REG - Phoenix Grp Hldgs - Phoenix Group Holdings - 2016 Annual Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 15
20/03/2017 07:07
- Part 15: For the preceding part double click ID:nRST8776Zn
'Pensions Agreement'), the principal terms of which have not been altered following the 30 June 2015
triennial valuation. The principal terms of the Pensions Agreement are:
- annual cash payments into the scheme of £70 million in 2013 and 2014 payable on 30 September, followed by payments
of £40 million each year from 2015 to 2021. It is expected that the timing of payment of contributions will change during
2017 so that the contributions will be paid on a monthly basis. The Pensions Agreement includes a sharing mechanism,
related to the level of dividends paid out of PGH2, that in certain circumstances allows for an acceleration of the
contributions to be paid to the Pearl Scheme;
- additional contributions may become payable if the scheme is not anticipated to meet the two agreed funding
targets:
(i) to reach full funding on the technical provisions basis by 30 June 2022; and
(ii) to reach full funding on a gilts flat basis by 30 June 2031;
- the Trustee continues to benefit from a first charge over shares in Phoenix Life Assurance Limited, Pearl Group
Services Limited and PGS2 Limited. The security claim granted under the share charges is capped at the lower of £600
million and 100% of the Pearl Scheme deficit (calculated on a basis linked to UK government securities) revalued every
three years thereafter; and
- covenant tests relating to the embedded value of certain companies with the Group.
It should be noted that the terms of the £900 million facility agreement (see note E5) restrict the Group's ability, with
certain exceptions, to transfer assets into the companies over which the Trustee holds a charge over shares.
An additional liability of £66 million (2015: £74 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 £189 million (2015: £213
million) in accordance with the minimum funding requirement. A deferred tax asset of £32 million (2015: £38 million) has
also been recognised to reflect tax relief at a rate of 17% (2015: 18%) that is expected to be available on the
contributions, once paid into the scheme.
Contributions totalling £40 million were paid into the scheme on 30 September 2016 (2015: £40 million), and contributions
totalling £50 million are expected to be paid into the scheme in 2017, £10 million in relation to the last quarter of 2016
and £40 million by monthly instalments.
Summary of amounts recognised in the consolidated financial statements
The amounts recognised in the consolidated financial statements are as follows:
2016
Fair value Defined Provision for Minimum Total
of scheme benefit tax on the funding £m
assets obligation economic requirement
£m £m surplus obligation
available as £m
a refund
£m
At 1 January 2,213 (1,937) (97) (74) 105
Interest income/(expense) 84 (73) (3) (3) 5
Included in profit or loss 84 (73) (3) (3) 5
Remeasurements:
Return on plan assets excluding amounts included in interest income 453 - - - 453
Loss from changes in demographic assumptions - (15) - - (15)
Loss from changes in financial assumptions (367) (367)
Experience gains - 50 - - 50
Change in provision for tax on economic surplus available as a refund - - (57) - (57)
Change in minimum funding requirement obligation - - - 11 11
Included in other comprehensive income 453 (332) (57) 11 75
Employer's contributions 40 - - - 40
Benefit payments (105) 105 - - -
At 31 December 2,685 (2,237) (157) (66) 225
2015
Fair value Defined Provision for Minimum Total
of scheme benefit tax on the funding £m
assets obligation economic requirement
£m £m surplus obligation
available as £m
a refund
£m
At 1 January 2,279 (2,061) (76) (86) 56
Interest income/(expense) 82 (73) (3) (3) 3
Included in profit or loss 82 (73) (3) (3) 3
Remeasurements:
Return on plan assets excluding amounts included in interest income (85) - - - (85)
Gain from changes in demographic assumptions - 55 - - 55
Experience gains - 39 - - 39
Change in provision for tax on economic surplus available as a refund - - (18) - (18)
Change in minimum funding requirement obligation - - - 15 15
Included in other comprehensive income (85) 94 (18) 15 6
Employer's contributions 40 - - - 40
Benefit payments (103) 103 - - -
At 31 December 2,213 (1,937) (97) (74) 105
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
2016 2015
Total Of which not Total Of which not
£m quoted in an £m quoted in an
active market active market
£m £m
Hedging portfolio 2,327 (38) 1,891 (24)
Equities 134 - 122 -
Fixed interest gilts 129 - 130 -
Other debt securities 958 - 941 -
Properties 206 206 191 191
Private equities 38 38 34 34
Hedge funds 30 30 32 32
Cash and other 84 - 99 -
Obligations for repayment of stock lending collateral received (1,221) - (1,227) -
2,685 236 2,213 233
The actual return on plan assets was a gain of £537 million (2015: £3 million loss).
