REG - Phoenix Grp Hldgs - Phoenix Group Holdings - 2016 Annual Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 5
20/03/2017 07:07
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the Group. The Board's role is to provide
entrepreneurial leadership within a framework of prudent and effective controls, which enables risk to be assessed and
managed. The Board has a schedule of matters reserved for its consideration and approval supported by a set of operating
principles. These matters include:
- Group strategy and business plans
- Major acquisitions, investments and capital expenditure
- Financial reporting and controls
- Dividend policy
- Capital structure
- The constitution of Board committees
- Appointments to the Board and Board committees
- Senior executive appointments
- Key Group policies.
The schedule of matters reserved for the Board is available from the Group Company Secretary. Matters which are not
reserved for the Board and also its committees under their terms of reference (which are available on the Group website),
or for shareholders in general meetings, are delegated to the executive management under a schedule of delegated
authorities approved by the Board.
The terms of appointment for the Directors state that they are expected to attend in person regular (at least six per year)
and additional Board meetings of the Company and to devote appropriate preparation time ahead of each meeting. In February
2017, the Nomination Committee reviewed the time spent by Directors and concluded that the time required of (and given by)
the Company's Directors is considered at least at the level expected in their appointment terms and is believed to be high
in comparison with other FTSE 250 companies.
The remuneration of the Directors is shown in the Directors' Remuneration Report on pages 58 to 84. The terms and
conditions of appointment of Non-Executive Directors are on the Group's website. In accordance with the provisions of the
Articles and the Code, all Directors (except Isabel Hudson and David Woods, who are standing down from the Board) will
submit themselves for election or re-election at the Company's AGM on 11 May 2017.
Alastair Barbour, on account of being on the boards of a number of public companies listed in the UK and/or Bermuda and the
USA and chairing the audit committee for all, has provided an analysis of his work commitments to the Nomination Committee,
which shows the relatively low level of time commitment required for certain of his other roles and the complementary
nature of his roles and the time committed to Phoenix (40 days in 2016, his equal largest commitment). The Nomination
Committee and Board confirmed their absolute satisfaction with the time and overall commitment given to Phoenix by Mr
Barbour and all other Directors.
Wendy Mayall, John Pollock and Nicholas Shott were appointed to the Board from 1 September 2016 with pre-existing
commitments which affected their Board attendance during their first few months on the Board. All attended the final Board
meeting in 2016 (30 November) and it is their intention to attend all Board meetings going forward.
The Board met eight times during 2016 and is scheduled to meet seven times in 2017 including for a two-day strategy-setting
meeting. Additional meetings will be held as required, and the Non-Executive Directors will hold meetings with the
Chairman, without the Executive Directors being present, as they did on several occasions in 2016.
KEY FOCUS AREAS AT BOARD MEETINGS IN 2016
Subject % of time spent (approximate)
CEO Report 25
Strategy and Planning including consideration of corporate transactions 25
CFO/Management Information Report 20
Financial Reporting 15
Reports from Chairs of Board committees and subsidiary Boards 5
Board and Board committee changes and issues 5
Other Matters 5
Board attendance 2016
Board meetings
Maximum Actual
Chairman
Henry Staunton 8 7
Executive Directors
Clive Bannister (Group CEO) 8 8
James McConville (Group FD) 8 8
Non-Executive Directors
René-Pierre Azria3 8 8
Alastair Barbour 8 8
Ian Cormack 8 7
Tom Cross Brown1 3 3
Isabel Hudson 8 7
Wendy Mayall2 3 2
John Pollock2 3 2
Nicholas Shott2 3 1
Kory Sorenson 8 8
David Woods 8 6
1 Tom Cross Brown resigned from the Board on 11 May 2016.
2 Wendy Mayall, John Pollock and Nicholas Shott were appointed to the Board on 1 September 2016.
3 Rene-Pierre Azria resigned from the Board on 30 November 2016.
BOARD COMMITTEES
The Board has delegated specific responsibilities to four standing committees of the Board. The terms of reference of the
committees can be found on the Company's website.
EXPECTED MAJOR FOCUS ITEMS IN 2017
Committee Items
Audit Committee Oversight of embedding of controls across the enlarged Group following 2016 acquisitions
Nomination Committee Executive and Non-Executive Director Succession Planning
Remuneration Committee New Remuneration Policy for May 2017 AGM and continued focus on aligning remuneration with strategic performance
Risk Committee Forward-looking risk planning
Audit Committee
Alastair Barbour
Audit Committee Chairman
"Our focus in 2017 will be ensuring the control environment remains strong across our enlarged Group following our recent
acquisitions. This will be supported by strengthening the links between the Group and Phoenix Life Audit Committees."
OTHER MEMBERS
Isabel Hudson
Kory Sorenson
David Woods
Audit Committee
MEETING ATTENDANCE 2016 Maximum Actual
Chairman
Alastair Barbour 7 7
Other members
Isabel Hudson 7 7
Kory Sorenson 7 6
David Woods 7 6
The composition of the Audit Committee is in accordance with the requirements of the Code that the Audit Committee should
consist of at least three independent Non-Executive Directors of whom at least one has recent and relevant financial
experience. Both Alastair Barbour and Kory Sorenson have that experience. The Audit Committee met seven times during 2016.
