Company Fund Edinburgh7 Unit Trust 24.07%
abrdn Global Focused Equity Fund Edinburgh7 OEIC, sub fund 46.66%
abrdn UK High Income Equity Fund Edinburgh7 OEIC, sub fund 49.91%
abrdn High Yield Bond Fund Edinburgh7 OEIC, sub fund 21.64%
abrdn UK Opportunities Equity Fund Edinburgh7 OEIC, sub fund 55.59%
abrdn Investment Grade Corporate Bond Fund Edinburgh7 OEIC, sub fund 44.22%
abrdn UK Smaller Companies Fund Edinburgh7 OEIC, sub fund 30.76%
abrdn Short Duration Global Inflation-Linked Bond Fund Edinburgh7 OEIC, sub fund 37.23%
abrdn UK Unconstrained Equity Fund Edinburgh7 OEIC, sub fund 53.54%
abrdn Ethical Corporate Bond Fund Edinburgh7 OEIC, sub fund 56.62%
abrdn Global Real Estate Fund Edinburgh7 Unit Trust 40.27%
abrdn MyFolio Market I Fund Edinburgh7 OEIC, sub fund 43.39%
abrdn MyFolio Market II Fund Edinburgh7 OEIC, sub fund 47.20%
abrdn MyFolio Market III Fund Edinburgh7 OEIC, sub fund 54.17%
abrdn MyFolio Market IV Fund Edinburgh7 OEIC, sub fund 51.88%
abrdn MyFolio Market V Fund Edinburgh7 OEIC, sub fund 60.81%
abrdn MyFolio Multi-Manager II Fund Edinburgh7 OEIC, sub fund 54.75%
abrdn MyFolio Multi-Manager III Fund Edinburgh7 OEIC, sub fund 65.02%
abrdn MyFolio Multi-Manager IV Fund Edinburgh7 OEIC, sub fund 57.29%
abrdn MyFolio Multi-Manager V Fund Edinburgh7 OEIC, sub fund 60.59%
abrdn MyFolio Managed IV Fund Edinburgh7 OEIC, sub fund 67.78%
abrdn Standard SICAV II European Smaller Companies Fund Luxembourg30 SICAV, sub fund 28.68%
abrdn Standard SICAV II European Corporate Bond Fund Luxembourg30 SICAV, sub fund 33.26%
abrdn Standard SICAV II Global Absolute Return Strategies Fund Luxembourg30 SICAV, sub fund 49.38%
abrdn Standard SICAV II Global Corporate Bond Fund Luxembourg30 SICAV, sub fund 73.15%
abrdn American Unconstrained Equity Fund Edinburgh7 OEIC, sub fund 26.01%
abrdn Liquidity Fund (Lux) Euro Fund Luxembourg31 UCITS, sub fund 28.60%
abrdn Europe ex UK Income Equity Fund Edinburgh7 OEIC, sub fund 21.51%
abrdn UK Income Unconstrained Equity Fund Edinburgh7 OEIC, sub fund 58.73%
Amundi Index Solutions - Amundi MSCI Emerging Ex China ESG Leaders Select Luxembourg40 SICAV, sub fund 61.30%
Brent Cross Partnership London43 Limited Partnership 23.83%
Gallions Reach Shopping Park Unit Trust Jersey32 Unit Trust 100.00%
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 28.91%
AQR Global Risk Premium UCITS Fund USA49 UCITS, sub fund 96.48%
Threadneedle Investment Funds ICVC - American Select Fund London50 OEIC, sub fund 20.99%
Vanguard Investment Series plc - Vanguard Global Short-Term Corporate Bond Dublin51 UCITS, sub fund 23.83%
Index Fund
Vanguard Investment Series plc - Vanguard U.K. Short-Term Investment Grade Dublin51 UCITS, sub fund 45.15%
Bond Index Fund
Vanguard Common Contractual Fund - Vanguard U.S. Equity Index Common Dublin51 UCITS, sub fund 92.82%
Contractual Fund
Vanguard Investment Series plc - Vanguard Global Corporate Bond Index Fund Dublin51 UCITS, sub fund 22.42%
Vanguard Investments Common Contractual Fund - Vanguard FTST Developed World Dublin51 UCITS, sub fund 98.17%
ex UK Common Contractual Fund
MI Somerset Global Emerging Markets Fund London53 OEIC, sub fund 64.46%
abrdn Emerging Markets Equity Enhanced Index Fund Edinburgh7 OEIC, sub fund 20.36%
Amundi UCITS Funds - Amundi Global Multi-Factor Equity Fund Luxembourg40 UCITS, sub fund 61.34%
abrdn SICAV I - Emerging Markets Low Volatility Equity Portfolio Luxembourg30 SICAV, sub fund 87.52%
abrdn SICAV I - GDP Weighted Global Government Bond Fund Luxembourg31 SICAV, sub fund 84.51%
abrdn SICAV I - Global Bond Fund Luxembourg31 SICAV, sub fund 91.69%
abrdn 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 87.04%
Janus Henderson Diversified Growth Fund London29 OEIC, sub fund 68.80%
L&G Emerging Markets Bond Fund Luxembourg57 SICAV, sub fund 39.41%
Legal & General European Trust London37 Unit Trust 50.34%
L&G Multi-Asset Target Return Fund Luxembourg57 SICAV, sub fund 39.62%
Legal & General Emerging Markets Government Bond USD Index Fund London37 Unit Trust 26.58%
Legal & General High Income Trust London37 Unit Trust 42.68%
L&G Euro High Alpha Corporate Bond Fund Luxembourg57 SICAV, sub fund 21.28%
Legal & General UK Smaller Companies Trust London37 Unit Trust 30.59%
LGIM Sterling Liquidity Plus Fund Dublin51 UCITS, sub fund 43.41%
Marks and Spencer Worldwide Managed Fund London(34) Unit Trust 36.28%
Quilter Investors China Equity Fund London39 OEIC, sub fund 21.88%
Quilter Investors Ethical Equity Fund London39 Unit Trust 50.02%
Quilter Investors Global Equity Growth Fund London39 OEIC, sub fund 46.52%
Vanguard Investments Common Contractual Fund - Vanguard FTSE Developed Europe Dublin51 UCITS, sub fund 96.34%
ex UK Common Contractual Fund
Vanguard Investments Common Contractual Fund - Vanguard FTSE Developed World Dublin51 UCITS, sub fund 44.19%
Common Contractual Fund
Baillie Gifford UK & Balanced Funds ICVC - Baillie Gifford UK and Edinburgh59 OEIC, sub fund 24.88%
Worldwide Equity Fund
Baillie Gifford Investment Funds II ICVC - Baillie Gifford UK Equity Core Fund Edinburgh59 OEIC, sub fund 36.11%
abrdn Short Dated Sterling Corporate Bond Tracker Fund Edinburgh7 OEIC, sub fund 41.08%
abrdn Global Inflation-Linked Bond Tracker Fund Edinburgh7 OEIC, sub fund 49.65%
abrdn Multi-Asset Fund Edinburgh7 OEIC, sub fund 28.45%
abrdn SICAV I - Diversified Income Fund Luxembourg31 SICAV, sub fund 34.44%
abrdn Diversified Growth Fund London11 Unit Trust 24.69%
Amundi Index Solutions - Amundi MSCI China ESG Leaders Select Luxembourg40 SICAV, sub fund 43.46%
Amundi Index Solutions - Amundi Global Corp SRI 1-5Y Luxembourg40 SICAV, sub fund 37.32%
BNY Mellon Multi-Asset Global Balanced Fund London60 UCITS, sub fund 26.37%
Aberdeen Japan Equity Fund Edinburgh7 OEIC, sub fund 24.48%
abrdn European Equity Tracker Fund Edinburgh7 OEIC, sub fund 20.75%
abrdn UK Responsible Equity Fund Edinburgh7 OEIC, sub fund 33.71%
Performance Retail Unit Trust Jersey62 Unit Trust 50.10%
Vanguard Investments Common Contractual Fund - Vanguard FTSE Developed Europe Dublin51 UCITS, sub fund 96.34%
ex UK Common Contractual Fund
Vanguard Investments Common Contractual Fund - Vanguard FTSE Developed World Dublin51 UCITS, sub fund 44.19%
Common Contractual Fund
1 These subsidiaries have been granted audit exemption by parental guarantee
by virtue of s.479A of the Companies Act 2006.