The Group ensures that the investment positions are managed within an asset liability matching ('ALM') framework that has
been developed to achieve long-term investments that are in line with the obligations under the Pearl Scheme. Within this
framework an allocation of 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 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: 38% (2015: 40%)
- Pensioners: 62% (2015: 60%)
The weighted average duration of the defined benefit obligation at 31 December 2016 is 17 years (2015: 17 years).
Principal assumptions
The principal financial assumptions of the Pearl Scheme are set out in the table below:
2016 2015
% %
Rate of increase for pensions in payment (5% per annum or RPI if lower) 3.05 2.95
Rate of increase for deferred pensions ('CPI') 2.20 2.05
Discount rate 2.65 3.85
Inflation - RPI 3.20 3.05
Inflation - CPI 2.20 2.05
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 based on the SAPS standard tables for males and for females based on year of
use. Future longevity improvements are based on CMI 2014 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 31.0 years and 33.1 years for male and
female members respectively.
A quantitative sensitivity analysis for significant actuarial assumptions as at 31 December 2016 is shown below:
2016
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) 2,237 (86) 91 60 (56) 63 (62)
2015
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) 1,937 (71) 75 54 (52) 54 (54)
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 ongoing consultation on
this matter. Once this consultation process has reached a conclusion, the Group will be able to quantify the impact of this
change.
G6.2 PGL Pension Scheme
The PGL Pension Scheme comprises a final salary section and a defined contribution section.
Scheme details
Defined contribution scheme
Contributions in the year amounted to £6 million (2015: £6 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 2016,
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 2015 was completed in June 2016. This showed a
surplus as at 30 June 2015 of £164 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 in total over the period from
October 2013 to August 2017 would remain unchanged. Contributions totalling £15 million were paid into the scheme in 2016
(2015: £15 million) and the remaining outstanding contributions totalling £10 million are expected to be paid into the
scheme in 2017.
An additional liability has been recognised of £4 million (2015: £9 million) reflecting a charge on any refund of the
resultant economic surplus (prior to the elimination of insurance policies) that arises after adjustment for discounted
future contributions of £10 million (2015: £24 million) in accordance with the minimum funding requirement. A deferred tax
asset of £2 million (2015: £4 million) has also been recognised to reflect tax relief at a rate of 17% (2015: 18%) that is
expected to be available on the contributions, once paid into the scheme.
Liability management exercises
In January 2016, the Group carried out a pension increase exchange ('PlE') exercise in respect of the PGL Pension Scheme.
Existing in-scope pensioners were offered the option to exchange future non-statutory pension increases for a one-off
uplift to their current pension, thereby reducing longevity and inflation risk for the Group. The financial effect of all
acceptances received in the period has been recognised in the consolidated financial statements as a reduction in scheme
liabilities of £3 million shown as a past service credit in the condensed consolidated income statement.
In February 2016, the Group commenced a flexible retirement option ('FRO') exercise whereby defined members who are
eligible to retire within the PGL Pension Scheme were offered a transfer value on standard terms or a pension in the
scheme. The financial effect of all acceptances received have been recognised in the consolidated financial statements and
an experience gain of £2 million on liabilities arose as a result of this exercise.
Insurance policies with Group entities
In June 2014, 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 transferred the risk of longevity improvements to PLL. The financial effect of this contract
was eliminated on consolidation.