Its meetings are attended by the Chairman of the Risk Committee (who is also a member of the Audit Committee), the Group
Finance Director, the Deputy Group Finance Director, the Group Head of Internal Audit, the external auditors and usually
also by the Group Chairman and the Group Chief Executive Officer. The Audit Committee holds private meetings at least
annually with each of the Group Finance Director, the Group Head of Internal Audit and the external auditors.
AUDIT COMMITTEE'S ROLE
- Receiving and reviewing the Annual Report and Accounts and other related financial disclosures, although the
ultimate responsibility for these matters remains with the Board.
- Monitoring the overall integrity of the financial reporting by the Company and its subsidiaries and the
effectiveness of the Group's internal controls.
- Provision of advice to the Board to enable the Board to report on whether the Annual Report and Accounts, taken as a
whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group's
performance, business model and strategy.
- Responsible for making recommendations to the Board on the appointment of the external auditors and their terms of
engagement including approval of external auditor fees and non-audit services and for reviewing the performance,
objectivity and independence of the external auditors. The terms of reference of the Audit Committee state that it shall
meet the external auditor at least once a year without management being present.
- Considering and approving the remit of the internal audit function and reviewing its effectiveness.
- Oversight of activities of subsidiary audit committees through receipt and review of minutes, discussions between
the Chairmen of the Audit Committee and subsidiary audit committees, and the Audit Committee Chairman's attendance at the
Phoenix Life Audit Committee on an occasional basis, as well as his receipt of all papers going to the Phoenix Life Audit
Committee. This was enhanced in 2016 through the commencement of occasional attendance at the Audit Committee by the
Phoenix Life Audit Committee Chairman.
AUDIT COMMITTEE'S PRINCIPAL ACTIVITIES DURING 2016
EXTERNAL REPORTING AND CONTROLS
- Reviewed the Company's 2015 Annual Report and Accounts and 2016 Interim Financial Statements, recommending their
approval to the Board, as well as related disclosures and the financial reporting process, supported by reports from
management and the external auditors.
- Considered and addressed a number of significant matters in relation to the IFRS consolidated financial statements
for 2015 (annual), 2016 (interim) and 2016 (annual) as summarised in the table on page 53. These matters were considered by
the Audit Committee to be areas subject to the most significant levels of judgement or estimation, and identified with
regard to the significant risks assessed by the Group's external auditors as set out in their audit opinion on page 91.
- Reviewed the financial forecasts prepared by management, supported by the sensitivity analysis on the key
assumptions underpinning the forecasts, in support of the assumption that the Group will continue as a going concern, the
Group's ongoing viability and in support of dividend payments.
- Reviewed the Line 1 risk and controls report from management, the annual internal controls effectiveness report (and
the half-year update) prior to its consideration by the Board and received reports regarding consequential actions; and
received a dedicated briefing, in conjunction with the Phoenix Life Audit Committee on cyber risk and controls.
- Reviewed reports from Internal Audit on the control environment in the Group's outsource service providers and on
the effectiveness of the internal audit work undertaken within the outsource service providers, noting that this was
addressed in more detail at the Phoenix Life Audit Committee., whose Chairman reported further on this matter through
attendance at the Audit Committee.
- Considered and noted the independence of KPMG in relation to post-acquisition audit work undertaken with regard to
Abbey Life.
EXTERNAL AUDIT
- Undertook an audit tender which included a review of the effectiveness, engagement and remuneration of the current
external auditors. This culminated in a recommendation to re-appoint EY, which was approved by the Board and will be
recommended to shareholders at the May 2017 AGM - see 'Assessment of the effectiveness of the external audit process' and
'Auditor's Appointment' on page 52.
- Reviewed and monitored the independence of the external auditors including their provision of non-audit services and
fees- see Auditor's Independence and External Auditor Policy on page 52.
INTERNAL AUDIT
- Reviewed an update from Internal Audit on the recommendations from the 2015 External Quality Assessment by
Independent Audit and requested, in consequence of one of the recommendations, that the 2017 Internal Audit plan provides
details of the use of data analytics.
- Assessed the effectiveness of Internal Audit, supported by the April 2016 follow-up review by Independent Audit to
their 2015 External Quality Assessment, noting the positive actions taken in response to the recommendations from the 2015
assessment.
- Approved the Group Internal Audit Proposition for 2017 and a more dynamic planning approach of six months fixed and
six months flexible; and a continuation of the move from a static policy approach to a plan more focused on thematic audits
based on emerging risks and topical matters.
- Approved the annual update of the Group Internal Audit Charter (which was aligned to the CIIA Code for 'Effective
Internal Audit in Financial Services') and the Group Internal Audit Plan (including its link to the Risk Management
Framework), receiving regular reports to monitor progress against the plan.
- Reviewed the internal audit control environment opinion which included Internal Audit's view on the embedding of the
risk management framework across the Group.
