REG - Phoenix Grp Hldgs - Phoenix Group Holdings - 2015 Annual Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 14
23/03/2016 08:18
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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
2015 2015 2014 2014
£m £m £m £m
Life assurance business:
Insurance contracts 31,150 5,474 33,582 4,484
Investment contracts with DPF 10,420 1 11,124 1
41,570 5,475 44,706 4,485
Less amounts classified as held for sale (note I1.2) (1,587) (1,521) (1,776) (1,713)
39,983 3,954 42,930 2,772
Amounts due for settlement after 12 months 37,337 3,909 39,636 2,705
Gross liabilities Reinsurers' share Gross liabilities Reinsurers' share
2015 2015 2014 2014
£m £m £m £m
At 1 January 42,930 2,772 42,729 2,851
Amounts classified as held for sale at 1 January 1,776 1,713 - -
44,706 4,485 42,729 2,851
Premiums 902 1,376 981 1,792
Claims (3,931) (326) (3,724) (341)
Other changes in liabilities 70 (47) 4,751 200
Foreign exchange adjustments (19) (13) (31) (17)
Disposal of SMI (note I1.3) (158) - - -
41,570 5,475 44,706 4,485
Less amounts classified as held for sale (note I1.2) at 31 December (1,587) (1,521) (1,776) (1,713)
At 31 December 39,983 3,954 42,930 2,772
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.
2015 2014
£m £m
At 1 January 981 970
Transfer (to)/from income statement (84) 11
Disposal of SMI (see note I1.3) (20) -
At 31 December 877 981
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 £1,376 million (2014: £1,792 million).
On 9 November 2015 the Group entered into an agreement with RGA International, effective from 1 November 2015, to reinsure
substantively all of the Phoenix Life Assurance Limited ('PLAL') annuity liabilities previously ceded to Opal Reassurance
Limited ('Opal Re'), a subsidiary undertaking of the Company. The Group paid a reinsurance premium of £1,346 million to RGA
International. Under the terms of the arrangement, RGA International holds assets in a collateral account over which the
Group has a floating charge as disclosed in note F3.2.
On 31 July 2014, the Group entered into a business transfer agreement with Guardian Assurance Limited ('Guardian') (see
note I1.2). The transfer has been initially effected under a reinsurance agreement effective from 1 January 2014.
In accordance with the business transfer agreement, it is intended that the reinsurance agreement will be replaced by a
transfer of the business using a scheme under Part VII of the Financial Services and Markets Act 2000 by the end of 2016
subject to the necessary regulatory and Court approvals.
The Group paid a reinsurance premium of £1,736 million to Guardian. Under the terms of the agreement, in order to mitigate
the risk of counterparty default, Guardian holds assets in a collateral account over which the Group has a fixed charge as
disclosed in note F3.2.
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 £4,909 million (2014: £3,829 million). The increase is largely driven by the
reinsurance agreement entered into with RGA International during the period over certain portfolios of the Group's annuity
liabilities (see note F3.1).
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'. The amounts recognised as financial assets and liabilities from cash collateral
received at 31 December 2015 are set out below.
Reinsurance transactions
2015 2014
£m £m
Financial assets 376 405
Financial liabilities 376 405
F4. RISK MANAGEMENT - INSURANCE RISK
This note forms one part of the risk management disclosures in the consolidated financial statements. Financial risk is
included in note E6.
Insurance risk refers to the risk that the frequency or severity of insured events may be worse than expected and includes
expense risk. The Phoenix Life segment contracts include the following sources of insurance risk:
Mortality higher than expected number of death claims on assurance products and occurrence of one or more large claims;
Longevity faster than expected improvements in life expectancy on immediate and deferred annuity products;
Morbidity higher than expected number of serious illness claims or more sickness claims which last longer on income protection policies;
Expenses policies cost more to administer than expected;
Lapses the numbers of policies terminating early is different to that expected in a way which increases expected claims costs or expenses or reduces future profits; and
Options unanticipated changes in policyholder option exercise rates giving rise to increased claims costs.
Objectives and policies for mitigating insurance risk
The Group uses several methods to assess and monitor insurance risk exposures both for 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.
The profitability of the run-off of the closed long-term insurance businesses 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.