In December 2016, the PGL Pension Scheme entered into a 'buy-in' agreement with PLL, which converted the longevity swap
contract into a bulk annuity contract, covering both longevity and investment risk. The Scheme transferred £1,164 million
of plan assets to a collateral account over which PLL has a fixed charge. The assets transferred to PLL are recognised in
the relevant line within financial assets in the consolidated statement of financial position (see note E1). The transfer
of the assets constituted the payment of the premium to PLL and a simultaneous deposit of collateral by PLL, and was net of
a £23 million prepayment by PLL to the scheme in respect of benefits up to 31 May 2017.. An adjustment of £6 million to the
value of the premium is due to be paid by PLL to the PGL Scheme in 2017. The economic effect of the 'buy-in' transaction in
the Scheme is to replace the plan assets transferred with a single line insurance policy reimbursement asset which is
eliminated on consolidation. The value of this insurance policy at 31 December 2016 was £892 million.
Included within insurance policies with Group entities of £913 million is a further insurance policy reimbursement asset of
£21 million (2015: £22 million) which was also eliminated on consolidation.
At the same time as the buy-in transaction, there was a rule change made with respect to pre-1997 excess benefits for
members of the Phoenix section of the PGL Scheme. Pensions increases will now be increased in line with CPI inflation
subject to a maximum of 5% p.a. Prior to this, members received discretionary increases in payment on these benefits with
the discretionary increases not allowed for in the defined benefit obligation. The financial impact of this change has been
to recognise an increase in the defined benefit obligation of £6 million, and a past service cost in the consolidated
income statement.
Summary of amounts recognised in the consolidated financial statements
The amounts recognised in the consolidated financial statements are as follows:
2016
Fair value of scheme assets Defined Provision for Minimum funding requirement obligation Total
£m benefit tax on the £m £m
obligation economic
£m surplus
available as
a refund
£m
At 1 January 2,006 (1,397) (199) (9) 401
Interest income/(expense) 76 (52) (8) - 16
Administrative expenses (2) - - - (2)
Past service cost - (3) - - (3)
Included in profit or loss 74 (55) (8) - 11
Remeasurements:
Return on plan assets excluding amounts included in interest income 349 - - - 349
Experience gains - 15 - - 15
Loss from changes in financial assumptions - (289) - - (289)
Loss from changes in demographic assumptions (8) (8)
Change in provision for tax on economic surplus available as a refund - - 72 - 72
Change in minimum funding requirement obligation - - - 5 5
Included in other comprehensive income 349 (282) 72 5 144
Scheme assets transferred as premium for buy-in transaction (1,164) - - - (1,164)
Employer's contributions 15 - - - 15
Benefit payments (85) 85 - - -
At 31 December 1,195 (1,649) (135) (4) (593)
2015
Fair value of Defined Provision for Minimum Total
scheme assets benefit tax on the funding £m
£m obligation economic requirement
£m surplus obligation
available as £m
a refund
£m
At 1 January 2,024 (1,457) (184) (13) 370
Interest income/(expense) 73 (52) (6) (1) 14
Administrative expenses (3) - - - (3)
Included in profit or loss 70 (52) (6) (1) 11
Remeasurements:
Return on plan assets excluding amounts included in interest income (40) - - - (40)
Experience gains - 13 - - 13
Gain from changes in financial assumptions - 36 - - 36
Change in provision for tax on economic surplus available as a refund - - (9) - (9)
Change in minimum funding requirement obligation - - - 5 5
Included in other comprehensive income (40) 49 (9) 5 5
Employer's contributions 15 - - - 15
Benefit payments (63) 63 - - -
At 31 December 2,006 (1,397) (199) (9) 401
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
2016 2015
Total Of which not Total Of which not
£m quoted in an £m quoted in an
active market active market
£m £m
Fixed interest gilts 320 - 930 -
Index-linked bonds 732 - 984 -
Swaps 7 7 3 3
Properties 104 104 98 98
Hedge funds 85 85 83 83
Corporate bonds 13 -
Cash and other 29 - 21 -
Obligations for repayment of stock lending collateral received (95) - (113) -
Reported scheme assets 1,195 196 2,006 184
Add back:
Insurance policies eliminated on consolidation 913 - 22 -
Amounts due from subsidiary eliminated on consolidation 6 - - -
Economic value of assets 2,114 196 2,028 184
The actual return on plan assets was £425 million (2015: £33 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 85% of the scheme assets is invested in a combination of supranational debt and a liability
hedging portfolio. The Liability Driven Investment ('LDI') portfolio is passively managed against a liability benchmark in
order to hedge the duration and inflation risks.