AUDIT COMMITTEE'S PERFORMANCE
- The Committee's performance was reviewed by the Board in November 2016 as part of its overall Board Evaluation
Review. The Board concluded that the Committee undertakes a difficult role very well and that the reporting from the
Committee Chairman to the Board is good. The Committee undertook a self-effectiveness review in early 2017, concluding that
it contained an appropriate balance of skills and that the interaction with the Phoenix Life Audit Committee should
continue to be enhanced.
GENERAL
- Reviewed arrangements for whistleblowing (and whistleblowing activity) should an employee wish to raise concerns, in
confidence, about any possible improprieties; and approved an updated whistleblowing policy which complied with the FCA and
PRA's new whistleblowing rules and the introduction of a prescribed responsibility of a Whistleblowing Champion under the
Senior Insurance Managers Regime. The Audit Committee Chairman was appointed to this role.
- Reviewed and approved updates to the Group Tax Policy and the Group Liquidity & Funding Policy.
ASSESSMENT OF THE EFFECTIVENESS OF THE EXTERNAL AUDIT PROCESS
The effectiveness of the external audit process was assessed through the completion of a questionnaire by the key divisions
and Group functions within Phoenix Group covering EY's performance during the 2015 financial reporting cycle to provide a
more detailed analysis and to support the imminent tender process. The review was supported by the utilisation of an online
questionnaire based tool provided by a third party supplier. The output from the review demonstrated the positive action
taken in respect of recommendations from the previous year's review and enabled management to identify key areas of focus
to further facilitate the audit process. The Audit Committee contributed feedback to the exercise, considered the
effectiveness of the process and reviewed the overall findings.
During 2016, the Financial Reporting Council undertook an Audit Quality Review of EY's audit of the PGH financial
statements for the year ended 31 December 2015 and reported to the Chair of the Audit Committee. None of their findings
were considered to be of sufficient significance for inclusion in the report.
AUDITOR'S APPOINTMENT
The current auditors, EY, were appointed in September 2009. However, EY have been auditors to significant parts of the
Group for a longer period. In accordance with the requirements of The Statutory Audit Services for Large Companies Market
Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014, the Audit
Committee undertook a competitive audit tender in 2016 to take effect for the 2017 statutory audit, which it considered to
be in the best interests of its shareholders in light of the length of association with the current auditors.
The tender process was overseen by the Audit Committee and undertaken in accordance with internal procurement policies and
external regulations. In accordance with the requirements of the regulations, a report on the process was undertaken and
the rationale supporting the decision reached was prepared to enable the Audit Committee to validate the appropriateness of
the selection procedure undertaken and reach their final conclusions. The report confirmed that there was evidence that the
Audit Committee had fulfilled its responsibilities in connection with the competitive tender process as set out in the
regulations and that the selection process was transparent, free from influence and was conducted in a fair manner. The
Audit Committee concluded, and recommended to the Board, that the incumbent audit firm, EY, should be retained as the
external auditor of the Group from 2017.
The current audit partner is Ed Jervis, who has held that role from the 2014 statutory audit and will rotate off that role
after the 2018 statutory audit.
AUDITOR'S INDEPENDENCE and external auditor policy
The Company has an external auditor policy which requires the Company and the external auditors to take measures to
safeguard the objectivity and independence of the external auditors. These measures include a prohibition regarding
non-audit services in respect of specific areas, such as secondments to management positions, or those which could create a
conflict or perceived conflict. It also includes details of the procedures for the rotation of the external engagement
partner. The Charter can be found on the Group's website. The policy was updated in 2016 to reflect changes brought about
by the EU Audit Directive and Regulations; in particular that non-audit fees will going forward now be capped at 70% of the
average audit fee over the three preceding financial years. In 2016, total fees of £8.7 million were paid to EY. Of this
amount, £4.2 million related to statutory audit fees of the parent and its subsidiaries, with a further £0.8 million
incurred in relation to services provided pursuant to legal or regulatory requirements. The remaining fees of £3.7 million
are classified as non-audit services as defined by the new EU Audit Directive and Regulations, and give rise to a ratio of
87 % of non-audit to audit fees in 2016.
The engagement of EY to perform any non-audit service is subject to a process of pre-approval by the Audit Committee. £1.9
million of the non-audit fees related to actuarial and finance due diligence procedures conducted in relation to the
acquisitions of the AXA businesses and Abbey Life. The Audit Committee considers that the engagement of the external
auditors in the performance of such diligence procedures should provide synergies with audit work post-completion of the
transaction and enhanced insight as to the quality of the control environment operated in the target company by comparison
to Group standards. Of the remaining balance and consistent with market practice, a further £1.7 million relates to the
provision of assurance services to the Board and the sponsoring banks in support of disclosures made in the public
transaction documentation relating to the two acquisitions.
The Audit Committee is satisfied that the non-audit services performed during 2016 have not impaired the independence of EY
in its role as external auditor. Further information on non-audit fees is provided in Auditor's Remuneration in Notes to
the IFRS Consolidated Financial Statements on page 117.