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
63 Canon's Court, 22 Victoria Street, Hamilton, HM12, Bermuda
64 Calle Nanclares de Oca, 1B, 28022 Madrid
The following subsidiaries were dissolved during the period. The subsidiaries
were deconsolidated from the date of dissolution:
• PGH (LC1) Limited
• PGH (LC2) Limited
• PGH (LCA) Limited
• PGH (LCB) Limited
• PGH (MC1) Limited
• PGH (MC2) Limited
• PGH (TC1) Limited
• PGH (TC2) Limited
• PGH Capital PLC
• PUTM Bothwell Japan Tracker Fund
• PUTM Bothwell North America Fund
The following subsidiaries were either fully disposed of or the Group was no
longer deemed to control the entity. The subsidiaries were deconsolidated from
either the date of disposal or from the date when the Group was deemed to no
longer control the subsidiary:
• Aberdeen Standard SICAV II European Equity Unconstrained Fund
• Aberdeen Standard SICAV III Global Short Duration Corporate Bond Fund
• Aberdeen Standard SICAV II Global Bond Fund
• Aberdeen Standard SICAV II Global Emerging Markets Unconstrained Fund
• Aberdeen Standard Liquidity Fund (Lux) Sterling Fund
• Aberdeen Standard SICAV III Dynamic Multi Asset Growth Fund
• ASI Europe ex UK Growth Equity Fund
• ASI Global Real Estate Share Fund
• ASI MyFolio Multi-Manager I Fund
• ASI Phoenix Venture Capital Partners LP
• ASI (Standard Life) Global Equity Trust II
• ASI (Standard Life) Multi-Asset Trust
• Legal & General Dynamic Bond Fund
• Northampton General Partner Limited
• The Pearl Martineau Galleries Limited Partnership
• The Pearl Martineau Limited Partnership
• Quilter Investors Diversified Portfolio Fund
• Quilter Investors UK Equity Large-Cap Value Fund
The following associates were dissolved during the period. The investment in
associate was derecognised from the date of dissolution:
• Brixton Radlett Property Limited
• Moor House General Partner Limited
• UK Commercial Property Estates Limited
• UK Commercial Property GP Limited
• UK Commercial Property Holdings Limited
• UK Commercial Property Nominee Limited
The Group no longer has significant holdings in the following undertakings:
• Aberdeen Standard Global SICAV III Global Equity Impact Fund
• Aberdeen Standard UK Retail Park Trust
• AXA Global High Income Fund
• Blackrock ICS Sterling Government Liquidity Fund
• Castlepoint LP
• Central Saint Giles Unit Trust
• HSBC ETFs PLC - HSBC FTSE EPRA NAREIT Developed UCITS ETF
• L&G Absolute Return Bond Plus Fund
• Legal & General Asian Income Trust
• Legal & General Emerging Markets Government Bond (Local Currency)
Index Fund
• Legal & General UK Equity Income Fund
• Legal & General European Index Trust
• Legal & General Global Real Estate Dividend Index Fund
• Legal & General Real Capital Builder Fund
• Legal & General UK Special Situations Trust
• Invesco US Equity Fund
• Quilter Investors Bond 2 Fund
• Quilter Investors Cirilium Moderate Blend Portfolio Fund
• Vanguard FTSE U.K. All Share Index Unit Trust
• Vanguard Investment Series plc - Vanguard U.K. Investment Grade Bond
Index Fund
I. Other notes
I1. Share-based payments
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:
2022 2021
£m £m
Expense arising from equity-settled share-based payment transactions 16 14
I1.2 Share-based payment schemes
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 2020, 2021 and 2022 LTIP awards are subject to performance
conditions tied to the Group's performance in respect of net operating cash
receipts, return on shareholder value, persistency and total shareholder
return ('TSR'). The 2022 LTIP also included a performance condition tied to
the Group's performance on decarbonisation. See page 134 of the Directors'
Remuneration Report for further details of the performance conditions.
For all LTIP awards, a holding period applies so that any LTIP awards to
Executive Committee members for which the performance vesting requirements are
satisfied will not be released for a further two years from the third
anniversary of the original award date. Dividends will accrue on LTIP awards
until the end of the holding period. There are no cash settlement
alternatives.
2022 LTIP awards were granted on 18 March 2022 and are expected to vest on 18
March 2025. The 2019 LTIP awards vested on 11 March 2022. The 2020 awards will
vest on 13 March 2023 and the 2021 awards will vest on 12 March 2024. 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 2020, 2021 and 2022 TSR
elements of the LTIP awards has been calculated using a Monte Carlo model. The
inputs to this model are shown below:
2022 2021 2020
TSR performance condition
TSR performance condition
TSR performance condition
Share price (p) 639 738.6 586.3
Expected term (years) 2.8 3.0 3.0
Expected volatility (%) 31 30 20
Risk-free interest rate (%) 1.21 0.14 0.28
Expected dividend yield (%) Dividends are received by holders of the awards therefore
no adjustment to fair value is required
On 19 August 2022 and 17 August 2021, LTIP awards were granted to certain
senior management employees. The vesting periods and performance conditions
for these awards are linked to the core 2021 and 2022 LTIP awards
respectively.
On 18 March 2022 and 19 August 2022 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. Similar awards
were also issued on 12 March 2021 and 17 August 2021.
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.
Each year, the Group issues a Chair'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 2020, 2021 and 2022 LTIP awards. These grants of shares
are conditional on the employees remaining in employment with the Group for
the vesting period and achieving an established minimum good/good performance
grading. Good leavers will be able to, at the discretion of the Remuneration
Committee, exercise their full award at vesting.
Deferred Bonus Share Scheme ('DBSS')
Each year, part of the annual incentive for certain executives is deferred
into shares of the 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 2022 DBSS was granted on 18 March 2022 and is expected to vest on 18 March
2025. The 2019 DBSS awards vested on 11 March 2022. The 2020 awards are
expected to vest on 13 March 2023 and the 2021 awards are expected to vest on
12 March 2024.
The fair value of these awards is estimated at the average share price in the
three days preceding the date of the grant, taking into account the terms and
conditions upon which the options were granted.
Sharesave scheme
The Sharesave scheme allows participating employees to save up to £500 each
month across all active UK scheme and up to €500 per month for the Irish
scheme over a period of either three or five years. The 2022 UK Sharesave
options were granted on 15 April 2022. Irish Sharesave options are no longer
granted.
Under the Sharesave arrangement, participants remaining in the Group's
employment at the end of the three or five year saving period are entitled to
use their savings to purchase shares at an exercise price at a 20% discounted
exercise price which is calculated using a three-day average share price
immediately before invitations are issued to employees. 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.
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 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 2018 to 2022 UK Sharesave options:
The information for determining the fair value of the 2021 Irish Sharesave
options differed from that included in the table above as follows:
- Share price (€): 8.618
- Exercise price (€): 6.880
- Risk-free rate (%): (0.4) (for 3.25 year scheme) and (0.3) (for 5.25 year
scheme)
- No Sharesave awards were granted to Irish employees during 2022.
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 2022, 543,995 matching shares
(excluding unrestricted shares) were conditionally awarded to employees (2021:
391,658).
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 2022
LTIP Sharesave DBSS
Outstanding at the beginning of the year, including dividend shares 7,613,036 4,750,822 1,551,935
Granted during the year 3,350,169 1,827,291 1,121,085
Forfeited during the year (523,125) (252,992) (4,917)
Cancelled during the year - (506,796) -
Exercised during the year (1,328,703) (816,419) (443,747)
Dividends on vested awards 275,858 - 77,445
Outstanding at the end of the year 9,387,235 5,001,906 2,301,801
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, excluding dividend shares - as previously 7,301,032 4,750,822 1,550,293
reported
Outstanding dividend shares 312,004 - 1,642
Outstanding at the end of the year, including dividend shares 7,613,036 4,750,822 1,551,935
1 The comparative disclosures for the LTIP and DBSS awards were previously
reported excluding dividend shares that had been allocated at the vesting
date. These dividend shares are now included within the movement analysis for
the year ended 31 December 2022
The weighted average fair value of options granted during the year was £4.34
(2021: £4.98).
The weighted average share price at the date of exercise for the rewards
exercised is £6.13 (2021: £7.06).
