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Phoenix Group Hldgs (PHNX)

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Monday 14 March, 2022

Phoenix Group Hldgs

2021 Annual Financial Report

RNS Number : 6359E
Phoenix Group Holdings PLC
14 March 2022
 

Phoenix Group Holdings plc: 2021 Full Year Results    14 March 2022

Phoenix Group announces a record set of financial results for 2021, its first ever organic dividend increase of 3% and a new dividend policy

 

CASH

Operating companies'
cash generation

£1,717m

2020: £1,713m

 

+

RESILIENCE

Solvency II Surplus and
SCCR

£5.3bn and 180%

2020: £5.3bn and 164%

 

+

GROWTH

Incremental new business long-term cash generation

£1,184m

2020: £766m

 

 

Financial highlights

 

Delivering cash

· Record cash generation1 of £1,717m in 2021 (2020: £1,713m) exceeds our £1.5bn-to-£1.6bn target range for the year.

· 2021 cash generation includes c.£400m of integration synergies, with integration synergies to date across the Standard Life and ReAssure acquisitions now in excess of £2.5bn.

· Having met our two conditions for dividend growth, the Board is recommending a 2021 final dividend of 24.8p per share, which includes our first ever organic dividend increase of 3% (2021 total dividend: 48.9p per share).

· Our increased dividend cost of c.£0.5bn per annum remains just as sustainable over the long term with c.£11.8bn of Group long-term free cash available to shareholders (after deducting interest on debt to maturity).

 

Delivering resilience

· Strong balance sheet maintained with a Solvency II Surplus of £5.3bn2 as at 31 December 2021 (2020: £5.3bn3).

· Increased Solvency II Shareholder Capital Coverage Ratio2,4 ('SCCR') of 180% as at 31 December 2021 (2020: 164%3,4); SCCR is currently at the top-end of our target range of 140%-to-180%, which provides significant capacity to invest into both organic and inorganic growth opportunities.

· Fitch leverage ratio5 of 28% as at 31 December 2021 is within our target range of 25%-to-30% (2020: 28%).

 

Delivering growth

· Record new business long-term cash generation of £1,184m in 2021 (2020: £766m6) means that Phoenix has proved 'the wedge' hypothesis for the first time, with organic growth from our Open business more than offsetting the natural run-off of our Heritage business (currently c.£800m per annum).

· 2021 new business long-term cash generation comprises £950m from our Bulk Purchase Annuities (BPA) business (2020: £522m) and £234m from our capital-light asset-based businesses including Workplace (2020: £244m7).

· Record level of BPA premiums contracted in 2021 at £5.6bn (2020: £2.5bn), which is a 124% year-on-year increase, and reflects the investment we have made into our capabilities, with our capital strain reducing to 6.5% (2020: 9%).

· Clear momentum is also building in our Workplace business, with 41 new smaller schemes won during 2021, due to the investment we are making into our proposition and through leveraging the Standard Life brand acquired in 2021.

 

Other key financial metrics

· Assets under administration increased to £310bn as at 31 December 2021 (2020: £307bn8).

· IFRS operating profit increased to £1,230m in 2021 (2020: £1,199m).

 

New dividend policy

 

· To better reflect that Phoenix is now a growing, sustainable business, the Board has announced Phoenix Group's new dividend policy and now "intends to pay a dividend that is sustainable and grows over time".

Our strategic priorities support us in delivering on our purpose and strategy

 

Optimising our in-force business

· Record Solvency II management actions of £1.5bn in 2021, including c.£700m from a range of 'business as usual' actions, as well as c.£550m of capital synergies from our new harmonised internal model.

· 48% year-on-year increase in illiquid asset origination in 2021 with £3.0bn of new assets originated (2020: £2.0bn).

· Sale of Ark Life completed in November 2021; proceeds of £198m can be reinvested into future growth opportunities.

 

Enhancing our operating model and culture

· Integration synergies of £824m were delivered in 2021, including £590m realised from the Standard Life acquisition (£1,632m total to date - 134% of target) and £234m from ReAssure (£930m total in just 18 months - 89% of target).

· Female representation in Top 100 leadership positions increased to 319 as we improve our gender equality (2020: 21).

 

Growing our business to support both new and existing customers

· Investment into our Open business capabilities underpinned a strong year in BPA and built momentum in Workplace.

· Having acquired the trusted Standard Life brand, we can now fully leverage it to accelerate future growth.

· Strong customer satisfaction scores maintained at 92%+, exceeding our targets.

 

Innovating to provide our customers with better financial futures

· Developed a roadmap to transition 1.5m customers and over £15bn of assets into a sustainable default fund in 2022.

· Launched Phoenix Insights - a new think tank set up to inform, debate and catalyse actions across society to enable better longer lives, through a combination of public engagement and high-impact research.

 

Investing in a sustainable future

· 2021 illiquid asset origination includes £1.3bn of investment into sustainable assets (2020: £788m), with £542m invested into social housing, £364m into healthcare & education and £220m in positive environmental impact projects.

· 34% reduction in Scope 1 & 2 premises emissions intensity10 in 2021; on track for net zero in own operations by 2025.

· Announced ambitious new 2025 and 2030 interim portfolio decarbonisation targets on our path to net zero by 2050.

 

New targets

 

· Cash - 1-year 2022 cash generation target range of £1.3bn-£1.4bn; 3-year 2022-24 cash generation target of £4.0bn.

· Resilience - continue to operate within our SCCR target range of 140%-180% and Fitch leverage range of 25%-30%.

· Growth - prove 'the wedge' in 2022 with incremental new business long-term cash generation >£800m, as well as a clear ambition to execute value-accretive M&A with significant opportunities within the c.£480bn Heritage market.

 

Strategic outlook

 

Phoenix has a clear and differentiated strategy, which leverages the major market trends, where the whole is greater than the sum of the parts. Our Heritage business will provide our Open asset-based businesses with structural cost advantages through our unique TCS partnership and access to c.13m customers, and our BPA business will benefit from significant capital efficiencies through risk diversification. While for M&A our scalable platform and balance sheet unlock significant cost and capital synergies. We are therefore confident of delivering both organic and inorganic growth going forward.

 

Commenting on the results, Phoenix Group CEO, Andy Briggs said:

 

"It has been an outstanding year for Phoenix, with a record set of financial results and significant strategic progress made as we fully embraced our purpose. 2021 marked a pivotal moment for Phoenix, with £1.2 billion of new business from our Open business more than offsetting the run-off of our Heritage business for the first time. This demonstrates that Phoenix is a growing, sustainable business, and enabled the Board to recommend our first ever organic dividend increase of 3%. Phoenix has also today announced a new dividend policy which sets out our intention to pay a dividend that is sustainable and grows over time."

 

Enquiries

Investors/analysts:

Claire Hawkins,   Director of Corporate Affairs, Phoenix Group

+44 (0)20 4559 3161

Andrew Downey,   Investor Relations Director, Phoenix Group

+44 (0)20 4559 3145

Media:

Douglas Campbell , Teneo

+44 (0)7753 136 628

Shellie Wells , Corporate Communications Director, Phoenix Group

+44 (0) 20 4559 3031

 

Presentation and financial supplement details

There will be a live virtual presentation for analysts and investors today starting at 09:30 (GMT).

A link to the live webcast of the presentation, with the facility to raise questions, as well as a copy of the presentation and a detailed financial supplement will be available at:

https://www.thephoenixgroup.com/investor-relations/results-reports-and-presentations

You can also register for the live webcast at:   https://phoenixfullyear2021.virtualhub.events/

A replay of the presentation and transcript will also be available on our website following the event.

 

Dividend details

The recommended final dividend of 24.8p per share is expected to be paid on 9 May 2022.

The ordinary shares will be quoted ex-dividend on the London Stock Exchange as of 31 March 2022. The record date for eligibility for payment will be 1 April 2022.

Footnotes

1.  Cash generation is a measure of cash and cash equivalents, remitted by Phoenix Group's operating subsidiaries to the holding companies and is available to cover dividends, debt interest, debt repayments and other items.

2.  31 December 2021 Solvency II capital position is an estimated position and reflects a regulator approved recalculation of transitionals as at 31 December 2021 and recognition of the foreseeable Final 2021 shareholder dividend of £248m.

3.  31 December 2020 Solvency II capital position is an estimated position and reflects a dynamic recalculation of transitionals for the Group's Life companies and recognition of the foreseeable Final 2020 shareholder dividend. Had the dynamic recalculation not been assumed, the Solvency II surplus and the Shareholder Capital Coverage Ratio would decrease by £0.1bn and 1% respectively.

4.  The Shareholder Capital Coverage Ratio excludes Solvency II own funds and Solvency Capital Requirements of unsupported with-profit funds and unsupported pension schemes.

5.  Current Fitch leverage ratio is estimated by management.

6.  £766m incremental new business long-term cash generation in 2020 includes £23m for Wrap SIPP, Onshore Bond and TIP products. These products are not included in 2021 due to the economic interest having been transferred to abrdn plc effective 01 January 2021 following the announced sale in February 2021.

7.  £244m incremental new business long-term cash generation in 2020 includes £23m for Wrap SIPP, Onshore Bond and TIP products. These products are not included in 2021 due to the economic interest having been transferred to abrdn plc effective 01 January 2021 following the announced sale in February 2021.

8.  2020 pro forma for the disposal of £29.1bn of assets from the Wrap SIPP, Onshore Bond and TIP products due to the economic interest having been transferred to abrdn plc effective 01 January 2021 and the disposal of £1.8bn of assets from Ark Life which was sold to Irish Life in November 2021.

9.  Includes known hires at 31 December 2021 who join in 2022.

10.  Emissions from occupied premises per full-time employee intensity.

Legal Disclaimers

This announcement in relation to Phoenix Group Holdings plc and its subsidiaries (the 'Group') contains, and the Group may make other statements (verbal or otherwise) containing, forward-looking statements and other financial and/or statistical data about the Group's current plans, goals, ambitions and expectations relating to future financial condition, performance, results, strategy and/or objectives.

Statements containing the words: 'believes', 'intends', 'will', 'may', 'should', 'expects', 'plans', 'aims', 'seeks', 'targets', 'continues' and 'anticipates' or other words of similar meaning are forward looking.  Such forward-looking statements and other financial and/or statistical data involve risk and uncertainty because they relate to future events and circumstances that are beyond the Group's control. For example, certain insurance risk disclosures are dependent on the Group's choices about assumptions and models, which by their nature are estimates. As such, actual future gains and losses could differ materially from those that the Group has estimated.

Other factors which could cause actual results to differ materially from those estimated by forward-looking statements include, but are not limited to: domestic and global economic, social, environmental and business conditions; asset prices; market related risks such as fluctuations in interest rates and exchange rates, the potential for a sustained low-interest rate environment, and the performance of financial markets generally; the policies and actions of governmental and/or regulatory authorities, including, for example, initiatives related to the financial crisis, the COVID-19 pandemic, climate change and the effect of the UK's version of the "Solvency II" requirements on the Group's capital maintenance requirements; the impact of inflation and deflation; the political, legal, social and economic effects of the COVID-19 pandemic and the UK's exit from the European Union; information technology or data security breaches (including the Group being subject to cyberattacks); the development of standards and interpretations including evolving practices in ESG and climate reporting with regard to the interpretation and application of accounting; the limitation of climate scenario analysis and the models that analyse them; lack of transparency and comparability of climate-related forward-looking methodologies; climate change and a transition to a low-carbon economy (including the risk that the Group may not achieve its targets); market competition; changes in assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, gender pricing and lapse rates); the timing, impact and other uncertainties of proposed or future acquisitions, disposals or combinations within relevant industries; risks associated with arrangements with third parties; inability of reinsurers to meet obligations or unavailability of reinsurance coverage; the impact of changes in capital, solvency or accounting standards, and tax and other legislation and regulations in the jurisdictions in which members of the Group operate.

As a result, the Group's actual future financial condition, performance and results may differ materially from the plans, goals, ambitions and expectations set out in the forward-looking statements and other financial and/or statistical data within this announcement. The Group undertakes no obligation to update any of the forward-looking statements or data contained within this announcement or any other forward-looking statements or data it may make or publish.  Nothing in this announcement constitutes, nor should it be construed as, a profit forecast or estimate.

 

 

 

 

 

 

 

 

 

 

 

 

Chairman's statement

 

Embracing our purpose

 

2021 has seen Phoenix make significant strategic progress as we fully embraced our purpose of 'helping people secure a life of possibilities.

 

2021 has been another landmark year for Phoenix Group with our strong financial and operational performance enabling us to deliver on our ambition of 'proving the wedge'. This means that organic growth from our Open business has more than offset the run-off of our Heritage business for the first time. It is a pivotal moment for Phoenix as it transforms us from a business that was in long-term run-off to a business that is now growing and sustainable.

Importantly, the investment we are making into our business is directly benefiting all of our stakeholders, including our customers, colleagues, investors and wider society. We are delivering our vision of growing a strong and sustainable business that helps more people on their journey to and through retirement.

 

Our purpose drives our actions

As the UK's largest long-term savings and retirement business we can make a significant difference to society and we are committed to making change happen today to support people in having better financial futures. We therefore have three core pillars that underpin our comprehensive sustainability strategy which is aligned to our purpose.

Our first pillar is 'investing in a sustainable future', where we will use our scale to drive real change and invest in the things that help to build a more sustainable world. We are responsible for looking after c.£310 billion of customer and shareholder assets, which requires us to keep their money safe and provide them with strong long-term financial returns. We will do this by integrating sustainability into every investment decision we make, through investing responsibly, by tracking our performance to deliver our ambitious decarbonisation goals and through engaging to drive wider system change.

Our second pillar is 'engaging people in better financial futures', which is about providing our customers with the right guidance and products, at the right time, to support the right decisions. We will do this through delivering fund and product innovation to develop sustainable retirement income solutions that help close the pension savings gap and by empowering our customers to plan their financial futures. We also want to drive a national conversation about the implications of longer lives, through our new think tank, Phoenix Insights. While Phoenix Group will continue to advocate for change, using our scale and influence.

Our third pillar is 'building a leading responsible business'. We will do this by continuing to invest in our people and culture, working responsibly with our supply chain, supporting our communities and reducing the environmental impact of our own operations.

Against each pillar we have set clear targets, including our ambitious 2025 and 2030 interim decarbonisation targets for our investment portfolio, as part of our roadmap to net zero by 2050. We also have a commitment for being net zero across our own operations by 2025. You can find out more about our strategy and targets in our 2021 Sustainability Report.

 

Inaugural organic dividend increase

As a result of the Group's strong financial performance in 2021, I am delighted to announce that the Board is recommending Phoenix Group's inaugural organic dividend increase. The Board had previously set two clear conditions for considering an organic dividend increase, both of which have been met in 2021. The Board has therefore determined that a 3% increase in the Group's 2021 Final dividend to 24.8 pence per share is appropriate, meaning the Group's total dividend for 2021 will be 48.9 pence per share. Importantly, the Board has always been clear that any organic dividend increase must maintain our existing long-term dividend sustainability, which the growth in our business in 2021 has ensured.

Going forward, we now expect the business to continue growing organically and we also remain committed to M&A, where we see significant opportunities in the marketplace. As a result, the Board has evolved the Group's dividend policy to reflect that it now has two potential drivers of future dividend increases; organic and inorganic growth. However, the Board will, as ever, continue to prioritise the Group's long-term dividend sustainability, which is why our dividend policy is to pay a dividend that is sustainable and grows over time.

 

Board changes

We recently announced a series of Board changes that will take effect this year, which are a result of my having received the great honour of being elected as the next Lord Mayor of the City of London. It is due to the support I have received from the Board, our major shareholders and our regulators that I will be able to commence this role in November 2022. However, in order to assume this full-time position, I will need to take a 14-month sabbatical from my role as Phoenix Group Chairman, commencing 1 September 2022. As a result, the Board has decided that, subject to regulatory approval, our current Senior Independent Director, Alastair Barbour, will assume the role of interim Chairman during my sabbatical. Alastair will in turn step down as Chair of the Board Audit Committee in September and given that he will have served for 10 years by 2023, he will then leave the Board upon my return in November 2023. In his place, Karen Green has been chosen, subject to regulatory approval, to become our new Senior Independent Director.

I am also delighted to welcome Katie Murray to Phoenix Group, who is joining the Board as an independent Non-Executive Director in April 2022. Katie is currently Group Chief Financial Officer of the NatWest Group and brings a wealth of relevant experience to the Group.

Finally, I would like to thank Christopher Minter from Swiss Re for his insightful counsel while on the Board. Christopher left the Board in 2021 following Swiss Re's initial disposal of shares which reduced their stake below the 10% threshold that entitled them to a Board seat.

 

Outlook

As we enter 2022, the Board and I believe that Phoenix is well-positioned to execute our ambitious strategy at pace and to continue embracing our purpose.

 

Thank you

Finally, I would like to take the opportunity to thank the Board, our colleagues, our partners and our wider stakeholders for their hard work, dedication and support in delivering what has been a pivotal year for Phoenix Group.

 

Nicholas Lyons

Chairman

 

 

 

Chief Executive Officer's report

Phoenix is a growing, sustainable business

 

2021 was a pivotal year for Phoenix as we demonstrated that we are a growing, sustainable business with our Open business delivering organic growth that more than offsets the Heritage run-off for the first time.

 

I am delighted with our performance in 2021, which has seen us deliver record financial results and make significant progress against our strategic objectives, as we continued to embrace our purpose.

I passionately believe that the best businesses have a core social purpose, and at Phoenix ours is 'helping people secure a life of possibilities'. As a purpose-led organisation we are committed to delivering better outcomes for all of our stakeholders, including our customers, colleagues, investors and wider society.

 

A pivotal year for Phoenix

2021 marked a pivotal moment in Phoenix Group's evolution as our Open business delivered annual organic growth that, for the first time, will more than offset the natural run-off of our Heritage book. This is what we refer to as proving 'the wedge' and it means that Phoenix has now demonstrated that it is a growing, sustainable business.

This has been enabled by the strong momentum we have built in our Open business, driven by the investment we have made into developing our capabilities and through leveraging the Standard Life brand that we acquired earlier this year.

We operate a clear financial framework that delivers Cash, Resilience and Growth. During 2021 we delivered record cash generation of £1,717 million, exceeding our 2021 target range of £1.5-to-£1.6 billion. We maintained our resilient Solvency II ('SII') capital position with a SII Surplus of £5.3 billion (2020: £5.3 billion) and increased our Shareholder Capital Coverage Ratio ('SCCR') to 180% (2020: 164%). Our Open business has also delivered record new business long-term cash generation of £1,184 million, an increase of 55% from 2020 (£766 million). This strong financial performance means that we have once again exceeded our public financial targets.

As a result, I am delighted that the Board is recommending Phoenix Group's inaugural organic dividend increase of 3%. Importantly, the Board has always been clear that an organic dividend increase would only be implemented if the increased level of dividend remained every bit as sustainable over the long term as it previously was. Owing to the growth in our business, that is the case in 2021.

Phoenix is unique for the dependable cash and resilience our operating model delivers. As a result, we can be confident that our in-force business can pay our current, increased dividend over the very long term. And growth, whether through the investment in our Open business or through further M&A, has the ability to increase this dividend further over time, whilst fully maintaining its sustainability.

 

Market trends offer growth opportunities

As the UK's largest long-term savings and retirement business, it is critical that we understand the major drivers of change in the market. There are four key drivers, which offer Phoenix Group significant growth opportunities.

 

Delivering our strategy

We have a clear strategy. Our Heritage business is the bedrock of the Group. It delivers high levels of predictable cash that both funds our dividend over the long term and generates surplus cash to reinvest into organic Open business growth and inorganic M&A. We are already the market-leaders in Heritage and M&A, which create significant shareholder value, while the investment we are making into our Open division is building market-leading businesses here too. At Phoenix, the whole really is greater than the sum of the parts. This is because our Heritage business provides our Open business with significant cost and capital efficiencies as well as access to c.13 million customers, and simultaneously it also supports us in delivering higher synergies from M&A.

If our strategy is the what, then our strategic priorities are the how. These are the key programmes and initiatives that will differentiate us, building distinctive capabilities to win in our chosen markets, and support us in delivering on our strategy and our purpose. We have five strategic priorities as outlined below.

 

Optimise our in-force business

Phoenix is the market leader in managing in-force business for cash and resilience, which in turn underpins our sustainable dividend. It is the in-force business that delivered our record cash generation and ongoing resilience during 2021.

A key driver of this is our expertise in optimising for cost and capital efficiencies, the output of which we call 'management actions'. During 2021 we delivered total management actions of £1.5 billion for the year. This included the UK's first approved internal model harmonisation of two legacy models which delivered in-year capital benefits of c.£550 million and unlocks a pipeline of further value-accretive management actions as well as supporting future M&A.

Another aspect of optimising our in-force business is to continually assess whether our portfolio of assets is maximising value for shareholders. We therefore undertook a strategic review of our European operations in 2021, in response to unsolicited expressions of interest. This culminated with the sale of Ark Life, an Irish closed-book business acquired as part of ReAssure, for £198 million, which completed in November 2021. This transaction accelerated the cash release from the business and allows us to reinvest the capital into higher return growth opportunities.

We have also made significant progress in building a strong asset management function which supports us in enhancing our capital efficiency. We do this through the proactive management of our c.£40 billion shareholder credit portfolio including the origination of more capital efficient illiquid assets to back our illiquid liabilities, with £3 billion originated in 2021.

Meanwhile, we continue to operate our unique dynamic hedging approach which protects our SII balance sheet by hedging the majority of our market risks.

 

Enhance our operating model and culture

Phoenix is the market-leader in delivering M&A integrations and customer migrations that realise substantial cost and capital synergies. During 2021 we have, once again, demonstrated how good we are at realising cost and capital synergies from our integrations.

We have delivered £590 million of further synergies from Standard Life in the year, meaning we have now realised over £1.6 billion of synergies, which is £400 million more than the revised target we set post-acquisition. While on ReAssure, we have delivered £234 million of synergies in 2021, which is a total of £930 million to date, in just 18 months, against a revised target of just over £1 billion. With £2.5 billion of total synergies delivered to date, this demonstrates the significant value we create through M&A.

This is underpinned by our unique capability of delivering multiple integrations concurrently, as we delivered both the migration of 170,000 Old Mutual Wealth customers onto our ALPHA platform, and the ongoing migration of Phoenix customers from Capita to TCS, to realise synergies and improve the customer experience.

A crucial component for delivering on our purpose and strategy is attracting and retaining the best talent. That is why we are committed to making Phoenix the best place our colleagues have ever worked, by creating a workforce that is reflective of our community and which enables colleagues to bring their whole self to work. We therefore introduced a refreshed people and culture strategy in 2021 and strengthened our teams through the hiring of market-leading talent. Achieving cultural cohesion and inclusiveness is even more critical as we navigate our new ways of working. For this reason we made a significant investment into the latest technology to enhance collaboration and inclusion in the hybrid workplace.

It is therefore great to see our efforts reflected in a further increase in our employee engagement, with our average score currently 7.5 of 10, meeting our target for the year. I am also pleased that our focus on increasing female representation is beginning to develop momentum, with the number of females in our Top 100 leadership positions increasing from 21 to 31.

 

Grow our business to support both new and existing customers

We delivered record new business long-term cash generation of £1,184 million in 2021, a 55% increase on 2020. This reflects the significant investment we have made into our Open business and asset management capabilities, as well as the acquisition of the Standard Life brand which the majority of our Open business now operates under.

Our Retirement Solutions business was the largest contributor in 2021 with £950 million of new business long-term cash generation, having contracted £5.6 billion of BPA premiums in the year. This was more than double the £2.5 billion of premiums in 2020. Importantly, we have also reduced our capital strain from 9% in 2020 to 6.5% in 2021, primarily due to the benefits of our internal model harmonisation as well as the strong illiquid asset origination overseen by our asset management function. The Standard Life brand has already begun to deliver benefits in the BPA business where the brand is resonating strongly amongst pension trustees and their advisers, thus opening up more opportunities for us.

Meanwhile, the multi-year investment we are making into our Workplace pensions proposition is beginning to deliver momentum, as we look to balance our growth from BPA over time. We were delighted to win 41 new schemes during the year. While these new schemes are small in terms of assets, it is an important milestone, with advisers giving us the opportunity to prove ourselves on these smaller schemes before we hopefully begin winning the larger schemes in time. In addition, positive net flows of £0.6 billion during the year provide a good platform to build on. This success has been supported by our investment and commitment to the Standard Life brand, as we reignite its reputation amongst employee benefit consultants and advisers.

It is also pleasing to see that the investment in our propositions and customer service platforms is reflected in our continued high customer satisfaction scores, which once again exceeded our targets. We delivered a Combined Group telephony customer satisfaction score of 92% (target: 90%) and a Standard Life digital journeys satisfaction score of 95% (target: 92%).

 

Innovate to provide our customers with better financial futures

Engaging and supporting people in improving their financial futures is crucial to fulfilling our purpose of 'helping people secure a life of possibilities'. The UK faces a significant retirement savings gap which we are committed to helping close by engaging with our customers. We want to provide people with the right guidance and products, at the right time, to support the right decisions.

We are investing into fund and product innovation to develop flexible retirement solutions and sustainable fund choices. Key successes in 2021 include transitioning our Workplace Master Trust to a sustainable default fund and the launch of our new range of innovative Lifetime Mortgage products through Standard Life. We are also developing our digital capabilities to deliver broader engagement options, with a 16% increase in customer log-ins across our Standard Life digital platforms in 2021 and the launch of our Homebuyer Hub and Money Mindset pilots. This was also underpinned by new initiatives to enhance digital literacy skills and better support vulnerable customers.

The UK's ageing society does present significant long-term challenges for people in being able to realise the potential of their longer lives, which is why we established a new think-tank, Phoenix Insights, in 2021.

 

Invest in a sustainable future

As the UK's largest long-term savings and retirement business we are responsible for managing c.£310 billion of assets on behalf of our c.13 million customers. Our customers and shareholders trust us to reflect their priorities in how we invest. That means keeping their money safe and providing them with strong long-term financial returns, while using our scale to play our part in delivering a sustainable future.

That is why we are integrating sustainability across our business. This requires us to collaborate closely with our asset management partners to fully integrate ESG across our third-party managed assets and we are embedding best-in-class data analytics and capabilities to support this.

We also need to invest responsibly and are doing this in three ways. Firstly, we are designing decarbonising portfolios that deliver reduced carbon emissions, but maintain the broad risk and return profile. We must then use our position of influence to bring about corporate change through active stewardship. And we also need to evolve our investment decisions to increase the sustainable assets held within both our shareholder and policyholder funds.

We have made great progress on this journey in 2021 by putting in place the core foundations to deliver on our ambitions. A great example of this is the £1.3 billion of investment we allocated to sustainable assets in 2021, which represents 67% of our illiquid asset origination (excluding ERM). This included £542 million of investment into affordable housing, £364 million into healthcare and education, and £220 million into projects with positive environmental impacts.

In 2020 we committed to being net zero carbon across our investment portfolio by 2050 and during 2021 we set ambitious new interim investment portfolio decarbonisation targets too. This includes our target for a 25% reduction by 2025 in the carbon emission intensity of our c.£160 billion of listed equity and credit assets where we exercise control and influence, as well as a >50% reduction in the carbon emission intensity of the c.£250 billion of assets directly within our control by 2030.

We are also committed to being net zero in our own operations by 2025, which we remain on track to achieve, with strong progress made in 2021 through a 34% year-on-year reduction in premises emissions per FTE intensity.