SIGNIFICANT MATTERS CONSIDERED BY THE AUDIT COMMITTEE IN RELATION TO THE FINANCIAL STATEMENTS
Significant matters in relation to the 2016 IFRS financial statements How these issues were addressed
Review of the actuarial valuation process, to include the setting of actuarial assumptions and methodologies, and the robustness of actuarial data - Management presented papers to the Phoenix Life Audit Committee detailing recommendations for the actuarial assumptions and methodologies to be used for the interim and year-end reporting periods with justification and benchmarking as appropriate. These
assumptions and methodologies were debated and challenged by the Phoenix Life Audit Committee, focusing on longevity and persistency in relation to demographics and on credit in relation to economics, prior to their approval. Papers were also presented
outlining changes to assumptions proposed to align the IFRS basis of reserving more closely with the requirements of Solvency II. - A summary of these papers was presented for oversight review by the Audit Committee, and the Phoenix Life Audit Committee's
conclusions were reported to the Audit Committee through minutes of its meeting and a discussion between the Chairmen of the two committees. The Audit Committee discussed, and questioned management and EY on, the content of the summary papers and the
Phoenix Life Audit Committee's conclusions.- The Audit Committee received and considered detailed written and verbal reporting from the external auditors setting out their observations and conclusions in respect of the assumptions, methodologies and
actuarial models. Pension assumptions for use in the IAS 19 Employee Benefits valuations were reviewed and approved by the Audit Committee prior to the finalisation of the valuation reports.
Valuation of complex and illiquid financial assets - Management presented papers setting out the basis of valuation of financial assets, including changes in methodology and assumptions, for the interim and year-end reporting periods to the Phoenix Life Audit Committee. The assumptions, valuations and
processes, particularly for financial assets determined by valuation techniques using significant non-observable inputs (Level 3), were debated and challenged by the Phoenix Life Audit Committee prior to being approved.- The valuation information was then
presented for oversight review by the Audit Committee who considered and confirmed the appropriateness of the basis of valuation.
Acquisition Accounting - The Audit Committee has considered the impact of the acquisitions of the AXA businesses and Abbey Life on the Group consolidated IFRS financial statements. This has included consideration of the adoption of Group accounting policies and methodologies
by the acquired businesses.- Management presented papers detailing the basis of fair value adjustments made to the acquisition balance sheets including the recognition of intangible assets. The key assumptions and methodologies applied in determining
such adjustments were reviewed and approved by the Audit Committees.
Operating Profit - The Audit Committee reviewed the allocation of key items to operating profit to ensure the allocations were in line with the Group's operating profit framework and consistent with previous practice.
Assessment of whether the Annual Report and Accounts are fair, balanced and understandable - The Audit Committee considered an analysis of the processes and conclusions in support of management's conclusions that the Annual Report and Accounts are fair, balanced and understandable. In particular, the Audit Committee sought assurance as to the
review processes that operated over the production of the Annual Report and Accounts.
Going concern analysis - A comprehensive going concern assessment was undertaken by the Audit Committee for the 2016 year-end and 2016 interim reporting periods, based on an assessment by management of the Group's liquidity for the going concern review period together with
forecasts and a stress and sensitivity analysis. The analysis also confirmed that all regulatory and working capital requirements would be met under the base case and adverse stress scenarios throughout the going concern review period.
Viability Statement - The Audit Committee reviewed the process to support, and the contents of, the Viability Statement. The Committee concluded that the period covered by the Viability Statement should continue to be five years to align it to the Group's strategic plan.
Please note that references in this table to the Phoenix Life Audit Committee include Audit Committees for the acquired AXA
Wealth and Abbey Life businesses in respect of post-acquisition activity.
Remuneration Committee
IAN CORMACK
Remuneration Committee Chairman
"The Remuneration Committee continues to be focused on alignment of reward to execution of strategy as will be reflected in
our Remuneration Policy being presented to shareholders for approval at our May 2017 AGM."
OTHER MEMBERS
Isabel Hudson
Nicholas Shott
Kory Sorenson
Remuneration Committee
MEETING ATTENDANCE 2016 Maximum Actual
Chairman
Ian Cormack 6 6
Other members
Isabel Hudson 6 6
Nicholas Shott1 1 1
Kory Sorenson 6 5
1 Appointed to the Committee on 20 October 2016.
The composition of the Remuneration Committee accords with the requirements of the Code that the Remuneration Committee
should consist of at least three independent Non-Executive Directors. The Remuneration Committee met six times during
2016.
The Remuneration Committee is responsible for making recommendations to the Board on the Company's remuneration and
compensation plans, policies and practices and for determining, within agreed terms of reference, specific remuneration
packages for the Executive Directors. These include pension rights and executive incentive schemes to encourage superior
performance. In 2016, the Committee approved a Remuneration Policy Statement in accordance with the PRA's Solvency II
Remuneration Guidance. Details of the remuneration structure and the Remuneration Committee's activities in 2016 are
provided in the Directors' Remuneration Report on pages 58 to 84.
FIT Remuneration Consultants provided advice to the Remuneration Committee in 2016 and are independent of the Group.
Risk Committee
DAVID WOODS
Risk Committee Chairman
"I am confident that on stepping down from the Board and as Risk Committee Chairman (at our May 2017 AGM), the risk
management framework and governance is on a sound and robust footing."