The weighted average remaining contractual life for the awards outstanding as
at 31 December 2022 is 5.7 years (2021: 5.5 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 2022 2021
£m
£m
Loss for the year before tax (2,840) (430)
Adjustments for non-cash movements in loss before tax for the year:
Gain on completion of abrdn plc transaction A6.1 - (110)
Loss on disposal of Ark Life, excluding transaction costs A6.2 - 17
Fair value losses/(gains) on:
Investment property G4 1,363 (1,195)
Financial assets and derivative liabilities 45,197 (9,436)
Change in fair value of borrowings E5.2 186 (9)
Amortisation and impairment of intangible assets G2 526 644
Change in unallocated surplus F2 (378) (106)
Share-based payment charge I1.1 16 14
Finance costs C5 230 242
Net interest expense on Group defined benefit pension scheme liability/asset G1 64 37
Pension past service costs G1 15 -
Other costs of pension schemes G1 7 6
Movement in assets and liabilities relating to operations:
Decrease in investment assets 3,934 6,738
Decrease/(increase) in reinsurance assets 3,449 (227)
Decrease in assets classified as held for sale 2,741 286
(Decrease)/increase in insurance contract and investment contract liabilities (44,351) 6,354
Decrease in deposits received from reinsurers (971) (521)
Decrease in obligation for repayment of collateral received (1,740) (1,762)
Decrease in liabilities classified as held for sale (3,386) (264)
Net increase in working capital (3,034) (1,100)
Other cash movements relating to operations:
Contributions to defined benefit pension schemes G1 (9) (49)
Cash generated/(utilised) by operations 1,019 (871)
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 52 to 67 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 and 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'.
The Group operates an Internal Model to calculate Group SCR, all Group
companies are within the scope of the internal model, with the exception of
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 2022 2021
£bn £bn
PGH plc Eligible Own Funds 11.1 14.8
Remove Own Funds pertaining to unsupported with-profit funds and pension (1.8) (2.9)
schemes
Group capital resources 9.3 11.9
Solvency II surplus - unaudited
An analysis of the PGH plc Solvency II surplus as at 31 December 2022 is
provided in the business review section on page 34 to 35. During 2022, both
Eligible Own Funds and SCR have decreased principally as a consequence of
rising interest rates. This has resulted in a decrease in the present value of
certain risks included within the SCR along with a corresponding fall in the
value of Own Funds in accordance with the Group's hedging strategy that aims
to protect the value of the Solvency II surplus.
The Group has complied with all externally imposed capital requirements during
the year.
I4. Related party transactions
In the ordinary course of business, the Group and its subsidiaries carry out
transactions with related parties, as defined by IAS 24 Related party
disclosures , which comprise a Group pension scheme, an associate and key
management personnel
I4.1 Related party transactions
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, was 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.
During the year, the Group entered into the following related party
transactions with a Group pension scheme and an associate:
Transactions Transactions
2022(1) 2021(1)
£m £m
Pearl Group Staff Pension Scheme
Payment of administrative expenses (4) (4)
UK Commercial Property REIT
Dividend income 29 17
abrdn plc(2)
Investment management fees N/A (20)
Fees under Transitional Services Arrangement and material outsource agreements N/A (4)
1 There were no outstanding balances with related parties as at 31 December
2021 and 31 December 2022.
2 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 were all 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:
2022 2021
£m £m
Salary and other short-term benefits 5 5
Equity compensation plans 3 3
Details of the shareholdings and emoluments of individual Directors are
provided in the Remuneration report on pages 110 to 146.
During the year to 31 December 2022 key management personnel and their close
family members contributed £183,933 (2021: £291,546) to Pensions and Savings
products sold by the Group. At 31 December 2022, the total value of key
management personnel's investments in Group Pensions and Savings products was
£525,781 (2021: £3,443,658).
I5. Commitments
This note analyses the Group's other commitments.
2022 2021
£m £m
To subscribe to private equity funds and other unlisted assets 1,132 710
To purchase, construct or develop investment property and income strips 62 206
For repairs, maintenance or enhancements of investment property 13 12
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 4 August 2022, the Company announced the proposed acquisition of the entire
issued share capital of SLF of Canada UK Limited from the Sun Life Assurance
Company of Canada, part of the Sun Life Financial Inc. Group. Regulatory
approval for the acquisition was received from the Prudential Regulation
Authority on 3 March 2023 and in accordance with the share purchase agreement
is expected to complete in April 2023. Total cash consideration of £248
million is payable to the Sun Life Assurance Company of Canada upon
completion, subject to certain adjustments.
On 7 February 2023, the Group announced its plan to extend the existing
strategic partnership with TCS and Diligenta and intention to move all
policies administered on the ReAssure ALPHA platform to the TCS BaNCS
platform. This move is expected to have an immaterial impact on the financial
statements. The expense assumptions used to determine the relevant liabilities
to policyholders at 31 December 2022 reflect the impact of the move to TCS
BaNCS and the associated implementation costs.
On 10 March 2023, the Board recommended a final dividend of 26.0p per share
for the year ended 31 December 2022 (2021: 24.8p). 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 2022 and will be charged to the statement of consolidated
changes in equity in 2023.
A Barbour
A Briggs
R Thakrar
S Bruce
K Green
H Iioka
K Murray
J Pollock
B Richards
M Semple
N Shott
K Sorenson
10 March 2023
Parent company financial statements
Statement of financial position
As at 31 December 2022
Notes 2022 2021
£m
£m
ASSETS
Property, plant and equipment 10 19 21
Investments in Group entities 11 10,231 10,031
Financial assets
Loans and deposits 12 2,550 1,234
Derivatives 6 257 69
Debt securities 13 1 1
Collective investment schemes 13 775 690
Deferred tax 14 113 82
Prepayments and accrued income 54 58
Other amounts due from Group entities 20 19 616
Cash and cash equivalents 15 - 95
Total assets 14,019 12,897
EQUITY AND LIABILITIES
Equity attributable to ordinary shareholders
Share capital 3 100 100
Share premium 3 10 6
Merger relief reserve 3 1,819 1,819
Other reserve 3 (4) (4)
Retained earnings 5,062 5,448
Total equity attributable to ordinary shareholders 6,987 7,369
Tier 1 Notes 4 411 411
Total equity 7,398 7,780
Liabilities
Financial liabilities
Borrowings 5 6,229 4,387
Derivatives 6 22 5
Obligations for repayment of collateral received 6 86 66
Other amounts due to Group entities 20 43 415
Provisions 7 97 92
Lease liabilities 8 20 21
Accruals and deferred income 9 124 131
Total liabilities 6,621 5,117
Total equity and liabilities 14,019 12,897
The notes identified numerically on pages 296 to 306 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 175 to 289.
Approved by the Board on 10 March 2023.
Andy Briggs
Rakesh Thakrar
Chief Executive
Officer
Chief Financial Officer
Company registration number 11606773.
Statement of changes in equity
For the year ended 31 December 2022
Share Share premium (note 3) Merger relief reserve Other Retained earnings Total Tier 1 Notes (note 4) Total
capital
£m
(note 3)
reserve
£m
£m
£m
(note 3)
£m
(note 3) Equity
£m
£m
£m
At 1 January 2022 100 6 1,819 (4) 5,448 7,369 411 7,780
Total comprehensive income for the year attributable to owners - - - - 116 116 - 116
Issue of ordinary share capital, net of associated commissions and expenses - 4 - - - 4 - 4
Dividends paid on ordinary shares (note B4) - - - - (496) (496) - (496)
Coupon paid on Tier 1 Notes, net of tax relief - - - - (22) (22) - (22)
Credit to equity for equity-settled share-based payments (note I1) - - - - 16 16 - 16
At 31 December 2022 100 10 1,819 (4) 5,062 6,987 411 7,398
For the year ended 31 December 2021
Share Share premium (note 3) Merger relief reserve Other Retained earnings Total Tier 1 Notes (note 4) Total
capital
£m
(note 3)
reserve
£m
£m
£m
(note 3)
£m
(note 3) Equity
£m
£m
£m
At 1 January 2021 100 4 1,819 (4) 5,211 7,130 411 7,541
Total comprehensive income for the period attributable to owners - - - - 728 728 - 728
Issue of ordinary share capital, net of associated commissions and expenses - - - - - 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
Statement of cash flows
For the year ended 31 December 2022
Notes 2022 2021
£m
£m
Cash flows from operating activities
Cash (utilised)/generated by operations 16 (417) 897
Net cash flows from operating activities (417) 897
Cash flows from investing activities
Advances to Group entities (852) -
Dividends received from Group entities 455 -
Interest received from Group entities 162 111
Capital contribution to subsidiary (note 11) (200) (63)
Repayment of amounts due from Group entities 2 -
Derivative settlements (70) -
Net cash flows from investing activities (503) 48
Cash flows from financing activities
Proceeds from issuing ordinary shares 3 4 2
Proceeds from new shareholder borrowings, net of associated expenses 5 2,274 -
Repayment of shareholder borrowings 5 (616) (122)
Ordinary share dividends paid (496) (482)
Interest paid on borrowings (311) (222)
Lease payments (1) (1)
Coupon paid on Tier 1 Notes (29) (29)
Net cash flows from financing activities 825 (854)
Net (decrease)/increase in cash and cash equivalents (95) 91
Cash and cash equivalents at the beginning of the year 95 4
Cash and cash equivalents at the end of the year - 95
Notes to the parent company financial statements
1. Accounting policies
(a) Basis of preparation
The financial statements have been prepared under a going concern basis and on
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 2022
was £116 million (2021: £728 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 175 to 289 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 to date 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 5, 12 and
15.