 

Outlook

Phoenix has a clear and differentiated strategy, which creates shareholder value through leveraging the major market trends, and where the whole is greater than the sum of the parts.

Heritage is the bedrock of our business, which delivers high levels of predictable cash, that covers our current dividend into the long term. And it also generates surplus cash, that we can re-invest into both our Open business, and into M&A, to support future dividend increases.

We continue to see M&A as a key priority and are ready to consider transactions today. We estimate the UK Heritage market is c.£480 billion with a small number of large portfolios, as well as a larger number of small-to-mid size portfolios that we could acquire for cash. We are the market-leader in Heritage M&A and a trusted partner for vendors, which gives us great confidence in the outlook for M&A.

 

Thank you

Phoenix Group's strong 2021 performance could not have been achieved without our exceptional people and I would therefore like to thank my colleagues throughout the Group for their hard work in 2021.

 

Andy Briggs

Group Chief Executive Officer

 

 

Business review

Delivering cash, resilience and growth

 

It was a pivotal year for Phoenix as we proved 'the wedge' for the first time and announced our inaugural dividend increase of 3% for 2021.

 

Phoenix has delivered another strong financial performance in 2021. We reported record cash generation of £1.7 billion, exceeding our target range of £1.5bn-to-£1.6bn for the year, and maintained our resilience through a strong Solvency II (SII) balance sheet with a SII surplus of £5.3 billion and SII SCCR of 180%.

In 2018 we set out a strategy to prove 'the wedge' hypothesis, by investing to deliver new business growth which would allow us to offset the natural run-off of the Heritage business cash generation (currently c.£800 million). I am therefore delighted that we have delivered £1.2 billion in new business long-term cash generation in 2021 to more than prove 'the wedge'.

Having met our two conditions for organic dividend growth, the Board has recommended our inaugural organic dividend increase of 3%, which remains just as sustainable over the long-term owing to our business growth in 2021.

 

A strong financial performance in 2021

 

Key financial metrics:

2021

2020

YOY change

 

Cash

Cash generation

£1,717m

£1,713m

0%

 

Solvency II
Capital

PGH Solvency II surplus

£5.3bn

£5.3bn

-

 

 

PGH Shareholder Capital Coverage Ratio ('SCCR')

180%

164%

+16%pts

 

New Business

Incremental long-term cash generation

£1,184m

£766m

55%

 

Dividends

Total dividend per share

48.9p

47.5p

 

 

Final dividend per share

24.8p

24.1p

+3%

 

Other financial metrics:

2021

2020

YOY change

 

Assets

Assets under administration

£310bn

£307bn¹

+1%

 

Leverage

Fitch leverage
ratio

28%

28%

-

 

IFRS

(Loss)/profit after tax

£(709)m

£834m

N/A

 

 

Operating profit
before tax

£1,230m

£1,199m

3%

 

                     

1  Proforma for the disposal of £29 billion of assets from the Wrap SIPP, TIP and Onshore Bond businesses sold
to abrdn plc in 2021, as well as £2 billion of assets from Ark Life which was sold to Irish Life in 2021

Our key performance indicators

With our financial framework designed to deliver cash, resilience and growth, we recognise the need to use a broad range of metrics to measure and report the performance of our company, some of which are not defined or specified in accordance with Generally Accepted Accounting Principles ('GAAP') or the statutory reporting framework. The IFRS results are discussed on page 38 of the Annual Report & Accounts and the IFRS financial statements are set out from page 155 onwards of the Annual Report & Accounts.

Alternative performance measures

In prioritising the generation of sustainable cash flows from our operating companies, performance metrics are monitored where they support this strategic purpose, which includes ensuring that the Solvency II capital strength of the Group is maintained. We use a range of alternative performance measures ('APMs') to evaluate our business, which are summarised below.

Cash generation

Cash generation remains our key performance metric. It represents free surplus above capital requirements distributed from the life companies to the Group, generated through margins earned on different life and pension products and the release of capital requirements.

This cash generation is used by the Group to fund expenses, interest costs and shareholder dividends, with any surplus then available to reinvest into organic and inorganic growth opportunities.

Solvency II

Solvency II is a key metric by which the Group makes business decisions and measures capital resilience. It is a regulatory measure that prescribes the measurement of value on a Solvency II basis and the calculation of the solvency capital requirement ('SCR'). The excess value above the SCR is reported as both a financial amount, "Solvency II surplus", and as a ratio "Solvency II Shareholder Capital Coverage Ratio ('SCCR')".

Fitch leverage

The Group seeks to manage the level of debt on its balance sheet by monitoring its financial leverage ratio. This is to ensure we maintain our investment grade rating issued by Fitch Ratings and optimise our financial flexibility to support future acquisitions. Our financial leverage is calculated (using Fitch Ratings' stated methodology) as debt as a percentage of the sum of debt and equity.

Incremental long-term cash generation

Incremental long-term cash generation is a key metric for measuring growth. It represents the operating companies' cash generation that is expected to arise in future years as a result of new business transacted in the current period within our Open business, including Bulk Purchase Annuities ('BPA'). By generating sufficient incremental long-term cash generation to offset the run-off of our Heritage business cash flows (currently c.£800 million per annum), we can bring sustainability to future cash generation to prove what we describe as 'the wedge' hypothesis.

Assets under Administration

The Group's Assets under Administration ('AUA') is another measure of growth. It represents our assets administered by or on behalf of the Group, covering both shareholder and policyholder, and indicates the potential long-term earnings capability of the Group arising from its insurance and investment business.

Operating profit

The Group uses operating profit as a further performance measure to demonstrate longer-term performance on an IFRS basis. IFRS operating profit is less affected by the short-term market volatility driven by Solvency II hedging (as illustrated above) and non-recurring items than IFRS profit. A more detailed definition of operating profit is set out on page 321 of the Annual Report & Accounts.

 

Cash

Cash generation & group liquidity

Operating companies' cash generation represents cash remitted by the Group's operating companies to the holding companies. Please see the APM section on page 321 of the Annual Report & Accounts for further details of this measure.

Cash generation from the operating companies' is principally used to fund the Group's shareholder dividends, debt interest and repayments, and its various operating costs. Any surplus remaining is available for reinvestment into organic and inorganic growth opportunities. The cash flow analysis that follows reflects the cash paid by the operating companies to the Group's holding companies, as well as the uses of those cash receipts.

 

Group cash flow analysis

£m

 

2021

2020

 

Cash and cash equivalents at 1 January

 

1,055

275

 

Operating companies cash generation:

 

 

 

 

 

Cash receipts from life companies

 

1,717

1,073

 

Cash remittances to Standard Life international

 

-

(50)

Total cash receipts¹

 

1,717

1,023

 

Uses of cash:

 

 

 

 

Operating expenses

 

(80)

(42)

 

Pension scheme contributions

 

(11)

(80)

 

Debt interest

 

(250)

(184)

 

Non-operating cash outflows

 

(305)

(66)

 

Uses of cash before debt repayments
and shareholder dividend

 

(646)

(372)

 

Debt repayments

 

(322)

-

 

Shareholder dividend

 

(482)

(403)

 

Total uses of cash

 

(1,450)

(775)

 

Debt issuance (net of fees)

 

-

1,445

 

Cost of acquisitions

 

-

(1,265)

 

ReAssure Holding Company cash acquired

 

-

580

 

Support of BPA activity

 

(359)

(228)

 

Closing cash and cash equivalents at 31 December

 

963

1,055

 

               

1  Total cash receipts include £95 million received by the holding companies in respect of tax losses surrendered
(2020: £108 million). 2020 excludes £690 million of cash generation from ReAssure arising in period prior
to completion.

Cash receipts

Cash generated by the operating companies during 2021 was £1,717 million (2020: £1,713 million). This exceeded the Group's target range of £1.5bn-to-£1.6bn for the year.

 

Uses of cash

Operating expenses of £80 million (2020: £42 million) represent corporate office costs, net of income earned on holding company cash and investment balances. The increase relative to 2020 reflects the inclusion of a full year of costs borne by the ReAssure corporate entities, together with increased LTIP costs and the costs associated with the development of capabilities across our Group functions as we execute our growth strategy.

Annual pension scheme contributions of £11 million (2020: £80 million). 2021 only reflects contributions into the Abbey Life Scheme, due to the completion of contributions into the Pearl Pension Scheme during 2020.

Debt interest of £250 million (2020: £184 million) increased in the year due to the inclusion of a full year's coupon on the three debt instruments substituted to the Group as part of the acquisition of the ReAssure businesses in August 2020 (£250 million Tier 2, £500 million Tier 2 and £250 million Tier 3), and additional debt raised to help fund the acquisition.

Non-operating cash outflows of £305 million (2020: £66 million) include £230 million of Group project expenses including transition activity, and the £68 million settlement of a creditor recognised at 31 December 2020 with abrdn plc ('abrdn') relating to amounts due under indemnity arrangements pertaining to FCA Thematic Review findings in Standard Life. Other items included £49 million of net cash received from abrdn upon entering into a new agreement to simplify the strategic partnership, including consideration for the disposal of the Wrap SIPP, Onshore Bond and TIP businesses, and £56m of net other items, including hedge collateral posted and one-off ReAssure costs.

 

Shareholder dividend

The shareholder dividend of £482 million represents the payment of £241 million in May for the 2020 final dividend and the payment of the 2021 interim dividend of £241 million in September.

 

Debt repayments & issuance (net of fees)

£322 million of debt repayments in 2021 include the £200 million Tier 2 subordinated bond in April and £122 million senior bond in July. (2020: debt issuance of £1,445 million net of fees).

 

Support of BPA activity

Funding of £359 million (2020: £228 million) has been provided to the life companies to support a strong year in BPA with £5.6 billion of premiums written. With the capital strain on BPAs having reduced to 6.5% in 2021 (2020: 9%).

 

Future sources and uses of cash

Looking over the period 2022-24, we expect to have significant Group cash resources of around £5.0 billion. This will more than cover the Group's expected uses of c.£3.3 billion for operating and integration costs, debt interest and repayments, and our shareholder dividend cost at its new, increased level. As a result, the Group expects to have a significant amount of surplus cash of around £1.7 billion available for investment into organic growth through BPA and inorganic growth opportunities through further M&A.

Group Long-Term Free Cash

£bn

Group LTFC

Year ended 31 December 2021

Group LTFC Pro forma

Year ended 31 December 20201

Long-term in-force cash generation

17.0

17.7

Less M&A and transition costs

(0.2)

(0.3)

Plus closing Holding Company cash

1.0

1.0

Long-term Group cash

17.8

18.4

Less shareholder debt

(4.6)

(5.0)

Group Long-Term Free Cash

13.2

13.4

1  Stated on a pro forma basis to reflect the impact of the sale of Wrap SIPP, Onshore Bond and TIP products to SLA (£0.2bn) and the impact of the increase in the rate
of corporation tax from April 2023 to 25% announced in the March 2021 budget (£0.3bn).

Group long-term free cash

Group Long-Term Free Cash ('LTFC') is comprised of long-term cash generation expected to emerge from our in-force business plus existing Group holding company cash, less an allowance for costs associated with our M&A integration activity and a deduction for our shareholder debt outstanding.

LTFC is an important measure for demonstrating the business is growing, as we seek to ensure that our recurring sources of cash exceed our recurring uses. This is one of the two conditions we had set for considering an inaugural organic dividend increase.

I am therefore delighted that the investment in our capabilities has enabled us to deliver £1.2 billion of incremental long-term cash generation during the year. When combined with our £0.2 billion over-delivery of management actions in 2021 and an additional year of estimated management actions now reflected for 2024 in our targets, we have seen our recurring sources of cash exceed our recurring uses by c.£0.3 billion in the year. This means we met our second dividend condition, which supported our decision to increase our shareholder dividend for 2021.

Group long-term free cash was £13.2 billion at the end of 2021, slightly down on 2020 (£13.4 billion) due to some non-recurring expenses. The first of these is the significant investment we are making into the capabilities needed to deliver our continued growth ambitions, where the capitalised impact of future costs has decreased LTFC by c.£0.2 billion. The second non-recurring expense was from the industry-wide transition from LIBOR-to-SONIA which had a c.£0.2 billion adverse impact.

With £13.2 billion of LTFC available, we have a significant amount of dependable cash that will emerge from our current in-force book, which supports our increased dividend over the very long term.

 

Resilience

 

Capital management

A Solvency II capital assessment involves a valuation in line with Solvency II principles of the Group's Own Funds and a risk-based assessment of the Group's Solvency Capital Requirement ('SCR'). The Group's Own Funds differ materially from the Group's IFRS equity for a number of reasons, including the recognition of future shareholder transfers from the with-profit funds and future management charges on investment contracts, the treatment of certain subordinated debt instruments as capital items, and a number of valuation differences, most notably in respect of insurance contract liabilities, taxation and intangible assets.

 

Group Solvency II capital position

Our Solvency II capital position remains strong, with a resilient surplus of £5.3 billion, which includes the deduction of our 2021 final dividend. Our Shareholder Capital Coverage Ratio ('SCCR') has increased from 164% to 180%, and is currently at the top-end of our 140%-to-180% target range, providing the capacity to invest into both organic and inorganic growth opportunities.

 

Change in Group Solvency II surplus (estimated)

The Group Solvency II Surplus has remained stable at £5.3 billion year-on-year. Our ongoing surplus emergence of £0.6 billion and significant over-delivery of management actions at £1.5 billion provided us with the capacity to pay our operating costs, dividends and interest of £0.8 billion, with surplus then available for reinvestment into growth, and headroom to absorb several non-recurring impacts.

We delivered a record level of management actions in 2021, which included around £0.7 billion from "BAU" activity, including illiquid asset origination and asset risk management actions. In addition, our internal model harmonisation success provided a significant contribution, at around £0.6 billion, the majority of which was a reduction in SCR.

As a result of our unique hedging strategy, designed to stabilise our capital position, we saw a small £0.1 billion positive economic variance This extends our track record of small economic variances through periods of market volatility.

We invested £0.4 billion of capital into growth, primarily for the funding of £5.6 billion of BPA premiums written in the year.

Elsewhere, assumptions, model and methodology changes were negative £0.2 billion and we repaid debt of £0.2 billion. There was also an adverse impact of £0.3 billion from the industry-wide transition from LIBOR-to-SONIA and the change in the UK Corporation Tax rate. A range of other items totalled a negative £0.3 billion.

 

Change in SCCR (estimated)

While the surplus remained stable year-on-year, our SCCR has increased by 16%pts to 180% as at 31 December 2021 with a number of contributing factors.

The largest single contributor was the £1.5 billion of management actions delivered, which increased the SCCR by 28%pts.

We have also reflected the future change in the Corporation Tax rate, which had a positive impact on the SCCR primarily due to an increase in loss absorbing capacity of deferred taxes in the SCR, and the transition from LIBOR-to-SONIA. The net combination of these two impacts has decreased our SCCR by 1%pt.

Further adverse SCCR movements include the strain borne from the writing of new BPA business which decreased the SCCR by 10%pts and the c.£0.2 billion debt repayment which reduced the SCCR by 3%pts.

 

Sensitivity and scenario analysis

As part of the Group's internal risk management processes, the Own Funds and regulatory SCR are tested against
a number of financial scenarios.

While there is no value captured in the Group stress scenarios for recovery management actions, the Group does proactively manage its risk exposure. Therefore in the event of a stress, we would expect to recover some of the loss reflected in the illustrative stress impacts shown.

 

Illustrative risk exposure stress testing

Estimated impact1 on PGH Solvency II 

Surplus

SCCR

 

£bn

%

Solvency II base

5.3

180

Equities: 20% fall in markets

(0.1)

4

Long-term rates: 80bps rise in interest rates2

(0.2)

3

Long-term rates: 70bps fall in interest rates2

0.2

(3)

Long-term inflation: 70bps rise in inflation3

Nil

(1)

Property: 12% fall in values4

(0.2)

3

Credit spreads: 150bps widening with no allowance for downgrades5

(0.4)

(4)

Credit downgrade: immediate full letter downgrade
on 20% of portfolio6

(0.4)

(10)

Lapse: 10% increase/decrease in rates7

(0.2)

(1)

Longevity: 6 months increase8

(0.7)

(11)

 

1  Assumes stress occurs on 1 January 2022 and that there is no market recovery.

2  Assumes the impact of a dynamic recalculation of transitionals and an element of dynamic hedging which is performed on a continuous basis to minimise exposure to the interaction of rates with other correlated risks including longevity.

3  Stress reflects a structural change in long-term inflation with an increase of 70bps across the curve

4  Property stress represents an overall average fall in property values of 12%.

5  Credit stress varies by rating and term and is equivalent to an average 150bps spread widening. It assumes the impact of a dynamic recalculation of transitionals and makes no allowance for the cost of defaults/downgrades.

6  Impact of an immediate full letter downgrade across 20% of the shareholder exposure to the bond portfolio (e.g. from AAA to AA, AA to A, etc). This sensitivity assumes no management actions are taken to rebalance the annuity portfolio back to the original average credit rating and makes no allowance for the spread widening which would be associated with a downgrade.

7  Assumes most onerous impact of a 10% increase/decrease in lapse rates across different product groups.

8  Applied to the annuity portfolio.

 

Unrewarded market risk sensitivities

We have a particularly low appetite to equity, interest rate, inflation and currency risks, which we see as unrewarded i.e. the return on capital for retaining the risk is lower than for hedging it. We use a range of hedging instruments to hedge these risk exposures in order to stabilise the SII surplus. This translates into the low sensitivities presented in the table above.

Equity risk primarily arises from our exposure to a variation in future management fees on policyholder assets exposed to equities, while our currency exposure primarily arises from our foreign currency denominated debt.

Our interest rate exposure principally relates to our shareholder credit portfolio, while our inflation exposure arises from both cost inflation expectations and inflation-linked policies.

Rewarded credit risk sensitivities

We do however retain the credit risk in our c.£40 billion shareholder credit portfolio, where we see the risk as rewarded. The shareholder credit assets are primarily used to back the Group's annuity portfolio.

However, we actively manage our credit portfolio to ensure it remains high quality and diversified, and to maintain our sensitivities within risk appetite.

The key sensitivity we focus on here is a full letter downgrade of 20% of our credit portfolio, which reduced slightly in 2021 to £0.4 billion and is therefore small in the context of the Group's £5.3 billion Solvency II surplus.

Demographic risk sensitivities

We also have two key demographic risks that we manage. Lapse risk arises from customers surrendering policies early or keeping policies with valuable guarantees for longer. While our longevity risk principally arises from our annuity book, but this is managed through reinsurance, where we retain around half of the risk across our current in-force book, and reinsure most of this risk on new business.

Life company free surplus

Life Company Free Surplus represents the Solvency II surplus of the Life Companies that is in excess of their Board-approved capital management policies. It is this Free Surplus from which the life companies remit cash to Group. As at 31 December 2021, the Life Company Free Surplus is £2.6 billion (2020: £2.9 billion). The table shown analyses the movement in 2021.

 

Estimated
 position as at 31 December
 2021
£bn

Opening Free Surplus

2.9

Surplus generation and run-off of capital requirements

0.8

Management actions

1.2

Economics, financing and other

(0.7)

Free Surplus before cash remittances

4.2

Cash remittances to holding companies

(1.6)

Closing Free Surplus

2.6

Growth

Incremental new business long-term cash generation reflects the impact on the Group's future cash generation arising as a result of new business transacted in the year. It is stated on an undiscounted basis.

Assets under administration ('AUA') provide an indication of the potential earnings capability of the Group arising from its insurance and investment business, whilst AUA flows provide a measure of the Group's ability to deliver new business growth.

A reconciliation from the Group's IFRS statement of consolidated financial position to the Group's AUA is provided
on page 314 of the Annual Report & Accounts.

Please see the APM section on page 321 of the Annual Report & Accounts for further details of these measures.

Incremental new business long-term cash generation

We have delivered a record level of incremental new business long-term cash generation of £1,184 million in 2021, with a
55% increase on 2020 (£766 million).

This means that for the first time we have delivered new business growth which allows us to offset the natural run-off of the Heritage business cash generation of c.£800 million, thus more than proving 'the wedge'.

This is a pivotal moment for Phoenix as it demonstrates we are a growing, sustainable business.

Retirement Solutions

The investment we have made into developing our Bulk Purchase Annuity ('BPA') business and asset management capabilities has supported Phoenix in writing £5.6 billion of BPA premiums in 2021. Having completed two significant transactions of £1.7 billion and £1.8 billion, it is clear we have become an established BPA market player.

This in turn has delivered £950 million of long-term cash generation, an 82% increase on 2020 (£522 million). We also successfully reduced our capital strain from 9% in 2020 to 6.5% in 2021, largely reflecting the capital efficiency benefit from our new harmonised internal model. Despite a competitive market and low credit spreads, we have maintained our pricing discipline which is evidenced by our delivery of a double-digit IRR in 2021.

Importantly though, we are not growing in BPA at the expense of our resilience, with a balanced portfolio and low credit risk sensitivity remaining our long-term ambition here.

Workplace

Our Workplace business has delivered broadly stable incremental long-term cash generation of £139 million in the year (2020: £140 million), which largely reflects several large scheme losses offsetting new business growth.

However, I was delighted that we saw clear momentum building in our Workplace business, with 41 new schemes won during 2021. While these schemes are small in terms of assets, it is an important milestone, with advisers giving us the opportunity to prove ourselves on these smaller schemes, before we hopefully begin winning the larger schemes in time.

Customer savings and investment ('CS&I')

The 2021 incremental long-term cash generation of £29 million from our CS&I business is down on the prior year (2020: £56 million) primarily due to the sale of the platform businesses to abrdn which contributed £23 million of incremental long-term cash generation in 2020.

Europe

We have seen an increase in the incremental long-term cash generation from our European business at £31 million (2020: £25m), reflecting a marked increase in Offshore Bond sales in the Irish business.

SunLife

Our incremental long-term cash generation from SunLife of £35 million has increased year-on-year (2020: £23 million) due to strong new business in the period.

Group AUA

Group AUA as at 31 December 2021 was £310.4 billion (2020: £337.7 billion). The decrease in the year is driven by the removal of £29.1 billion of AUA relating to the disposal of the Wrap SIPP, TIP and Onshore Bond business to abrdn, and the removal of £1.8 billion of Ark Life assets following its disposal to Irish Life.

Heritage net flows

UK Heritage net outflows of £11.2 billion (2020: £7.3 billion) reflect policyholder outflows on claims such as maturities and surrenders, net of total premiums received in the period from in-force contracts. This increase year-on-year is due to the inclusion of a full years' experience of ReAssure Heritage net flows compared with five months post acquisition that were reported in 2020.

Retirement Solutions net flows

Net flows in Retirement Solutions, which encompasses our individual annuity and BPA businesses, were £3.3 billion (2020: £0.9 billion). in 2021. Gross inflows during the period were £6.2 billion (2020: £3.2 billion), inclusive of £5.6 billion of new BPA premiums written in the year. Outflows of £2.9 billion in the period (2020 £2.3 billion) primarily reflect the natural run-off of our in-payment annuity policies.

 

 

Workplace net flows

Net inflows within our Workplace business were a positive £0.6 billion in 2021 (2020: £1.7 billion). Gross inflows were £4.9 billion, slightly up on 2020 (£4.7 billion). However, 2021 outflows of £4.3 billion (2020: £3.0 billion) were impacted by c.£2 billion of historic scheme losses delayed partly due to the pandemic and reflect decisions taken on our legacy proposition that has since been improved substantially.

Positive net flows in the year provide a platform to build upon, and the 41 schemes won in 2021, while small, are testament to the reignited market interest in the Standard Life proposition following our brand acquisition and investment.

Other asset businesses net flows

We have seen net outflows of £0.7 billion businesses (2020: £0.3 billion net inflows) from our other asset based businesses. Gross inflows were £4.7 billion in the year (2020: £6.3 billion), primarily reflecting our individual retirement products sold in the UK and Europe, while outflows of £5.4 billion in the year (2020: £6.0 billion) are largely due to the natural run-off of our CS&I and Europe businesses.

Other movements including markets

AUA increased by £11.6 billion (2020: £18.5 billion) as a result of other movements, largely driven by the net positive impacts of market movements, largely due to a rise in equity markets.

 

IFRS Results

IFRS (loss) / profit is a GAAP measure of financial performance and is reported in our statutory financial statements on page 155 onwards of the Annual Report & Accounts.

Operating profit is a non-GAAP financial performance measure based on expected long-term investment returns. It is stated before amortisation and impairment of intangibles, other non-operating items, finance costs and tax.

Please see the APM section on page 321 of the Annual Report & Accounts for further details of this measure.

IFRS profit and loss statement

£m

2021

2020

Heritage

  537

431

Open

788

817

Service company

Group costs

(71)

(55)

Operating profit before tax

1,230

1,199

Investment return variances and economic assumption changes

(1,125)

101

Amortisation and impairment of intangibles

(639)

(482)

Other non-operating items

(65)

281

Finance costs

(217)

(191)

Profit before tax attributable to non-controlling interest

128

36

(Loss)/profit before tax attributable to owners

(688)

944

Tax charge attributable to owners

(21)

(110)

(Loss)/profit after tax attributable to owners

(709)

834

 

IFRS (loss)/profit after tax

The Group generated an IFRS loss after tax attributable to owners of £709 million (2020: profit of £834 million), which primarily reflects £1,125 million of adverse investment return variances and economic assumption changes and £639 million of charges for amortisation and impairment of intangibles, as well as several other movements shown in the table below.

 

Operating profit

The Group generated an increased operating profit of £1,230 million (2020: £1,199 million), reflecting the contribution of a full year of profits from the ReAssure business and increased Bulk Purchase Annuity ('BPA') new business in the period, offset by the adverse impact of strengthened expense assumptions required to reflect our growth ambitions.

The 2020 split of operating profit by segment has been restated to reflect that the management and reporting of ReAssure has been aligned with that of the other Group businesses. In 2020 ReAssure was shown as a separate segment, whereas this is now allocated within our Heritage and Open business segments.

 

Basis of operating profit

Operating profit generated by our Heritage and Open business segments is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities (being the release of prudent margins and the interest cost of unwinding the discount on the liabilities).

The principal assumptions underlying the calculation of the long-term investment return are set out in note B2.1 to the IFRS consolidated financial statements.

Operating profit includes the effect of variances in experience for non-economic items, such as mortality and persistency, and the effect of changes in non-economic assumptions. Any impact from market movements is shown outside of operating profit. Operating profit is net of policyholder finance charges and policyholder tax.

 

Heritage operating profit

Our Heritage business segment does not actively sell new life or pension policies and runs-off gradually over time. Our Heritage segment delivered operating profit of £537 million (2020: £431 million¹), including a full year of profits for ReAssure, partly offset by a strengthening of expense assumptions.

 

Open operating profit

The Group's Open business segment delivered an operating profit of £788 million (2020: £817 million¹). This includes operating profits generated in the Group's Retirement Solutions, Workplace and CS&I business units, as well as new business distributed through the Group's SunLife brand and our European operations. 2021 includes stronger Retirement Solutions new business profits of £291 million (2020: £216 million). This was more than offset by a reduced longevity benefit that was c.£100 million lower than in 2020 due to an element of positive one-off updates to ReAssure longevity assumptions last year, and strengthening of expense assumptions to reflect the investment into our growth ambitions.

Service company

The operating loss for management services from the service company of £24 million (2020: profit of £6 million) comprises income from the life and holding companies in accordance with the respective management services agreements less fees related to the outsourcing of services and other operating costs. The decrease compared to the prior period reflects additional costs incurred, driven by investment in the Open division and the development of asset management capabilities in support of our growth strategy. This partly reflects that these costs have not yet been factored into the management service agreements for recharging back to the life companies.