OTHER MEMBERS
Alastair Barbour
Wendy Mayall
John Pollock
Risk Committee
MEETING ATTENDANCE 2016 Maximum Actual
Chairman
David Woods 6 5
Other members
René-Pierre Azria1 6 6
Alastair Barbour 6 6
Tom Cross Brown2 3 3
Wendy Mayall3 1 1
John Pollock3 1 1
1 Member of Committee up to 30 Nov 2016.
2 Member of Committee up to 11 May 2016.
3 Appointed to the Committee on 20 October 2016.
The establishment of a Risk Committee is not a requirement of the Code. However, the Board believes such a Committee is
important to ensure the robust oversight of the management of risk within the Group. The composition of the Risk Committee,
comprised totally of independent Non-Executive Directors, is in accordance with the final recommendations of the report by
Sir David Walker titled 'A review of corporate governance in UK banks and other financial industry entities'. The Risk
Committee met six times in 2016. Its meetings are attended by the Chairman of the Audit Committee (who is also a member of
the Risk Committee), the Chief Risk Officer, the Group Head of Internal Audit and occasionally also by the Group Chairman
and the Group Chief Executive Officer.
The Risk Committee advises the Board on risk appetite and tolerance in setting the future strategy, taking account of the
Board's overall degree of risk aversion, the current financial situation of the Group and the Group's capacity to manage
and control risks within the agreed strategy. It advises the Board on all high-level risk matters. Details of the Risk
Management Framework, for which the Risk Committee has oversight, are provided in the Risk Management section on pages 34
to 39.
RISK COMMITTEE'S PRINCIPAL ACTIVITIES DURING 2016
- Reviewed the Group's risk appetite and recommended to the Board the Group's overall risk management strategy.
- Monitored progress against the 2016 Group Risk Function plan.
- Considered any breaches of the Group's risk appetite.
- Monitored compliance with the Group's principal risk policies, satisfying itself that action plans to address
significant breaches of those policies were sufficient.
- Reviewed the Group's risk profile, monitoring it against the risk categories of Market, Insurance, Credit, Financial
Soundness, Customer and Operational with particular attention to risk appetite, risk trends, risk concentrations,
provisions, experience against budget and key performance indicators for risk.
- Provided oversight of, and challenge to, the design and execution of the Group's stress and scenario testing,
including any changes of assumptions.
- Undertook horizon scanning to consider emerging risks that could impact the Group including more prominent badging
of forward-looking work in risk papers.
- Considered risks, issues and matters that are escalated from the Phoenix Life Risk Committee.
- Informed the Remuneration Committee regarding the management of the Group's material risks to support their
consideration of executive's Annual Incentive Plan rewards.
- Provided oversight and due diligence on risk issues relating to material transactions and strategic proposals.
Nomination Committee
HENRY STAUNTON
NOMINATION COMMITTEE CHAIRMAN
"I am very pleased with the Nomination Committee's role in our three new Non-Executive Director appointments from 1
September 2016 and the effective renewal of skills on our Board."
OTHER MEMBERS
Alastair Barbour
Ian Cormack
David Woods
Nomination Committee
MEETING ATTENDANCE 2016 Maximum Actual
Chairman
Henry Staunton 6 6
Other members
Alastair Barbour2 3 3
Tom Cross Brown1 3 3
Ian Cormack 6 6
David Woods2 3 3
1 Member of Committee to 11 May 2016.
2 Appointed to the Committee on 11 May 2016.
The composition of the Nomination Committee is in accordance with the requirements of the Code that a majority of its
members should be independent Non-Executive Directors. The Nomination Committee is responsible for considering the size,
composition and balance of the Board; the retirement and appointment of Directors; succession planning for the Board and
senior management; and making recommendations to the Board on these matters.
The Nomination Committee met six times in 2016.
The standard process used by the Committee for Board appointments involves the use of an external search consultancy to
source candidates external to the Group (and in the case of executive appointments also considers internal candidates).
Detailed assessments of short-listed candidates are undertaken by the search consultancy, followed by interviews with
Committee members and other Directors and the sourcing of references before the Committee recommends the appointments to
the Board. This process was used for the appointment of Wendy Mayall, John Pollock and Nicholas Shott in 2016. The search
consultancy used in 2016 for Director appointments was Korn Ferry which has no other connection with the Company.
NOMINATION COMMITTEE'S PRINCIPAL ACTIVITIES DURING 2016
- Delivered a recommendation to the Board for the appointments of Wendy Mayall, John Pollock and Nicholas Shott as
Non-Executive Directors following a comprehensive search process led by the Nomination Committee with Korn Ferry search
consultancy.
- Taking account of the Board Evaluation Review, reviewed the balance of skills, diversity, experience, independence
and knowledge on the Board.
- Taking account of the Board Evaluation Review, reviewed the structure, size and composition of the Board.
- Reviewed the time spent by Directors in fulfilling their duties, concluding that the time spent appeared to be high
in comparison with other FTSE 250 companies.
- Reviewed the succession plan for Executive and Non-Executive Directors and recommended its approval to the Board.
The Board's policy on diversity is as follows:
- The Board supports the enhancement of diversity, including gender, as a consideration when recruiting new
Directors.
- The Board's overriding aim is to appoint the right Directors to the Board to drive forward the Group's strategy
within a robustly compliant framework.