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 details 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.
c) Critical accounting estimates and judgements
Critical accounting estimates are those which involve the most complex or
subjective judgements or assessments. The area of the Company's business that
typically requires such estimates and judgement is the impairment assessment
for investments in Group entities.
Impairment of investments in Group entities
The Company conducts impairment reviews of investments in subsidiaries
whenever events or changes in circumstances indicate that their carrying
amounts may not be recoverable. Determining whether an asset is impaired
requires an estimation of the recoverable amount, which requires the Company
to estimate the value in use which uses future cash flows and a suitable
discount rate in order to calculate the present value. Where the actual future
cash flows are less than expected, an impairment loss may arise. Further
details are included in note 11.
2. Financial information
New accounting pronouncements not yet effective
Details of the standards, interpretations and amendments to be adopted in
future periods are detailed in note A5 to the consolidated financial
statements, none of which are expected to have a significant impact on the
Company's financial statements.
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 2022, the Company issued 816,419 shares (2021: 303,914 shares) with a
premium of £4 million (2021: £2 million) in order to satisfy its obligations
to employees under the Group's sharesave schemes.
The Company has applied the relief in section 612 of the Companies Act 2006 to
present the difference between the consideration received and the nominal
value of the shares issued of £1,819 million in a merger reserve as opposed
to in share premium. A merger reserve is required to be used as a result of
the Company having issued equity shares in 2020 as part consideration for the
shares of the ReAssure Group plc and securing at least a 90% holding in that
entity.
On 12 December 2018, the Company became the ultimate parent undertaking of the
Group by acquiring the entire share capital of 'Old PGH' (the Group's ultimate
parent company until December 2018) via a share for share exchange. The cost
of investment in Old PGH was determined as the carrying amount of the
Company's share of the equity of Old PGH on the date of the transaction. The
difference between the cost of investment and the market capitalisation of Old
PGH immediately before the share for share exchange of £4 million has been
recognised as an Other reserve, and is shown as a separate component of
equity.
2022 2021
£m £m
Issued and fully paid:
1000.4 million ordinary shares of £0.10 each (2021: 999.5 million) 100 100
2022 Number £
Shares in issue at 1 January 2022 999,536,058 99,953,605
Ordinary shares issued in the period 816,419 81,642
Ordinary shares in issue at 31 December 2022 1,000,352,477 100,035,247
2021 Number £
Shares in issue at 1 January 2021 999,232,144 99,923,214
Other ordinary shares issued in the period 303,914 30,391
Ordinary shares in issue at 31 December 2021 999,536,058 99,953,605
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.
2022 2021
£m
£m
Tier 1 Notes 411 411
On 12 December 2018, the Company was substituted in place of Old PGH as issuer
of the Tier 1 Notes and these were recognised at the fair value of £411
million in the form of an intragroup loan which was received as consideration.
On 27 October 2020, the terms of the Tier 1 Notes were amended and the
consequence of a trigger event, linked to the Solvency II capital position,
was changed. Previously, the Tier 1 Notes were subject to a permanent
write-down in value to zero. The amended terms require that the Tier 1 Notes
would automatically be subject to conversion to ordinary shares of the Company
at the conversion price of £1,000 per share, subject to adjustment in
accordance with the terms and conditions of the notes and all accrued and
unpaid interest would be cancelled. Following any such conversion there would
be no reinstatement of any part of the principal amount of, or interest on,
the Tier 1 Notes at any time.
5. Borrowings
The accounting policy for borrowings is included in note E5 to the
consolidated financial statements.
Carrying value Fair value
2022 2021 2022 2021
£m
£m
£m
£m
Loans due to third-parties:
£428 million subordinated loans (note a) 433 435 429 498
£450 million Tier 3 subordinated notes (note b) - 449 - 457
US $500 million Tier 2 bonds (note c) 383 337 390 408
€500 million Tier 2 notes (note d) 414 389 416 490
US $750 million Contingent Convertible Tier 1 notes (note e) 618 551 580 581
£500 million Tier 2 notes (note f) 487 485 445 593
US $500 million Fixed Rate Reset Tier 2 notes (note g) 412 368 382 389
£500 million 5.867% Tier 2 subordinated notes (note h) 543 550 465 598
£250 million 4.016% Tier 3 subordinated notes (note i) 256 257 231 264
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes (note j) 259 266 244 269
3,805 4,087 3,582 4,547
Loans due to Group companies:
Loan due to Standard Life Assurance Limited (note k) 309 300 309 300
Senior loan due to ReAssure Limited (note l) 718 - 718 -
€100 million loan due to Standard Life International DAC (note m) 89 - 89 -
£130 million floating term loan to ReAssure Life Limited (note n) 130 - 130 -
Cash-pooling with other Group entities (note o) 1,178 - 1,178 -
2,424 300 2,424 2,424
Total borrowings 6,229 4,387 6,006 4,847
Amount due for settlement after 12 months 5,051 4,387
a. On 12 December 2018, the Company was substituted in place of Old PGH as
issuer of the £428 million Tier 2 subordinated notes due 2025 at a coupon of
6.625%, which were initially recognised at fair value of £439 million.
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. On 20
July 2022, the Company redeemed the £450 million Tier 3 subordinated notes in
full at their principal amount, together with interest accrued to the
repayment date.
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 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.
f. 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.
g. 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.
h. 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.
i. 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.
j. On 22 February 2019, the Company recognised a loan due in 2024 to Standard
Life Assurance Limited ('SLAL'), a subsidiary undertaking, for £162 million.
This loan was the initial consideration for the acquisition from SLAL of its
investment in Standard Life International Designated Activity Company
('SLIDAC'). On 28 March 2019 the purchase price was adjusted by £120 million,
which resulted in an increase in the loan principal. Interest accrues at SONIA
plus 1.9366% and is capitalised. During the year interest of £9 million
(2021: £6 million) was capitalised.
k. 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.
l. On 31 December 2022, ReAssure Limited ('RAL') issued a £718 million term
loan of £718 million to the Company, maturing on 31 December 2027. At the
same time, the Company issued a contingent loan to RAL for the same amount
(see note 12 (c) for further details). Interest accrues on the term loan asset
at a rate of SONIA plus 1.49%. If the Company fails to make payments of
principal or interest in accordance with the terms of the loan, a
corresponding amount of RAL's obligations under the contingent loan would be
offset.
m. On 20 December 2022, Standard Life International DAC
('SLIDAC') issued to the Company a €100 million loan at an interest rate of
2.29% with a maturity date of 31 March 2024.
n. On 16 December 2022, ReAssure Life Limited issued a
£130 million floating term loan to the Company at an interest rate of 4.72%
for a term of 5 years.
o. On 13 September 2022, the Company entered into an
uncommitted intra-group cash-pooling facility with certain subsidiaries, under
which the Company will either borrow funds from, or lend funds to, the
relevant subsidiary. All amounts due under the facility attract interest at
SONIA and are repayable on demand.
p. 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 2022.