 

Group costs

Group costs in the period were £71 million (2020: £55 million¹). They mainly comprise project recharges from the service companies and the returns on the scheme surpluses/deficits of the Group staff pension schemes. The increase in costs compared to the prior period principally reflects the inclusion of a full year of corporate and project costs associated with the ReAssure businesses (versus five months in 2020) and costs associated with developing out our Group capabilities to support our growth ambitions.

 

Investment return variances and economic assumption changes

The net adverse investment return variances and economic assumption changes of £1,125 million (2020: £101 million positive) have primarily arisen as a result of rising yields, increasing inflation and rising global equity markets. Movements in yields, inflation and equity markets are hedged to protect our Solvency II surplus from volatility, but our IFRS balance sheet is, in effect, "over-hedged" as it is not impacted by the additional SII balance sheet items (see illustration on page 29 of the Annual Report & Accounts). Therefore, the impact of the adverse hedging instrument values, which offset the positive market movements in the period gives rise to losses in the IFRS results. However, importantly the Group's cash generation and dividend capacity are broadly unaffected by this due to the Group's continued resilient Solvency
balance sheet.

 

Amortisation and impairment of acquired in-force business and other intangibles

The previously acquired in-force business is being amortised in line with the expected run-off profile of the profits to which it relates.

Amortisation and impairment of acquired in-force business during the year totalled £572 million (2020: £464 million) with the increase from the prior year driven by a full year's amortisation charges on intangible assets recognised on acquisition of ReAssure and an impairment charge of £40 million primarily arising from the sale of Ark Life and an update to the reserving methodology on a specific block of European unit-linked insurance contracts.

Amortisation and impairment of other intangible assets totalled £67 million in the year (2020: £18 million), including a £47 million impairment charge in relation to goodwill associated with the management services companies.

 

Other non-operating items

The previously acquired in-force business Other non-operating items had an adverse impact of £65 million in the year (2020: £281 million positive).

Positive impacts include the £110 million net gain recognised on the transaction to simplify the strategic relationship with abrdn plc, including the disposal of the Wrap SIPP, Onshore bond and TIP businesses, and the acquisition of the Standard Life brand. Also included is an £83 million policyholder tax benefit recognised following the favourable conclusion of discussions with HMRC in respect of excess management expenses attached to the L&G Mature Savings business acquired as part of ReAssure.

These positive non-operating items are offset by a number of non-recurring expenses. Integration costs of £119 million across both the Standard Life and ReAssure programmes, including delivery of the harmonised internal model, were incurred and are inclusive of internal costs. There was also a £58m impact of providing for the costs of implementation of the new IFRS 17 insurance accounting standard. While we also incurred a loss of £23 million recognised on disposal of Ark Life, which includes the recycling of £14 million of foreign exchange ('FX') losses that had been accumulated in the FX reserve on consolidation.

The remaining non-recurring expenses of £58 million relate to various Group projects. The large variance to the prior year is largely due to a sizeable gain that was recognised on acquisition of the ReAssure business of £372 million
during 2020.

 

Finance costs

Finance costs of £217 million (2020: £191 million) have increased by £26 million, reflecting a full year of interest charges on the three debt instruments which were substituted to the Group as part of the acquisition of the ReAssure businesses in July 2020 and the additional debt issued by the Group to finance the ReAssure acquisition.

 

Tax charge attributable to owners

The Group's approach to the management of its tax affairs is set out in its Tax Strategy document which is available in the corporate responsibility section of the Group's website.

The Group tax charge for the period attributable to owners is £21 million (2020: £110 million) based on a loss (after policyholder tax) of £688 million (2020: profit of £944 million).

The tax credit of £131 million arising on the loss (after policyholder tax) is primarily offset by a £147 million tax charge arising from the impact of the new 25% corporate tax rate effective from 1 April 2023 on deferred tax. A reconciliation of the tax charge is set out in note C6.4 to the Group financial statements.

 

Financial leverage

The Group seeks to manage the level of debt on its balance sheet by monitoring its financial leverage ratio. The financial leverage ratio as at 31 December 2021 (as calculated by the Group in accordance with Fitch Ratings' stated methodology) is 28% (2020: 28%). This is within the target range management considers to be associated with maintaining an investment grade rating of 25% to 30%.

1  2020 operating profit split has been restated to split ReAssure across Open, Heritage and Group costs segments as appropriate

 

Dividend

Inaugural organic dividend increase

Phoenix has a strong dividend track record and we have significantly outperformed the wider FTSE 100 over the past seven years. However, until now our historical dividend increases had only come from M&A.

We had outlined two clear conditions that would act as triggers for the Board to consider an organic dividend increase.

The first was to prove 'the wedge' through organic growth that would more than offset the run-off of our Heritage business (currently c.£800 million p.a.). The second was that the Group's recurring sources of cash exceeded our recurring uses.

I am delighted that we have met these two conditions in 2021, having proven 'the wedge' with new business long-term cash generation of £1.2 billion and with our recurring sources of cash exceeding our recurring uses by around £300 million.

As a result, the Board has assessed that a dividend increase is appropriate and is therefore recommending the Group's inaugural organic dividend increase of 3% in the Final 2021 dividend to 24.8 pence per share, This equates to a Total 2021 dividend of 48.9 pence per share.

This increase reflects both the growth in our business and our strong overdelivery of management actions in 2021. Our new, increased level of dividend is just as sustainable as it was previously.

 

Future dividend policy and approach

Having proven 'the wedge' for the first time and announced our inaugural organic increase, the Board has evolved our dividend policy to reflect the growing, sustainable business that Phoenix now is.

We have evolved our previous policy that was for a "stable and sustainable dividend" to a policy which is to pay a dividend that is sustainable and grows over time.

It is important to emphasise that the Board will, above all else, prioritise the sustainability of our dividend over the
long term.

Phoenix Group can now grow both organically through its Open business and inorganically through M&A. The Board will therefore now assess annually whether business growth can fund a dividend increase that is sustainable over the long term.

We are confident that the cash from today's in-force business, without any new business or any M&A, can pay our current, increased dividend over the long term. What is really exciting is that we now have two sources of potential dividend increases, through both organic growth and inorganic growth.

The Board and I believe this is an important milestone in the evolution of the Phoenix Group investment case.

Outlook

 

Looking ahead

We have a differentiated strategy, which leverages the major market trends, and where the whole is greater than the sum of the parts.

Heritage is the bedrock of our business, which delivers high levels of predictable cash that covers our dividend into the very long term. And it also generates surplus cash, that we can re-invest into both our Open business, and into M&A, to support future dividend increases.

We remain focused on optimising every pound of shareholder capital through a rigorous capital allocation framework that ensures we only invest in growth opportunities that drive real value.

Phoenix continues to offer an attractive dividend, covered into the very long term by today's in-force business. And that now has the potential to grow both organically and inorganically.

 

New financial targets

We have a clear set of targets as we continue to prioritise the delivery of cash, resilience and growth.

Starting with cash, Phoenix has set two new cash generation targets. The first is a one-year target range for 2022 of £1.3- to-£1.4 billion. And the second is a three-year target of £4.0 billion across 2022 to 2024.

In terms of resilience, we will continue to maintain a strong Solvency II surplus through our unique, dynamic hedging approach. This will see us continue to operate within our Solvency II SCCR target range of 140%-to-180% and continue to manage our key individual risk sensitivities on an absolute surplus basis. Despite the difficult ongoing economic backdrop and volatile markets, our uniquely resilient Solvency II balance sheet is strongly positioned to enable us to deliver on our ambitions in 2022.

In addition, we will continue to manage the Group's gearing level by operating within our Fitch financial leverage ratio target range of 25%-30%.

Looking to growth. The investment we are making into our Open business proposition, along with setting aside around £300 million of capital per annum for new BPA, means that we are now confident of delivering ongoing organic growth, which will more than offset the Heritage run-off, year-after-year. As a result, we expect to prove 'the wedge' again in 2022, by delivering >£800 million of incremental new business long-term cash generation.

Inorganic growth through M&A also remains a key priority for Phoenix. In terms of the market opportunity, we believe that the c.£480 billion UK Heritage market is split between a small number of large deals and a larger number of small-to-mid sized deals. We stand ready to do our next deal, enabled by our scalable platforms, and our £1.3 billion of available firepower.

I look forward to an exciting year in 2022 as we continue to deliver on our purpose and our strategy.

 

Rakesh Thakrar

Group Chief Financial Officer

 

 

Principal risks and uncertainties facing the Group

 

The Group's principal risks and uncertainties are detailed in this section, together with their potential impact, mitigating actions in place and any change in risk exposure since the Group's 2020 Annual Report and Accounts, published in March 2021.

 

The Board Risk Committee has carried out a robust assessment of principal risks and emerging risks. As a result of this review, 'Cyber Resilience', which was previously considered under the 'Operational Resilience' principal risk, is now treated as a separate principal risk in its own right. As highlighted in the 2021 Interim Report, this recognises the growing importance of managing Cyber risk to enable the Group to effectively deliver its strategic objectives. Further details of the Group's exposure to financial and insurance risks and how these are managed are provided in note E6 and F4 (to the IFRS consolidated financial statements).

Strategic priorities:

1 Optimise our in-force business

2 Enhance our operating model and culture

3 Grow our business to support both new and existing customers

4 Innovate to provide our customers with better financial futures

5 Invest in a sustainable future

Risk

Impact

Mitigation

Strategic priorities

Change from 2020 Annual Report and Accounts

STRATEGIC RISK

 

 

 

 

The Group fails to make further value adding acquisitions or effectively transition acquired businesses

The Group is exposed to the risk of failing to drive value through inorganic growth opportunities, including acquisitions of life and pensions books of business.

The transition of acquired businesses into the Group, including customer migrations, could introduce structural or operational challenges that result in the Group failing to deliver the expected outcomes for customers or value
for shareholders.

 

The Group continues to assess and execute new inorganic growth opportunities and applies a clear set of criteria to assessing these opportunities.

The Group's acquisition strategy is supported by the Group's financial strength and flexibility, strong regulatory relationships and its track record of generating value and delivering good customer outcomes that are in line with expectations.

The financial and operational risks of target businesses are assessed in the acquisition phase and potential mitigants are identified.

Integration plans are developed and resourced with appropriately skilled staff to ensure target operating models are delivered in line with expectations.

Customer migrations are planned thoroughly with robust execution controls in place. Lessons learned from previous migrations are applied to future activity to continuously strengthen the Group's processes.

1

2

3

No change

Significant progress has been made in 2021 on the Standard Life Assurance and ReAssure plc integrations, with further integration of a number of key business areas, including Finance and Actuarial. The Group has also made the strategic decision to re-phase the remaining legacy Standard Life migrations in order to build new capability to support future new business growth, which means the legacy Standard Life migrations will now complete by 2025.

A key milestone in the Standard Life Assurance integration was delivered in September 2021 when the Group received PRA approval for its harmonised Internal Model, bringing together the Internal Models of Standard Life Assurance and Phoenix. Harmonisation brings the Group a material enhancement to its risk management and modelling capabilities. This fundamentally underpins the security of the Group's customers.

The alignment to and embedding of the Group's Risk Management Framework within ReAssure plc was successfully completed in 2021.

The Group's ongoing investment in technology and enhancing the technological infrastructure of the Group is informed by lessons learned from completed integration activities. Investments aim to deliver a stable and scalable environment to deliver market leading migrations and integrations as the Group delivers its strategic objectives through acquisitions.

 

The Group's strategic partnerships fail to deliver the expected benefits

Strategic partnerships are a core enabler for delivery the Group's strategy; they allow it to meet the needs of its customers and clients and deliver value for its shareholders. The Group's end state operating model will leverage the strengths of its strategic partners whilst retaining in-house key skills which differentiate it from
the market.

There is a risk that the Group's strategic partnerships do not deliver the expected benefits. Some of the Group's key strategic partnerships include:

abrdn plc: Provides investment management services to the Group including the development of investment solutions for customers. abrdn plc manages c. £165 billion of the Group's assets under administration, at January 2022.

TCS: The Group's enlarged partnership with TCS is expected to support growth plans for the Open business, enabling further market-leading digital and technology capabilities to be developed to support enhanced customer outcomes.

HSBC: Provides fund accounting services to the Group.

The Group has in place established engagement processes with abrdn plc to oversee and develop the strategic partnership. These processes reflect the simplified and extended strategic partnership between the Group and abrdn plc that was announced in February 2021.

The Group's engagement with Diligenta, and its parent TCS, adheres to a rigorous governance structure, in line with the Group's Supplier Management Model. As a result, productive and consistent relationships have been developed with TCS, which will continue to develop throughout future phases of the enlarged partnership.

The Group has in place established processes to oversee services provided by HSBC.

 

2

3

4

No change

Whilst the Group has strengthened and simplified its strategic partnerships over 2021, 'No Change' is reflective of the Group's ongoing reliance on its strategic partners to deliver the volume of change needed to deliver the Group's strategic objectives.

The Group continues to develop the partnership with TCS to support its strategic deliverables. Both parties have managed the impacts of COVID-19 with actions being taken to protect strategic and BAU activity. Actions include the implementation of hybrid working models and the strengthening of change management and prioritisation processes.

The simplified and extended partnership with abrdn plc continues to progress towards the Target Operating Model with key milestones such as the transfer of specialist colleagues back to the Group alongside the purchase of the Standard Life brand from abrdn plc completed in 2021.

The Group fails to deliver long-term growth in its
Open business

The Open business has strong foundations and is central to the Group's purpose of helping people secure a life of possibilities. It is also fundamental to the Group's plans of proving 'the wedge' which assumes that Open business growth can offset the run-off from the in-force business and bring sustainability to organic cash generation.

Confidence in the Group might be diminished if the Open business fails to deliver against
its strategic objectives, particularly as the Group seeks to promote a 'customer obsessed' mind-set underpinned by strong retention and consolidation as customers journey to and through retirement.

 

The Group's Open Division Business Unit structure brings focus and accountability to its Open ambitions, particularly in key growth areas of Retirement Solutions (including Bulk Purchase Annuities (BPA)) and Pensions and Savings.

The Open Division holds an annual strategy setting exercise to consider customer needs, interests of shareholders, the competitive landscape and
the Group's overall purpose
and objectives.

As part of its Annual Operating Plan the Group is committed to making significant investment in its Open business that will include propositions which are driven by customer insight.

The Group is established in the BPA  market and continues to invest in its operating model to further strengthen its capability to support its growth plans.

For new BPA business, the Group continues to be selective and proportionate, focusing on value not volume, by applying the Group's rigorous Capital Allocation Framework.

2

3

4

No change

Long-term cash generation, driven by BPA activity, in the Open business in 2021, offset the run-off of the in-force business for the year. However, 'No Change' reflects that there is still uncertainty (both in internal and external environments) around the delivery of consistent long-term growth.

Over 2021 the Group completed BPA transactions with a combined premium of £5.6 billion, more than double the premiums of 2020.
This demonstrates the Group has the ability to compete and win in the BPA market.

In 2021 the Group purchased the Standard Life brand from abrdn plc. The brand is central to the Group's plans, will elevate its market presence and enhance the Standard Life experience for customers, clients, financial advisers and employee benefit consultants.

The Group continues to develop its Workplace propositions under the Standard Life brand and strengthen the Group's position as a leading pensions provider. In addition to the brand purchase, 68 roles in marketing, retail adviser distribution and data were also transferred from abrdn plc, bringing considerable subject matter expertise into the Group and enhancing its Open business capabilities.

 

The Group does not have sufficient capacity and capability to fully deliver its significant change agenda which is required to execute the Group's strategic objectives

The Group's ability to deliver change on time and within budget could be adversely impacted by insufficient resource and capabilities as well as inefficient prioritisation, scheduling and oversight of projects. The risk could materialise both within the Group and its strategic partners.

This could result in the benefits of change not being realised by the Group in the timeframe assumed in its business plans
and may result in the Group being unable to deliver its strategic objectives.

 

The Group's Change Management Framework was strengthened in 2021 with an enhanced change model, consistent with ensuring empowerment and accountability within Business Units to effectively deliver change. The Group continues to assess the prioritisation of change to ensure there
is clear alignment to the
Group's strategy.

Information setting out the levels of resource demand and supply, both a current and forecast view, will continue to be provided to accountable senior management so that informed decision-making can take place. This aims to ensure all material risks to delivery are appropriately identified, assessed, managed, monitored and reported.

1

2

3

4

5

No change

In 2022, the Group will continue to manage a significant volume of change, consistent with 2021.

A strengthening of the Change Management Framework has been delivered over the last 12 months. Following an external review, the Group has delivered improvements to resource management practices and introduced a new portfolio and hub model to simplify the management of a complex change stack. This promotes the delegation of responsibility; avoiding bottlenecks at senior management.

 

The Group fails to appropriately prepare for and manage the effects of climate change and wider ESG risks

The Group is exposed to market risks related to climate change as a result of the potential implications of a transition to a low carbon economy.

In addition, there are long-term market, insurance, reputational, propositional and operational implications of physical risks resulting from climate change (e.g. the impact of physical risks on the prospects of current and future investment holdings, along with potential impacts on future actuarial assumptions).

The Group is also exposed to the risk of failing to respond to wider Environmental, Social and Governance ('ESG') risks and delivering on its social purpose; for example, failing to meet its sustainability commitments.
A failure to deliver could result in adverse customer outcomes, reduced colleague engagement, reduced proposition attractiveness and reputational risks.

 

A Group-wide project was undertaken to enhance the approach to managing the financial risks of climate change, including embedding climate risk considerations within the Group's RMF, to meet the requirements of the PRA Supervisory Statement 3/19 (SS3/19). The Group's disclosures, in line with the Task Force on climate-related Financial Disclosures ('TCFD') are outlined in the Group's Climate Report. The report also includes planned future priorities across each of the TCFD focus areas.

Consideration of material climate-related risks has been embedded into the Group's risk policies.

The Group's sustainability strategy has continued to evolve to respond to the changing needs of stakeholders, resulting in the Group setting targets to monitor progress towards its sustainability commitments. Further details on the sustainability strategy are available in the Sustainability Report.

The Group continues to actively engage with regulators on progress with all climate change and sustainability-related deliverables.

1

2

3

4

5

No change

A number of positive initiatives are underway to deliver against the Group's Net-Zero targets and social purpose. However, 'No Change' is driven by the Group's recognition that significant work, over a number of years, is required to deliver on these commitments.

In 2021 the Group made a commitment to reducing carbon intensity for £250 billion of its investment portfolio by at least 50% by 2030. In addition, an interim de-carbonisation target of a 25% reduction in the carbon emission intensity of its investments by 2025 has been set. The Group has been working with its key partners and suppliers to encourage them to adopt Science Based Targets (SBTi) carbon reduction targets.

The TCFD disclosures in the Group's Climate Report provide an overview of progress to date in achieving compliance with SS3/19 and planned future priorities across each of the TCFD focus areas. This includes internal climate risk appetites linked to metrics and targets, further embedding of climate risk considerations within the Group's RMF and enhancement of internal climate risk reporting.

The Group has taken an active approach in understanding the requirements to deliver on its social purpose; including the launch of a new think tank, Phoenix Insights.

 

CUSTOMER RISK

 

 

 

 

The Group fails to deliver fair outcomes for its customers or fails to deliver propositions that continue to meet the evolving needs of customers

The Group is exposed to the risk that it fails to deliver fair outcomes for its customers, leading to adverse customer experience and potential customer detriment. This could also lead to reputational damage for the Group and/or financial losses.

In addition a failure to deliver propositions that meet the evolving needs of customers may result in the Group's failure to deliver its purpose of helping people secure a life
of possibilities.

The Group's Conduct Risk Appetite sets the boundaries within which the Group expects customer outcomes to be managed.

The Group Conduct Risk Framework, which overarches the Risk Universe and all risk policies, is designed to detect where customers are at risk of poor outcomes, minimise conduct risks, and respond with timely and appropriate mitigating actions.

The Group has a suite of customer policies which set out key customer risks and minimum control standards in place to mitigate them.

The Group maintains a strong and open relationship with the FCA and other regulators, particularly on matters involving customer outcomes.

The Group's Proposition Development Process ensures consideration of customer needs and conduct risk when developing propositions.

2

3

4

5

No change

In 2021, the Group continued to make significant investments in its propositions; launching Investment Pathways and announcing a partnership with Key Group to launch a lifetime mortgage range, supporting customers with the later stages of financial planning.

Throughout the pandemic the Group has continued to provide ongoing support to customers, including those most vulnerable, both when paying out on their protection plans and when making decisions about their life savings during this period of uncertainty.

As noted in the 2020 Annual Report and Accounts and the 2021 Interim Report, following the acquisition of ReAssure plc the Group completed a Part VII transfer of business acquired from L&G. Customers in this book of business were migrated to the Group's in-house administration platform. The Group continues to monitor the service levels delivered to migrated customers to ensure there is alignment to internal customer service standards.

In light of the situation in Ukraine a review of the legal and regulatory requirements from the sanctions has been performed. The review concluded that , at the time of writing, a low level of risk exists given that the Group has a low volume of customers that reside in Russia and Belarus. In addition, no Russian banks have employer schemes or products with the Group.

OPERATIONAL RISK

 

 

 

The Group or its outsourcers are not sufficiently operationally resilient

The Group is exposed to the risk of causing intolerable levels of disruption to its customers and stakeholders if it cannot maintain the provision of important business services when faced with a major operational disruption to core IT systems and operations. This could occur either in-house or within the Group's primary and downstream outsourcers and includes a range of environmental and
climatic factors.

The Group regularly conducts customer migrations as part of transition activities in delivering against its strategic objectives. The fundamental risk faced when executing migrations is an interruption to the safe, stable and secure customer services delivered by the Group. Any service interruption may result in the Group failing to deliver expected customer outcomes.

Regulatory requirements in respect of operational resilience were published in March 2021, together with a timetable to achieve full compliance. Whilst the specific requirement to work within set impact tolerances takes effect in March 2025, the Group is already exposed to regulatory censure in the event of operational disruption where the Regulator determines that the cause was, fully or in part, a breach of existing regulation.

The Group has established an Operational Resilience Framework that identifies important business services, accountability, sets tolerances for disruption and describes the processes that will deliver the required level of resilience. This enhances the protection of customers and stakeholders, preventing intolerable harm and supports compliance with the regulations. The Group works closely with its outsourcers to ensure that the level of resilience delivered is aligned to the Group's impact tolerances.

The Group and its outsourcers have well established business continuity management and disaster recovery frameworks that are subject to an annual refresh and regular testing.

The Group continues to actively manage operational capacity and monitor service continuity required to deliver its strategy, including transition activities. Rigorous planning and stress testing is in place to identify and develop pre-emptive management strategies should services be impacted as a result of customer migrations.

The Group and its outsourcer's implementated a hybrid working model significantly reducing exposure to a number
of physical risks caused by COVID-19.

1

2

3

No change

This principal risk was rated as 'Heightened' in the 2020 Annual Report and Accounts; there has been no change to the position since. There remain two core drivers for this risk assessment: COVID-19 uncertainty and strategic customer transformation.

Whilst many potential exposures to COVID-19 can now be effectively mitigated, a large-scale loss of colleagues due to illness or incapacity, in the UK or globally, on a temporary or more permanent basis is more challenging to resolve in the short-term as there remains uncertainty around the efficacy of vaccines against future COVID-19 mutations.

The Group aims to deliver considerable customer transformation activity in 2022, consistent with the quantum of change in 2021. Although the scale of change exposes the Group to significant risk, this is mitigated through strengthened Resilience and Change Management Frameworks.

The Group has taken action through previous strategic transformation activity to reduce exposure to technological redundancy and key person dependency risk, increasing resilience of our customer service.

 

The Group is impacted by significant changes in the regulatory, legislative or political environment

Changes in regulation could lead to non-compliance with new requirements that could impact the Group's fair treatment of its customers. These could require changes to working practices and have an adverse impact on resources and financial performance..

Political uncertainty or changes in the government could see changes in policy that could impact the industry in which
the Group operates.

The Group undertakes proactive horizon scanning to understand potential changes to the regulatory and legislative landscape. This allows the Group to understand the potential impact of these changes to amend working practices to meet the new requirements by the deadline.

1

2

3

Heightened

There is uncertainty around future Solvency II reforms; expected to be proposed by HM Treasury in April 2022. The scope is expected to include a 60-70% reduction to the Risk Margin, a review of the Fundamental Spread component of the Matching Adjustment and a relaxation of Matching Adjustment eligibility rules. Detail on potential reforms to Solvency Capital Requirement has not yet featured. While there are potential upsides for the Group (including broader investment opportunities to advance the Group's growth and sustainability objectives), there remains significant uncertainty as to what the final package of reforms will look like, how it will impact the Group, and the timing for implementation.

Broader financial services regulation is also being consulted on by HM Treasury, which aims to establish how much rule-making power will pass from legislation to the UK's regulators.

The FCA has proposed a new Consumer Duty, designed to give a higher level of protection to consumers. The aim is to drive culture change and instil consumer trust, an aim welcomed by the Group. The FCA is consulting on draft rules and plans to publish final rules by 31 July 2022. An internal project has been initiated to support this work.

The Group or its Supply Chain are not sufficiently cyber resilient

As the Group continues to grow in size and profile this could lead to increased interest from cyber criminals and a greater risk of cyber-attack which could have significant impact on customer outcomes, strategic objectives, regulatory obligations and the Group's reputation and brand.

Based on external events and trends, the threat posed by a cyber security breach remains high and the complexity of the Group's increasingly interconnected digital ecosystem exposes it to multiple attack vectors. These include phishing and business email compromise, hacking, data breach and supply chain compromise.

Increased use of online functionality to meet customer preferences and future ways of working including remote access to business systems adds additional challenges to cyber resilience and could impact service provision and Customer security.

The Group is continually strengthening its cyber security controls, attack detection and response processes, identifying weaknesses through ongoing assessment and review.

The Information/Cyber Security Strategy includes a continuous Information Security and Cyber Improvement Programme, which is driven by input from the Annual Cyber Risk Assessments.

The Group continues to assess and utilise cyber security tools and capabilities. The specialist Line 2 Information Security & Cyber Risk team provides independent oversight and challenge of information security controls; identifying trends, internal and external threats and advising on appropriate mitigation solutions.

Comprehensive outsourced service provider and third party oversight and assurance processes are in place. Regular Board, Executive, Risk and Audit Committee engagement occurs within the Group.

1

2

New principal risk

Heightened

Cyber Resilience was previously a component considered under the 'Operational Resilience' principal risk.

The key driver for the heightened rating is the conflict in Ukraine which has increased cyber threat levels and the likelihood of a cyber-attack from a State actor, particularly on supply chains and the wider Financial Services industry which the Group relies upon. The Group regularly monitors National Cyber Security Centre guidance.

The Group's cyber controls are designed and maintained to repel the full range of the cyber-attack scenarios; although the Group's main threat is considered to be Cyber Crime, from Individuals or Organised Crime Groups, the same controls are utilised to defend against a Nation-State level cyber-attack. In H2 2021 the Group continued to strengthen its cyber controls, including in areas such as Detect and Respond capabilities and infrastructure scanning capabilities.

 

 

The Group fails to retain or attract a diverse and engaged workforce with the skills needed to deliver its strategy

Delivery of the Group's strategy is dependent on a talented, diverse and engaged workforce.

Periods of prolonged uncertainty can result in a loss of critical corporate knowledge, unplanned departures of key individuals or the failure to attract individuals with the appropriate skills to help deliver the Group's strategy.