The PGL Scheme uses swaps, UK Government bonds and UK Government stock lending to hedge the interest rate and inflation
exposure arising from the liabilities. Under the Scheme's stock lending programme, the Scheme lends a Government bond to an
approved counterparty and receives a similar value of cash in return which it typically reinvested into other Government
bonds. The Scheme retains economic exposure to the Government bonds, hence the value of the gilts continues to be
recognised as a scheme asset 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: 39% (2015: 39%)
- Pensioners: 61% (2015: 61%)
The weighted average duration of the defined benefit obligation at 31 December 2016 is 19 years (2015: 17 years).
Principal assumptions
The principal financial assumptions of the PGL Pension Scheme are set out in the table below:
2016 2015
% %
Rate of increase for pensions in payment (7.5% per annum or RPI if lower} 3.25 3.10
Rate of increase for deferred pensions ('CPI') 2.20 2.05
Discount rate 2.65 3.85
Inflation - RPI 3.20 3.05
Inflation - CPI 2.20 2.05
The discount rate and inflation assumptions have been determined by considering the shape of the appropriate yield curves
and the duration of the PGL 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.
It has been assumed that post-retirement mortality is in line with 86%/94% of S1PA base tables with future longevity
improvements in line with CMI 2014 Core Projections and a long-term rate of improvement of 2% p.a. up to and including age
75 then decreasing linearly to 0% at age 110. Under these assumptions, the average life expectancy from retirement for a
member currently aged 40 retiring at age 62 is 27.7 years and 29.5 years for male and female members respectively.
A quantitative sensitivity analysis for significant actuarial assumptions as at 31 December 2016 is shown below:
2016
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) 1,649 (70) 75 47 (51) 55 (55)
2015
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) 1,397 (54) 57 37 (39) 46 (46)
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 financial position.
The UK Government currently intends to equalise benefits between males and females arising from the accrual of Guaranteed
Minimum Pension ('GMP') requirements. Legislation will be implemented following completion of the ongoing consultation on
this matter. Once this consultation process has reached a conclusion, the Group will be able to quantify the impact of this
change.
G6.3 Abbey Life Staff Pension Scheme
Scheme details
The Abbey Life Staff Pension Scheme ('the Abbey Life Scheme') was consolidated into the Group statement of financial
position following the acquisition of Abbey Life Assurance Company Limited ('Abbey Life') (see note H2.2). The scheme is a
defined benefit scheme which is currently open to future accrual. The Abbey Life Scheme is a registered occupational
pension scheme, set up under Trust, and legally separate from the employer Abbey Life. The scheme is administered by Abbey
Life Trust Securities Limited ('The Trustee'), a corporate trustee. There are four Trustee Directors, two of whom are
nominated by the scheme members and two of whom are appointed by Abbey Life. The Trustee is responsible for administering
the scheme in accordance with the trust deed and rules and pensions laws and regulations.
The trust deed under which the Abbey Life Scheme is established provides for the gradual settlement of the plan liabilities
over time until all members have left the scheme. Where appropriate, any excess value of the assets over the liabilities is
recognised in the consolidated statement of financial position in accordance with IFRIC 14.
The valuation has been based on an assessment of the liabilities of the Abbey Life Scheme as at 31 December 2016 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 Scheme was carried out by a qualified actuary as at 31 March 2015 and showed a deficit of
£107 million. A new schedule of contributions was introduced with effect from 1 July 2016 following completion of the 31
March 2015 funding valuation. In respect of future accrual of benefits, Abbey Life will pay 39.5% of gross pensionable
earnings from 1 July 2016. In relation to deficit contributions, Abbey Life will pay the following:
- a lump sum of £15 million into the Scheme by 30 June 2016 (paid on 24 June 2016);
- monthly contributions of £246,000 into the Scheme between 1 July 2016 and 30 June 2026. These amounts are to be paid
to the Scheme on or before the 19th of the calendar month following that to which the payment relates;
- annual payments of £2.92 million into the 2016 Charged Account by 31 July each year, with the first payment being
due by 31 July 2016, and the last payment due by 31 July 2025.