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 Non-cashflow
At 1 New borrowings, net of costs Repayments Movement in foreign exchange Amortisation Capitalised interest Movement in fair value At 31 December 2022
January 2022
£m £m £m £m £m £m £m
£m
£428 million subordinated notes 435 - - - (2) - - 433
£450 million Tier 3 subordinated notes 449 - (450) - 1 - - -
US $500 million Tier 2 bonds 337 - - 41 5 - - 383
€500 million Tier 2 notes 389 - - 21 4 - - 414
US $750 million Contingent Convertible Tier 1 notes 551 - - 66 1 - - 618
£500 million Tier 2 notes 485 - - - 2 - - 487
US $500 million Fixed Rate Reset Tier 2 notes 368 - - 44 - - 412
£500 million 5.867% Tier 2 subordinated notes 550 - - - (7) - - 543
£250 million 4.016% Tier 3 subordinated notes 257 - - - (1) - - 256
£250 million Fixed Rate Reset Callable Tier 2 subordinated notes 266 - - - (7) - - 259
Loan due to Standard Life Assurance Limited 300 - - - - 9 - 309
Senior loan due to ReAssure Limited - 7182 - - - - - 718
€100 million loan due to Standard Life International DAC - 88 - 1 - - - 89
£130 million floating term loan to ReAssure Life Limited - 130 - - - - - 130
Cash-pooling with other Group entities - 1,338 (166) - - 6 - 1,178
Derivative assets(1) (48) - - - - - (177) (225)
Derivative liabilities(1) 5 - - - - - (5) -
4,344 2,274 (616) 173 (4) 15 (182) 6,004
1 Cross currency swaps to hedge against adverse currency movements in
respect of Group's Euro and US Dollar denominated borrowings (see note 6 for
further details).
2 Settled simultaneously with the issuance of the £718 million contingent
loan (see note 12(d)).
Cash Non-cashflow
At 1 New borrowings, net of costs Repayments Movement in foreign exchange Amortisation Capitalised interest Movement in fair value At 31 December 2021
January 2021
£m £m £m £m £m £m £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 assets(1) - - - - - - (48) (48)
Derivative liabilities(1) - - - - - - 5 5
4,521 - (122) (12) (6) 6 (43) 4,344
1 Cross currency swaps to hedge against currency movements in respect of
Group's Euro and US Dollar denominated borrowings (see note 6 for further
details).
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
2022 2021 2022 2021
£m
£m
£m
£m
Cross currency swaps 225 48 - 5
Foreign currency swaps 32 21 22 -
257 69 22 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 over-the-counter ('OTC')
derivative assets is £257 million (2021: £69 million) of which credit risk
of £86 million (2021: £66 million) is mitigated by use of collateral
arrangements (which are settled net after taking account of any OTC derivative
liabilities owed by the counterparty).
Assets pledged
The Company has not pledged any collateral in respect of its OTC derivative
liabilities.
7. Provisions
In 2019, the Company recognised a Standard Life transition and transformation
restructuring provision of £159 million. During the year, £28 million (2021:
£17 million) of the restructuring provision was utilised and the provision
was increased by £33 million (2021: £nil). The remaining provision of £97
million (2021: £92 million) is expected to be utilised within one to three
years.
Further details, including the accounting policy for provisions, 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.
2022 2021
£m
£m
At 1 January 21 -
Inception of lease - 22
Lease payments (1) (1)
At 31 December 20 21
Amount due within twelve months 1 2
Amount due after twelve months 19 19
9. Accruals and deferred income
The accounting policy for accruals and deferred income is included in note G11
to the consolidated financial statements.
2022 2021
£m
£m
Accruals and deferred income 124 131
Amount due for settlement after 12 months - -
10. Property, plant and equipment
The accounting policy for property, plant and equipment is included in note G3
to the consolidated financial statements.
Property, plant and equipment includes the right-of-use asset relating to
office premises leased at 20 Old Bailey, London. Depreciation is being charged
on a straight line basis over the term of the lease.
Total Property, Plant and Equipment
2022
£m
Cost or valuation
At 1 January and 31 December 22
Depreciation
At 1 January (1)
Depreciation (2)
At 31 December (3)
Carrying amount at 31 December 19
Total Property, Plant and Equipment
2021
£m
Cost or valuation
At 1 January -
Additions 22
At 31 December 22
Depreciation
At 1 January -
Depreciation (1)
At 31 December (1)
Carrying amount at 31 December 21
11. Investments in group entities
2022 2021
£m
£m
Cost
At 1 January 14,220 14,236
Additions 200 63
Acquisition Price Adjustment - (79)
At 31 December 14,420 14,220
Impairment
At 1 January (4,189) (4,146)
Charge for the year - (43)
At 31 December (4,189) (4,189)
Carrying amount
At 31 December 10,231 10,031
During 2022, a capital contribution was made to Phoenix Life Holdings Limited
of £200 million.
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.
As at 31 December 2022 and 31 December 2021, the market capitalisation of the
Company was lower than the net asset value, and this was considered to be an
indicator that the Company's investments in its subsidiaries may have been
impaired. Where such indicators are identified, an impairment test is
performed. As at 31 December 2022, the recoverable amount of the investments
in subsidiaries was determined to be greater than carrying value. In 2021, an
impairment charge of £43 million was recognised to align the carrying value
of certain investments in subsidiaries to the recoverable amount.
As a starting point, the contribution of the life insurance subsidiaries to
the recoverable amount has been determined with reference to Solvency II Own
Funds, which reflects a probability-weighted best estimate for the expected
cash flows under in-force insurance and investment contracts consistent with
the Group's operating plan with an allowance for risk, together with an
economic valuation of the underlying assets and other liabilities. Suitable
adjustments were made to Solvency II Own Funds, in order to align to the
expected dividends to be paid by the life insurance subsidiary, which included
the removal of the surplus attributable to policyholders in the with-profit
funds. Additionally, where relevant, the recoverable amount incorporated the
value ultimately expected to accrue to the Company in respect of future new
business written. The contribution of the non-insurance subsidiaries was
determined using net asset values.
For a list of principal Group entities, refer to note H4 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
2022 2021 2022 2021
£m
£m
£m
£m
Loans due from Phoenix Life Holdings Limited (note a) 1,273 1,221 1,279 1,370
Cash-pooling to other Group entities (note b) 546 - 546 -
Loan due from Phoenix Group Employee Benefit Trust (note c) 13 13 13 13
Loan due from ReAssure Limited (note d) 718 - 718 -
Loans and deposits due from Group entities 2,550 1,234 2,556 1,383
Total loans and deposits 2,550 1,234 2,556 1,383
Amounts due after 12 months 2,004 784
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 2022, the carrying
value of the loan was £433 million (2021: £435 million).
On 12 December 2018, the Company was assigned a £450 million subordinated
loan by PLHL. The loan accrues interest at a rate of 4.158% and matured on 20
July 2022. On 20 July 2022, the amount due on the maturity of the subordinated
loan of £450 million was advanced under a new loan to PLHL. The new loan
accrued interest at a rate of compounded SONIA rate plus a margin of £1.30%
and matures on 31 December 2027. At 31 December 2022, the carrying value of
the loan was £457 million (2021: £449 million due under the subordinated
loan).
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 increased the carrying value by
£41 million (2021: £4 million (decrease)). At 31 December 2022, the carrying
value of the loan was £383 million (2021: £336 million).
b) On 13 September 2022, the Company entered into an
uncommitted intra-group cash-pooling facility with certain subsidiaries, under
which the Company will either borrow funds from, or lend funds to, the
relevant subsidiary. All amounts due under the facility attract interest at
SONIA and are repayable on demand.
c) On 18 June 2019, the Company was assigned an interest free facility
arrangement with Phoenix Group Employee Benefit Trust ('EBT'). As at 31
December 2022, the carrying value of the loan was £13 million (2021: £13
million). The loan is fully recoverable until the awards held in the EBT vest
to the participants, at which point the loan is reviewed for impairment. Any
impairments are determined by comparing the carrying value to the estimated
recoverable amount of the loan. During the year funding of £12 million (2021:
£16 million) was provided to the EBT and £12 million of the loan was
impaired (2021: £10 million).
d) On 31 December 2022, the Company issued a contingent
loan of £718 million with ReAssure Limited ('RAL') which accrues interest at
a rate of SONIA plus 2.95%. Loan repayments and interest payments are made
quarterly in arrears. Repayment of principal each quarter is set at the amount
of surplus emerging from a specified block of unit-linked business in RAL,
less interest payable. The best estimate for the total amount of surplus
expected to emerge from this block of business as at 31 December 2022 is £1.4
billion, giving rise to a ratio of loan-to-value of approximately 50%. The
contingent loan is expected to be fully repaid by 31 December 2027, five years
from the date of issue.