This risk is inherent in the Group's business model given the nature of acquisition activity and specialist risk management skillsets.

Potential areas of uncertainty include: the ongoing transition of the Standard Life Assurance and ReAssure businesses into the Group, the expanded strategic partnership with TCS and the introduction of the hybrid working model.

 

Timely communications to colleagues aim to provide clarity around corporate activities. Communications include details of key milestones to deliver against the Group's plans.

The Group regularly benchmarks terms and conditions against the market. The Group maintains and reviews succession plans for key individuals, ensuring successors bring appropriate diversity of thought, backgrounds and experiences.

The Group continues to manage colleague uncertainty of integration activities through cross-organisational collaboration, health and wellbeing support and regular communications to staff.

The Group conducts monthly colleague surveys to monitor engagement levels and identify any concerns; appropriate actions are taken following analysis of the results.

The Group continues to actively manage operational capacity required to deliver its strategy with ongoing focus on senior bandwidth, attrition and sickness.

A move to hybrid working offers colleagues greater flexibility in both where and how they choose to work in future.

 

 

 

1

2

3

4

5

No change

Whilst there have been strong engagement scores in colleague surveys during 2021, 'No Change' is driven by uncertainty regarding the longer term social and marketplace impacts of the pandemic on colleague attrition and sickness. Skills essential to the Group are currently in high-demand in the wider marketplace and recruitment and retention has the potential to be impacted by post-Brexit, COVID-19 and inflationary factors. The Group continues to monitor this closely but remains confident in the attractiveness of its colleague proposition.

The Group has opted to implement a hybrid working model. The approach is focused on empowerment by enabling leaders and colleagues to agree together the right working arrangements which meet individual, team and business needs.

Strategic investments in technology and other resources have been made to maximise the efficacy of the hybrid model implementation.

The increased scale and presence of the Group, and success in multi-site and remote working, gives greater access to a larger talent pool to attract in the future. In addition, the Group's Graduate Programmes restarted in 2021, helping to support the talent pipeline.

MARKET RISK

 

 

 

 

Adverse market movements can impact the Group's ability to meet its cash flow targets, along with the potential to negatively impact customer sentiment

The Group and its customers are exposed to the implications of adverse market movements. This can impact the Group's capital, solvency, profitability and liquidity position, fees earned on assets held, the certainty and timing of future cash flows and long-term investment performance for shareholders and customers.

There are a number of drivers for market movements including government and central bank policies, geopolitical events, market sentiment, sector specific sentiment, global pandemics and financial risks of climate change, including risks from the transition to a low carbon economy.

 

The Group undertakes regular monitoring activities in relation to market risk exposure, including limits in each asset class, cash flow forecasting and stress and scenario testing. In particular, the Group's increase in exposure to residential property and private investments, as a result of its BPA investment strategy, is actively monitored. The Group's exposures are currently relatively small in the context of the Group's AUM and remain within risk appetite.

The Group continues to implement de-risking strategies to mitigate unwanted customer and shareholder outcomes from certain market movements, such as equities, interest rates, inflation and foreign currencies.

The Group maintains cash buffers in its holding companies and has access to a credit facility to reduce reliance on emerging cash flows.

The Group's excess capital position continues to be closely monitored and managed.
The Group regularly discusses market outlook with its asset managers.

1

2

3

No change

Market stability improved in 2021, driven by a successful COVID-19 vaccine rollout. However, there remains significant market uncertainty as a result of the developing conflict in Ukraine which has resulted in economic sanctions being introduced against Russia and Belarus as well as the risks presented by further mutations of the COVID-19 virus.

The Group continues to monitor its exposure to markets affected by the conflict in Ukraine and the effects of the conflict on markets in which the Group transacts.

Inflation is considered a risk over the short to medium-term, with a shortage of labour in key industries and ongoing supply chain issues increasing costs. The Bank of England is faced with a balancing act of managing inflation and aiding the post-COVID recovery. Changes in inflation have, to date, followed market predictions; however, any unexpected moves in interest rates are likely to impact asset values significantly. The Group's strategy involves hedging the major market risks and in 2021 the Group's Stress and Scenario Testing Programme demonstrated the resilience of its balance sheet to market stresses.

Contingency actions remain available to help manage the Group's capital and liquidity position if any unanticipated market movements occur.

 

INSURANCE RISK

The Group may be exposed to adverse demographic experience which is out of line with expectations

The Group has guaranteed liabilities, annuities and other policies that are sensitive to future longevity, persistency and mortality rates. For example, if annuity policyholders live for longer than expected, then the Group will need to pay their benefits for longer.

The amount of additional capital required to meet additional liabilities could have a material adverse impact on the Group's ability to meet its cash flow targets.

The Group undertakes regular reviews of experience and annuitant survival checks to identify any trends or variances in assumptions.

The Group regularly reviews assumptions to reflect the continued trend of reductions in future mortality improvements.

The Group continues to manage its longevity risk exposures, which includes the use of longevity swaps and reinsurance contracts to maintain this risk within appetite.

The Group actively monitors persistency risk metrics and exposures against appetite across the Open and Heritage businesses.

Where required, the Group continues to take capital management actions to mitigate adverse demographic experience.

1

3

No change

'No Change' is driven by remaining uncertainty around future demographic experience as a result of COVID-19 impacts.

Demographic experience and the latest views on future trends are considered in regular assumption reviews although, for most products, experience over the COVID-19 pandemic has been given little weight given its anomalous nature.

The Group completed bulk annuity transactions with a combined premium of £5.6 billion in 2021. Consistent with previous transactions, the Group continues to reinsure the vast majority of the longevity risk with existing arrangements that are reviewed regularly.

CREDIT RISK

The Group is exposed to the risk of downgrade or failure of a significant counterparty

The Group is exposed to the risk of downgrades and deterioration in the creditworthiness or default of investment, reinsurance or banking counterparties.
This could cause immediate financial loss, or a reduction in future profits.

The Group is also exposed to trading counterparties, such as reinsurers or service providers failing to meet all or part of their obligations.

 

The Group regularly monitors its counterparty exposures and has specific limits relating to individual counterparties, sector concentration and geography.

The Group undertakes regular stress and scenario testing of the credit portfolio. Where possible, exposures are diversified through the use of a range of counterparty providers. All material reinsurance and derivative positions are appropriately collateralised.

The Group regularly discusses market outlook with its asset managers.

For mitigation of risks associated with stock-lending, additional protection is provided through indemnity insurance.

1

2

No change

Over the last 12 months the Group has continued to undertake de-risking action to increase the overall credit quality of the portfolio and mitigate the impact of future downgrades on risk capital. Furthermore, the Group has enhanced its counterparty concentration limits framework to better manage counterparty failure risk. This positive progress is balanced by residual uncertainty, due to the wider economic and social impacts arising from COVID-19, and the developing conflict in Ukraine which presents an increased risk of downgrades and defaults. This results in 'No Change' overall.

The Group has immaterial credit exposure to Russia and no shareholder exposure to sanctioned Russian banks.

The Group continues to increase investment in illiquid credit assets as a result of BPA transactions. This is in line with the Group's strategic asset allocation plan and within risk appetite.

 

Emerging risks and opportunities

The Group's senior management and Board take emerging risks and opportunities into account when considering potential outcomes. This determines if appropriate management actions are in place to manage the risk or take advantage of the opportunity. Key risks discussed by senior management and the Board during 2021 include:

Risk Title

Description

Risk universe category

Consumer Duty

The FCA has set out plans for a higher level of consumer protection in retail financial markets, where firms are competing vigorously in the interests of consumers. Consultation underway to introduce a new 'Consumer Duty', setting higher expectations for the standard of care that firms provide to consumers.

Customer

Artificial Intelligence

Risk in late adoption of operational efficiency opportunities that AI capabilities could present, e.g. by not keeping up with emerging machine learning and perception systems.

Operational

Solvency II Reforms

HM Treasury issued Call for Evidence on potential reforms to SII for the UK, post-Brexit. The scope is expected to include a 60-70% reduction to the Risk Margin, a review of the Fundamental Spread component of the Matching Adjustment and a relaxation of Matching Adjustment eligibility rules. Detail on potential reforms to Solvency Capital Requirement has not yet featured.

Operational, Financial Soundness

Pension Superfunds

Pension Superfunds could offer a cheaper or easier option than Bulk Purchase Annuities (BPAs) for Defined Benefit schemes looking to de-risk and transfer their liabilities.

Strategic

 

 

Statement of Directors' responsibilities

Statement of Directors' responsibilities in respect of the Annual Report and Accounts of Phoenix Group Holdings plc

The Directors are responsible for preparing the Annual Report, consolidated financial statements and the Company financial statements in accordance with applicable United Kingdom law and regulations.

The Board has prepared a Strategic Report which provides an overview of the development and performance of the Group's business for the year ended 31 December 2021, covers the future developments in the business of Phoenix Group Holdings plc and its consolidated subsidiaries and provides details of any important events affecting the Company and its subsidiaries after the year-end. For the purposes of compliance with DTR 4.1.5R(2) and DTR 4.1.8R, the required content of the 'Management Report' can be found in the Strategic Report and this Directors' Report, including the sections of the Annual Report and Accounts incorporated by reference.

Company law requires the Directors to prepare the consolidated and the Company financial statements for each financial year. Under that law the Directors have elected to prepare the consolidated and Company financial statements in accordance with UK-adopted international accounting standards ('IASs') in conformity with the requirements of the Companies Act 2006. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group and the Company for that period.

In preparing these financial statements the Directors are required to:

· select suitable accounting policies in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;

· make judgements and accounting estimates that are reasonable and prudent;

· present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

· provide additional disclosures when compliance with the specific requirements in IASs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group and Company financial position and financial performance;

· in respect of the consolidated financial statements, state whether UK-adopted international accounting standards have been followed, subject to any material departures disclosed and explained in the consolidated financial statements;

· in respect of the Company financial statements, state whether UK-adopted international accounting standards, have been followed, subject to any material departures disclosed and explained in the financial statements; and

· prepare the consolidated and the Company financial statements on the going concern basis unless it is inappropriate to presume that the Company and/or the Group will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's and Group's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group, and enable them to ensure that the Company and the consolidated financial statements and the Directors' Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. The Directors are responsible for making, and continuing to make, the Company's Annual Report and Accounts available on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors as at the date of this Directors' Report, whose names and functions are listed in the Board of Directors section on pages 74 to 76 of the Annual Report & Accounts, confirm that, to the best of their knowledge:

· the consolidated financial statements, prepared in accordance with UK-adopted international accounting standards give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and undertakings included in the consolidation taken as a whole;

· the Annual Report, including the Strategic Report, includes a fair review of the development and performance of the business and the position of the company and undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

· they consider the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for users (who have a reasonable knowledge of business and economic activities) to assess the Company's position, performance, business model and strategy.

The Strategic Report and the Directors' Report were approved by the Board of Directors on 11 March 2022.

By order of the Board

 

Andy Briggs  Rakesh Thakrar

Group Chief  Group Chief
Executive Officer  Financial Officer

12 March 2022

 

 

Consolidated income statement

For the year ended 31 December 2021

 

Notes

2021
£m

2020
£m

 

 

 

 

Gross premiums written

 

7,455

4,706

Less: premiums ceded to reinsurers

F3

(2,079)

(796)

Net premiums written

 

5,376

3,910

 

 

 

 

Fees and commissions

C1

1,001

794

Total revenue, net of reinsurance payable

 

6,377

4,704

 

 

 

 

Net investment income

C2

18,001

16,935

Other operating income

 

76

121

Gain on completion of abrdn plc transaction

A6.1

110

-

Loss on disposal of Ark Life

H3

(23)

-

Gain on acquisition of ReAssure businesses

H2.1

-

372

Gain on L&G Part VII portfolio transfer

H2.2

-

85

Net income

 

24,541

22,217

 

 

 

 

Policyholder claims

 

(9,656)

(7,808)

Less: reinsurance recoveries

 

1,597

1,613

Change in insurance contract liabilities

 

3,076

(3,249)

Change in reinsurers' share of insurance contract liabilities

 

(177)

(568)

Transfer from/(to) unallocated surplus

F2

106

(113)

Net policyholder claims and benefits incurred

 

(5,054)

(10,125)

 

 

 

 

Change in investment contract liabilities

 

(16,812)

(7,991)

Amortisation and impairment of acquired in-force business

G2

(577)

(469)

Amortisation of other intangibles

G2

(20)

(18)

Impairment of goodwill

G2

(47)

-

Administrative expenses

C3

(2,056)

(1,674)

Net income/(expense) under arrangements with reinsurers

F3.3

22

(219)

Net income attributable to unitholders

 

(185)

(217)

Total operating expenses

 

(24,729)

(20,713)

 

 

 

 

(Loss)/profit before finance costs and tax

 

(188)

1,504

 

 

 

 

Finance costs

C5

(242)

(234)

(Loss)/profit for the year before tax

 

(430)

1,270

 

 

 

 

Tax charge attributable to policyholders' returns

C6

(258)

(326)

(Loss)/profit before the tax attributable to owners

 

(688)

944

 

 

 

 

Tax charge

C6

(279)

(436)

Add: tax attributable to policyholders' returns

C6

258

326

Tax charge attributable to owners

C6

(21)

(110)

(Loss)/profit for the year attributable to owners

 

(709)

834

Attributable to:

 

 

 

Owners of the parent

 

(837)

798

Non-controlling interests

D5

128

36

 

 

(709)

834

 

 

 

 

Earnings per ordinary share

 

 

 

Basic (pence per share)

B3

(86.4)p

91.8p

Diluted (pence per share)

B3

(86.4)p

91.5p

 

Statement of comprehensive income

For the year ended 31 December 2021

 

Notes

2021
 m

2020
£m

(Loss)/profit for the year

 

(709)

834

 

 

 

 

Other comprehensive income/(expense):

 

 

 

Items that are or may be reclassified to profit or loss:

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

Fair value gains arising during the year

 

44

129

Reclassification adjustments for amounts recognised in profit or loss

 

(36)

(79)

Exchange differences on translating foreign operations

 

(45)

33

Foreign currency translation reserve recycled to profit or loss on disposal of Ark Life

H3

14

-

 

 

 

 

Items that will not be reclassified to profit or loss:

 

 

 

Remeasurements of net defined benefit asset/liability

G1

281

(21)

Tax charge relating to other comprehensive income items

C6

(138)

(37)

Total other comprehensive income for the year

 

120

25

 

 

 

 

Total comprehensive (expense)/income for the year

 

(589)

859

 

 

 

 

Attributable to:

 

 

 

Owners of the parent

 

(717)

823

Non-controlling interests

D5

128

36

 

 

(589)

859

 

Statement of consolidated financial position

As at 31 December 2021

 

Notes

2021
 m

2020
£m

Assets

 

 

 

 

 

 

 

Pension scheme asset

G1

36

11

Reimbursement rights

G1

212

-

 

 

 

 

Intangible assets

 

 

 

Goodwill

 

10

57

Acquired in-force business

 

4,323

5,013

Other intangibles

 

232

171

 

G2

4,565

5,241

 

 

 

 

Property, plant and equipment

G3

130

119

 

 

 

 

Investment property

G4

5,283

7,128

 

 

 

 

Financial assets

 

 

 

Loans and deposits

 

475

647

Derivatives

E3

4,567

6,880

Equities

 

86,981

82,634

Investment in associate

 

431

400

Debt securities

 

104,761

109,455

Collective investment schemes

 

85,995

89,248

Reinsurers' share of investment contract liabilities

 

9,982

9,559

 

E1

293,192

298,823

Insurance assets

 

 

 

Reinsurers' share of insurance contract liabilities

F1

8,587

9,542

Reinsurance receivables

 

69

141

Insurance contract receivables

 

70

94

 

 

8,726

9,777

 

 

 

 

Current tax

G8

419

263

Prepayments and accrued income

 

373

343

Other receivables

G5

1,805

1,622

Cash and cash equivalents

G6

9,112

10,998

Assets classified as held for sale

A6.1

9,946

-

 

 

 

 

Total assets

 

333,799

334,325

Equity and liabilities

 

 

 

 

 

 

 

Equity attributable to owners of the parent

 

 

 

Share capital

D1

100

100

Share premium

 

6

4

Shares held by employee benefit trust

D2

(12)

(6)

Foreign currency translation reserve

 

71

102

Merger relief reserve

D1

1,819

1,819

Other reserves

D3

56

48

Retained earnings

 

3,775

4,970

Total equity attributable to owners of the parent

 

5,815

7,037

 

 

 

 

Tier 1 Notes

D4

494

494

Non-controlling interests

D5

460

341

Total equity

 

6,769

7,872

 

 

 

 

Liabilities

 

 

 

Pension scheme liabilities

G1

3,103

2,036

 

 

 

 

Insurance contract liabilities

 

 

 

Liabilities under insurance contracts

F1

128,864

133,907

Unallocated surplus

F2

1,801

1,768

 

 

130,665

135,675

Financial liabilities

 

 

 

Investment contracts

 

160,417

165,106

Borrowings

E5

4,225

4,567

Deposits received from reinsurers

 

3,569

4,080

Derivatives

E3

1,248

1,001

Net asset value attributable to unitholders

 

3,568

3,791

Obligations for repayment of collateral received

 

3,442

5,205

 

E1

176,469

183,750

 

 

 

 

Provisions

G7

235

282

Deferred tax

G8

1,399

1,036

Reinsurance payables

 

143

134

Payables related to direct insurance contracts

G9

1,864

1,669

Current tax

G8

19

-

Lease liabilities

G10

99

84

Accruals and deferred income

G11

567

521

Other payables

G12

721

1,266

Liabilities classified as held for sale

A6.1

11,746

-

Total liabilities

 

327,030

326,453

 

 

 

 

Total equity and liabilities

 

333,799

334,325

 

Statement of consolidated changes in equity

For the year ended 31 December 2021

 

Share capital (note D1)
£m)

Share premium (note D1)
£m

Shares held
by the employee benefit trust
(note D2)
£m

Foreign currency translation reserve
£m

Merger relief reserve (note D1)
£m

Other reserves (note D3)
£m

Retained earnings
£m

Total
£m

Tier 1 Notes (note D4)
£m

Non-controlling interests (note D5)
£m

Total equity
£m

At 1 January 2021

100

4

(6)

102

1,819

48

4,970

7,037

494

341

7,872

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/profit for the year

-

-

-

-

-

-

(837)

(837)

-

128

(709)

Other comprehensive (expense)/income for the year

-

-

-

(31)

-

8

143

120

-

-

120

Total comprehensive (expense)/income for the year

-

-

-

(31)

-

8

(694)

(717)

-

128

(589)

 

 

 

 

 

 

 

 

 

 

 

 

Issue of ordinary share capital, net of associated commissions and expenses

-

2

-

-

-

-

-

2

-

-

2

Dividends paid on ordinary shares

-

-

-

-

-

-

(482)

(482)

-

-

(482)

Dividends paid to non-controlling interests

-

-

-

-

-

-

-

-

-

(9)

(9)

Credit to equity for equity-settled share-based payments

-

-

-

-

-

-

14

14

-

-

14

Shares distributed by the employee benefit trust

-

-

10

-

-

-

(10)

-

-

-

-

Shares acquired by the employee benefit trust

-

-

(16)

-

-

-

-

(16)

-

-

(16)

Coupon paid on Tier 1 Notes, net of tax relief

-

-

-

-

-

-

(23)

(23)

-

-

(23)

At 31 December 2021

100

6

(12)

71

1,819

56

3,775

5,815

494

460

6,769

 

Statement of consolidated changes in equity

For the year ended 31 December 2020

 

Share capital (note D1)
£m

Share premium (note D1)
£m

Shares held by employee benefit trust
 (note D2)
£m

Foreign currency translation reserve
£m

Merger
relief
reserve
(note D1)
£m

Other reserves (note D3)
£m

Retained earnings
£m

Total
£m

Tier 1 Notes (note D4)
£m

Non-controlling interests (note D5)
£m

Total equity
£m

At 1 January 2020

72

2

(7)

69

-

(2)

4,651

4,785

494

314

5,593

 

 

 

 

 

 

 

 

 

 

 

 

Profit for the year

-

-

-

-

-

-

798

798

-

36

834

Other comprehensive income/(expense) for the year

-

-

-

33

-

50

(58)

25

-

-

25

Total comprehensive income for the year

-

-

-

33

-

50

740

823

-

36

859

 

 

 

 

 

 

 

 

 

 

 

 

Issue of ordinary share capital, net of associated commissions and expenses

28

2

-

-

1,819

-

-

1,849

-

-

1,849

Dividends paid on ordinary shares

-

-

-

-

-

-

(403)

(403)

-

-

(403)

Dividends paid to non-controlling interests

-

-

-

-

-

-

-

-

-

(9)

(9)

Credit to equity for equity-settled share-based payments

-

-

-

-

-

-

13

13

-

-

13

Shares distributed by employee benefit trust

-

-

8

-

-

-

(8)

-

-

-

-

Shares acquired by employee benefit trust

-

-

(7)

-

-

-

-

(7)

-

-

(7)

Coupon paid on Tier 1 Notes, net of tax relief

-

-

-

-

-

-

(23)

(23)

-

-

(23)

At 31 December 2020

100

4

(6)

102

1,819

48

4,970

7,037

494

341

7,872

 

Statement of consolidated cash flows

For the year ended 31 December 2021

 

Notes

2021
£m

2020
£m

Cash flows from operating activities

 

 

 

Cash (utilised)/generated by operations

I2

(871)

7,316

Taxation paid

 

(149)

(562)

Net cash flows from operating activities

 

(1,020)

6,754

 

 

 

 

Cash flows from investing activities

 

 

 

Proceeds from completion of abrdn plc transaction

A6

115

-

Disposal of Ark Life, net of cash disposed

H3

189

-

Acquisition of ReAssure businesses, net of cash acquired

H2.1

-

(979)

Net cash flows from investing activities

 

304

(979)

 

 

 

 

Cash flows from financing activities

 

 

 

Proceeds from issuing ordinary shares, net of associated commission and expenses

 

2

2

Ordinary share dividends paid

B4

(482)

(403)

Dividends paid to non-controlling interests

D5

(9)

(9)

Repayment of policyholder borrowings

E5.2

(18)

(55)

Repayment of shareholder borrowings

E5.2

(322)

-

Repayment of lease liabilities

G10

(16)

(18)

Proceeds from new shareholder borrowings, net of associated expenses

E5.2

-

1,445

Proceeds from new policyholder borrowings, net of associated expenses

E5.2

17

-

Coupon paid on Tier 1 Notes

 

(29)

(29)

Interest paid on policyholder borrowings

 

-

(5)

Interest paid on shareholder borrowings

 

(237)

(171)

Net cash flows from financing activities

 

(1,094)

757

 

 

 

 

Net (decrease)/increase in cash and cash equivalents

 

(1,810)

6,532

Cash and cash equivalents at the beginning of the year

 

10,998

4,466

Less: cash and cash equivalents of operations classified as held for sale

A6.1

(76)

-

Cash and cash equivalents at the end of the year

 

9,112

10,998

 

Notes to the consolidated financial statements

A. Significant accounting policies

A1. Basis of preparation

The consolidated financial statements for the year ended 31 December 2021 set out on pages 155 to 293 comprise the financial statements of Phoenix Group Holdings plc ('the Company') and its subsidiaries (together referred to as 'the Group'), and were authorised by the Board of Directors for issue on 12 March 2022.

The consolidated financial statements have been prepared under the historical cost convention, except for investment property, owner-occupied property and those financial assets and financial liabilities (including derivative instruments) that have been measured at fair value.

The consolidated financial statements are presented in sterling (£) rounded to the nearest million except where otherwise stated.

Assets and liabilities are offset and the net amount reported in the statement of consolidated financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expenses are not offset in the consolidated income statement unless required or permitted by an International Financial Reporting Standard ('IFRS') or interpretation, as specifically disclosed in the accounting policies of the Group.

Statement of compliance

The consolidated financial statements have been prepared in accordance with UK-adopted international accounting standards.

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiary undertakings, including collective investment schemes, where the Group exercises overall control. In accordance with the principles set out in IFRS 10 Consolidated Financial Statements, the Group controls an investee if and only if the Group has all the following:

power over the investee;

exposure, or rights, to variable returns from its involvement with the investee; and

the ability to use its power over the investee to affect its returns.

The Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including relevant activities, substantive and protective rights, voting rights and purpose and design of an investee. The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Further details about the consolidation of subsidiaries, including collective investment schemes, are included in note H1.

Going concern

The consolidated financial statements have been prepared on a going concern basis. In assessing whether the Group is a going concern the Directors have taken into account the guidance issued by the Financial Reporting Council ('FRC'), Guidance for Directors of UK Companies Going Concern and Liquidity, in October 2009. The considerations and approach are consistent with FRC provisions issued in September 2014 and the assessment has taken into account the requirements of the pronouncement from the Financial Reporting Lab, 'Covid-19 - Going concern, risk and viability'. Further details of the going concern assessment for the period to 31 March 2023 are included in the Directors' Report on page 139.

The Directors have, at the time of approving the consolidated financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the period covered by the assessment.

A2. Accounting policies

The principal accounting policies have been consistently applied in these consolidated financial statements. Where an accounting policy can be directly attributed to a specific note to the consolidated financial statements, the policy is presented within that note, with a view to enabling greater understanding of the results and financial position of the Group. All other significant accounting policies are disclosed below.

A2.1 Foreign currency transactions

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the 'functional currency'). The consolidated financial statements are presented in sterling, which is the Group's presentation currency.

The results and financial position of all Group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

assets and liabilities are translated at the closing rate at the period end;

income, expenses and cash flows denominated in foreign currencies are translated at average exchange rates; and

all resulting exchange differences are recognised through the statement of consolidated comprehensive income and taken to the foreign currency translation reserve within equity.

Foreign currency transactions are translated into the functional currency of the transacting Group entity using exchange rates prevailing at the date of the translation. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated income statement.

Translation differences on debt securities and other monetary financial assets measured at fair value through profit or loss are included in foreign exchange gains and losses. Translation differences on non-monetary items at fair value through profit or loss are reported as part of the fair value gain or loss.

A3. Critical accounting estimates and judgements

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Disclosures of judgements made by management in applying the Group's accounting policies include those that have the most significant effect on the amounts that are recognised in the consolidated financial statements. Disclosures of estimates and associated assumptions include those that have a significant risk of resulting in a material change to the carrying value of assets and liabilities within the next year. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of the judgements as to the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Critical accounting estimates are those which involve the most complex or subjective judgements or assessments. The areas of the Group's business that typically require such estimates are the measurement of insurance and investment contract liabilities, determination of the fair value of financial assets and liabilities, valuation of pension scheme assets and liabilities and valuation of intangibles on initial recognition.

The application of critical accounting judgements that could have the most significant effect on the recognised amounts include classification of contracts to be accounted for as insurance or investment contracts, recognition of pension surplus, the determination of operating profit, identification of intangible assets arising on acquisitions, the recognition of an investment as an associate and determination of control with regards to underlying entities. Details of all critical accounting estimates and judgements are included below.

A3.1 Insurance and investment contract liabilities

Insurance and investment contract liability accounting is discussed in more detail in the accounting policies in note F1 with further detail of the key assumptions made in determining insurance and investment contract liabilities included in note F4. Economic assumptions are set taking into account market conditions as at the valuation date. Non-economic assumptions, such as future expenses, longevity and mortality are set based on past experience, market practice, regulations and expectations about future trends.

