REG - Phoenix Grp Hldgs - Phoenix Group Holdings - 2014 Annual Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 13
18/03/2015 07:01
- Part 13: For the preceding part double click ID:nRSR7166Hl
assumptions - 57 - 57
Loss from change in financial assumptions - (44) - (44)
Experience losses - (3) - (3)
Change in minimum funding requirement obligation - - 2 2
Included in other comprehensive income (8) 10 2 4
Employer's contributions 73 - - 73
Benefit payments (90) 90 - -
At 31 December 2013 1,855 (1,908) (84) (137)
During 2013 the Group completed an ETV exercise which offered in-scope deferred members of the Pearl Scheme the option to
take an equivalent cash transfer value to exit the scheme, thereby extinguishing any future liability and risk for the
Group with respect of these members. The financial effect of all completed transfers was recognised in the consolidated
financial statements in 2013.
As at 31 December 2013, ETVs of £72 million had been paid out, reducing scheme assets, and there was a resultant reduction
in scheme liabilities of £63 million. The net settlement cost of £9 million was recognised in the 2013 consolidated income
statement.
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
2014 2013
Total£m Of which not quoted in an active market£m Total£m Of which not quoted in an active market£m
Hedging portfolio 1,916 (16) 1,646 24
Equities 120 - 110 -
Fixed interest gilts 140 - 111 -
Other debt securities 935 - 819 -
Properties 170 170 178 178
Private equities 37 37 35 35
Hedge funds 38 38 36 36
Cash and other 90 - 57 -
Obligations for repayment of stock lending collateral received (1,167) - (1,137) -
2,279 229 1,855 273
The actual return on plan assets was £443 million (2013: £75 million).
The Group ensures that the investment positions are managed within an asset liability matching ('ALM') framework that has
been developed to achieve long-term investments that are in line with the obligations under the pension scheme. Within this
framework an allocation of 25% of the scheme assets is invested in collateral for interest rate and inflation rate hedging
where the intention is to hedge greater than 90% of the interest rate and inflation rate risk measured on the Technical
Provisions basis. The hedge ratio will be further increased to 100% when market conditions appear favourable.
The Pearl Scheme uses swaps, UK Government bonds and UK Government stock lending to hedge the interest rate and inflation
exposure arising from the liabilities which are disclosed in the table above as 'Hedging Portfolio' assets. Under the
Scheme's stock lending programme, the Scheme lends a Government bond to an approved counterparty and receives a similar
value in the form of cash in return which is typically reinvested into other Government bonds. The Scheme retains economic
exposure to the Government bond, hence the bonds continue to be recognised as scheme assets with a corresponding liability
to repay the cash received as disclosed in the table above.
Defined benefit obligation
The calculation of the defined benefit obligation can be allocated to the scheme's members as follows:
Deferred scheme members: 40% (2013: 41%)
Retirees: 60% (2013: 59%)
The weighted average duration of the defined benefit obligation at 31 December 2014 is 17 years (2013: 17 years).
Principal assumptions
The principal financial assumptions of the Pearl Scheme are set out in the table below:
2014 2013
% %
Rate of increase for pensions in payment (5% per annum or RPI if lower) 2.90 3.15
Rate of increase for deferred pensions ('CPI') 2.00 2.35
Discount rate 3.65 4.50
Inflation - RPI 3.00 3.35
Inflation - CPI 2.00 2.35
The discount rate and inflation rate assumptions have been determined by considering the shape of the appropriate yield
curves and the duration of the Pearl Scheme's liabilities. This method determines an equivalent single rate for each of the
discount and inflation rates, which is derived from the profile of projected benefit payments.
It has been assumed that post-retirement mortality is in line with a scheme-specific table which was derived from the
actual mortality experience in recent years, performed as part of the actuarial funding valuation as at 30 June 2012, based
on the SAPS standard tables for males and for females based on year of use. Future longevity improvements are in line with
current Group best estimate longevity improvements, which are based on CMI 2012 Core Projections and a long-term rate of
improvement of 2% p.a. up to and including age 75 then decreasing linearly to 0% p.a. at age 110. Under these assumptions,
the average life expectancy from retirement for a member currently aged 40 retiring at age 60 is 29.9 years and 33.0 years
for male and female members respectively.