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
2022 2021
£m
£m
Financial assets at fair value through profit or loss
Derivatives 257 69
Debt securities 1 1
Collective investment schemes 775 690
1,033 760
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 2022 Level 1 Level 2 Level 3 Total
£m
£m
£m
£m
Financial assets at fair value through profit or loss
Derivatives - 257 - 257
Debt securities - - 1 1
Collective investment schemes 775 - - 775
775 257 1 1,033
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
There were no transfers between levels in either 2022 or 2021.
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 2022 Credit for the year 31 December 2022
£m £m £m
Provisions and other temporary differences 82 31 113
1 January 2021 Credit for the year 31 December 2021
£m £m £m
Provisions and other temporary differences 16 66 82
The standard rate of UK corporation tax for the accounting period is 19%
(2021: 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.
2022 2021
£m £m
Bank and cash balances - 95
16. Cash flows from operating activities
2022 2021
£m £m
Profit for the year before tax 26 661
Non-cash movements in profit for the year before tax:
Impairment of loan due from subsidiary 12 10
Impairment of investment in subsidiaries - 43
Investment income (127) (111)
Finance costs 287 274
Fair value gains on financial assets (171) (62)
Foreign exchange movement on borrowings at amortised cost 173 (11)
Share-based payment charge 16 14
Depreciation 2 1
Decrease in investment assets 290 385
Net increase in working capital (925) (307)
Cash (utilised)/generated by operations (417) 897
17. Capital and risk management
The Company's capital comprises share capital, the Tier 1 Notes and all
reserves as calculated in accordance with International Financial Reporting
Standards ('IFRS'), as set out in the statement of changes in equity. Under
English company law, dividends must be paid from distributable profits. As the
ultimate parent undertaking of the Group, the Company manages its capital to
ensure that it has sufficient distributable profits to pay dividends in
accordance with its dividend policy. The distributable reserves of the Company
as at 31 December 2022 were £5,062 million (2021: £5,448 million).
At 31 December 2022, total capital was £7,398 million (2021: £7,780
million). The movement in capital in the period comprises the total
comprehensive income for the period attributable to owners of £116 million
(2021: £728 million), dividends paid of £496 million (2021: £482 million),
coupon paid on Tier 1 Notes, net of tax relief of £22 million (2021: £23
million), credit to equity for equity-settled share-based payments of £16
million (2021 £14 million) and issue of ordinary share capital of £4 million
(2021: £2 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:
2022 External credit rating Internal credit rating 12 month or lifetime ECL Gross carrying amount Loss allowance Net carrying amount
£m
£m
£m
Loans and deposits (note 12) N/A Performing 12 month ECL 2,550 - 2,550
Other amounts due from Group entities (note 20) N/A Performing 12 month ECL 19 - 19
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
The Company considers reasonable and supportable information that is relevant
and available without undue cost or effort to assess whether there has been a
significant increase in risk since initial recognition. This includes
quantitative and qualitative information and forward-looking analysis.
Loans and deposits - The Company is exposed to credit risk relating to loans
and deposits from other Group companies, which are considered to be of low
risk. Given their low risk, the loss allowance has been set at less than £1
million. The Company assesses whether there has been a significant increase in
credit risk since initial recognition by assessing whether there have been any
historic defaults, by reviewing the going concern assessment of the borrower
and the ability of the Group to prevent a default by providing a capital or
cash injection. Specific considerations for the loan to the Employee Benefit
Trust are discussed in note 12.
Amounts due from other Group entities - The credit risk from activities
undertaken in the normal course of business is considered to be extremely low.
Given their low risk, the loss allowance has been set at less than £1
million. The Company assesses whether there has been a significant increase in
credit risk since initial recognition by assessing past credit impairments,
history of defaults and the long-term stability of the Group.
Cash and cash equivalents - The Company's cash and cash equivalents as at 31
December 2021 were held with bank and financial institution counterparties
which had investment grade 'A' credit ratings. The Company considered the
associated credit risk was low based on the external credit ratings of the
counterparties and, there being no history of default, the impact to the net
carrying amount stated in the table above is therefore considered not to be
material.
The Company writes off a financial asset when there is information indicating
that the counterparty is in severe financial difficulty and there is no
realistic prospect of recovery, e.g. when the counterparty has been placed
into liquidation or has entered into bankruptcy proceedings. Financial assets
written off may still be subject to enforcement activities under the Company's
recovery procedures, taking into account legal advice where appropriate. Any
recoveries made are recognised in profit or loss.
18. Share-based payments
Detailed information on the Long-term incentive plans, Sharesave schemes and
Deferred bonus share schemes is contained in note I1 in the consolidated
financial statements.
19. Directors' remuneration
Details of the remuneration of the Directors of Phoenix Group Holdings plc is
included in the Directors' Remuneration Report on pages 110 to 146 of the
Annual Report and Accounts.
20. Related party transactions
The Company has related party transactions with Group entities and its key
management personnel. Details of the total compensation of key management
personnel, being those having authority and responsibility for planning,
directing and controlling the activities of the Group, including the Executive
and Non-Executive Directors, are included in note I4 to the consolidated
financial statements.
During the year ended 31 December 2022, the Company entered into the following
transactions with related parties.
2022 2021
£m £m
Dividend income from other Group entities 455 957
Interest income from other Group entities 124 111
579 1,068
Impairment of investment in subsidiaries - 43
Expense to other Group entities 246 205
Interest expense to other Group entities 60 43
306 291
Amounts due from related parties at the end of the year:
2022 2021
£m £m
Loans due from Group entities 2,550 1,234
Interest accrued on loans due from Group entities 29 35
Other amounts due from Group entities 19 616
2,598 1,885
Amount due for settlement after 12 months 2,004 784
Amounts due to related parties at the end of the year:
2022 2021
£m £m
Loans due to Group entities 2,424 300
Interest accrued on loans due to Group entities 14 14
Other amounts due to Group entities 43 415
2,481 729
Amount due for settlement after 12 months 1,246 300
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.
A Barbour
A Briggs
R Thakrar
S Bruce
K Green
H Iioka
K Murray
J Pollock
B Richards
M Semple
N Shott
K Sorenson
10 March 2023
Additional life company asset disclosures
The analysis of the asset portfolio provided below comprises the assets held
by the Group's life companies, and it is stated net of derivative liabilities.
It excludes other Group assets such as cash held in the holding and management
service companies and the assets held by the non-controlling interests in
consolidated collective investment schemes.
The following table provides an overview of the exposure by asset category of
the Group's life companies' shareholder and policyholder funds:
31 December 2022
Carrying value Shareholder and non-profit funds1 Participating supported1 Participating non-supported2 Unit-linked2 Total
£m £m £m £m £m
Cash and cash equivalents 4,385 1,027 5,312 6,445 17,169
Debt securities - gilts and foreign government bonds 4,913 260 15,065 13,212 33,450
Debt securities - other government and supranational 1,691 242 1,717 2,341 5,991
Debt securities - infrastructure loans - project finance(3) 922 - - - 922
Debt securities - infrastructure loans - corporate (4) 1,205 - 1 - 1,206
Debt securities - local authority loans(5) 686 1 2 4 693
Debt securities - loans guaranteed by export credit agencies and 509 - - - 509
supranationals(6)
Debt securities - private corporate credit (7) 1,660 - 100 8 1,768
Debt securities - loans to housing association (8) 769 - 8 2 779
Debt securities - commercial real estate loans(9) 1,104 - - - 1,104
Debt securities - equity release mortgages(9) 3,934 - - - 3,934
Debt securities - other debt securities 13,895 1,118 13,067 33,515 61,595
31,288 1,621 29,960 49,082 111,951
Equity securities 109 46 17,114 94,462 111,731
Property investments 68 22 1,698 5,361 7,149
Income strips(9) - - - 786 786
Other investments(10) (1,238) (506) 738 9,271 8,265
Total Life Company assets 34,612 2,210 54,822 165,407 257,051
Less assets held by disposal groups(11) - - - (8,312) (8,312)
At 31 December 2022 34,612 2,210 54,822 157,095 248,739
Cash and cash equivalents in Group holding companies 502
Cash and financial assets in other Group companies 1,071
Financial assets held by the non-controlling interest in consolidated 4,213
collective investment schemes
Financial assets in consolidated funds held by disposal groups(11) 1,147
Total Group consolidated assets excluding amounts classified as held for sale 255,672
Comprised of:
Investment property 3,727
Financial assets 248,981
Cash and cash equivalents 8,839
Derivative liabilities (5,875)
255,672
1 Includes assets where shareholders of the life companies bear the
investment risk.