The Charged Accounts are escrow accounts which were created 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 Scheme assets.
Under the terms of the 2013 Funding Agreement dated 28 June 2013, the funding position of the Scheme will be assessed as at
31 March 2021. A payment will be made from the 2013 Charged Account to the Scheme if the results of the assessment reveal a
shortfall calculated in accordance with the terms of the 2013 Funding Agreement. The amount of the payment will be the
lower of the amount of the shortfall and the amount held in the 2013 Charged Account.
Under the terms of the 2016 Funding Agreement dated 23 June 2016, the funding position of the Scheme will be assessed as at
31 March 2027. A payment will be made from the 2016 Charged Account to the Scheme if the results of the assessment reveal a
shortfall calculated in accordance with the terms of the 2016 Funding Agreement. The amount of the payment will be the
lower of the amount of the shortfall and the amount held in the 2016 Charged Account.
Summary of amounts recognised in the consolidated financial statements
The amounts recognised in the consolidated financial statements are as follows:
2016
Fair value of scheme assets Defined benefit obligation Total£m
£m £m
At 1 January - - -
Acquisition of Abbey Life 237 (324) (87)
At 31 December 237 (324) (87)
As the acquisition of Abbey Life took place on 30 December 2016, no amounts are recognised in the consolidated income
statement or in the statement of comprehensive income in relation to the Abbey Life Scheme.
Scheme assets
The distribution of the scheme assets at the end of the year was as follows:
2016
Total Of which not quoted in an active market
£m £m
Equities - UK 25 -
Fixed interest government bonds 115 -
Corporate bonds 123 -
Derivatives (35) (35)
Cash and cash equivalents 9 -
Pension scheme assets 237 (35)
Derivative values above include interest rate and inflation rate swaps and foreign exchange forward contracts. The Abbey
Life Scheme has hedged its inflation risk through an inflation swap. It is currently exposed to interest rate risk to the
extent that the holdings in bonds are mismatched to the scheme liabilities. The long-term intention is to fully hedge this
risk through an interest rate swap. Further key risks that will remain are longevity and credit spread exposures.
Defined benefit obligation
The calculation of the defined benefit obligation can be allocated to the scheme's members as follows:
- Active scheme members: 5%
- Deferred scheme members: 59%
- Pensioners: 36%
The weighted average duration of the defined benefit obligation at 31 December 2016 is 18 years.
Principal assumptions
The principal financial assumptions of the Abbey Life Scheme are set out in the table below:
2016
%
Rate of increase for pensions in payment 3.05
Rate of increase for deferred pensions ('CPI' subject to caps) 2.20
Discount rate 2.70
Inflation - RPI 3.20
Inflation - CPI 2.20
Rate of salary increases 4.20
Commutation of benefits to lump sums on retirement 15.00
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.
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 31 March 2015,
using the SAPS S2 'Light' tables for males and for females based on year of use. Future longevity improvements are based on
CMI 2015 Core Projections with long-term improvements of 1.25% p.a. Under these assumptions the average life expectancy
from retirement for a member currently aged 45 retiring at age 65 is 25.0 years and 27.2 years for male and female members
respectively.
A quantitative sensitivity analysis for significant actuarial assumptions as at 31 December 2016 is shown below:
2016
Assumptions Base Discount rate RPI Life expectancy
Sensitivity level 25bps increase 25bps decrease 25bps increase 25bps decrease 1 year increase 1 year decrease
Impact on the defined benefit obligation (£m) 324 (14) 15 11 (11) 10 (10)
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 financial position.