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 £12 million (2014: £14 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 £12 million (2014: £14 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 £99 million (2014: £135 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 £99 million (2014: £135 million).
A decrease of 25% 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 £76 million (2014: £53 million).
An increase of 25% 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 £76 million (2014: £46 million).
F4.1 Assumptions
Valuation of participating insurance and investment contracts
For participating business, which is with-profit business (insurance and investment contracts), 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.
Valuation of non-participating insurance contracts
The non-participating insurance contract liabilities are determined using either a net premium or gross premium valuation
method.
Process used to determine assumptions
For participating business in realistic basis companies the assumptions about future demographic trends are intended to be
'best estimates'. They are determined after considering the companies' recent experience and/or relevant industry data.
Economic assumptions are market consistent.
For other business, demographic assumptions are derived by adding a prudent margin to best estimate assumptions. Economic
assumptions are prudent estimates of the returns expected to be achieved on the assets backing the liabilities.
During the year a number of changes were made to assumptions to reflect changes in expected experience or to harmonise the
approach across the enlarged Group. The impact of material changes during the year was as follows:
(Decrease)/ Decrease in insurance liabilities 2014
increase in insurance liabilities 2015 £m
£m
Change in longevity assumptions (3) (14)
Change in persistency assumptions 1 (13)
Change in mortality assumptions 3 -
Change in expenses assumptions 5 -
Valuation interest rate
For realistic basis companies the liabilities are determined stochastically using an appropriate number of risk neutral
scenarios produced by an economic scenario generator calibrated to market conditions and gilt yields as at the valuation
date.
For funds not subject to realistic reporting, the method used to determine valuation interest rates generally follows the
regulations set out in the Prudential Sourcebook for Insurers.
Assets are firstly hypothecated to classes of business being valued. The valuation interest rates for each block of
business are based on the expected returns of the hypothecated assets. The yield is then adjusted to make allowance for
credit risk, liquidity risk, reinvestment risk and investment management expenses.
Valuation interest rates (after tax for life policies) are typically in the following ranges:
2015 2014
% %
Life policies 1.70 - 2.18 2.06 - 2.72
Pension policies 1.26 - 3.01 2.45 - 3.31
Expense inflation
Expenses are assumed to increase at the rate of increase in the Retail Price Index ('RPI') 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 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 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. Surrender or voluntary premium discontinuances are only assumed for realistic basis
companies. 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 companies, 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.
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 (see deferred annuities in note F4.2 for details). The total
amount provided in the with-profit and non-profit funds in respect of the future costs of guaranteed annuity options are
£1,710 million (2014: £1,809 million) and £5 million (2014: £6 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 £254 million (2014: £284 million) and £14 million (2014: £15
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.
F4.2 Managing product risk
The following sections give an assessment of the risks associated with the Group's main life assurance products, as shown
below, and the ways in which the Group manages those risks.
2015
Gross Reinsurance
Insurance contracts £m Investment contracts with DPF £m Insurance contracts £m Investment contracts with DPF £m
With-profit funds:
Pensions:
Deferred annuities - with guarantees 8,534 142 726 -
Deferred annuities - without guarantees 1,586 - - -
Immediate annuities 865 - 404 -
Unitised with-profit 1,017 8,574 38 -
Total pensions 12,002 8,716 1,168 -
Life:
Immediate annuities 59 - 4 -
Unitised with-profit 555 640 20 -
Life with-profit 4,377 - 9 1
Total life 4,991 640 33 1
Other 1,967 - 182 -
Non-profit funds:
Deferred annuities - with guarantees 14 - - -
Deferred annuities - without guarantees 489 - 2 -
Immediate annuities 7,933 - 2,383 -
Protection 508 - 99 -
Unit-linked 1,353 1,059 46 -
Other 306 5 40 -
29,563 10,420 3,953 1
2014
Gross Reinsurance
Insurance contracts £m Investment contracts with DPF £m Insurance contracts £m Investment contracts with DPF £m
With-profit funds:
Pensions:
Deferred annuities - with guarantees 9,298 157 595 -
Deferred annuities - without guarantees 1,717 - - -
Immediate annuities 1,158 - 589 -
Unitised with-profit 1,089 9,106 39 -
Total pensions 13,262 9,263 1,223 -
Life:
Immediate annuities 63 - 5 -
Unitised with-profit 594 688 22 -
Life with-profit 4,704 - 10 1
Total life 5,361 688 37 1
Other 2,022 - 181 -
Non-profit funds:
Deferred annuities - with guarantees 15 - - -
Deferred annuities - without guarantees 647 - - -
Immediate annuities 8,107 - 1,117 -
Protection 497 - 114 -
Unit-linked 1,650 1,167 54 -
Other 246 5 45 -
31,807 11,123 2,771 1
The tables above exclude insurance contract liabilities and related reinsurer's share of insurance contract liabilities
classified as held for sale at 31 December 2015 and 31 December 2014.