2 Includes assets where policyholders bear most of the investment risk.
3 Total infrastructure loans - project finance of £922 million include
£882 million classified as Level 3 debt securities in the fair value
hierarchy.
4 Total infrastructure loans - corporate of £1,206 million include £1,175
million classified as Level 3 debt securities in the fair value hierarchy
5 Total local authority loans of £693 million include £596 million
classified as Level 3 debt securities in the fair value hierarchy.
6 Total loans guaranteed by export credit agencies and supranationals of
£509 million include £402 million classified as Level 3 debt securities in
the fair value hierarchy.
7 Total private corporate credit of £1,768 million include £1,422 million
classified as Level 3 debt securities in the fair value hierarchy.
8 Total loans to housing associations of £779 million include £691 million
classified as Level 3 debt securities in the fair value hierarchy.
9 All commercial real estate loans, equity release mortgages and income
strips are classified as Level 3 debt securities in the fair value hierarchy.
10 Includes policy loans of £11 million, other loans
of £398 million, net derivative liabilities of £(1,837) million, reinsurers'
share of investment contracts of £9,088 million and other investments of
£605 million.
11 See note A6.1 to the consolidated financial
statements for further details
31 December 2021
Shareholder and non-profit funds1 Participating supported1 Participating non-supported2 Unit-linked2 Total3
Carrying value £m £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 loans - project finance(3,4) 1,026 - 1 - 1,027
Debt securities - infrastructure loans - corporate(3,5) 1,118 1,118
Debt securities - local authority loans and US municipal bonds(3,6) 1,140 - 10 6 1,156
Debt securities - loans guaranteed by export credit agencies and 373 - - - 373
supranationals(3,7)
Debt securities - private corporate credit(3,8) 1,928 1 169 27 2,125
Debt securities - loans to housing associations (3,9) 1,161 - 9 3 1,173
Debt securities - commercial real estate loans(3,10) 1,317 1,317
Debt securities - equity release mortgages (3,10) 4,214 4,214
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 strips(3,10) - - - 886 886
Other investments(11) 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 group (12) - - - (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 group (12) 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 The illiquid asset classes have been represented to align with those used in
the Group's Internal Model.
4 Total infrastructure loans - project finance of £1,027 million include
£967 million classified as Level 3 debt securities in the fair value
hierarchy.
5 Total infrastructure loans - corporate of £1,118 million include £1,074
million classified as Level 3 debt securities in the fair value hierarchy.
6 Total local authority loans and US municipal bonds of £1,156 million
include £917 million classified as Level 3 debt securities in the fair value
hierarchy.
7 Total loans guaranteed by export credit agencies and supranationals of £373
million include £219 million classified as Level 3 debt securities in the
fair value hierarchy.
8 Total private corporate credit of £2,125 million include £1,488 million
classified as Level 3 debt securities in the fair value hierarchy.
9 Total loans to housing associations of £1,173 million include £1,022
million classified as Level 3 debt securities in the fair value hierarchy.
10 All commercial real estate loans, equity release
mortgages and income strips are classified as Level 3 debt securities in the
fair value hierarchy.
11 Includes 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.
12 See note A6.1 to the consolidated financial
statements for further details.
Additional life company asset disclosures
The following table provides a reconciliation of the total life company assets
to the Assets under Administration ('AUA') as at 31 December 2022 detailed in
the Business Review on page 37.
2022 2021
£bn £bn
Total Life Company assets excluding amounts classified as held for sale 248.7 298.6
Off-balance sheet AUA(1) 10.3 11.8
Assets Under Administration 259.0 310.4
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.
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
Industrials - 395 252 643 11 1,301
Basic materials - 1 130 6 - 137
Consumer, cyclical - 311 314 111 67 803
Technology and telecoms 186 288 517 551 - 1,542
Consumer, non-cyclical 246 328 802 231 - 1,607
Structured finance - - 38 - - 38
Banks(2) 526 464 2,919 344 39 4,292
Financial services 139 401 100 68 19 727
Diversified - 5 29 - - 34
Utilities 19 141 727 1,353 - 2,240
Sovereign, sub-sovereign and supranational(3) 932 5,838 509 116 2 7,397
Real estate 76 234 2,590 1,053 180 4,133
Investment companies 1 125 - 5 - 131
Insurance 22 354 321 70 43 810
Oil and gas - 132 346 55 - 533
Collateralised debt obligations - 7 - - - 7
Private equity loans - - 7 69 - 76
Infrastructure - 123 60 1,208 155 1,546
Equity release mortgages(4) 2,216 852 810 56 - 3,934
At 31 December 2022 4,363 9,999 10,471 5,939 516 31,288
1 Includes unrated holdings of £108 million.
2 The £4,292 million total shareholder exposure to bank debt comprised
£3,345 million senior debt and £947 million subordinated debt.
3 Includes £686 million reported as local authority loans, £1,660 million
reported as private corporate credit and £509 million reported as loans
guaranteed by export credit agencies and supranationals in the summary table
on page 307.
4 The credit ratings attributed to equity release mortgages are based on the
ratings assigned to the internal securitised loan notes.
Sector analysis of shareholder and non-profit fund bond portfolio
AAA AA A BBB BB & below1 Total
£m £m £m £m £m £m
Industrials - 165 329 820 6 1,320
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 258 271 966 338 - 1,833
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 1,304 1,272 2 2,724
Sovereign, sub-sovereign and supranational3 1,465 9,983 827 109 - 12,384
Real estate 27 183 3,364 757 254 4,585
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 - 84 236 1,620 204 2,144
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 local authority loans & US
municipal bonds, £42 million reported as private corporate credit and £205
million reported as loans guaranteed by export credit agencies and
supranationals in the summary table on page 308.
4 The credit ratings attributed to equity release mortgages are based on the
ratings assigned to the internal securitised loan notes.
5 The illiquid asset classes have been represented to align with those used
I the Group's Internal Model.
The following table sets out the debt security exposure by country of the
shareholder and non-profit funds of the life companies:
Analysis of shareholder debt security exposure by country Sovereign, sub-sovereign and supranational Corporate Total Sovereign, sub-sovereign and supranational Corporate Total
and other
and other
2022
2022 2021
2021
2022
2021
£m
£m £m
£m
£m £m
UK 5,914 13,781 19,695 10,216 17,076 27,292
Supranationals 541 45 586 800 - 800
USA 317 5,122 5,439 340 4,881 5,221
Germany 46 716 762 112 418 530
France 153 921 1,074 230 1,207 1,437
Netherlands 24 417 441 117 769 886
Italy - 145 145 - 171 171
Ireland - 74 74 - 57 57
Spain 17 103 120 26 105 131
Luxembourg 56 118 174 60 22 82
Belgium 28 83 111 39 111 150
Australia 1 386 387 1 503 504
Canada 6 385 391 99 303 402
Mexico 2 137 139 2 192 194
Other - non-Eurozone (1) 252 1,241 1,493 288 1,579 1,867
Other - Eurozone 40 217 257 54 280 334
Total shareholder debt securities 7,397 23,891 31,288 12,384 27,674 40,058
1 There was no shareholder exposure to Russia, Ukraine and Belarus at 31
December 2022. In the prior year, this included £2 million sovereign debt and
£21 million corporate and other debt with exposure to Russia only.
Additional capital disclosures
PGH PLC Solvency II surplus
The PGH plc surplus at 31 December 2022 is £4.4 billion (2021: £5.3
billion).