A quantitative sensitivity analysis for significant actuarial assumptions as at 31 December 2014 is shown below:
2014
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) 2,061 (79) 84 53 (50) 55 (53)
2013
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) 1,908 (71) 75 49 (47) 53 (52)
The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In
practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the
sensitivity of the defined benefit obligation to significant actuarial assumptions the same method has been applied as when
calculating the pension asset recognised within the statement of financial position.
The UK Government currently intends to equalise benefits between males and females arising from the accrual of Guaranteed
Minimum Pensions ('GMP') requirements. Legislation will be implemented following completion of the current consultation on
this matter. Once this consultation process has reached a conclusion, the Group will be able to quantify the impact of this
change.
30.2 PGL PENSION SCHEME
Scheme details
The PGL Pension Scheme comprises a final salary section and a defined contribution section.
Defined contribution scheme
Contributions in the year amounted to £6 million (2013: £5 million).
Defined benefit scheme
The defined benefit section of the PGL Pension Scheme is a final salary arrangement which is closed to new entrants and has
been closed to future accrual by active members since 1 July 2011.
The PGL Scheme is administered by a separate Trustee company, PGL Pension Trustee Ltd. The Trustee company is comprised of
two representatives from the Group, three member nominated representatives and one independent trustee in accordance with
the Trustee company's articles of association. The Trustee is required by law to act in the interest of all relevant
beneficiaries and is responsible for the investment policy with regard to the assets plus the day to day administration of
the benefits.
The valuation has been based on an assessment of the liabilities of the PGL Pension Scheme as at 31 December 2014,
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. Additionally pension funding contributions
are considered to be a minimum funding requirement and, to the extent that the contributions payable will not be available
to the Group after they are paid into the scheme, a liability is recognised when the obligation arises.
Funding
A triennial funding valuation of the PGL Pension Scheme as at 30 June 2012 was completed in September 2013. This showed a
deficit as at 30 June 2012 of £39 million. Following discussions with the Trustee of the PGL Pension Scheme it was agreed
that the existing schedule of cash contributions to the scheme amounting to £59 million would continue to be paid over the
period from October 2013 to August 2017. Total future contributions amount to £40 million at 31 December 2014 and
contributions totalling £15 million are expected to be paid into the scheme in 2015.
In accordance with an agreement dated November 2005, certain of the Group's with-profit funds indemnified the shareholders
in respect of contribution calls equal to their share of the costs of changes in longevity assumptions. In January 2014,
PGH1 received £8 million under this agreement. In June 2014, PGH1 and Phoenix Life Limited ('PLL') entered into an
agreement whereby in exchange for a payment by the PLL with-profit funds to PGH1 of £68 million, PGH1 released the
with-profit funds from any future obligations to indemnify the company. On the same date, the PLL non-profit fund entered
into a longevity swap with the PGL Pension Scheme with effect from 1 January 2014, under which the Scheme has transferred
the risk of longevity improvements to PLL. The financial effect of this contract is eliminated on consolidation.
An additional liability has been recognised of £13 million (2013: £17 million) reflecting a charge on any refund of the
resultant IAS 19 surplus that arises after adjustment for discounted future contributions of £38 million (2013: £51
million) in accordance with the minimum funding requirement. A deferred tax asset of £8 million (2013: £10 million) has
also been recognised to reflect tax relief at a rate of 20% (2013: 20%) 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:
2014
Fair value of Defined benefit obligation Provision for tax Minimum funding requirement obligation Total
scheme assets £m on the economic surplus available £m £m
£m as a refund
£m
At 1 January 2014 1,639 (1,366) (96) (17) 160
Interest income/(expense) 75 (60) (4) (2) 9
Administrative expenses (3) - - - (3)
Included in profit or loss 72 (60) (4) (2) 6
Remeasurements:
Return on plan assets excluding amounts 277 - - - 277
included in interest income
Gain from change in demographic assumptions - 54 - - 54
Loss from change in financial assumptions - (143) - - (143)
Change in provision for tax on economic - - (84) - (84)
surplus available as a refund
Change in minimum funding requirement obligation - - - 6 6
Included in other comprehensive income 277 (89) (84) 6 110
Plan assets previously eliminated on consolidation 74 - - - 74
Employer's contributions 20 - - - 20
Benefit payments (58) 58 - - -
At 31 December 2014 2,024 (1,457) (184) (13) 370
2013
Fair value of Defined benefit obligation£m Provision for tax Minimum Total£m
scheme assets£m on the economic surplus available funding requirement obligation£m
as a refund£m
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