The valuation of insurance contract liabilities is sensitive to the assumptions which have been applied in their calculation. Details of sensitivities arising from significant non-economic assumptions are detailed on page 228 in note F4.

Classification of contracts as insurance is based upon an assessment of the significance of insurance risk transferred to the Group. Insurance contracts are defined by IFRS 4 as those containing significant insurance risk if, and only if, an insured event could cause an insurer to make significant additional payments in any scenario, excluding scenarios that lack commercial substance, at the inception of the contract.
 

A3.2 Fair value of financial assets and liabilities

Financial assets and liabilities are measured at fair value and accounted for as set out in the accounting policies in note E1. Financial instruments valued where valuation techniques are based on observable market data at the period end are categorised as Level 2 financial instruments. Financial instruments valued where valuation techniques are based on non-observable inputs are categorised as Level 3 financial instruments. Level 2 and Level 3 financial instruments therefore involve the use of estimates.

Further details of the estimates made are included in note E2. In relation to the Level 3 financial instruments, sensitivity analysis is performed in respect of the key assumptions used in the valuation of these financial instruments. The details of this sensitivity analysis are included in note E2.3.

A3.3 Pension scheme obligations

The valuation of pension scheme obligations is determined using actuarial valuations that depend upon a number of assumptions, including discount rate, inflation and longevity. External actuarial advice is taken with regard to setting the financial assumptions to be used in the valuation. As defined benefit pension schemes are long-term in nature, such assumptions can be subject to significant uncertainty.

Further details of these estimates and the sensitivity of the defined benefit obligation to key assumptions are provided in note G1.

A3.4 Recognition of pension scheme surplus

A pension scheme surplus can only be recognised to the extent that the sponsoring employer can utilise the asset through a refund of surplus or a reduction in contributions. A refund is available to the Group where it has an unconditional right to a refund on a gradual settlement of liabilities over time until all members have left the scheme. A review of the Trust Deeds of the Group's pension schemes that recognise a surplus has highlighted that the Scheme Trustees are not considered to have the unilateral power to trigger a wind-up of the Scheme and the Trustees' consent is not needed for the sponsoring company to trigger a wind-up. Where the last beneficiary died or left the Scheme, the sponsoring company could close the Scheme and force the Trustees to trigger a wind-up by withholding its consent to continue the Scheme on a closed basis. This view is supported by external legal opinion and is considered to support the recognition of a surplus. Management has determined that the scheme administrator would be subject to a 35% tax charge on a refund and therefore any surplus is reduced by this amount. Further details of the Group's pension schemes are provided in note G1.

A3.5 Operating profit

Operating profit is the Group's non-GAAP measure of performance and provides stakeholders with a comparable measure of the underlying performance of the Group. The Group is required to make judgements as to the appropriate longer-term rates of investment return for the determination of operating profit based on risk-free yields at the start of the financial year, as detailed in note B2, and as to what constitutes an operating or non-operating item in accordance with the accounting policy detailed in note B1.

A3.6 Acquisition of the ReAssure businesses

The identification and valuation of identifiable intangible assets, such as acquired in-force business, arising from the Group's acquisition of the ReAssure businesses during the prior year, required the Group to make a number of judgements and estimates. Further details are included in notes G2 'Intangible assets' and H2 'Acquisitions and portfolio transfers'.

A3.7 Control and consolidation

The Group has invested in a number of collective investment schemes and other types of investment where judgement is applied in determining whether the Group controls the activities of these entities. These entities are typically structured in such a way that owning the majority of the voting rights is not the conclusive factor in the determination of control in line with the requirements of IFRS 10 Consolidated Financial Statements. The control assessment therefore involves a number of further considerations such as whether the Group has a unilateral power of veto in general meetings and whether the existence of other agreements restrict the Group from being able to influence the activities. Further details of these judgements are given in note H1.

A3.8 Impact of climate risk on accounting judgments and estimates

In preparation of these financial statements, the Group has considered the impact of climate change across a number of areas, predominantly in respect of the valuation of financial instruments, insurance and investment contract liabilities and goodwill and other intangible assets.

Many of the effects arising from climate change will be longer-term in nature, with an inherent level of uncertainty, and have been assessed as having a limited effect on accounting judgments and estimates for the current period.

The majority of the Group's financial assets are held at fair value and use quoted market prices or observable market inputs in their valuation. The use of quoted market prices and market inputs to fair value is assumed to include current information and knowledge regarding the effect of climate risk. For the valuation of Level 3 financial instruments, there are no material unobservable inputs in relation to climate risk. Note E6 provides further risk management disclosures in relation to financial risks including sensitivities in relation to credit and market risk. In addition, further details on managing the related climate change risks are provided in the Task Force for Climate-related Financial Disclosures ('TCFD') on page 51 of the Annual Report and Accounts.

Insurance and investment contract liabilities use economic assumptions taking into account market conditions at the valuation date as well as non-economic assumptions such as future expenses, longevity and mortality which are set based on past experience, market practice, regulations and expectations about future trends. Due to the level of annuities written by the Group, it is particularly exposed to longevity risk. At 31 December 2021, there are no adjustments made to the longevity assumptions to specifically allow for the impact of climate change on annuitant mortality. Further details as to how assumptions are set and of the sensitivity of the Group's results to annuitant longevity and other key insurance risks are set out in note F4.

The assessment of impairment for goodwill and intangibles is based on value in use calculations. Value in use represents the value of future cash flows and uses the Group's five year annual operating plan and the expectation of long-term economic growth beyond this period. The five year annual operating plan reflects management's current expectations on competitiveness and profitability, and reflects the expected impacts of the process of moving towards a low-carbon economy. Note G2 provides further details on goodwill and other intangible assets and on impairment testing performed.

A4. Adoption of new accounting pronouncements in 2021

In preparing the consolidated financial statements, the Group has adopted the following standards, interpretations and amendments effective from 1 January 2021:

Amendment to IFRS 16 LeasesCOVID-19-Related Rent Concessions beyond 30 June 2021 (1 June 2020): The amendment permits lessees, as a practical expedient, not to assess whether particular rent concessions occurring as a direct consequence of the COVID-19 pandemic are lease modifications and instead to account for those rent concessions as if they are not lease modifications. The Group does not expect to make use of this practical expedient.

Interest Rate Benchmark Reform - Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16) (1 January 2021): The changes introduced in Phase 2 of the Interest Rate Benchmark Reform project relate to the modification of financial assets, financial liabilities and lease liabilities (introducing a practical expedient for modifications required by the IBOR reform), specific hedge accounting requirements to ensure hedge accounting is not discontinued solely because of the IBOR reform, and disclosure requirements applying IFRS 7 to accompany the amendments regarding modifications and hedge accounting. The IASB also amended IFRS 4 to require insurers that apply the temporary exemption from IFRS 9 to apply the amendments in accounting for modifications directly required by IBOR reform.


Additional disclosures have been included in note E6.1 to provide details of the derivative and non-derivative financial instruments affected by the interest rate benchmark reform together with a summary of the actions taken by the Group to manage the risks relating to the reform.

Amendments to IFRS 4 Insurance Contracts - Extension of the Temporary Extension for applying IFRS 9 Financial Instruments (1 January 2021): Following the issue of IFRS 17 Insurance Contracts (Revised) in June 2020, the end date for applying the two options under the IFRS 4 amendments (including the temporary exemption from IFRS 9) was extended to 1 January 2023, aligning the date with the revised effective date of IFRS 17. The Group has taken advantage of this extension to align the implementation of IFRS 9 and IFRS 17.

A5. New accounting pronouncements not yet effective

The IASB has issued the following standards or amended standards and interpretations which apply from the dates shown. The Group has decided not to early adopt any of these standards, amendments or interpretations where this is permitted.

IFRS 9 Financial Instruments (1 January 2023): Under IFRS 9, all financial assets will be measured either at amortised cost or fair value and the basis of classification will depend on the business model and the contractual cash flow characteristics of the financial assets. In relation to the impairment of financial assets, IFRS 9 requires the use of an expected credit loss model, as opposed to the incurred credit loss model required under IAS 39 Financial Instruments: Recognition and Measurement. The expected credit loss model will require the Group to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition.

The Group has taken advantage of the temporary exemption granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 until 1 January 2023 as a result of meeting the exemption criteria as at 31 December 2015. As at this date the Group's activities were considered to be predominantly connected with insurance as the percentage of the total carrying amount of its liabilities connected with insurance relative to the total carrying amount of all its liabilities was greater than 90%. Following the acquisition of the ReAssure businesses on 22 July 2020, this assessment was re-performed and the Group's activities were still considered to be predominantly connected with insurance.

IFRS 9 will be implemented at the same time as the new insurance contracts standard (IFRS 17 Insurance Contracts) effective from 1 January 2023. During the year, the Group continued its implementation activities in respect of IFRS 9 and expects to continue to value the majority of its financial assets at fair value through profit or loss on initial recognition, either as a result of these financial assets being managed on a fair value basis or as a result of using the fair value option to irrevocably designate the assets at fair value through profit or loss. A number of additional disclosures will be required by IFRS 7 Financial Instruments: Disclosures as a result of implementing IFRS 9.

Additional disclosures have been made in note E1.2 to the consolidated financial statements to provide information to allow comparison with entities who have already adopted IFRS 9.

IFRS 3 Business Combinations(1 January 2022): The amendments update a reference in IFRS 3 to the Conceptual Framework for Financial Reporting without changing the accounting requirements for business combinations. There are no impacts from this amendment.

IAS 16 Property, Plant and Equipment(1 January 2022): The amendments prohibit the Group from deducting from the cost of property, plant and equipment amounts received from selling items produced while the Group is preparing the asset for its intended use. Instead, such sales proceeds and related costs should be recognised in profit or loss. These amendments do not currently have any impact on the Group.

IAS 37 Provisions, Contingent Liabilities and Contingent Assets(1 January 2022): The amendments specify which costs a company includes when assessing whether a contract will be loss making. These amendments are not expected to have any impact on the Group.

Annual Improvements Cycle 2018 - 2020 (1 January 2022): Minor amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 9 Financial Instruments, IAS 41 Agriculture and the Illustrative Examples accompanying IFRS 16 Leases. These amendments do not currently have any impact on the Group.

IFRS 17 Insurance Contracts(1 January 2023): Once effective IFRS 17 will replace IFRS 4 the current insurance contracts standard and it is expected to significantly change the way the Group measures and reports its insurance contracts. The overall objective of the new standard is to provide an accounting model for insurance contracts that is more useful and consistent for users.

IFRS 17 applies to insurance contracts (including reinsurance contracts) an entity issues, reinsurance contracts an entity holds and investment contracts with discretionary participation features an entity issues provided it also issues insurance contracts. The scope of IFRS 17 for the Group is materially consistent with that of IFRS 4. Investment contracts will be measured under IFRS 9.

IFRS 17 requires that contracts are divided into groups for the purposes of recognition and measurement. Portfolios of contracts are identified by grouping together contracts which have similar risks and are managed together. These groups are then further divided into groups based on their expected profitability. Contracts which are onerous at inception cannot be grouped with contracts which are profitable at inception. Contracts which are issued more than one year apart are not permitted to be included within the same group, although there is some relief from this requirement for business in-force at the date of transition under the transitional arrangements.

 

The standard introduces three measurement approaches, of which two, the general model and the variable free approach, are applicable to the Group's business. The main features of these models are the measurement of an insurance contract as the present value of expected future cash flows including acquisition costs, plus an explicit risk adjustment, remeasured at each reporting period using current assumptions, and a contractual service margin ('CSM').

 

The risk adjustment represents the compensation the Group requires for bearing the uncertainty about the amount and timing of cash flows that arise from non-financial risk as the obligations under the insurance contract are fulfilled.

 

The CSM represents the unearned profit of a group of insurance contracts and is recognised in profit or loss as the insurance service is provided to the customer using coverage units. Coverage units are a measurement of the quantum of service provided across the life of the contract and are used to measure the service provided in the reporting period and release a corresponding amount of profit to the income statement. If a group of contracts becomes loss-making after inception the loss is recognised immediately in the income statement. This treatment of profits and losses in respect of services is broadly consistent with the principles of IFRS 15 and IAS 37 applicable to other industries.

 

Under the general model the CSM is adjusted for non-economic assumption changes relating to future periods. For certain contracts with participating features the variable fee approach is applied, this allows changes in economic assumptions and experience to adjust the CSM as well as non-economic assumptions, reflecting the variable nature of the entity's earnings driven by investment returns.

 

IFRS 17 requires the standard to be applied retrospectively. Where this is assessed as impracticable the standard allows the application of a simplified retrospective approach or a fair value approach to determine the contractual service margin.

The measurement principles set out in IFRS 17 will significantly change the way in which the Group measures its insurance contracts and investment contracts with discretionary participation features ('DPF'), and associated reinsurance contracts. These changes will impact the pattern in which profit emerges when compared to IFRS 4 and add complexity to valuation processes, data requirements and assumption setting.

 

The introduction of IFRS 17 will simplify the presentation of the statement of financial position. It requires the presentation of groups of insurance (or reinsurance) contracts that are in an asset position separately from those in a liability position. The presentation of the income statement will change more significantly with IFRS 17 setting out how components of the profitability of contracts are disaggregated into an insurance service result and insurance finance income/expenses. IFRS 17 also requires extensive disclosures on the amounts recognised from insurance contracts and the nature and extent of risks arising from them.

 

The Group's implementation project continued through 2021 with a focus on finalising methodologies and developing the operational capabilities required to implement the standard including data, systems and business processes. The focus for 2022 is on embedding the operational capabilities and determining the transition balance sheet and comparatives required for 2023 reporting.

 

Classification of Liabilities as Current and Non-current (Amendments to IAS 1 Presentation of Financial Statements) (1 January 2023): The amendments clarify rather than change existing requirements and aim to assist entities in determining whether debt and other liabilities with an uncertain settlement date should be classed as current or non-current. It is currently not expected that there will be any reclassifications as a result of this clarification.

Disclosure of Accounting Policies (Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2 Making Materiality Judgements) (1 January 2023): The amendments are intended to assist entities in deciding which accounting policies to disclose in their financial statements and requires an entity to disclose 'material accounting policy information' instead of its 'significant accounting policies'. Accounting policy information is material if, when considered together with other information included in an entity's financial statements, it can reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements. The IASB has also developed guidance and examples to explain and demonstrate the application of the 'four-step materiality process' described in IFRS Practice Statement 2. The amendments to IFRS Practice Statement 2 do not contain an effective date or transition requirements. These amendments are not expected to have any impact on the Group.

Definition of Accounting Estimates (Amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors) (1 January 2023): The amendments replace the definition of a change in accounting estimates with a definition of accounting estimates. Under the new definition, accounting estimates are 'monetary amounts in financial statements that are subject to measurement uncertainty'. The Board has retained the concept of changes in accounting estimates in the Standard by including a number of clarifications. These amendments are not expected to have any impact on the Group.

Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12 Income Taxes) (1 January 2023): The amendments narrow the scope of the recognition exemption in paragraphs 15 and 24 of IAS 12 so that it no longer applies to transactions that, on initial recognition, give rise to equal taxable and deductible temporary differences. The IASB expects that the amendments will reduce diversity in reporting and align the accounting for deferred tax on such transactions with the general principle in IAS 12 of recognising deferred tax for temporary differences. There will potentially be some additional disclosures required in relation to the Group's leasing arrangements as a result of implementing these amendments.

Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) (Effective date deferred): The amendments address the conflict between IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. These amendments are not expected to have any impact on the Group.

On 31 January 2020, the UK left the EU and effective from 1 January 2021, the European Commission will no longer endorse international accounting standards for use in the UK. UK legislation provides that all IFRSs that had been endorsed by the EU on or before 31 December 2020 became UK-adopted international accounting standards. From 1 January 2021, any new IFRSs or amended IFRSs will require independent endorsement in the UK to be part of the suite of UK-adopted international accounting standards that can be applied by UK companies. On 21 May 2021 the powers to endorse and adopt IFRSs for the UK were delegated by the Secretary of State to the UK Endorsement Board.

The following amendments to standards listed above have been endorsed for use in the UK by the Secretary of State:

Interest Rate Benchmark Reform - Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16);

Amendment to IFRS 16 Leases COVID-19-Related Rent Concessions; and

Amendments to IFRS 4 Insurance Contracts - Extension of the Temporary Extension for applying IFRS 9 Financial Instruments.

The amendments to IFRS 9 Financial Instruments formed part of the EU-adopted IFRSs which were adopted by the UK on 1 January 2021 and have previously been endorsed by the EU.

A6. Significant transactions during the year

The Group classifies disposal groups as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Costs to sell are the incremental costs directly attributable to the disposal of the disposal group, excluding finance costs and income tax expense. Assets and liabilities classified as held for sale are presented separately in the statement of consolidated financial position.

A6.1 New agreement with abrdn plc (formerly Standard Life Aberdeen plc)

On 23 February 2021, the Group entered into a new agreement with abrdn plc to simplify the arrangements of their Strategic Partnership, enabling the Group to control its own distribution, marketing and brands, and focusing the Strategic Partnership on using abrdn plc's asset management services in support of Phoenix's growth strategy.

Under the terms of the transaction, the Group will sell its UK investment and platform-related products, comprising Wrap Self Invested Personal Pension ('Wrap SIPP'), Onshore Bond and UK Trustee Investment Plan ('TIP') to abrdn plc and effective from 1 January 2021 has transferred the economic benefit of this business to abrdn plc. The Group has also acquired ownership of the Standard Life brand and as part of this acquisition, the relevant marketing, distribution and data team members transferred to the Group. As a result, the Client Service and Proposition Agreement ('CSPA'), entered into between the two groups following the acquisition of the Standard Life businesses in 2018, has been dissolved. In addition, Phoenix and abrdn plc resolved all legacy issues in relation to the Transitional Service Agreement ('TSA') entered into at the time of the acquisition of the Standard Life businesses and the CSPA.

The Group received cash consideration for the overall transaction of £115 million, £62 million of which has been deferred as detailed below. On completion of the agreement the Group recognised a net gain on the transaction of £89 million which has been recognised in the consolidated income statement as follows:

 

2021
 m

Sale of Wrap SIPP, Onshore and TIP business

(51)

Transfer of marketing services and termination of CSPA1

14

Value attributed to acquisition of the brand (note G2.5)

111

Resolution of legacy issues and project costs

36

Gain on completion of abrdn plc transaction

110

Attributable tax charge

(21)

 

89

1  Includes the impact of derecognising the CSPA related intangible asset. Further details are included in note G2.5.

The sale of the Wrap SIPP, Onshore Bond and TIP business currently within Standard Life Assurance Limited, will be effected through a Part VII transfer targeted for completion in late 2023. The economic risk and rewards for this business transferred to abrdn plc effective from 1 January 2021 via a profit transfer arrangement. Consideration received of £62 million in respect of this business has been deferred until completion of the Part VII and the payments to abrdn plc in respect of the profit transfer arrangement are being offset against the deferred consideration balance.

The balances in the statement of consolidated financial position relating to the Wrap SIPP, Onshore Bond and TIP business have been classified as a disposal group held for sale. The total proceeds of disposal are not expected to exceed the carrying value of the related net assets and accordingly the disposal group has been measured at fair value less costs to sell. At the date of the transaction an impairment loss of £59 million was recognised upon classification of the business as held for sale in respect of the acquired in-force business ('AVIF'). The major classes of assets and liabilities classified as held for sale are as follows:

 

 2021
£m

Acquired in-force business

54

Investment property

3,309

Financial assets

6,507

Cash and cash equivalents

76

Assets classified as held for sale

9,946

Assets in consolidated funds1

1,788

Total assets of the disposal group

11,734

 

 

Investment contract liabilities

(11,676)

Other financial liabilities

(4)

Provisions

(2)

Deferred tax liabilities

(10)

Accruals and deferred income

(54)

Liabilities classified as held for sale

(11,746)

1  Included in assets of the disposal group are assets in consolidated funds, which are held to back investment contract liabilities of the Wrap SIPP, Onshore bond and TIP business and are disclosed within financial assets in the consolidated statement of financial position. The Group controls these funds at 31 December 2021 and therefore consolidates 100% of the assets with any non-controlling interest recognised as net asset value attributable to unitholders.

A6.2 Disposal of Ark Life

On 1 November 2021, the Group completed the sale of Ark Life Assurance Company DAC ('Ark Life') to Irish Life Group Limited for gross cash consideration of €230 million (£198 million). Further details of the transaction are provided in note H3.

B. Earnings performance

B1. Segmental analysis

The Group defines and presents operating segments in accordance with IFRS 8 'Operating Segments'which requires such segments to be based on the information which is provided to the Board, and therefore segmental information in this note is presented on a different basis from profit or loss in the consolidated financial statements.

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses relating to transactions with other components of the Group.

As at 31 December 2020, following the acquisition of the ReAssure businesses, a separate operating segment was reported which included all of the ReAssure businesses. During the year, the Group has again reassessed its operating segments to reflect that the management and reporting of the ReAssure businesses have been aligned with that of the other Group businesses. Consequently, the results previously reported within the ReAssure segment are all now reported within the UK Heritage and UK Open segments and within Unallocated Group. The Group now has four reportable segments comprising UK Heritage, UK Open, Europe and Management Services, as set out in note B1.1.

For management purposes, the Group is organised into business units based on their products and services. For reporting purposes, business units are aggregated where they share similar economic characteristics including the nature of products and services, types of customers and the nature of the regulatory environment. No such aggregation has been required in the current year.

The UK Heritage segment contains UK businesses which no longer actively sell products to policyholders and which therefore run-off gradually over time. These businesses will accept incremental premiums on in-force policies.

The UK Open segment includes new and in-force life insurance and investment policies in respect of products that the Group continues to actively market to new and existing policyholders. This includes products such as workplace pensions and Self-Invested Personal Pensions ('SIPPs') distributed through the Group's Strategic Partnership with abrdn plc, products sold under the SunLife brand, and annuities, including Bulk Purchase Annuity contracts.

The Europe segment includes business written in Ireland and Germany. This includes products that are actively being marketed to new policyholders, and legacy in-force products that are no longer being sold to new customers.

The Management Services segment comprises income from the life and holding companies in accordance with the respective management service agreements less fees related to the outsourcing of services and other operating costs.

Unallocated Group includes consolidation adjustments and Group financing (including finance costs) which are managed on a Group basis and are not allocated to individual operating segments.

Inter-segment transactions are set on an arm's length basis in a manner similar to transactions with third parties. Segmental results include those transfers between business segments which are then eliminated on consolidation.

The business of Ark Life, which was disposed of during the year (see note H3), was allocated to the Heritage operating segment.

The Wrap SIPP, Onshore Bond and TIP businesses that have been classified as a disposal group held for sale as at 31 December 2021 (see note A6.1) are allocated to the Open operating segment.

Segmental measure of performance: Operating Profit

The Group uses a non-GAAP measure of performance, being operating profit, to evaluate segment performance. Operating profit is considered to provide a comparable measure of the underlying performance of the business as it excludes the impact of short-term economic volatility and other one-off items. This measure incorporates an expected return, including a longer-term return on financial investments backing shareholder and policyholder funds over the period, with consistent allowance for the corresponding expected movement in liabilities. Annuity new business profits are included in operating profit using valuation assumptions consistent with the pricing of the business (including the Group's expected longer-term asset allocation backing the business).

Operating profit includes the effect of variances in experience for non-economic items, such as mortality and expenses, and the effect of changes in non-economic assumptions. It also incorporates the impacts of significant management actions where such actions are consistent with the Group's core operating activities (for example, actuarial modelling enhancements and data reviews). Operating profit is reported net of policyholder finance charges and policyholder tax.

 

 

Operating profit excludes the impact of the following items:

the difference between the actual and expected experience for economic items and the impacts of changes in economic assumptions on the valuation of liabilities (see notes B2.1 and B2.2);

amortisation and impairments of intangible assets (net of policyholder tax);

finance costs attributable to owners;

gains or losses on the acquisition or disposal of subsidiaries (net of related costs);

the financial impacts of mandatory regulatory change;

the profit or loss attributable to non-controlling interests;

integration, restructuring or other significant one-off projects; and

any other items which, in the Directors' view, should be disclosed separately by virtue of their nature or incidence to enable a full understanding of the Group's financial performance. This is typically the case where the nature of the item is not reflective of the underlying performance of the operating companies.

Whilst the excluded items are important to an assessment of the consolidated financial performance of the Group, management considers that the presentation of the operating profit metric provides useful information for assessing the performance of the Group's operating segments on an ongoing basis. The IFRS results are significantly impacted by the amortisation of intangible balances arising on acquisition, the one-off costs of integration activities and the costs of servicing debt used to finance acquisition activity, which are not indicative of the underlying operational performance of the Group's segments.

Furthermore, the hedging strategy of the Group is calibrated to protect the Solvency II capital position and cash generation capability of the operating companies, as opposed to the IFRS financial position. This can create additional volatility in the IFRS result which is excluded from the operating profit metric.

The Group therefore considers that operating profit provides a good indicator of the ability of the Group's operating companies to generate cash available for the servicing of the Group's debts and for distribution to shareholders. Accordingly, the measure is more closely aligned with the business model of the Group and how performance is managed by those charged with governance.

Restatement of prior period information

As noted above, during the year the Group reassessed its operating segments to reflect the way the ReAssure businesses are now managed and reported. Consequently, the results previously reported within the ReAssure segment are now reported within the UK Heritage and UK Open segments and within Unallocated Group. UK Heritage and UK Open operating profit for the year ended 30 December 2020 has been increased by £153 million to £431 million and £301 million to £773 million respectively and Unallocated Group has decreased by £10 million to an operating loss of £55 million. UK Heritage segmental revenue has been increased by £251 million to £939 million and UK Open segmental revenue has been decreased by £69 million to £2,529 million.

 

B1.1 Segmental result

 

Notes

2021
£m

2020 restated1
£m

Operating profit

 

 

 

UK Heritage

 

537

431

UK Open

 

701

773

Europe

 

87

44

Management Services

 

(24)

6

Unallocated Group

 

(71)

(55)

Total segmental operating profit

 

1,230

1,199

 

 

 

 

Investment return variances and economic assumption changes

on long-term business and owners' funds

B2.2

(1,125)

101

Amortisation and impairment of acquired in-force business

 

(572)

(464)

Amortisation and impairment of other intangibles and goodwill

G2

(67)

(18)

Other non-operating items

 

(65)

281

Finance costs on borrowing attributable to owners

 

(217)

(191)

 

 

 

 

(Loss)/profit before the tax attributable to owners of the parent

 

(816)

908

 

 

 

 

Profit before tax attributable to non-controlling interests

 

128

36

 

 

 

 

(Loss)/profit before the tax attributable to owners

 

(688)

944

1  See note B1 for details of the restatement

Other non-operating items in respect of 2021 include:

a net £110 million gain arising on the transaction with abrdn plc, which included the sale of the Group's UK investment and platform related products and the acquisition by the Group of the Standard Life brand (see note A6.1 for further details);

a loss on disposal of £23 million arising on the sale of Ark Life Assurance Company DAC ('Ark Life') (see note H3 For further details);

£35 million related to the increase in provision for costs associated with the delivery of the Group Target Operating Model for IT and Operations;

£45 million of costs associated with the ongoing ReAssure integration programme; costs of £27 million associated with the integration of the Old Mutual Wealth business acquired by ReAssure Group plc in December 2019 and costs of £12 million associated with the integration of the acquired L&G mature savings business;

an £83 million policyholder tax benefit recognised following the favourable conclusion of discussions with HMRC in respect of certain excess management expenses associated with the L&G mature savings business;

£58 million of costs associated with the implementation of IFRS 17, which will be effective from 1 January 2023;

£44 million of other corporate project costs; and

net other one-off items totalling a cost of £14 million.