31 December 31 December
2022 2021
Estimated £bn
£bn
Own Funds 11.1 14.8
SCR (6.7) (9.5)
Surplus 4.4 5.3
Calculation of group solvency
The Group 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 2022 31 December 2021
Estimated £bn
£bn
Tier 1 - Unrestricted 7.1 9.9
Tier 1 - Restricted 1.0 1.1
Tier 2 2.6 2.9
Tier 3 0.4 0.9
Total Own Funds 11.1 14.8
PGH plc's unrestricted Tier 1 capital accounts for 63% (2021: 67%) of total
Own Funds and comprises ordinary share capital, surplus funds of the
unsupported with-profit funds which are recognised only to a maximum of the
SCR, and the accumulated profits of the remaining business.
Restricted Tier 1 capital comprises the contingent convertible Tier 1 Notes
issued in January 2020 and the Tier 1 Notes issued in April 2018, the terms of
which enable the instruments to qualify as restricted Tier 1 capital for
regulatory reporting purposes.
Tier 2 capital is comprised of subordinated notes whose terms enable them to
qualify as Tier 2 capital for regulatory reporting purposes.
Tier 3 items include the Tier 3 subordinated notes of £0.2 billion (2021:
£0.7 billion) and the deferred tax asset of £0.2 billion (2021: £0.2
billion).
Breakdown of SCR
The Group operates one single PRA approved Internal Model covering all the
Group entities, with the exception of the Irish entity, Standard Life
International Designated Activity Company ('SLIDAC') and the acquired ReAssure
businesses. SLIDAC and 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 2022 31 December 2021
Estimated
ReAssure and SLIDAC ReAssure and SLIDAC
Internal Model Standard Formula Internal Model Standard Formula
%
%
% %
Longevity 15 17 22 21
Credit 17 19 18 21
Persistency 18 28 20 22
Interest rates 8 6 9 8
Operational 8 4 6 3
Swap spreads 2 - 3 -
Property 4 1 4 1
Other market risks 15 14 12 14
Other non-market risks 13 11 6 10
Total pre-diversified SCR 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 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 2022 is £2.3 billion (2021: £3.0 billion).
PGH plc's Eligible Own Funds to cover MGSCR is £8.4 billion (2021: £11.5
billion) leaving an excess of Eligible Own Funds over MGSCR of £6.1 billion
(2021: £8.5 billion), which translates to an MGSCR coverage ratio of 369%
(2021: 387%).
Alternative performance measures
The Group assesses its financial position and performance based on a range of
measures. Some of these are management derived measures that 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.
Pro forma adjustments will be used in the Annual Report and Accounts ('ARA')
where management considers that they allow the users of the ARA to better
understand the financial performance, financial position, cash flows or
outlook of the Group. Examples of where pro forma adjustments may be used are
in relation to acquisitions or disposals which are material to the Group,
changes to the Group's capital structure or changes in reporting frameworks
the Group applies such as Solvency II or IFRS. Where pro forma adjustments are
considered necessary for the understanding of the financial performance,
financial position, cash flows or outlook of the Group these will be clearly
labelled as pro forma with a clear explanation provided as to the reason for
the adjustments and the Key Performance Indicators, Alternative Performance
Metrics and other performance metrics impacted.
APM Definition Why this measure is used Reconciliation to
financial statements
Assets under administration The Group's Assets under Administration ('AUA') represents assets administered AUA indicates the potential earnings capability of the Group arising from its A reconciliation from the Group's IFRS statement of consolidated financial
by or on behalf of the Group, covering both policyholder fund and shareholder insurance and investment business. AUA flows provide a measure of the Group's position to the Group's AUA is provided on page 309.
assets. It includes assets recognised in the Group's IFRS statement of ability to deliver new business growth.
consolidated financial position together with certain assets administered by
the Group for which beneficial ownership resides with customers.
Adjusted operating profit Adjusted operating profit is a financial performance measure based on expected This measure provides a more representative view of the Group's performance A reconciliation of adjusted operating profit to the IFRS result before tax
long-term assumptions. It is stated before tax and excludes amortisation and than the IFRS result after tax as it provides long-term performance attributable to owners is included in the business review on page 38.
impairments of intangibles, finance costs attributable to owners and other information unaffected by short-term economic volatility and one-off items,
items which in the Director's view should be excluded by their nature or and is stated net of policyholder finance charges and tax.
incidence to enable a full understanding of financial performance. Items
excluded from adjusted operating profit are referred to as non-operating It helps give stakeholders a better understanding of the underlying
items. performance of the Group by identifying and analysing non-operating items.
Further details of the components of this measure and the assumptions inherent
in the calculation of the long-term investment return are included in note
B2.1 to the consolidated financial statements.
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 are directly sourced from the Group's IFRS
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 statement of consolidated financial position on pages 170 and 172 and the
defined as the IFRS carrying value of shareholder borrowings excluding investment grade credit rating as issued by Fitch Ratings and optimises its analysis of borrowings note on page 217.
subordinated liabilities qualifying as Tier 1 Own Funds under Solvency II. funding costs and financial flexibility for future acquisitions.
Equity is defined as the sum of equity attributable to the owners of the
parent, non-controlling interests, the unallocated surplus, subordinated
liabilities qualifying as Tier 1 Own Funds under Solvency II and the Tier 1
Notes. Values for debt and equity are adjusted to allow for the impact of
currency hedges in place over foreign currency denominated debt.
Group In-force Long-term Free Cash ('Group in-force LTFC') Group in-force LTFC represents the cash expected to be available over time to Group in-force LTFC provides a measure of the Group's total long-term cash The metric is not directly reconcilable to the financial statements as it
fund future dividends from today's in-force business. It is defined as the available for operating costs, interest, growth and shareholder returns. includes a significant component relating to cash that is expected to emerge
estimated lifetime cash generation from our in-force business, plus Group cash Increases in Group in-force LTFC will be driven by sources of long-term cash in the future. Holding company cash included within Group in-force LTFC is
held in the Holding Company, less outstanding shareholder debt, committed i.e. new business and over-delivery of management actions. Decreases in Group consistent with the holding company cash and cash equivalents as disclosed in
M&A and transition costs, and interest on debt until maturity. in-force LTFC will reflect the uses of cash at holding company level, the cash section of the business review. Shareholder debt outstanding reflects
including expenses, interest, investment in BPA and dividends. the face value of the shareholder borrowings disclosed on page 217.
The calculation for the LTIP performance metric excludes any future
shareholder dividends and is before interest on debt until maturity.
Incremental new business Incremental new business long-term cash generation represents the operating 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 companies' cash generation that is expected to arise in future years as a new business growth to offset the impact of run-off of the Group's Heritage financial statements as it relates to cash generation expected to arise in the
result of new business transacted in the current period within our UK Open and business and to bring sustainability to future cash generation. future.
Europe segments.
Life Company The Solvency II surplus of the Life Companies that is in excess of their Board This figure provides a view of the level of surplus capital in the Life Please see business review section on page 35 for further analysis of the
Free Surplus approved capital according to their capital management policies. Companies that is available for distribution to the holding companies, and the solvency positions of the Life Companies.
generation of Free Surplus underpins future operating cash generation.
Operating companies' cash generation Represents the net cash remitted from the operating entities to the Group, The statement of consolidated cash flows prepared in accordance with IFRS Operating companies' cash generation is not directly reconcilable to an
supported by the free surplus above capital requirements in the life combines cash flows relating to shareholders with cash flows relating to equivalent GAAP measure (IFRS statement of consolidated cash flows) as it
companies, which is generated through margins earned on different life and policyholders, but the practical management of cash within the Group maintains includes amounts that eliminate on consolidation.
pension products and the release of capital requirements, and group tax a distinction between the two. The Group therefore focuses on the cash flows
relief. 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 307.
Operating companies' cash generation is a key performance indicator used by
management for planning, reporting and executive remuneration. The AIP
performance metric 'cash generation' is aligned to this definition.
Shareholder Capital Coverage Ratio Represents total Eligible Own Funds divided by the Solvency Capital The unsupported with-profit funds and Group pension funds do not contribute to Further details of the Shareholder Capital Coverage Ratio and its calculation
Requirements ('SCR'), adjusted to a shareholder view through the exclusion of the Group Solvency II surplus. However, the inclusion of related Own Funds and are included in the business review on page 34.
amounts relating to those ring-fenced with-profit funds and Group pension SCR amounts dampens the implied Solvency II capital ratio. The Group therefore
schemes whose Own Funds exceed their SCR. focuses on a shareholder view of the capital coverage ratio which is
considered to give a more accurate reflection of the capital strength of the
Group.
(#_ftnref1)
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