With-profit fund (unitised and traditional)
The Group operates a number of with-profit funds in the UK 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, 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.
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.
During the last decade, interest rates and inflation have fallen and life expectancy has increased more rapidly than
originally anticipated. The guaranteed terms on GAR policies are more favourable than the annuity rates currently available
in the market available for cash benefits. The guaranteed terms on GCO policies are currently not valuable. Deferred
annuity policies which are written to provide annuity benefits are managed in a similar manner to immediate annuities and
are exposed to the same risks.
The option provisions on GAR policies are particularly sensitive to downward movements in interest rates, increasing life
expectancy and the proportion of customers exercising their option. Adverse movements in these factors could lead to a
requirement to increase reserves which could adversely impact profit and potentially require additional capital. In order
to address the interest rate risk (but not the risk of increasing life expectancy or changing customer behaviour with
regard to exercise of the option), insurance subsidiaries within the Group have purchased derivatives that provide
protection against an increase in liabilities and have thus reduced the sensitivity of profit to movements in interest
rates.
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.
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. 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.
Leasehold properties £m Staff related Known incidents £m Other Total
£m £m £m
At 1 January 7 12 2 5 26
Additions in the year - 1 - 7 8
Utilised during the year (1) - - (4) (5)
Released during the year (1) - - - (1)
At 31 December 5 13 2 8 28
The leasehold properties provision has been made for amounts 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. The discount rate used was 1.7% (2014: 1.7%) and it is expected that the provision will be utilised over
the next 3 years (2014: 4 years).
Staff related provisions include provisions for unfunded pensions of £6 million (2014: £6 million) and private medical
insurance costs for former employees of £3 million (2014: £3 million).
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.
Included in other provisions are litigation and onerous contract provisions.
G2. 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.
2015 2014
£m £m
Current tax:
Current tax receivable 47 8
Current tax payable (7) (165)
Deferred tax:
Deferred tax liabilities (354) (364)
Movement in deferred tax assets/(liabilities)
2015
1 January Recognised in consolidated income statement Recognised Disposals 31 December £m
£m £m in other comprehensive income in year£m
£m
Trading losses 37 (22) - (1) 14
Expenses and deferred acquisition costs carried forward 2 14 - - 16
Provisions and other temporary differences 11 (2) (1) - 8
Non-refundable pension scheme surplus (8) 1 - - (7)
Committed future pension contributions 57 (10) (5) - 42
Accelerated capital allowances 8 (2) - - 6
Unpaid interest 42 (21) - - 21
Acquired in-force business (401) 42 - - (359)
Customer relationships (43) 6 - - (37)
IFRS transitional adjustments (64) 10 - - (54)
Adjustment for insurance policies held with related parties in respect of the PGL pension scheme (5) 1 - - (4)
(364) 17 (6) (1) (354)
2014
1 January Recognised Recognised Discontinued operations disposed of during the year £m 31 December
£m in in other comprehensive income £m
consolidated income statement £m
£m
Trading losses 40 (3) - - 37
Expenses and deferred acquisition costs carried forward 37 (35) - - 2
Provisions and other temporary differences (3) 15 - (1) 11
Non-refundable pension scheme surplus - (8) - - (8)
Committed future pension contributions 70 (22) 9 - 57
Accelerated capital allowances 14 (4) - (2) 8
Unpaid interest 61 (19) - - 42
Acquired in-force business (428) 27 - - (401)
Customer relationships (73) 3 - 27 (43)
IFRS transitional adjustments (72) 8 - - (64)
Adjustment for insurance policies held with related parties in respect of the PGL pension scheme (19) 14 - - (5)
(373) (24) 9 24 (364)
The Finance Act 2014 set the rate of corporation tax at 20% from 1 April 2015. Finance (No. 2) Act 2015 reduces the rate of
corporation tax to 19% in April 2017 and 18% from April 2020. Consequently a blended rate of tax has been used for the
purposes of providing for deferred tax in these financial statements.