- The Board will undertake regular skills audits to ensure the Board's skills remain appropriate for its strategy and
providing diversity where possible.
COMMUNICATION WITH SHAREHOLDERS
The Company places considerable importance on communication with shareholders and regularly engages with them on a wide
range of issues.
The Company's Investor Relations department is dedicated to facilitating communication with investors and analysts and an
active investor relations programme is maintained.
During 2016, the Company's Investor Relations department and management held the following activity:
- 31 days of roadshows meeting investors
- 5 institutional conferences holding one-on-one or group meetings with investors
- 219 face-to-face meetings with investors and analysts.
The Company also held an Investor Day on 12 May 2016, which was attended by investors and research analysts.
In 2016, there was a marked increase in roadshow activity due to the AXA and Abbey Life acquisitions which involved an
equity placing and rights issue respectively.
At these meetings a wide range of relevant issues including strategy, performance, management and governance were
discussed. The Chairman, Senior Independent Director and Executive Directors are available to meet investors and analysts
when required. Should major shareholders wish to meet newly appointed Directors, or any of the Directors generally, they
are welcome to do so.
In addition, continued engagement is undertaken with shareholders and proxy advisers on evolving governance issues.
The Directors consider it important to understand the views of the market. Board members regularly receive copies of the
latest analyst reports on the Company and the insurance sector, as well as market feedback to further develop their
knowledge and understanding of external views about the Company. The Chairman and the Non-Executive Directors provide
feedback to the Board on topics raised with them by major shareholders. The Company also undertakes perception studies,
when appropriate, designed to determine the investment community's view of the core business from both institutional fund
managers and sell-side analysts.
The Company's AGM provides another opportunity to communicate with its shareholders. At the 2016 meeting, the Company
complied with the Code provisions relating to voting and the separation of resolutions. Shareholders were invited to ask
questions during the meeting. It is intended that the same processes will be followed at the 2017 AGM. In line with the
Code, details of proxy voting by shareholders will be made available at the meeting and will be posted on the Company's
website following the meeting.
The Company's Annual Report and Accounts, together with the Company's Interim Report and other public announcements and
presentations, are designed to present a fair, balanced and understandable view of the Group's activities and prospects.
These are available on the Company's website at www.thephoenixgroup.com, along with a wide range of relevant information
for private and institutional investors, including the Company's financial calendar
FINANCIAL REPORTING AND GOING CONCERN
The Directors have acknowledged their responsibilities in the Statement of Directors' Responsibilities in relation to the
IFRS financial statements for the year ended 31 December 2016.
The Group's business activities, together with the factors likely to affect its future development, performance and
position are set out in the Strategic Report on pages 2 to 40.
The financial position of the Group, its cash flows and liquidity position are described in the financial statements and
notes.
The Board's going concern assessment is included within the Directors' Report on page 87.
VIABILITY STATEMENT
The Viability Statement, as required by section C.2.2 of the Code, has been undertaken for a period of five years to align
to the Group's business planning and is contained in the Risk Management section on page 39.
REVIEW OF SYSTEM OF INTERNAL CONTROLS
The Code requires Directors to review the effectiveness of the Company's risk management and internal control systems which
includes financial, operational and compliance controls. The Board has overall responsibility for the Group's risk
management and internal control systems and for reviewing their effectiveness. The Group's systems of internal controls are
designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable
and not absolute assurance against material misstatement or loss. The Board's review of the period covered by this report,
which was undertaken with the assistance of the Audit and Risk Committees, was completed on 17 March 2017. Where any
significant weaknesses were identified, corrective actions have been taken, or are being taken and monitored.
The Board (and its subsidiary company boards) monitor internal controls on a continual basis, in particular through Audit
and Risk Committees. There is an ongoing process for identifying, evaluating and managing the significant risks faced by
the Group, which has been in place throughout the period covered by this report and up to the date of approval of the
Annual Report and Accounts for 2016, in accordance with the 'Guidance on Risk Management, Internal Control and Related
Financial and Business Reporting' published by the Financial Reporting Council.
Additional assurance is provided by the internal audit function, which operates and reports independently of management.
The internal audit function provides objective assurance on risk mitigation and control to the Audit Committee.
Directors' Remuneration REPORT
"Our approach to Reward adopts a prudent view on Executive pay balanced with appropriate alignment to a strategy well
delivered by the Group in a complex year."
Ian Cormack
Remuneration committee chairman
Dear Shareholder
On behalf of the Board, I am pleased to present our Directors' Remuneration Report for the year ended 31 December 2016.
This report covers remuneration for Executive Directors and Non-Executive Directors of the Company.
Company performance
2016 was a year of accomplishment for Phoenix Group as set out in more detail in the Group Chief Executive Officer's report
at the beginning of this Annual Report and Accounts. Particular operational and financial highlights for the year
included:
- Completion of the acquisition of AXA Wealth's pensions and protection businesses financed in part by a £194 million
capital raise
- Completion of the acquisition of Abbey Life, financed in part by a £735 million rights issue
- Operating companies' cash generation of £486 million
- Agreement with the Group's lending banks on a new Revolving Credit Facility of £900 million
- Development of the Phoenix Life website in order to digitise parts of the customer journey
- Improved Financial Ombudsman Service overturn rate to 18%
- Strong customer satisfaction scores of over 90%
- The accreditation, for the fifth successive year, that Phoenix has been formally recognised as one of the 'UK's Top
Employers'
The above highlights have been achieved whilst also meeting the challenges of the introduction of the new Solvency II
regime at the start of 2016. In addition, the volatile macroeconomic environment experienced over the course of the year,
including the sharp fall in long-term interest rates, has had a negative impact on the Group's financial position.