Other non-operating items in respect of 2020 include:

a gain on acquisition of £372 million reflecting the excess of the fair value of the net assets acquired over the consideration paid for the acquisition of ReAssure Group plc (see note H2.1 for further details);

a gain of £85 million arising on completion of the Part VII transfer of the mature savings liabilities and associated assets from the L&G Group (see note H2.2 for further details);

a net £43 million of additional costs associated with the delivery of the Group Target Operating Model for IT and Operations, comprising a £74 million increase in expenses recognised within liabilities under insurance contracts and partly offset by a £31 million release within the Transition and Transformation restructuring provision;

costs of £37 million associated with the acquisition of ReAssure Group plc, and £19 million incurred under the subsequent integration programme;

costs of £20 million associated with the ongoing integration of the Old Mutual Wealth business acquired by ReAssure Group plc in December 2019, incurred since the Group's acquisition of ReAssure Group plc in July 2020;

costs of £16 million associated with the transfer and integration of the L&G mature savings business;

£34 million of other corporate project costs; and

net other one-off items totalling a cost of £7 million.

Further details of the investment return variances and economic assumption changes on long-term business, and the variance on owners' funds are included in note B2.

B1.2 Segmental revenue

2021

UK Heritage £m

UK Open
£m

Europe
 m

Management Services
£m

Unallocated Group
£m

Total
 m

Revenue from external customers:

 

 

 

 

 

 

Gross premiums written

880

5,034

1,541

-

-

7,455

Less: premiums ceded to reinsurers

(284)

(1,739)

(56)

-

-

(2,079)

Net premiums written

596

3,295

1,485

-

-

5,376

 

 

 

 

 

 

 

Fees and commissions

634

297

70

-

-

1,001

Income from other segments

-

-

-

1,146

(1,146)

-

Total segmental revenue

1,230

3,592

1,555

1,146

(1,146)

6,377

 

2020 restated1

UK Heritage £m

UK Open
£m

Europe
£m

Management Services
£m

Unallocated Group
 m

Total
£m

Revenue from external customers:

 

 

 

 

 

 

Gross premiums written

765

2,726

1,215

-

-

4,706

Less: premiums ceded to reinsurers

(267)

(500)

(29)

-

-

(796)

Net premiums written

498

2,226

1,186

-

-

3,910

 

 

 

 

 

 

 

Fees and commissions

441

303

50

-

-

794

Income from other segments

-

-

-

737

(737)

-

Total segmental revenue

939

2,529

1,236

737

(737)

4,704

1   See note B1 for details of the restatement

Of the revenue from external customers presented in the table above, £5,448 million (2020: £3,818 million) is attributable to customers in the United Kingdom ('UK') and £929 million (2020: £886 million) to the rest of the world. The Europe operating segment comprises business written in Ireland and Germany to customers in both Europe and the UK. No revenue transaction with a single customer external to the Group amounts to greater than 10% of the Group's revenue.

The Group has total non-current assets (other than financial assets, deferred tax assets, pension schemes and rights arising under insurance contracts) of £5,245 million (2020: £7,042 million) located in the UK and £410 million (2020: £433 million) located in the rest of the world.

B2. Investment return variances and economic assumption changes

The long-term nature of much of the Group's operations means that, for internal performance management, the effects of short-term economic volatility are treated as non-operating items. The Group focuses instead on an operating profit measure that incorporates an expected return on investments supporting its long-term business. The accounting policy adopted in the calculation of operating profit is detailed in note B1. The methodology for the determination of the expected investment return is explained below together with an analysis of investment return variances and economic assumption changes recognised outside of operating profit.

B2.1 Calculation of the long-term investment return

The expected return on investments for both owner and policyholder funds is based on opening economic assumptions applied to the funds under management at the beginning of the reporting period. Expected investment return assumptions are derived actively, based on market yields on risk-free fixed interest assets at the start of each financial year.

The long-term risk-free rate used as a basis for deriving the long-term investment return is set by reference to the swap curve at the 15-year duration plus 10bps at the start of the year. A risk premium of 349bps is added to the risk-free yield for equities (2020: 349bps), 249bps for properties (2020: 249bps), 55bps for corporate bonds (2020: 55bps) and 15bps for gilts (2020: 15bps). The reduction in the risk-free rate reflected the lower expected return for these assets at the beginning of the period due to the lower fixed interest yields experienced in 2020.

The principal assumptions underlying the calculation of the long-term investment return are:

 

2021
%

2020
%

Equities

4.1

4.7

Properties

3.1

3.7

Gilts

0.8

1.4

Corporate bonds

1.2

1.8

B2.2 Investment return variances and economic assumption changes recognised outside of operating profit

Operating profit for life assurance business is based on expected investment returns on financial investments backing owners' and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, for example mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, for example market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit.

The movement in liabilities included in operating profit reflects both the change in liabilities due to the expected return on investments and the impact of experience variances and assumption changes for non-economic items.

The effect of differences between actual and expected economic experience on liabilities, and changes to economic assumptions used to value liabilities, are taken outside operating profit. For many types of long-term business, including unit-linked and with-profit funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. For other long-term business, the profit impact of economic volatility depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees. For non-long-term business including owners' funds, the total investment income, including fair value gains, is analysed between a calculated longer-term return and short-term fluctuations.

The investment return variances and economic assumption changes excluded from operating profit are as follows:

 

2021
£m

2020
 m

Investment return variances and economic assumption changes on long-term business and owners' funds

(1,125)

101

The net adverse investment return variances and economic assumption changes on long-term business and owners' funds of £1,125 million in 2021 (2020: positive £101 million) primarily reflect IFRS losses arising on life company hedging positions.

The impact of equity, interest rate and inflation movements on future profits in relation to with-profit bonuses and unit linked charges is hedged in order to benefit the regulatory capital position rather than the IFRS net assets. The impact of market movements on the value of the related hedging instruments is reflected in the IFRS results, but the corresponding change in the value of future profits is not. Such future profits are actively valued under Solvency II requirements but are either not recognised on an IFRS basis or are not revalued unless there is evidence of impairment (e.g. AVIF). This leads to volatility in the Group's IFRS results.

As a result of improving equity markets, rising yields and increasing inflation in the year, losses have been experienced on hedging positions held by the life companies. Continued strategic asset allocation initiatives undertaken by the Group, including investment in higher yielding assets and credit management actions provided a partial offset to the adverse variances experienced.

In 2020, declines in certain equity markets and falling yields gave rise to net gains on hedging positions, partially offset by adverse variances relating to movements in credit spreads and credit downgrades. The prior year result also included gains arising on derivative instruments entered into on announcement of the ReAssure acquisition to protect the Group's exposure to equity risk in the period prior to completion.

B3. Earnings per share

The Group calculates its basic earnings per share based on the present shares in issue using the earnings attributable to ordinary equity holders of the parent, divided by the weighted average number of ordinary shares in issue during the year.

Diluted earnings per share are calculated based on the potential future shares in issue assuming the conversion of all potentially dilutive ordinary shares. The weighted average number of ordinary shares in issue is adjusted to assume conversion of dilutive share awards granted to employees.

The basic and diluted earnings per share calculations are also presented based on the Group's operating profit net of financing costs. Operating profit is a non-GAAP performance measure that is considered to provide a comparable measure of the underlying performance of the business as it excludes the impact of short-term economic volatility and other one-off items.

The result attributable to ordinary equity holders of the parent for the purposes of determining earnings per share has been calculated as set out below.

2021

Operating profit
£m

Financing costs
£m

Operating earnings net of financing costs
£m

Other non-operating items
 m

Total
 m

Profit/(loss) before the tax attributable to owners

1,230

(217)

1,013

(1,701)

(688)

Tax (charge)/credit attributable to owners

(243)

44

(199)

178

(21)

Profit/(loss) for the year attributable to owners

987

(173)

814

(1,523)

(709)

Coupon paid on Tier 1 notes, net of tax relief

-

(23)

(23)

-

(23)

Deduct: Share of result attributable to non-controlling interests

-

-

-

(128)

(128)

Profit/(loss) for the year attributable to ordinary equity holders of the parent

987

(196)

791

(1,651)

(860)

 

2020

Operating profit
£m

Financing costs
£m

Operating earnings net of financing costs
£m

Other non-operating items
 m

Total
 m

Profit/(loss) before the tax attributable to owners

1,199

(191)

1,008

(64)

944

Tax (charge)/credit attributable to owners

(199)

48

(151)

41

(110)

Profit/(loss) for the year attributable to owners

1,000

(143)

857

(23)

834

Coupon paid on Tier 1 notes, net of tax relief

-

(23)

(23)

-

(23)

Deduct: Share of result attributable to non-controlling interests

-

-

-

(36)

(36)

Profit/(loss) for the year attributable to ordinary equity holders of the parent

1,000

(166)

834

(59)

775

The weighted average number of ordinary shares outstanding during the period is calculated as follows:

 

2021
Number million

2020 Number million

Issued ordinary shares at beginning of the year

999

722

Effect of ordinary shares issued

-

123

Own shares held by the employee benefit trust

(1)

(1)

Weighted average number of ordinary shares

998

844

The diluted weighted average number of ordinary shares outstanding during the period is 1,001 million (2020: 846 million). The Group's long-term incentive plan, deferred bonus share scheme and sharesave schemes increased the weighted average number of shares on a diluted basis by 2,702,934 shares for the year ended 31 December 2021 (2020: 2,316,109 shares). As losses have an anti-dilutive effect, none of the share-based awards have a dilutive effect in the calculation of basic earnings per share for the year ended 31 December 2021.

Earnings per share disclosures are as follows:

 

2021
pence

2020
pence

Basic earnings per share

(86.4)

91.8

Diluted earnings per share

(86.4)

91.5

Basic operating earnings net of financing costs per share

79.2

98.8

Diluted operating earnings net of financing costs per share

79.0

98.5

B4. Dividends

Final dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Group's owners. Interim dividends are deducted from equity when they are paid.

Dividends for the year that are approved after the reporting period are dealt with as an event after the reporting period. Declared dividends are those that are appropriately authorised and are no longer at the discretion of the entity.

 

 

2021
£m

2020
£m

Dividends declared and paid in the year

482

403

On 5 March 2021, the Board recommended a final dividend of 24.1p per share in respect of the year ended 31 December 2020. The dividend was approved at the Group's Annual General Meeting, which was held on 14 May 2021. The dividend amounted to £241 million and was paid on 18 May 2021.

On 10 August 2021, the Board declared an interim dividend of 24.1p per share for the half year ended 30 June 2021. The dividend amounted to £241 million and was paid on 3 September 2021.

C. Other income statement notes

C1. Fees and commissions

Fees related to the provision of investment management services and administration services are recognised as services are provided. Front end fees, which are charged at the inception of service contracts, are deferred as a liability and recognised over the life of the contract. No significant judgements are required in determining the timing or amount of fee income or the costs incurred to obtain or fulfil a contract.

The table below disaggregates fees and commissions by segment.

2021

UK Heritage £m

UK Open
 m

Europe
£m

Total
£m

Fee income from investment contracts without DPF

606

291

81

978

Initial fees deferred during the year

-

-

(11)

(11)

Revenue from investment contracts without DPF

606

291

70

967

Other revenue from contracts with customers

28

6

-

34

Fees and commissions

 634

 297

 70

 1,001

 

2020 restated1

UK Heritage
 m

UK Open
 m

Europe
£m

Total
£m

Fee income from investment contracts without DPF

429

293

58

780

Initial fees deferred during the year

-

-

(8)

(8)

Revenue from investment contracts without DPF

429

293

50

772

Other revenue from contracts with customers

12

10

-

22

Fees and commissions

 441

 303

 50

 794

1  The comparative information for fee income from investments without DPF has been restated. The ReAssure fee income of £145 million has been included within the UK Heritage fee income total of £441 million. For further details of the restatement see note B1.

Remaining performance obligations

The practical expedient under IFRS 15 has been applied and remaining performance obligations are not disclosed as the Group has the right to consideration from customers in amounts that correspond with the performance completed to date. Specifically management charges become due over time in proportion to the Group's provision of investment management services.

In the period no amortisation or impairment losses from contracts with customers were recognised in the statement of comprehensive income.

C2. Net investment income

Net investment income comprises interest, dividends, rents receivable, net interest income/(expense) on the Group defined benefit pension scheme asset/(liability), fair value gains and losses on financial assets (except for reinsurers' share of investment contract liabilities without DPF, see note E1), financial liabilities and investment property at fair value and impairment losses on loans and receivables.

Interest income is recognised in the consolidated income statement as it accrues using the effective interest method.

Dividend income is recognised in the consolidated income statement on the date the right to receive payment is established, which in the case of listed securities is the ex-dividend date.

Rental income from investment property is recognised in the consolidated income statement on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income.

Fair value gains and losses on financial assets and financial liabilities designated at fair value through profit or loss are recognised in the consolidated income statement. Fair value gains and losses includes both realised and unrealised gains and losses.

 

 

2021
£m

2020
£m

Investment income

 

 

Interest income on loans and deposits at amortised cost

1

8

Interest income on financial assets designated at FVTPL on initial recognition

2,647

2,313

Dividend income

4,384

3,525

Rental income

365

325

Net interest expense on Group defined benefit pension scheme (liability)/asset

(37)

(29)

 

7,360

6,142

 

 

 

Fair value gains/(losses)

 

 

Financial assets and financial liabilities at FVTPL:

 

 

Designated upon initial recognition

12,354

8,021

Held for trading - derivatives

(2,908)

2,824

Investment property

1,195

(52)

 

10,641

10,793

Net investment income

18,001

16,935

C3. Administrative expenses

Administrative expenses

Administrative expenses are recognised in the consolidated income statement as incurred.

Deferred acquisition costs

For insurance and investment contracts with DPF, acquisition costs which include both incremental acquisition costs and other direct costs of acquiring and processing new business, are deferred.

For investment contracts without DPF, incremental costs directly attributable to securing rights to receive fees for asset management services sold with unit-linked investment contracts are deferred.

Trail or renewal commission on investment contracts without DPF where the Group does not have an unconditional legal right to avoid payment is deferred at inception of the contract and an offsetting liability for contingent commission is established.

Deferred acquisition costs are amortised over the life of the contracts as the related revenue is recognised. After initial recognition, deferred acquisition costs are reviewed by category of business and are written off to the extent that they are no longer considered to be recoverable.

 

 

2021
£m

2020
£m

Employee costs

531

433

Outsourcer expenses

209

175

Movement in provision for transition and transformation programme (see note G7)

-

(31)

Professional fees

321

230

Commission expenses

178

152

Office and IT costs

150

124

Investment management expenses and transaction costs

528

437

Direct costs of life companies

-

4

Direct costs of collective investment schemes

28

25

Depreciation

18

28

Pension service costs

-

2

Pension administrative expenses

6

5

Advertising and sponsorship

58

58

Stamp duty payable on acquisition of ReAssure businesses

-

16

Other

59

45

 

2,086

1,703

Acquisition costs deferred during the year

(38)

(34)

Amortisation of deferred acquisition costs

8

5

Total administrative expenses

2,056

1,674

Employee costs comprise:

 

2021
 m

2020
£m

Wages and salaries

483

390

Social security contributions

48

43

 

531

433

 

 

2021
Number

2020 Number

Average number of persons employed

7,885

5,752

C4. Auditor's remuneration

During the year the Group obtained the following services from its auditor at costs as detailed in the table below.

 

2021
£m

2020
£m

Audit of the consolidated financial statements

1.8

2.1

Audit of the Company's subsidiaries

9.8

9.6

 

11.6

11.7

Audit-related assurance services

2.3

2.3

Reporting accountant assurance services

-

0.1

Total fee for assurance services

13.9

14.1

 

 

 

Other non-audit services

-

0.4

Total fees for other services

-

0.4

 

 

 

Total auditor's remuneration

13.9

14.5

No services were provided by the Company's auditors to the Group's pension schemes in either 2021 or 2020.

Audit of the consolidated financial statements in 2020 included amounts in respect of reporting to the auditor of abrdn plc given their status as a significant investor. The 2020 balance also includes amounts in respect of the audit of the acquisition balance sheet of the acquired ReAssure Group businesses.

Audit related assurance services includes fees payable for services where the reporting is required by law or regulation to be provided by the auditor, such as reporting on regulatory returns. It also includes fees payable in respect of reviews of interim financial information and services where the work is integrated with the audit itself.

Reporting accountant services relate to assurance reporting on historical information included within investment circulars. In 2020, this included public reporting associated with the acquisition of ReAssure Group.

There were no other non-audit services provided during the year (2020: £0.4 million). The 2020 fees related to services provided to ReAssure Group where the engagement occurred prior to completion of the acquisition and which were terminated within the three-month grace period.

Further information on auditor's remuneration and the assessment of the independence of the external auditor is set out in the Audit Committee report on pages 96 to 100.

C5. Finance costs

Interest payable is recognised in the consolidated income statement as it accrues and is calculated using the effective interest method.

 

 

2021
£m

2020
£m

Interest expense

 

 

On financial liabilities at amortised cost

239

230

On leases

3

4

 

242

234

 

 

 

Attributable to:

 

 

· policyholders

2

10

· owners

240

224

 

242

234

C6. Tax charge

Income tax comprises current and deferred tax. Income tax is recognised in the consolidated income statement except to the extent that it relates to items recognised in the statement of consolidated comprehensive income or the statement of consolidated changes in equity, in which case it is recognised in these statements.

Current tax is the expected tax payable on the taxable income for the year, using tax rates and laws enacted or substantively enacted at the date of the statement of consolidated financial position together with adjustments to tax payable in respect of previous years.

The tax charge is analysed between tax that is payable in respect of policyholders' returns and tax that is payable on owners' returns. This allocation is calculated based on an assessment of the effective rate of tax that is applicable to owners for the year.

C6.1 Current year tax charge

 

2021
£m

2020
£m

Current tax:

 

 

UK corporation tax

(9)

306

Overseas tax

114

59

 

105

365

Adjustment in respect of prior years

(66)

(4)

Total current tax charge

39

361

Deferred tax:

 

 

Origination and reversal of temporary differences

120

111

Change in the rate of UK corporation tax

147

(37)

Adjustments in respect of prior years

(27)

1

Total deferred tax charge

240

75

Total tax charge

279

436

Attributable to:

 

 

· policyholders

258

326

· owners

21

110

Total tax charge

279

436

The Group, as a proxy for policyholders in the UK, is required to pay taxes on investment income and gains each year. Accordingly, the tax credit or expense attributable to UK life assurance policyholder earnings is included in income tax expense. The tax charge attributable to policyholder earnings was £258 million (2020: £326 million).

The current tax prior year adjustment relates principally to the utilisation of excess management expenses transferred with the Legal & General business transfer in 2020. The benefit of the excess management expenses was not recognised in 2020 as discussions were ongoing with HMRC as to the appropriate tax treatment of the business transfer and associated transactions. Discussions with HMRC concluded late in 2021 and in accordance with IAS 12 and IFRIC 23 it is now considered appropriate to recognise the benefit of the excess management expenses. The expenses were utilised in full in the 2020 period reducing the current tax charge in 2020 by 57 million and increasing the utilisation of the capital losses in the company generating a further reduction to the current tax charge of 9 million, resulting in a prior year tax credit of £66 million in total. This comprises a policyholder tax credit of £79 million and a shareholder tax charge of £13 million.

C6.2 Tax charged to other comprehensive Income

 

2021
£m

2020
£m

Current tax charge

1

12

Deferred tax charge on defined benefit schemes

137

25

 

138

37

C6.3 Tax credited to equity

 

2021
£m

2020
£m

Current tax credit on Tier 1 Notes

(6)

(6)

Deferred tax credit on share schemes

(1)

-

 

(7)

(6)

C6.4 Reconciliation of tax charge

 

2021
£m

2020
£m

(Loss)/profit for the year before tax

(430)

1,270

Policyholder tax charge

(258)

(326)

(Loss)/profit before the tax attributable to owners

(688)

944

 

 

 

Tax (credit)/charge at standard UK rate of 19%1

(131)

179

Non-taxable income, gains and losses2

(10)

(78)

Disallowable expenses3

19

9

Prior year tax credit for shareholders4

(7)

(17)

Movement on acquired in-force amortisation at less than 19%

34

77

Profits taxed at rates other than 19%5

(22)

(10)

Recognition of previously unrecognised deferred tax assets6

(13)

(25)

Deferred tax rate change7

147

(37)

Current year losses not valued

1

9

Other

3

3

Owners' tax charge

21

110

Policyholder tax charge

258

326

Total tax charge for the year

279

436

1   The Phoenix operating segments are predominantly in the UK. The reconciliation of tax charge has, therefore, been completed by reference to the standard rate of UK tax.

2   The balance primarily relates to the release of provisions no longer required following the resolution of legacy matters with abrdn plc and non-taxable dividends.

3   Disallowable expense deductions are primarily in relation to goodwill impaired in the year and the loss on disposal of Ark Life Assurance Company DAC.

4   The 2021 prior year tax credit recognised in the current period predominately relates to the recognition of a £(17) million deferred tax credit on fair value adjustments on external loans, a £(5) million current tax credit arising on the release of an overprovision for tax on shareholder profits within Standard Life Assurance Limited and a £13 million charge arising from the shareholder tax impact of the utilisation of excess management expenses transferred in 2020 with the Legal and General business.

5   Profits taxed at rates other than 19% relates to overseas profits, consolidated fund investments and UK life company profits subject to marginal shareholder tax rates.

6   The 2021 tax credit predominately represents the recognition of tax credits of £(9) million in relation to tax losses, £(2) million in relation to intangible assets within Standard Life International DAC and £(2) million in relation to capital losses within the ReAssure group.

7   The 2021 deferred tax rate change relates to the impact of the new 25% corporation tax rate effective from 1 April 2023.

D. Equity

D1. Share capital

The Group has issued ordinary shares which are classified as equity. Incremental external costs that are directly attributable to the issue of these shares are recognised in equity, net of tax.

 

 

2021
£m

2020
£m

Issued and fully paid:

 

 

999.5 million ordinary shares of £0.10 each (2020: 999.2 million)

100

100

The holders of ordinary shares are entitled to one vote per share on matters to be voted on by owners and to receive such dividends, if any, as may be declared by the Board of Directors in its discretion out of legally available profits.

Movements in issued share capital during the year:

2021

Number

£

Shares in issue at 1 January

999,232,144

99,923,214

Ordinary shares issued in the year

303,914

30,391

Shares in issue at 31 December

999,536,058

99,953,605

During the year, 303,914 shares were issued at a premium £2 million in order to satisfy obligations to employees under the Group's sharesave schemes (see note I1).

2020

Number

£

Shares in issue at 1 January

721,514,944

72,151,494

Ordinary shares issued to Swiss Re and MS&AD

277,277,138

27,727,714

Other ordinary shares issued in the year

440,062

44,006

Shares in issue at 31 December

999,232,144

99,923,214

On 22 July 2020, the Group acquired 100% of the issued share capital of ReAssure Group plc from Swiss Re Finance Midco (Jersey) Limited, an indirect subsidiary of Swiss Re Limited, for total consideration of £3.1 billion. The consideration consisted of £1.3 billion of cash, funded through the issuance of debt and own resources, and the issue of 277,277,138 shares ('the Acquisition Shares') to Swiss Re Group on 23 July 2020.

Pursuant to an agreement between Swiss Re Group and MS&AD Insurance Group Holdings ('MS&AD'), MS&AD transferred its entire shareholding in ReAssure Group plc to the Swiss Re Group prior to 22 July 2020 in consideration for the transfer of 144,877,304 of the Acquisition Shares at completion. The equity stake in the Group held by Swiss Re Group and MS&AD was valued at £1,847 million, based on the share price at that date.

The Group has applied the relief in section 612 of the Companies Act 2006 to present the difference between the consideration received and the nominal value of the shares issued of £1,819 million in a merger relief reserve as opposed to in share premium. A merger relief reserve is required to be used as a result of the Group having issued equity shares as part consideration for the shares of ReAssure Group plc and securing at least a 90% holding in that entity.

During 2020, 440,062 shares were issued at a premium of £2 million in order to satisfy obligations to employees under the Group's sharesave schemes (see note I1).

D2. Shares held by the employee benefit trust

Where the Phoenix Group Employee Benefit Trust ('EBT') acquires shares in the Company or obtains rights to purchase its shares, the consideration paid (including any attributable transaction costs, net of tax) is shown as a deduction from owners' equity. Gains and losses on sales of shares held by the EBT are charged or credited to the own shares account in equity.

The EBT holds shares to satisfy awards granted to employees under the Group's share-based payment schemes.

 

2021
£m

2020
£m

At 1 January

6

7

Shares acquired by the EBT

16

7

Shares awarded to employees by the EBT

(10)

(8)

At 31 December

12

6

During the year 1,490,492 (2020: 1,230,763) shares were awarded to employees by the EBT and 2,423,407 (2020: 1,087,410) shares were purchased. The number of shares held by the EBT at 31 December 2021 was 1,885,918 (2020: 953,003).

The Company provided the EBT with an interest-free facility arrangement to enable it to purchase the shares.

D3. Other reserves

The other reserves comprise the owner-occupied property revaluation reserve and the cash flow hedging reserve.

Owner-occupied property revaluation reserve

This reserve comprises the revaluation surplus arising on revaluation of owner-occupied property. When a revaluation loss arises on a previously revalued asset it should be deducted first against the previous revaluation gain. Any excess impairment will then be recorded as an impairment expense in the consolidated income statement.

Cash flow hedging reserve

Where a cash flow hedging relationship exists, the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the consolidated income statement, and is reported in net investment income.

Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line as the recognised hedged item.

Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time is recycled to profit or loss over the period the hedged item impacts profit or loss.

Further details of the Group's hedge accounting policy are included in note E1.

 

2021

Owner-occupied property revaluation reserve
£m

Cash flow hedging reserve
£m

Total other reserves
£m

At 1 January 2021

5

43

48

Other comprehensive income for the year

-

8

8

At 31 December 2021

5

51

56

 

2020

Owner-occupied property revaluation reserve
£m

Cash flow hedging reserve
£m

Total other reserves
£m

At 1 January 2020

5

(7)

(2)

Other comprehensive income for the year

-

50

50

At 31 December 2020

5

43

48

In June 2021, the Group entered into four cross currency swaps which were designated as hedging instruments in order to effect cash flow hedges of the Group's Euro and US Dollar denominated borrowings. Hedge accounting has been adopted effective from the date of designation of the hedging relationship.

In April 2020, the Group terminated the derivative instruments which had previously been designated as hedging instruments in its cash flow hedging relationships. Hedge accounting was discontinued from the point of termination of the derivative instruments. The remaining cash flow hedging reserve will continue to be reclassified to profit or loss over the remaining term of the hedged items.

D4. Tier 1 notes

The Fixed Rate Reset Perpetual Restricted Tier 1 Contingent Convertible Notes ('Tier 1 Notes') meet the definition of equity and accordingly are shown as a separate category within equity at the proceeds of issue. The coupons on the instruments are recognised as distributions on the date of payment and are charged directly to the statement of consolidated changes in equity.

 

 

2021
£m

2020
£m

Tier 1 Notes

494

494

On 26 April 2018, Old PGH (the Group's ultimate parent company up to December 2018) issued £500 million of Tier 1 Notes, the proceeds of which were used to fund a portion of the cash consideration for the acquisition of the Standard Life Assurance businesses. The Tier 1 Notes bear interest on their principal amount at a fixed rate of 5.75% per annum up to the 'First Call Date' of 26 April 2028. Thereafter the fixed rate of interest will be reset on the First Call Date and on each fifth anniversary of this date by reference to a 5 year gilt yield plus a margin of 4.169%. Interest is payable on the Tier 1 Notes semi-annually in arrears on 26 October and 26 April. The coupon paid in the year was £29 million (2020: £29 million).