A further 1% reduction, to 17%, effective from April 2020 has been announced in the 2016 Budget and will be introduced by
future legislation. The benefit to the Group's net assets arising from the further 1% reduction in the tax rate is
estimated at £8 million in total and will be recognised when the legislation is substantively enacted.
Deferred income tax assets are recognised for tax losses carried forward only to the extent that realisation of the related
tax benefit is probable.
2015 2014
£m £m
Deferred tax assets have not been recognised in respect of:
Tax losses carried forward 16 39
Provisions and other temporary differences 4 6
Deferred tax assets not recognised on capital losses1 89 116
1 These can only be recognised against future capital gains and have no expiry date.
G3. PAYABLES RELATED TO DIRECT INSURANCE CONTRACTS
Payables related to direct insurance contracts 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.
2015 2014
£m £m
Payables related to direct insurance contracts 364 358
Amount due for settlement after 12 months - -
G4. ACCRUALS AND DEFERRED INCOME
This note analyses the Group's accruals and deferred income at the end of the year.
2015 2014
£m £m
Accruals and deferred income 128 130
Amount due for settlement after 12 months 1 -
G5. 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.
2015 2014
£m £m
Investment broker balances 581 242
Other payables 96 118
677 360
Amount due for settlement after 12 months - -
G6. PENSION SCHEMES
Defined contribution pension schemesObligations for contributions to defined contribution pension schemes are recognised as an expense in the consolidated income statement as incurred.Defined benefit pension schemesThe 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.
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 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 defined benefit asset/liability represents the economic surplus net of all adjustments noted above.The Group determines the net interest expense or income on the net defined benefit
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 defined benefit 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 defined benefit 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 defined benefit asset/liability, including any reimbursement assets (recognised within net investment income in the consolidated income statement), remeasurements of the net defined asset/liability (recognised in other comprehensive income) and employer contributions.
This note describes the Group's two main staff pension schemes for its employees, the Pearl Group Staff Pension Scheme and
the PGL Pension Scheme and explains how the pension asset/liability is calculated.
An analysis of the defined benefit asset for each pension scheme is set out below:
2015 2014
£m £m
Pearl Group Staff Pension Scheme
Economic surplus 276 218
Minimum funding requirement obligation (74) (86)
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme (97) (76)
Net defined benefit asset 105 56
PGL Pension Scheme
Economic surplus (including £570 million (2014: £526 million) available as a refund on a winding-up of the Scheme) 631 590
Adjustment for insurance policies eliminated on consolidation (22) (23)
Net economic surplus 609 567
Minimum funding requirement obligation (9) (13)
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme (199) (184)
Net defined benefit asset 401 370
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 volatility in the schemes' assets can be caused by both volatility within the markets or
variations in the return achieved by the schemes' investment managers relative to market performance. In particular there
is the risk that the variation in asset values will not be in line with the variation in pension liability values, and as
such differences in the nature and duration of the assets and liabilities can cause difference in the way that the assets
and liabilities vary.
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). Assets in both schemes are invested so as to hedge a significant proportion of the
inflation risks, further details of which are included in this note.
Life expectancy - the majority of the schemes' obligations are to provide benefits for the life of the member, so increases
in life expectancy will result in an increase in the liabilities.
Information on each of these schemes is set out below.
G6.1 Pearl Group Staff Pension Scheme
Scheme details
The Pearl Group Staff Pension Scheme ('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 final salary and hybrid sections of the Pearl Scheme are
closed to new members, and since 1 July 2011 are also closed to future accrual by active members.
Defined contribution scheme
Contributions in the year amounted to £1 million (2014: £1 million).
Defined benefit scheme
The defined benefit scheme is funded by payment of contributions to a separately administered trust fund. The Pearl Scheme
is established under, and governed by, the trust deeds and rules. 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 trustee company, P.A.T. (Pensions) Limited, which is separate from the
company. 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.
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.
The valuation has been based on an assessment of the liabilities of the Pearl Scheme as at 31 December 2015, undertaken by
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