These factors represent an effective performance by the Company and its management team and, accordingly, the Remuneration
Committee ('Committee') concluded that the out-turn of the Annual Incentive Plan ('AIP') and Long-Term Incentive Plan
('LTIP') (after increasing the targets to reflect the impact of the AXA acquisition) is appropriate, as more fully
described below.
Remuneration Policy for 2017
As I explained in my letter introducing our Directors' Remuneration Report for 2015, during the course of 2016 the
Committee has undertaken a review of our current Directors' Remuneration Policy in anticipation of updating the policy at
the 2017 Annual General Meeting ('AGM'). Whilst the Company is a non-UK incorporated Company, and so is not technically
subject to the UK's Directors' Remuneration Report regime we have always complied with this regime voluntarily, including
establishing a 3-year Directors' Remuneration Policy which we first had approved by our shareholders in 2014. As this
3-year authority is now expiring we intend to seek our shareholders' authority for a new Directors' Remuneration Policy at
our 2017 AGM.
In considering any changes to the policy the Committee was mindful of the wider external environment. In particular, it
noted the findings of the Executive Remuneration Working Group which endorsed replacing traditional LTIPs with smaller
awards of more certain restricted stock. This could have particular attractions for the Company given the additional
challenges we face in setting robust targets for a business which has as its strategy the enhancement of shareholder value
and dividend income through suitable acquisitions. The proposed new policy is largely a carry-forward of the current policy
with the Committee planning to undertake a fuller review during 2017.
The policy to be proposed at the 2017 AGM, therefore, contains a high degree of consistency with the Company's previous
policy:
- No increases to the potential quantum of Executive Directors' remuneration are proposed.
- Within the policy, each element of remuneration contains an appropriate cap. These are in place in order to comply
with regulations and do not reflect aspirations or targets. None of these caps have been increased from the previous
policy. Specifically within the policy section for base salary we have clarified the target positioning of Executive
Directors' base salaries as between the FTSE31-100 and FTSE250 data sets.
- Within the AIP we have retained the current maximum opportunity of 150% of base salary per annum. We have increased
the element of compulsory deferral into shares to 40% (from 33%), with the deferral period remaining at three years and
subject to continued employment.
- The precise metrics for the AIP will be set each year in line with strategic priorities. For 2017, we have removed
the profit-based measures in favour of increasing the weighting on both cash generation (the core financial metric for the
Company) and the customer experience. The simplified AIP scorecard will thus comprise a 50% weighting on cash generation,
20% on customer outcomes, and 30% on strategic/personal objectives. As now, the AIP policy includes an appropriate power
for the Committee to take a holistic view of performance and, as appropriate, moderate outcomes.
- For the LTIP, we have retained the current policy of 200% of base salary annual grant levels. The performance
measures for the 2017 LTIP will again be relative TSR and cash generation with an equal weighting on both. The LTIP also
includes a 2-year post-vesting holding period for Executive Directors.
- Share Ownership Guidelines for Executive Directors remain at a minimum of 200% of base salary.
- The holding periods applying to the LTIP awards together with bonus deferral will continue to apply post-cessation
to 'good leavers'.
Last year I highlighted the negative effects that extended and frequent 'prohibited periods' that limit Directors' and
senior employees' share transactions can have on our remuneration practices. This is particularly relevant for Phoenix
because acquiring additional closed funds is core to our strategy and the time spent to properly consider acquisitions can
mean extended prohibited periods. This constrains the normal timetables for awarding and vesting the Company's share
plans.
To address this issue we have amended the rules of the LTIP and Deferred Bonus Share Scheme ('DBSS') (the deferral vehicle
for the AIP) to provide that grants will be made on the fourth dealing day following the announcement of results regardless
of whether the Company is then in a prohibited period. While recognising that this is unusual it will have a significant
impact internally on the ability to operate the plans effectively. While awards will vest on the respective anniversary
dates the exercise of awards or the sale of shares will remain possible only in open periods.
Shareholder approval
At the AGM on 11 May 2017, shareholders will be asked to approve two resolutions related to Directors remuneration
matters:
- to approve the Directors' Remuneration Policy as set out in Part A of this Directors' Remuneration Report;
- to approve the Implementation Report sections of this Directors' Remuneration Report (excluding the Directors'
Remuneration Policy).
As Phoenix is a non-UK incorporated company both of these votes will be advisory in nature.
The Committee continues to seek to reflect developments in practice as deemed appropriate for the Phoenix Group.