At the issue date, the Tier 1 Notes were unsecured and subordinated obligations of Old PGH. On 12 December 2018, the Company was substituted in place of Old PGH as issuer.

The Tier 1 Notes have no fixed maturity date and interest is payable only at the sole and absolute discretion of the Company; accordingly the Tier 1 Notes meet the definition of equity for financial reporting purposes and are disclosed as such in the consolidated financial statements. If an interest payment is not made, it is cancelled and it shall not accumulate or be payable at any time thereafter.

The Tier 1 Notes may be redeemed at par on the First Call Date or on any interest payment date thereafter at the option of the Company and also in other limited circumstances. If such redemption occurs prior to the fifth anniversary of the Issue Date, such redemption must be funded out of the proceeds of a new issuance of, or exchanged into, Tier 1 Own Funds of the same or a higher quality than the Tier 1 Notes. In respect of any redemption or purchase of the Tier 1 Notes, such redemption or purchase is subject to the receipt of permission to do so from the PRA.

On 27 October 2020, the terms of the Tier 1 Notes were amended and the consequence of a trigger event, linked to the Solvency II capital position, was changed. Previously, the Tier 1 Notes were subject to a permanent write-down in value to zero. The amended terms require that the Tier 1 Notes would automatically be subject to conversion to ordinary shares of the Company at the conversion price of £1,000 per share, subject to adjustment in accordance with the terms and conditions of the notes and all accrued and unpaid interest would be cancelled. Following any such conversion there would be no reinstatement of any part of the principal amount of, or interest on, the Tier 1 Notes at any time.

D5. Non-controlling interests

Non-controlling interests are stated at the share of net assets attributed to the non-controlling interest holder at the time of acquisition, adjusted for the relevant share of subsequent changes in equity.

 

 

SLPET
 m

At 1 January 2021

341

Profit for the year

128

Dividends paid

(9)

At 31 December 2021

460

 

 

SLPET
 m

At 1 January 2020

314

Profit for the year

36

Dividends paid

(9)

At 31 December 2020

341

The non-controlling interests of £460 million (2020: £341 million) reflects third party ownership of Standard Life Private Equity Trust ('SLPET') determined at the proportionate value of the third party interest in the underlying assets and liabilities. SLPET is a UK Investment Trust listed and traded on the London Stock Exchange. As at 31 December 2021, the Group held 55.2% of the issued share capital of SLPET (2020: 55.2%).

The Group's interest in SLPET is held in the with-profit and unit-linked funds of the Group's life companies. Therefore, the shareholder exposure to the results of SLPET is limited to the impact of those results on the shareholder share of distributed profits of the relevant fund.

Summary financial information showing the interest that non-controlling interests have in the Group's activities and cash flows is shown below:

SLPET

2021
£m

2020
£m

Statement of financial position:

 

 

Financial assets

452

335

Other assets

19

9

Total assets

471

344

Total liabilities

11

3

Income statement:

 

 

Net income

134

41

Profit after tax

128

36

Comprehensive income

128

36

Cash flows:

 

 

Net increase/(decrease) in cash equivalents

10

(19)

E. Financial assets & liabilities

E1. Fair values

Financial assets

Purchases and sales of financial assets are recognised on the trade date, which is the date that the Group commits to purchase or sell the asset.

Loans and deposits are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and only include assets where a security has not been issued. These loans and deposits are initially recognised at cost, being the fair value of the consideration paid for the acquisition of the investment. All transaction costs directly attributable to the acquisition are also included in the cost of the investment. Subsequent to initial recognition, these investments are carried at amortised cost, using the effective interest method.

Derivative financial instruments are largely classified as held for trading. They are recognised initially at fair value and subsequently are remeasured to fair value. The gain or loss on remeasurement to fair value is recognised in the consolidated income statement. Derivative financial instruments are not classified as held for trading where they are designated and effective as a hedging instrument. For such instruments, the timing of the recognition of any gain or loss that arises on remeasurement to fair value in profit or loss depends on the nature of the hedge relationship.

Equities, debt securities and collective investment schemes are designated at FVTPL and accordingly are stated in the statement of consolidated financial position at fair value. They are designated at FVTPL because this is reflective of the manner in which the financial assets are managed and reduces a measurement inconsistency that would otherwise arise with regard to the insurance liabilities that the assets are backing.

Reinsurers share of investment contracts liabilities without DPF are valued, and associated gains and losses presented, on a basis consistent with investment contracts liabilities without DPF as detailed under the 'Financial liabilities' section below.

Impairment of financial assets

The Group assesses at each period end whether a financial asset or group of financial assets held at amortised cost are impaired. The Group first assesses whether objective evidence of impairment exists. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be recognised, are not included in the collective assessment of impairment.

Fair value estimation

The fair values of financial instruments traded in active markets such as publicly traded securities and derivatives are based on quoted market prices at the period end. The quoted market price used for financial assets is the applicable bid price on the period end date. The fair value of investments that are not traded in an active market is determined using valuation techniques such as broker quotes, pricing models or discounted cash flow techniques. Where pricing models are used, inputs are based on market related data at the period end. Where discounted cash flow techniques are used, estimated future cash flows are based on contractual cash flows using current market conditions and market calibrated discount rates and interest rate assumptions for similar instruments.

For units in unit trusts and shares in open-ended investment companies, fair value is determined by reference to published bid-values. The fair value of receivables and floating rate and overnight deposits with credit institutions is their carrying value. The fair value of fixed interest-bearing deposits is estimated using discounted cash flow techniques.

 

Associates

Investments in associates that are held for investment purposes are accounted for under IAS 39 Financial Instruments: Recognition and Measurementas permitted by IAS 28 Investments in Associates and Joint Ventures. These are measured at fair value through profit or loss. There are no investments in associates which are of a strategic nature.

Derecognition of financial assets

A financial asset (or part of a group of similar financial assets) is derecognised where:

the rights to receive cash flows from the asset have expired;

the Company retains the right to receive cash flows from the assets, but has assumed an obligation to pay them in full without material delay to a third party under a 'pass-through' arrangement; or

the Company has transferred its rights to receive cash flows from the asset and has either transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Financial liabilities

On initial recognition, financial liabilities are recognised when due and measured at the fair value of the consideration received less directly attributable transaction costs (with the exception of liabilities at FVTPL for which all transaction costs are expensed).

Subsequent to initial recognition, financial liabilities (except for liabilities under investment contracts without DPF and other liabilities designated at FVTPL) are measured at amortised cost using the effective interest method.

Financial liabilities are designated upon initial recognition at FVTPL and where doing so results in more meaningful information because either:

it eliminates or significantly reduces accounting mismatches that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or

a group of financial assets, financial liabilities or both is managed and its performance is evaluated and managed on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the investments is provided internally on that basis to the Group's key management personnel.

Investment contracts without DPF

Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as investment contracts and accounted for as financial liabilities.

Receipts and payments on investment contracts without DPF are accounted for using deposit accounting, under which the amounts collected and paid out are recognised in the statement of consolidated financial position as an adjustment to the liability to the policyholder.

The valuation of liabilities on unit-linked contracts are held at the fair value of the related assets and liabilities. The liability is the sum of the unit-linked liabilities plus an additional amount to cover the present value of the excess of future policy costs over future charges.

Movements in the fair value of investment contracts without DPF and reinsurers' share of investment contract liabilities are included in the 'change in investment contract liabilities' in the consolidated income statement.

Investment contract policyholders are charged for policy administration services, investment management services, surrenders and other contract fees. These fees are recognised as revenue over the period in which the related services are performed. If the fees are for services provided in future periods, then they are deferred and recognised over those periods. 'Front end' fees are charged on some non-participating investment contracts. Where the non-participating investment contract is measured at fair value, such fees which relate to the provision of investment management services are deferred and recognised as the services are provided.

 

 

Deposits received from reinsurers

It is the Group's practice to obtain collateral to cover certain reinsurance transactions, usually in the form of cash or marketable securities. Where cash collateral is available to the Group for investment purposes, it is recognised as a 'financial asset' and the collateral repayable is recognised as 'deposits received from reinsurers' in the statement of consolidated financial position. The 'deposits received from reinsurers' are measured at amortised cost.

Net asset value attributable to unitholders

The net asset value attributable to unitholders represents the non-controlling interest in collective investment schemes which are consolidated by the Group. This interest is classified at FVTPL and measured at fair value, which is equal to the bid value of the number of units of the collective investment scheme not owned by the Group.

Obligations for repayment of collateral received

It is the Group's practice to obtain collateral in stock lending and derivative transactions, usually in the form of cash or marketable securities. Where cash collateral received is available to the Group for investment purposes, it is recognised as a 'financial asset' and the collateral repayable is recognised as 'obligations for repayment of collateral received' in the statement of consolidated financial position. The 'obligations for repayment of collateral received' are measured at amortised cost, which in the case of cash is equivalent to the fair value of the consideration received. Further details of the Group's collateral arrangements are included in note E4.

Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged, or cancelled or expires.

Offsetting financial assets and financial liabilities

Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. When financial assets and liabilities are offset any related interest income and expense is offset in the income statement.

Hedge accounting

The Group designates certain derivatives as hedging instruments in order to effect cash flow hedges. At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk.

Where a cash flow hedging relationship exists, the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in net investment income.

Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line as the recognised hedged item.

Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time is recycled to profit or loss over the period the hedged item impacts profit or loss.

E1.1 Fair values analysis

The table below sets out a comparison of the carrying amounts and fair values of financial instruments as at 31 December 2021:

 

Carrying value

 

2021

Total
£m

Amounts
due for settlement after 12 months
£m

Fair value
£m

Financial assets

 

 

 

Financial assets at fair value through profit or loss:

 

 

 

Held for trading - derivatives

4,571

3,208

4,571

Designated upon initial recognition:

 

 

 

Equities1

87,059

-

87,059

Investment in associate (see note H4)1

431

-

431

Debt securities

106,990

88,965

106,990

Collective investment schemes1

90,164

-

90,164

Reinsurers' share of investment contract liabilities1

10,009

-

10,009

Financial assets measured at amortised cost:

 

 

 

Loans and deposits

475

48

475

Total financial assets

299,699

 

299,699

Less amounts classified as financial assets held for sale (see note A6.1)2

(6,507)

 

(6,507)

Total financial assets less financial assets classified as held for sale

293,192

 

293,192

 

 

Carrying value

 

 

Total
£m

Amounts
due for settlement after 12 months
£m

Fair value
£m

Financial liabilities

 

 

 

Financial liabilities at fair value through profit or loss:

 

 

 

Held for trading - derivatives

1,252

989

1,252

Designated upon initial recognition:

 

 

 

Borrowings

70

70

70

Net asset value attributable to unitholders1

3,568

-

3,568

Investment contract liabilities1

172,093

-

172,093

Financial liabilities measured at amortised cost:

 

 

 

Borrowings

4,155

3,688

4,564

Deposits received from reinsurers

3,569

3,150

3,569

Obligations for repayment of collateral received

3,442

-

3,442

Total financial liabilities

188,149

 

188,558

Less amounts classified as financial liabilities held for sale3

(11,680)

 

(11,680)

Total financial liabilities less financial liabilities held for sale

176,469

 

176,878

1  These assets and liabilities have no specified settlement date.

2  Amounts classified as financial assets held for sale include derivatives of £4 million, equities of £78 million, debt securities of £2,229 million, collective investment schemes of £4,169 million and reinsurers' share of investment contract liabilities of £27 million.

3  Amounts classified as financial liabilities held for sale include derivative liabilities of £4 million and investment contract liabilities of £11,676 million.

 

 

Carrying value

 

2020

Total
£m

Amounts
due for settlement after 12 months
£m

Fair value
£m

Financial assets

 

 

 

Financial assets at fair value through profit or loss:

 

 

 

Held for trading - derivatives

6,880

6,429

6,880

Designated upon initial recognition:

 

 

 

Equities1

82,634

-

82,634

Investment in associate (see note H4)1

400

-

400

Debt securities

109,455

94,070

109,455

Collective investment schemes1

89,248

-

89,248

Reinsurers' share of investment contract liabilities1

9,559

-

9,559

Financial assets measured at amortised cost:

 

 

 

Loans and deposits

647

60

647

Total financial assets

298,823

 

298,823

 

 

Carrying value

 

 

Total
£m

Amounts
due for settlement after 12 months
£m

Fair value
£m

Financial liabilities

 

 

 

Financial liabilities at fair value through profit or loss:

 

 

 

Held for trading - derivatives

1,001

727

1,001

Designated upon initial recognition:

 

 

 

Borrowings

84

84

84

Net asset value attributable to unitholders1

3,791

-

3,791

Investment contract liabilities1

165,106

-

165,106

Financial liabilities measured at amortised cost:

 

 

 

Borrowings

4,483

4,161

5,016

Deposits received from reinsurers

4,080

3,381

4,080

Obligations for repayment of collateral received

5,205

-

5,205

Total financial liabilities

183,750

 

184,283

1  These assets and liabilities have no specified settlement date.

E1.2 IFRS 9 Temporary exemption disclosures

Following application of the temporary exemption granted to insurers in IFRS 4 Insurance Contracts from applying IFRS 9 Financial Instruments (see note A5) the table below separately identifies financial assets with contractual cash flows that are solely payments of principal and interest ('SPPI') (excluding those held for trading or managed on a fair value basis) and all other financial assets, measured at fair value through profit or loss.

 

 

2021
£m

2020
 m

Financial assets with contractual cash flows that are SPPI excluding those held for trading or managed on a fair value basis:

 

 

Loans and deposits

475

647

Cash and cash equivalents1

9,112

10,998

Accrued income

282

251

Other receivables2

1,697

1,541

All other financial assets that are measured at fair value through profit or loss3

292,717

298,176

1   Cash and cash equivalents excludes assets classified as held for sale of £76 million (2020: £nil).

2   Other receivables excludes deferred acquisition costs.

3   The change in fair value during 2021 of all other financial assets that are measured at fair value through profit or loss is a £5,881 million gain (2020: £11,087 million gain). The balance excludes £6,507 million (2020: £nil) of financial assets that are measured at fair value through profit or loss classified as held for sale.

An analysis of credit ratings of financial assets with contractual cash flows that are SPPI, excluding those held for trading or managed on a fair value basis, is provided below:

2021
Carrying value

AAA
£m

AA
£m

A
£m

BBB
£m

BB and
below
£m

Non-rated1
£m

Unit-linked £m

Total
£m

Less amounts classified as held for sale (see note A6.1)
£m

Total
£m

Loans and deposits

-

6

-

-

-

414

55

475

-

475

Cash and cash equivalents

382

1,686

5,161

181

-

3

1,775

9,188

(76)

9,112

Accrued income

-

-

-

-

-

282

-

282

-

282

Other receivables

-

-

-

-

-

1,697

-

1,697

-

1,697

 

382

1,692

5,161

181

-

2,396

1,830

11,642

(76)

11,566

 

2020
Carrying value

AAA
£m

AA
£m

A
£m

BBB
£m

BB and
below
£m

Non-rated1
£m

Unit-linked £m

Total
£m

Loans and deposits

-

6

195

-

-

368

78

647

Cash and cash equivalents

30

1,728

7,049

173

-

10

2,008

10,998

Accrued income

-

-

-

-

-

251

-

251

Other receivables

-

-

-

-

-

1,541

-

1,541

 

30

1,734

7,244

173

-

2,170

2,086

13,437

1   The Group has assessed its non-rated assets as having a low credit risk.

E2.1 Determination of fair value and fair value hierarchy of financial instruments

Level 1 financial instruments

The fair value of financial instruments traded in active markets (such as exchange traded securities and derivatives) is based on quoted market prices at the period end provided by recognised pricing services. Market depth and bid-ask spreads are used to corroborate whether an active market exists for an instrument. Greater depth and narrower bid-ask spread indicate higher liquidity in the instrument and are classed as Level 1 inputs. For collective investment schemes, fair value is by reference to published bid prices.

Level 2 financial instruments

Financial instruments traded in active markets with less depth or wider bid-ask spreads which do not meet the classification as Level 1 inputs, are classified as Level 2. The fair values of financial instruments not traded in active markets are determined using broker quotes or valuation techniques with observable market inputs. Financial instruments valued using broker quotes are classified as Level 2, only where there is a sufficient range of available quotes. The fair value of over the counter derivatives is estimated using pricing models or discounted cash flow techniques. Collective investment schemes where the underlying assets are not priced using active market prices are determined to be Level 2 instruments. Where pricing models are used, inputs are based on market related data at the period end. Where discounted cash flows are used, estimated future cash flows are based on management's best estimates and the discount rate used is a market related rate for a similar instrument.

Level 3 financial instruments

The Group's financial instruments determined by valuation techniques using non-observable market inputs are based on a combination of independent third party evidence and internally developed models. In relation to investments in hedge funds and private equity investments, non-observable third party evidence in the form of net asset valuation statements is used as the basis for the valuation. Adjustments may be made to the net asset valuation where other evidence, for example recent sales of the underlying investments in the fund, indicates this is required. Securities that are valued using broker quotes which could not be corroborated across a sufficient range of quotes are considered as Level 3. For a small number of investment vehicles and debt securities, standard valuation models are used, as due to their nature and complexity they have no external market. Inputs into such models are based on observable market data where applicable. The fair value of loans, derivatives and some borrowings with no external market is determined by internally developed discounted cash flow models using appropriate assumptions corroborated with external market data where possible.

For financial instruments that are recognised at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) during each reporting period.

Fair value hierarchy information for non-financial assets measured at fair value is included in note G3 for owner-occupied property and in note G4 for investment property.

E2. Fair value hierarchy

E2.2 Fair value hierarchy of financial instruments

The tables below separately identify financial instruments carried at fair value from those measured on another basis but for which fair value is disclosed.

2021

Level 1
£m

Level 2
£m

Level 3
 m

Total fair value
£m

Financial assets measured at fair value

 

 

 

 

Derivatives

161

4,173

237

4,571

Financial assets designated at FVTPL upon initial recognition:

 

 

 

 

Equities

85,108

52

1,899

87,059

Investment in associate

431

-

-

431

Debt securities

57,992

36,546

12,452

106,990

Collective investment schemes

86,244

3,634

286

90,164

Reinsurers' share of investment contract liabilities

10,009

-

-

10,009

 

239,784

40,232

14,637

294,653

Total financial assets measured at fair value

239,945

44,405

14,874

299,224

Less amounts classified as held for sale (see note A6.1)

(5,194)

(421)

(892)

(6,507)

Total financial assets measured at fair value, excluding amounts classified as held for sale

234,751

43,984

13,982

292,717

Financial assets for which fair values are disclosed

 

 

 

 

Loans and deposits at amortised cost

-

464

11

475

 

234,751

44,448

13,993

293,192

 

2021

Level 1
£m

Level 2
£m

Level 3
 m

Total fair value
£m

Financial liabilities measured at fair value

 

 

 

 

Derivatives

155

972

125

1,252

Financial liabilities designated at FVTPL upon initial recognition:

 

 

 

 

Borrowings

-

-

70

70

Net asset value attributable to unit-holders

3,568

-

-

3,568

Investment contract liabilities

-

172,093

-

172,093

 

3,568

172,093

70

175,731

Total financial liabilities measured at fair value

3,723

173,065

195

176,983

Less amounts classified as held for sale (see note A6.1)

-

(11,680)

-

(11,680)

Total financial liabilities measured at fair value, excluding amounts classified as held for sale

3,723

161,385

195

165,303

Financial liabilities for which fair values are disclosed

 

 

 

 

Borrowings at amortised cost

-

4,564

-

4,564

Deposits received from reinsurers

-

3,484

85

3,569

Obligations for repayment of collateral received

-

3,442

-

3,442

Total financial liabilities for which fair values are disclosed

-

11,490

85

11,575

 

3,723

172,875

280

176,878

 

 

2020

Level 1
£m

Level 2
£m

Level 3
 m

Total fair value
£m

Financial assets measured at fair value

 

 

 

 

Derivatives

320

6,362

198

6,880

Financial assets designated at FVTPL upon initial recognition:

 

 

 

 

Equities

81,024

47

1,563

82,634

Investment in associate

400

-

-

400

Debt securities

74,043

25,248

10,164

109,455

Collective investment schemes

86,677

2,170

401

89,248

Reinsurers' share of investment contract liabilities

8,962

597

-

9,559

 

251,106

28,062

12,128

291,296

Total financial assets measured at fair value

251,426

34,424

12,326

298,176

Financial assets for which fair values are disclosed

 

 

 

 

Loans and deposits at amortised cost

-

632

15

647

 

251,426

35,056

12,341

298,823

 

2020

Level 1
£m

Level 2
£m

Level 3
 m

Total fair value
£m

Financial liabilities measured at fair value

 

 

 

 

Derivatives

119

720

162

1,001

Financial liabilities designated at FVTPL upon initial recognition:

 

 

 

 

Borrowings

-

-

84

84

Net asset value attributable to unitholders

3,791

-

-

3,791

Investment contract liabilities

-

165,106

-

165,106

 

3,791

165,106

84

168,981

Total financial liabilities measured at fair value

3,910

165,826

246

169,982

Financial liabilities for which fair values are disclosed

 

 

 

 

Borrowings at amortised cost

-

4,812

204

5,016

Deposits received from reinsurers

-

3,983

97

4,080

Obligations for repayment of collateral received

-

5,205

-

5,205

Total financial liabilities for which fair values are disclosed

-

14,000

301

14,301

 

3,910

179,826

547

184,283

E2.3 Level 3 financial instrument sensitivities

Level 3 investments in equities (including private equity and unlisted property investment vehicles) and collective investment schemes (including hedge funds) are valued using net asset statements provided by independent third parties, and therefore no sensitivity analysis has been prepared.

E2.3.1 Debt securities

Analysis of Level 3 debt securities

2021
£m

2020
 m

Unquoted corporate bonds:

 

 

 Local authority loans

917

646

 Private placements

3,120

2,297

 Loans guaranteed by export credit agencies

159

54

 Infrastructure loans

1,491

1,564

Equity release mortgages

4,214

3,484

Commercial real estate loans

1,317

1,075

Income strips

886

692

Bridging loans to private equity funds

339

320

Corporate transactions

-

29

Other

9

3

Total Level 3 debt securities

12,452

10,164

Less amounts classified as held for sale

(892)

-

Total Level 3 debt securities excluding amounts classified as held for sale

11,560

10,164

The Group holds unquoted corporate bonds comprising investments in local authority loans, loans guaranteed by export credit agencies, private placements and infrastructure loans with a total value of £5,687 million (2020: £4,561 million). These unquoted corporate bonds are secured on various assets and are valued using a discounted cash flow model. The discount rate is made up of a risk-free rate and a spread. The risk-free rate is taken from an appropriate gilt of comparable duration. The spread is taken from a basket of comparable securities. The valuations are sensitive to movements in this spread. An increase of 65bps would decrease the value by £468 million (an increase of 35bps in 2020: £246 million) and a decrease of 65bps would increase the value by £513 million (a decrease of 35bps in 2020: £190 million).

During 2020, as a result of the effects of the COVID-19 pandemic, the credit ratings for a small number of unquoted corporate bonds were downgraded and the impacts of this were reflected in the fair values at 31 December 2021 and 31 December 2020. There remains some ongoing uncertainty in respect of the credit ratings for unquoted corporate bonds and commercial real estate loans. Internal review processes are in place to closely monitor credit ratings and additional reviews are carried out as required, for example when triggered by credit performance or market factors. The financial impact of reasonable movements in spreads has been quantified above.

Included within debt securities are investments in equity release mortgages with a value of £4,214 million (2020: £3,484 million). The loans are valued using a discounted cash flow model and a Black-Scholes model for valuation of the No-Negative Equity Guarantee ('NNEG'). The NNEG caps the loan repayment in the event of death or entry into long-term care to be no greater than the sales proceeds from the property.

The future cash flows are estimated based on assumed levels of mortality derived from published mortality tables, entry into long-term care rates and voluntary redemption rates. Cash flows include an allowance for the expected cost of providing a NNEG assessed under a real world approach using a closed form model including an assumed level of property value volatility. For the NNEG assessment, property values are indexed from the latest property valuation point and then assumed to grow in line with an RPI based assumption.

Cash flows are discounted using a risk-free curve plus a spread, where the spread is based on recent originations, with margins to allow for the different risk profiles of Equity Release Mortgage ('ERM') loans.

Considering the fair valuation uses certain inputs that are not market observable, the fair value measurement of these loans has been categorised as a Level 3 fair value. The key non-market observable input is the voluntary redemption rate, for which the assumption varies by the origin, age and loan to value ratio of each portfolio. Experience analysis is used to inform this assumption, however where experience is limited for more recently originated loans, significant expert judgement is required.

The significant sensitivities arise from movements in the yield curve, inflation rate, house prices, mortality and voluntary redemption rate. An increase of 100bps in the yield curve would decrease the value by £443 million (2020: £351 million) and a decrease of 100bps would increase the value by £512 million (2020: £397 million). An increase of 1% in the inflation rate would increase the value by £26 million (2020: £29 million) and a decrease of 1% would decrease the value by £43 million (2020: £48 million).

An increase of 10% in house prices would increase the value by £13 million (2020: £16 million) and a decrease of 10% would decrease the value by £23 million (2020: £26 million). An increase of 5% in mortality would decrease the value by £10 million (2020: £11 million) and a decrease of 5% in mortality would increase the value by £9 million (2020: £7 million). An increase of 15% in the voluntary redemption rate would decrease the value by £22 million (2020: £24 million) and a decrease of 15% in the voluntary redemption rate would increase the value by £23 million (2020: £22 million).

The Group also holds investments in commercial real estate loans with a value of £1,317 million (2020: £1,075 million). The loans are valued using a model which discounts the expected projected future cash flows at the risk-free rate plus a spread derived from a basket of comparable securities. The valuation is sensitive to changes in the discount rate. An increase of 65bps in the discount rate would decrease the value by £24 million (an increase of 35bps in 2020: £15 million) and a decrease of 65bps would increase the value by £24 million (a decrease of 35bps in 2020: £16 million).

Also included within debt securities are income strips with a value of £886 million (2020: £692 million). Income strips are transactions where an owner-occupier of a property has sold a freehold or long leasehold interest to the Group, and has signed a long lease (typically 30-45 years) or a ground lease (typically 45-175 years) and retains the right to repurchase the property at the end of the lease for a nominal sum (usually £1). The income strips are valued using an income capitalisation approach, where the annual rental income is capitalised using an appropriate yield. The yield is determined by considering recent transactions involving similar income strips. The valuation is sensitive to movements in yield. An increase of 35bps would decrease the value by £94 million (2020: £68 million) and a decrease of 35bps would increase the value by £121 million (2020: £86 million).

E2.3.2 Borrowings

Included within borrowings measured at fair value and categorised as Level 3 financial liabilities are property reversion loans with a value of £70 million (2020: £84 million), measured using an internally developed model. The valuation is sensitive to the key assumption of the discount rate. An increase in the discount rate of 1% would decrease the value by £1 million (2020: £1 million) and a decrease of 1% would increase the value by £1 million (2020: £1 million).