The UK Government currently intends to equalise benefits between males and females arising from the accrual of Guaranteed
Minimum Pension ('GMP') requirements. Legislation will be implemented following completion of the ongoing consultation on
this matter. Once this consultation process has reached a conclusion, the Group will be able to quantify the impact of this
change.
G7. Intangible assets
Goodwill
Business combinations are accounted for by applying the purchase 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. It is tested for impairment annually or when there is evidence of possible impairment.
Goodwill is not amortised. For impairment testing, goodwill is allocated to relevant cash generating units and is impaired
when the recoverable amount is less than the carrying value.
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 its 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.
Internally generated intangible assets are not capitalised and expenditure is reflected in the consolidated income
statement in the year in which the expenditure is incurred.
Present value of future profits on non-participating business in the with-profit fund
The present value of future profits is determined on a realistic basis.
Brands
Brands acquired in a business combination are recognised at fair value at the acquisition date, and measured on initial
recognition at cost. Brands have finite lives and are carried at cost less amortisation. Amortisation is calculated using
the straight-line method to allocate the cost of brands over their estimated useful lives. They are tested for impairment
annually or when there is evidence of possible impairment. For impairment testing, they are allocated to the relevant cash
generating unit. Brands are impaired when the recoverable amount is less than the carrying value.
2016
Other intangibles
Goodwill Acquired in-force business Customer relationships Present value Brand name£m Total other Total
£m £m £m of future intangibles £m
profits £m
£m
Cost or valuation
At 1 January 39 2,048 297 17 - 314 2,401
On acquisition of AXA businesses (see note H2.1) 10 38 - - 20 20 68
On acquisition of Abbey Life (see note H2.2) 8 180 - - - - 188
Revaluation - - - (11) - (11) (11)
At 31 December 57 2,266 297 6 20 323 2,646
Amortisation and impairment
At 1 January - (783) (95) - - (95) (878)
Amortisation charge for the year - (76) (14) - - (14) (90)
At 31 December - (859) (109) - - (109) (968)
Carrying amount at 31 December 57 1,407 188 6 20 214 1,678
Amount recoverable after 12 months 57 1,143 174 6 18 198 1,557
2015
Other intangibles
Goodwill Acquired in-force business Customer relationships Present value Total other Total
£m £m £m of future intangibles £m
profits £m
£m
Cost or valuation
At 1 January 39 2,048 297 23 320 2,407
Revaluation - - - (6) (6) (6)
At 31 December 39 2,048 297 17 314 2,401
Amortisation
At 1 January - (635) (80) - (80) (715)
Amortisation charge for the year - (84) (15) - (15) (99)
Impairment charge for the year - (64) - - - (64)
At 31 December - (783) (95) - (95) (878)
Carrying amount at 31 December 39 1,265 202 17 219 1,523
Amount recoverable after 12 months 39 1,191 187 17 204 1,434
G7.1 Goodwill
The carrying value of goodwill has been tested for impairment at the year end. No impairment has resulted as the value in
use of this intangible continues to exceed its carrying value.
£39 million of the goodwill is attributable to the management services business of the Phoenix Life segment. Value in use
has been determined as the present value of certain future cash flows associated with this business. The cash flows used in
this calculation have been valued using a discount rate of 7.7% (2015: 9.0%) and are consistent with those adopted by
management in the Group's operating plan and, for the period 2021 and beyond, reflect the anticipated run-off of the
Phoenix Life insurance business. The underlying assumptions of these projections include management's best estimates with
regards to longevity, persistency, mortality and morbidity.
Impairment tests have been performed using assumptions which management consider reasonable. 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.
During the year, goodwill of £10 million was recognised on the acquisition of the AXA businesses and £8 million was
recognised on the acquisition of Abbey Life. These businesses are considered to be separate cash generating units for the
purpose of impairment testing.
G7.2 Acquired in-force business
Acquired in-force business 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.
Acquired in-force business on investment contracts without DPF is being amortised on a 15% diminishing balance basis. This
basis of amortisation has been updated following the application of the amendment to IAS 38 Intangible Assets, effective
from 1 January 2016. This change has had no impact on the amounts recognised in the consolidated financial statements.
Acquired in-force
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