I hope that we can continue to rely on the support of our shareholders for the resolutions which will be proposed at the
2017 AGM.
Yours sincerely
Ian Cormack
Remuneration Committee Chairman
17 March 2017
Directors' Remuneration REPORT
At a glance
How we performed in 2016
Group performance measures
Annual Incentive Plan ('AIP'):
Below we show outturn against the metrics within the 2016 AIP. More details of the 2016 AIP can be found on page 76.
OPERATING COMPANIES' CASH GENERATION (£m)
Target level for AIP 4451
Maximum level for AIP 5201
Performance 486
486
1 Target and maximum levels include increase of £20m (see page 76)
OPERATING PROFIT (£m)
Target level for AIP 250
Maximum level for AIP 300
Performance 351
351
CUSTOMER SATISFACTION
Target level for AIP 4.65
Maximum level for AIP 4.75
Performance 4.66
4.66
SERVICING COMPLAINTS AS A % OF TRANSACTIONS
Target level for AIP 0.40
Maximum level for AIP 0.30
Performance 0.32
0.32
Long-Term Incentive Plan ('LTIP'):
Below, we show progress against the measures which apply for the 2014 LTIP awards. Embedded value growth, cumulative cash
generation and TSR performance is shown over the three-year performance period (financial years 2014, 2015 and 2016). TSR
is measured against the constituents of the FTSE 250 (ex. Investment Trusts), with median being the 50th percentile and
upper quintile from the 80th percentile.
GROWTH IN EMBEDDED VALUE (%)
Threshold target 4.0%
Maximum target 6.0%
Performance (and see page 77) 6.1%
6.1%
CUMULATIVE CASH GENERATION (£m)
Threshold target 1,368
Maximum target 1,568
Performance 991
991
TOTAL SHAREHOLDER RETURN (%)
Median 50th percentile
Upper Quintile 80th percentile
Performance 69th percentile
69th percentile
How much the Executive Directors earned in 2016 (£000)
The charts below compare the maximum levels of Total Remuneration Opportunity in the remuneration policy (see page 70) and
the actual payments for 2016 detailed in the Single Figure Table. For the 2016 actual LTIP values, the share price growth
and dividend element is shown separately.
CLIVE BANNISTER
Maximum
Policy maximum fixed remuneration 839
Policy maximum AIP 1050
Policy maximum LTIP grant 1400
Actual
Actual fixed remuneration 839
Actual AIP 883
Actual LTIP vesting 770
Share growth and dividends on vested LTIP 302
302
JAMES MCCONVILLE
Maximum
Policy maximum fixed remuneration 533
Policy maximum AIP 660
Policy maximum LTIP grant 880
Actual
Actual fixed remuneration 533
Actual AIP 555
Actual LTIP vesting 484
Share growth and dividends on vested LTIP 190
190
Introduction
This report contains the material required to be set out as the Directors' Remuneration Report ('Remuneration Report') for
the purposes of Part 4 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations
2013, which amended The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 ('the DRR
regulations'). The Company intends to comply with the DRR regulations as a matter of good practice although as a non-UK
incorporated quoted company it is not strictly required to do so and is not subject to the technical consequences of
non-compliance with the DRR regulations.
Part A represents the Directors' Remuneration Policy. This policy will take effect, subject to the approval of the
shareholders, immediately after the 2017 AGM.
Part B constitutes the implementation sections of the Remuneration Report ('Implementation Report').
Part A: Directors' remuneration policy
The Directors' Remuneration Policy ('Remuneration Policy') as set out in this section of the Remuneration Report will, if
approved by shareholders, take effect for all payments made to Directors from the date of the AGM on 11 May 2017.
General policy
The Remuneration Policy for Executive Directors is summarised in the table below along with the position of the Chairman's
and the Non-Executive Directors' fees:
Overall Positioning*
The Company's overall positioning on remuneration for Executive Directors remains unchanged from prior years:- An appropriate balance is maintained between fixed and variable components of remuneration.- Our Remuneration Policy benchmarks the total target remuneration for the Executive Directors between FTSE 31-100 and FTSE 250 data sets, and remuneration for both Executive Directors is positioned appropriately between these data sets.
* This section does not form part of the Remuneration Policy and is for information only.
Summary of Changes from Previous Policy:
As more fully detailed in the 'Changes from Previous Policy' column in the Remuneration Policy table, the key changes to
the Remuneration Policy are the following:
Element Changes from previous policy
Base salary - Confirmation of caps for each element of the policy, including base salary. For base salaries, we have clarified the target positioning of Executive Directors' base salaries as between the FTSE 31-100 and FTSE 250 data sets.
Annual Incentive Plan - Increasing the level of bonus deferral to 40% of outcomes (from 33% of outcomes).
- Confirming that at least 50% of performance measures in any year will relate to financial measures.
- Confirming the automatic grant of deferred shares on the fourth dealing day following the announcement of annual results each year.
Long-Term Incentive Plan - Confirming the automatic grant of LTIP awards on the fourth dealing day following the announcement of annual results each year.
- Confirming the application of holding periods (which have applied to LTIP awards from 2015 onwards).
- Confirming that no material changes will be made to the current performance measures or the current mix of performance measures for LTIP awards made in any year without consulting major shareholders.
Remuneration Policy table
Element and purposeBase salaryThis is the core element of pay and reflects
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