E2.3.3 Longevity swap contracts

Included within derivative assets and derivative liabilities are longevity swap contracts with corporate pension schemes with a fair value of £230 million (2020: £155 million) and £49 million (2020: £85 million) respectively. These derivatives are valued on a discounted cash flow basis, key inputs to which are the interest rate swap curve and RPI and CPI inflation rates.

An increase of 100bps in the swap curve would decrease the net value by £28 million (2020: £15 million) and a decrease of 100bps would increase the net value by £35 million (2020: £17 million). An increase of 1% in the RPI and CPI inflation rates would increase the value by £8 million (2020: £11 million) and a decrease of 1% would decrease the value by £8 million (2020: £12 million).

E2.3.4 Derivatives

Included within derivative assets are forward local authority loans, forward private placements and forward infrastructure loans with a value of £7 million (2020: £43 million). These investments include a commitment to acquire or provide funding for fixed rate debt instruments at specified future dates. These investments are valued using a discounted cash flow model that takes a comparable UK Treasury stock and applies a credit spread to reflect reduced liquidity. The credit spreads are derived from a basket of comparable securities. The valuations are sensitive to movements in this spread. An increase of 65bps would decrease the value by £25 million (an increase of 35bps in 2020: 19 million) and a decrease of 65bps would increase the value by £27 million (a decrease of 35bps in 2020: £20 million).

Also included within derivative liabilities is the Equity Release Income Plan ('ERIP') total return swap with a value of £67 million (2020: 75 million), under which a share of the disposal proceeds arising on a portfolio of property reversions is payable to a third party (see note E.3.3 for further details). The carrying value of the financial liability is the discounted present value of the relevant share of all future property sales that will be passed to the counterparty as part of the swap arrangement. The valuation is sensitive to the discount rate applied. An increase of 1% in the discount rate would decrease the value by £2 million (2020: £3 million) and a decrease of 1% in the discount rate would increase the value by £2 million (2020: £3 million).

E2.4 Transfers of financial instruments between Level 1 and Level 2

2021

From
Level 1 to Level 2
£m

From
Level 2 to Level 1
£m

Financial assets measured at fair value

 

 

Derivatives

51

-

Financial assets designated at FVTPL upon initial recognition:

 

 

Equities

33

17

Debt securities

1,742

1,006

Collective investment schemes

32

42

 

1,807

1,065

Total financial assets measured at fair value

1,858

1,065

 

2020

From
Level 1 to Level 2
£m

From
Level 2 to Level 1
£m

Financial assets measured at fair value

 

 

Financial assets designated at FVTPL upon initial recognition:

 

 

Debt securities

492

10,174

Collective investment schemes

1

-

Consistent with the prior year, all the Group's Level 1 and Level 2 assets have been valued using standard market pricing sources.

The application of the Group's fair value hierarchy classification methodology at an individual security level, in particular observations with regard to measures of market depth and bid-ask spreads, resulted in an overall net movement of debt securities from Level 1 to Level 2 in the current period.

In the prior period, there was an overall net movement of financial assets from Level 2 to Level 1 and this movement was the result of an exercise to harmonise the approach to determining the fair value hierarchy for Level 1 and Level 2 debt securities across the Group. The methodology was updated to consistently use spread data and trade volume data to determine the activeness of the market. This resulted in assets being moved from Level 2 to Level 1, and from Level 1 to Level 2.

E2.5 Movement in Level 3 financial instruments measured at fair value

2021

At
1 January 2021
£m

Net (losses)/gains in income statement
£m

Purchases
£m

Sales
£m

Transfers from Level 1 and Level 2
£m

Transfers to Level 1
and Level 2
£m

At
31 December 20211
£m

Unrealised (losses)/gains on assets held at end of period
£m

Financial assets

 

 

 

 

 

 

 

 

Derivatives

198

(74)

113

-

-

-

237

(82)

Financial assets designated at FVTPL upon initial recognition:

 

 

 

 

 

 

 

 

Equities

1,563

436

269

(368)

-

(1)

1,899

278

Debt securities

10,164

88

6,394

(4,210)

26

(10)

12,452

115

Collective investment schemes

401

(70)

34

(94)

15

-

286

22

 

12,128

454

6,697

(4,672)

41

(11)

14,637

415

 

 

 

 

 

 

 

 

 

Total financial assets

12,326

380

6,810

(4,672)

41

(11)

14,874

333

1   Total financial assets of £14,874 million includes £892 million of assets classified as held for sale.

 

2021

At
1 January 2021
£m

Net (gains)/losses in income statement
£m

Purchases
£m

Sales/
repayments
£m

Transfers from Level 1 and Level 2
£m

Transfers to Level 1
and Level 2
£m

At
31 December 2021
£m

Unrealised (gains)/losses on liabilities held at end of period
£m

Financial liabilities

 

 

 

 

 

 

 

 

Derivatives

162

(19)

-

(18)

-

-

125

(29)

Financial liabilities designated at FVTPL upon initial recognition:

 

 

 

 

 

 

 

 

Borrowings

84

4

-

(18)

-

-

70

5

Total financial liabilities

246

(15)

-

(36)

-

-

195

(24)

 

2020

At
1 January 2020
£m

Net gains/(losses) in income statement
£m

Effect of
acquisitions/
purchases
£m

Sales
£m

Transfers from Level 1 and Level 2
£m

Transfers to Level 1
and Level 2
£m

At
31 December 2020
£m

Unrealised gains/(losses) on assets held at end of period
£m

Financial assets

 

 

 

 

 

 

 

 

Derivatives

175

23

-

-

-

-

198

36

Financial assets designated at FVTPL upon initial recognition:

 

 

 

 

 

 

 

 

Equities

1,596

113

213

(361)

2

-

1,563

44

Debt securities

6,026

432

6,301

(2,635)

63

(23)

10,164

471

Collective investment schemes

646

(161)

1

(85)

-

-

401

(100)

 

8,268

384

6,515

(3,081)

65

(23)

12,128

415

 

 

 

 

 

 

 

 

 

Total financial assets

8,443

407

6,515

(3,081)

65

(23)

12,326

451

 

2020

At
1 January 2020
£m

Net gains in
income statement

Effect of
acquisitions/
purchases
£m

Sales/
Repayments
£m

Transfers from Level 1 and Level 2
£m

Transfers to Level 1
and Level 2
£m

At
31 December 2020
£m

Unrealised losses on liabilities held at end of period
£m

Financial liabilities

 

 

 

 

 

 

 

 

Derivatives

74

17

78

(7)

-

-

162

13

Financial liabilities designated at FVTPL upon initial recognition:

 

 

 

 

 

 

 

 

Borrowings

99

4

-

(19)

-

-

84

4

Total financial liabilities

173

21

78

(26)

-

-

246

17

Gains and losses on Level 3 financial instruments are included in net investment income in the consolidated income statement. There were no gains or losses recognised in other comprehensive income in either the current or comparative period.

E3. Derivatives

The Group purchases derivative financial instruments principally in connection with the management of its insurance contract and investment contract liabilities based on the principles of reduction of risk and efficient portfolio management. The Group does not typically hold derivatives for the purpose of selling or repurchasing in the near term or with the objective of generating a profit from short-term fluctuations in price or margin. The Group also holds derivatives to hedge financial liabilities denominated in foreign currency.

Derivative financial instruments are largely classified as held for trading. Such instruments are recognised initially at fair value and are subsequently remeasured to fair value. The gain or loss on remeasurement to fair value is recognised in the consolidated income statement. Derivative financial instruments are not classified as held for trading where they are designated as a hedging instrument and where the resultant hedge is assessed as effective. For such instruments, any gain or loss that arises on remeasurement to fair value is initially recognised in other comprehensive income and is recycled to profit or loss as the hedged item impacts the profit or loss. See note E1 for further details of the Group's hedging accounting policy.

E3.1 Summary

The fair values of derivative financial instruments are as follows:

 

Assets
2021
£m

Liabilities 2021
£m

Assets
2020
£m

Liabilities 2020
£m

Forward currency

180

58

286

134

Credit default swaps

63

39

108

13

Contracts for difference

8

2

7

4

Interest rate swaps

1,509

506

2,754

98

Total return bond swaps

3

-

52

-

Swaptions

1,722

11

2,643

27

Inflation swaps

232

98

59

132

Equity options

408

254

543

322

Stock index futures

41

122

53

90

Fixed income futures

46

33

63

20

Retrocession contracts

-

-

-

1

Longevity swap contracts

230

49

155

85

Currency futures

7

1

1

-

Cross-currency swaps

122

12

156

-

Equity Release Income Plan total return swap

-

67

-

75

 

4,571

1,252

6,880

1,001

Less amounts classified as held for sale (see note A6.1)

(4)

(4)

-

-

 

4,567

1,248

6,880

1,001

E3.2 Corporate transactions

The Group has in place longevity swap arrangements with corporate pension schemes which do not meet the definition of insurance contracts under the Group's accounting policies. Under these arrangements the majority of the longevity risk has been passed to third parties. Derivative assets of £230 million and derivative liabilities of £49 million have been recognised as at 31 December 2021 (2020: £155 million and £85 million respectively).

E3.3 Equity Release Income Plan ('ERIP') total return swap

ERIP contracts are an equity release product under which the Group holds a reversionary interest in the residential property of policyholders who have been provided with a lifetime annuity in return for the legal title to their property (see note G4). The Group is party to an ERIP total return swap under which a share of the future generated cash flows arising under the ERIP contracts is payable to a third party. Over time, as the property reversions are realised, the relevant share of disposal proceeds is transferred to a third party who also holds a beneficial interest in these residential properties. The carrying amount of the derivative liability is the present value of all future cash flows due to the third party under the total return swap.

E4. Collateral arrangements

The Group receives and pledges collateral in the form of cash or non-cash assets in respect of stock lending transactions, derivative contracts and reinsurance arrangements in order to reduce the credit risk of these transactions. The amount and type of collateral required where the Group receives collateral depends on an assessment of the credit risk of the counterparty, but is usually in the form of cash and marketable securities.

Collateral received in the form of cash, where the Group has contractual rights to receive the cash flows generated and is available to the Group for investment purposes, is recognised as a financial asset in the statement of consolidated financial position with a corresponding financial liability for its repayment. Non-cash collateral received is not recognised in the statement of consolidated financial position, unless the counterparty defaults on its obligations under the relevant agreement.

Non-cash collateral pledged where the Group retains the contractual rights to receive the cash flows generated is not derecognised from the statement of consolidated financial position, unless the Group defaults on its obligations under the relevant agreement. Cash collateral pledged, where the counterparty has contractual rights to receive the cash flows generated, is derecognised from the statement of consolidated financial position and a corresponding receivable is recognised for its return.

E4.1 Financial instrument collateral arrangements

The Group has no financial assets and financial liabilities that have been offset in the statement of consolidated financial position as at 31 December 2021 (2020: none).

The table below contains disclosures related to financial assets and financial liabilities recognised in the statement of consolidated financial position that are subject to enforceable master netting arrangements or similar agreements. Such agreements do not meet the criteria for offsetting in the statement of consolidated financial position as the Group has no current legally enforceable right to offset recognised financial instruments. Furthermore, certain related assets received as collateral under the netting arrangements will not be recognised in the statement of consolidated financial position as the Group does not have permission to sell or re-pledge, except in the case of default. Details of the Group's collateral arrangements in respect of these recognised assets and liabilities are provided below.

 

 

Related amounts not offset

 

2021
Financial assets

Gross and net amounts of recognised financial assets
£m

Financial instruments and cash collateral received
£m

Derivative liabilities
£m

Net
amount
£m

OTC derivatives

4,394

3,600

487

307

Exchange traded derivatives

177

5

6

166

Stock lending

1,587

1,587

-

-

Total

6,158

5,192

493

473

 

 

 

Related amounts not offset

 

Financial liabilities

Gross and net amounts of recognised financial liabilities
 m

Financial instruments and cash collateral pledged
£m

Derivative assets
£m

Net
amount
£m

OTC derivatives

1,096

319

487

290

Exchange traded derivatives

156

24

6

126

Total

1,252

343

493

416

 

 

 

 

Related amounts not offset

 

2020
Financial assets

Gross and net amounts of recognised financial assets
£m

Financial instruments and cash collateral received
£m

Derivative liabilities
£m

Net
amount
£m

OTC derivatives

6,523

5,389

219

915

Exchange traded derivatives

357

9

17

331

Stock lending

2,435

2,435

-

-

Total

9,315

7,833

236

1,246

 

 

 

Related amounts not offset

 

Financial liabilities

Gross and net amounts of recognised financial liabilities
 m

Financial instruments and cash collateral pledged
£m

Derivative assets
£m

Net
amount
£m

OTC derivatives

886

328

219

339

Exchange traded derivatives

115

31

17

67

Total

1,001

359

236

406

E4.2 Derivative collateral arrangements

Assets accepted

It is the Group's practice to obtain collateral to mitigate the counterparty risk related to over-the-counter ('OTC') derivatives usually in the form of cash or marketable financial instruments.

The fair value of financial assets accepted as collateral for OTC derivatives but not recognised in the statement of consolidated financial position amounts to £945 million (2020: £885 million).

The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2021 are set out below.

 

OTC derivatives

 

2021
£m

2020
£m

Financial assets

3,442

5,205

Financial liabilities

(3,442)

(5,205)

The maximum exposure to credit risk in respect of OTC derivative assets is £4,394 million (2020: £6,523 million) of which credit risk of £4,087 million (2020: £5,608 million) is mitigated by use of collateral arrangements (which are settled net after taking account of any OTC derivative liabilities owed to the counterparty).

Credit risk on exchange traded derivative assets of £177 million (2020: £357 million) is mitigated through regular margining and the protection offered by the exchange.

Assets pledged

The Group pledges collateral in respect of its OTC derivative liabilities. The value of assets pledged at 31 December 2021 in respect of OTC derivative liabilities of £1,096 million (2020: £886 million) amounted to £942 million (2020: 1,216 million).

E4.3 Stock lending collateral arrangements

The Group lends listed financial assets held in its investment portfolio to other institutions.

The Group conducts stock lending only with well-established, reputable institutions in accordance with established market conventions. The financial assets do not qualify for derecognition as the Group retains all the risks and rewards of the transferred assets except for the voting rights.

It is the Group's practice to obtain collateral in stock lending transactions, usually in the form of cash or marketable financial instruments.

The fair value of financial assets accepted as such collateral but not recognised in the statement of consolidated financial position amounts to £1,749 million (2020: £2,686 million).

The maximum exposure to credit risk in respect of stock lending transactions is £1,587 million (2020: £2,435 million) of which credit risk of 1,587 million (2020: £2,435 million) is mitigated through the use of collateral arrangements.

E4.4 Other collateral arrangements

Details of collateral received to mitigate the counterparty risk arising from the Group's reinsurance transactions is given in note F3.

Collateral has also been pledged and charges have been granted in respect of certain Group borrowings. The details of these arrangements are set out in note E5.

E5. Borrowings

The Group classifies the majority of its interest bearing borrowings as financial liabilities carried at amortised cost and these are recognised initially at fair value less any attributable transaction costs. The difference between initial cost and the redemption value is amortised through the consolidated income statement over the period of the borrowing using the effective interest method.

Certain borrowings are designated upon initial recognition at fair value through profit or loss and measured at fair value where doing so provides more meaningful information due to the reasons stated in the financial liabilities accounting policy (see note E1). Transaction costs relating to borrowings designated upon initial recognition at fair value through profit or loss are expensed as incurred.

Borrowings are classified as either policyholder or shareholder borrowings. Policyholder borrowings are those borrowings where there is either no or limited shareholder exposure, for example, borrowings attributable to the Group's with-profit operations.

E5.1 Analysis of borrowings

 

Carrying value

 

Fair value

 

2021
£m

2020
£m

 

2021
£m

2020
£m

£200 million multi-currency revolving credit facility (note a)

17

-

 

17

-

Property reversions loan (note b)

70

84

 

70

84

Total policyholder borrowings

87

84

 

87

84

 

 

 

 

 

 

£200 million 7.25% unsecured subordinated loan (note c)

-

200

 

-

204

£300 million senior unsecured bond (note d)

-

122

 

-

125

£428 million Tier 2 subordinated notes (note e)

427

426

 

498

517

£450 million Tier 3 subordinated notes (note f)

450

449

 

457

470

US $500 million Tier 2 bonds (note g)

368

364

 

408

416

€500 million Tier 2 bonds (note h)

416

442

 

490

516

US $750 million Contingent Convertible Tier 1 notes (note i)

551

545

 

581

585

£500 million Tier 2 notes (note j)

485

484

 

593

622

US $500 million Fixed Rate Reset Tier 2 notes (note k)

368

364

 

389

395

£500 million 5.867% Tier 2 subordinated notes (note l)

550

556

 

598

620

£250 million Fixed Rate Reset Callable Tier 2 subordinated notes (note m)

266

272

 

269

280

£250 million 4.016% Tier 3 subordinated notes (note n)

257

259

 

264

266

Total shareholder borrowings

4,138

4,483

 

4,547

5,016

 

 

 

 

 

 

Total borrowings

4,225

4,567

 

4,634

5,100

 

 

 

 

 

 

Amount due for settlement after 12 months

3,758

4,245

 

 

 

a.  Standard Life Private Equity Trust has in place a £200 million syndicated multi-currency revolving credit facility of which £17 million (2020: £nil) had been drawn down as at 31 December 2021. The facility expires on 6 December 2024. Interest accrues on this facility at a margin over the reference rate of the currency drawn.

b.  The Property Reversions loan from Santander UK plc ('Santander') was recognised in the consolidated financial statements at fair value. It relates to the sale of Extra-Income Plan policies that Santander finances to the value of the associated property reversions. As part of the arrangement Santander receive an amount calculated by reference to the movement in the Halifax House Price Index and the Group is required to indemnify Santander against profits or losses arising from mortality or surrender experience which differs from the basis used to calculate the reversion amount. During 2021, repayments totalling £18 million were made (2020: 19 million). Note G4 contains details of the assets that support this loan.

c.  Scottish Mutual Assurance Limited issued £200 million 7.25% undated, unsecured subordinated loan notes on 23 July 2001 ('PLL subordinated debt'). With effect from 1 January 2009, following a Part VII transfer, these loan notes were transferred into the shareholder fund of PLL. On 25 March 2021, PLL redeemed this subordinated debt in full. The notes were redeemed at their principal amount together with interest accrued to the repayment date.

d.  On 7 July 2014, the Group's financing subsidiary, PGH Capital plc ('PGHC'), issued a £300 million 7 year senior unsecured bond at an annual coupon rate of 5.75% ('£300 million senior bond'). On 20 March 2017, Old PGH (the Group's ultimate parent company up to December 2018) was substituted in place of PGHC as issuer of the £300 million senior bond. On 5 May 2017, Old PGH completed the purchase of £178 million of the £300 million senior bond at a premium of £25 million in excess of the principal amount and accrued interest on the purchased bonds was settled on this date. On 18 June 2019, the Company was substituted in place of Old PGH as issuer of the £300 million senior bond. On 7 July 2021, the senior bond matured and the £122 million outstanding balance was repaid in full along with the final coupon of £7 million.

e.  On 23 January 2015, PGHC issued £428 million of subordinated notes due 2025 at a coupon of 6.625%. Fees associated with these notes of £3 million were deferred and are being amortised over the life of the notes in the statement of consolidated financial position. Upon exchange £32 million of these notes were held by Group companies. On 27 January 2017, £17 million of the 428 million subordinated notes held by Group companies were sold to third parties and a further £15 million were sold to third parties on 31 January 2017, thereby increasing external borrowings by £32 million. On 20 March 2017, Old PGH was substituted in place of PGHC as issuer of the £428 million subordinated notes and then on 12 December 2018 the Company was substituted in place of Old PGH as issuer.

f.  On 20 January 2017, PGHC issued £300 million Tier 3 subordinated notes due 2022 at a coupon of 4.125%. On 20 March 2017, Old PGH was substituted in place of PGHC as issuer of the £300 million Tier 3 subordinated notes. On 5 May 2017, Old PGH completed the issue of a further £150 million of Tier 3 subordinated notes, the terms of which are the same as the Tier 3 subordinated notes issued in January 2017. The Group received a premium of £2 million in excess of the principal amount. Fees associated with these notes of £5 million were deferred and are being amortised over the life of the notes. On 12 December 2018 the Company was substituted in place of Old PGH as issuer.

g.  On 6 July 2017, Old PGH issued US $500 million Tier 2 bonds due 2027 with a coupon of 5.375%. Fees associated with these notes of £2 million were deferred and are being amortised over the life of the notes. On 12 December 2018 the Company was substituted in place of Old PGH as issuer.

h.  On 24 September 2018, Old PGH issued €500 million Tier 2 notes due 2029 with a coupon of 4.375%. Fees associated with these notes of £7 million were deferred and are being amortised over the life of the notes. On 12 December 2018 the Company was substituted in place of Old PGH as issuer.

i.  On 29 January 2020, the Company issued US $750 million fixed rate reset perpetual restricted Tier 1 contingent convertible notes (the 'Contingent Convertible Tier 1 Notes') which are unsecured and subordinated. The Contingent Convertible Tier 1 Notes have no fixed maturity date and interest is payable only at the sole and absolute discretion of the Company. The Contingent Convertible Tier 1 Notes bear interest on their principal amount at a fixed rate of 5.625% per annum up to the 'First Reset Date' of 26 April 2025. Thereafter the fixed rate of interest will be reset on the First Reset Date and on each fifth anniversary of this date by reference to the sum of the yield of the Constant Maturity Treasury ('CMT') rate (based on the prevailing five year US Treasury yield) plus a margin of 4.035%, being the initial credit spread used in pricing the notes. Interest is payable on the Contingent Convertible Tier 1 Notes semi-annually in arrears on 26 April and 26 October. If an interest payment is not made it is cancelled and it shall not accumulate or be payable at any time thereafter.

  The terms of the Contingent Convertible Tier 1 Notes contain a contingent settlement provision which is linked to the occurrence of a 'Capital Disqualification Event'. Such an event is deemed to have taken place where, as a result of a change to the Solvency II regulations, the Contingent Convertible Tier 1 Notes are fully excluded from counting as own funds. On the occurrence of such an event and where the Company has chosen not to use its corresponding right to redeem the notes the Company shall no longer be able to exercise its discretion to cancel any interest payments due on such Contingent Convertible Tier 1 Notes on any interest payment date following the occurrence of this event. Accordingly the Contingent Convertible Tier 1 Notes are considered to meet the definition of a financial liability for financial reporting purposes.

  The Contingent Convertible Tier 1 Notes may be redeemed at par on the First Reset Date or on any interest payment date thereafter at the option of the Company and also in other limited circumstances. If such redemption occurs prior to the fifth anniversary of the Issue Date such redemption must be funded out of the proceeds of a new issuance of, or exchanged into, Tier 1 Own Funds of the same or a higher quality than the Contingent Convertible Tier 1 Notes. In respect of any redemption or purchase of the Contingent Convertible Tier 1 Notes, such redemption or purchase is subject to the receipt of permission to do so from the PRA. Furthermore, on occurrence of a trigger event, linked to the Solvency II capital position and as documented in the terms of the Contingent Convertible Tier 1 Notes, the Contingent Convertible Tier 1 Notes will automatically be subject to conversion to ordinary shares of the Company at the conversion price of US $1,000 per share, subject to adjustment in accordance with the terms and conditions of the notes and all accrued and unpaid interest will be cancelled. Following such conversion there shall be no reinstatement of any part of the principal amount of, or interest on, the Contingent Convertible Tier 1 Notes at any time.

j.  On 28 April 2020, the Company issued £500 million fixed rate Tier 2 Notes (the 'Tier 2 Notes') which are unsecured and subordinated. The Tier 2 Notes have a maturity date of 28 April 2031 and include an issuer par call right for the three-month period prior to maturity. The Tier 2 Notes bear interest on the principal amount at a fixed rate of 5.625% per annum payable annually in arrears on 28 April each year.

k.  On 4 June 2020, the Company issued US $500 million fixed rate reset callable Tier 2 notes (the 'Fixed Rate Reset Tier 2 Notes') which are unsecured and subordinated. The Fixed Rate Reset Tier 2 Notes have a maturity date of 4 September 2031 with an optional issuer par call right on any day in the three-month period up to and including 4 September 2026. The Fixed Rate Reset Tier 2 Notes bear interest on the principal amount at a fixed rate of 4.75% per annum up to the interest rate reset date of 4 September 2026. If the Fixed Rate Reset Tier 2 Notes are not redeemed before that date, the interest rate resets to the sum of the applicable CMT rate (based on the prevailing five year US Treasury yield) plus a margin of 4.276%, being the initial credit spread used in pricing the notes. Interest is payable on the Fixed Rate Reset Tier 2 Notes semi-annually in arrears on 4 March and 4 September each year.

l.  On 22 July 2020, as part of the acquisition of ReAssure Group plc, the Group assumed the £500 million 5.867% Tier 2 subordinated notes. On the same date, the Company was substituted in place of ReAssure Group plc as issuer of the notes. The £500 million 5.867% Tier 2 subordinated notes have a maturity date of 13 June 2029 and were initially recognised at their fair value as at the date of acquisition of £559 million. The fair value adjustment will be amortised over the remaining life of the notes. Interest is payable semi-annually in arrears on 13 June and 13 December.

m.  On 22 July 2020, as part of the acquisition of ReAssure Group plc, the Group assumed the £250 million fixed rate reset callable Tier 2 subordinated notes. On the same date, the Company was substituted in place of ReAssure Group plc as issuer of the notes. The 250 million fixed rate reset callable Tier 2 subordinated notes have a maturity date of 13 June 2029 and were initially recognised at their fair value as at the date of acquisition of £275 million. The fair value adjustment will be amortised over the remaining life of the notes. The notes include an issuer par call right exercisable on 13 June 2024. Interest is payable semi-annually in arrears on 13 June and 13 December. These notes initially bear interest at a rate of 5.766% on the principal amount and the rate of interest will reset on 13 June 2024, and on each interest payment date thereafter, to a margin of 5.17% plus the yield of a UK Treasury Bill of similar term.

n.  On 22 July 2020, as part of the acquisition of ReAssure Group plc, the Group assumed the £250 million 4.016% Tier 3 subordinated notes. On the same date, the Company was substituted in place of ReAssure Group plc as issuer of the notes. The £250 million 4.016% Tier 3 subordinated notes have a maturity date of 13 June 2026 and were initially recognised at their fair value as at the date of acquisition of £259 million. The fair value adjustment is being amortised over the remaining life of the notes. Interest is payable semi-annually in arrears on 13 June and 13 December.

o.  The Group has in place a £1.25 billion unsecured revolving credit facility (the 'revolving facility'), maturing in June 2026. The facility accrues interest at a margin over SONIA that is based on credit rating. The facility remains undrawn as at 31 December 2021.

E5.2 Reconciliation of liabilities arising from financing activities

The table below details changes in the Group's liabilities arising from financing activities, including both cash and non-cash changes (with the exception of lease liabilities, which have been included in note G10). Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group's consolidated statement of cash flows as cash flows from financing activities.

 

 

 

Cash movements

 

Non-cash movements

 

 

At
1 January 2021
£m

New borrowings, net of costs £m

Repayments £m

 

Changes in fair value
£m

Movement
in foreign exchange
£m

Other movements1 £m

Movements in fair value £m

At
31 December 2021
£m

£200 million multi-currency revolving credit facility

-

17

-

 

-

-

-

-

17

Property Reversions loan

84

-

(18)

 

4

-

-

-

70

£200 million 7.25% unsecured subordinated loan

200

-

(200)

 

-

-

-

-

-

£300 million senior unsecured bond

122

-

(122)

 

-

-

-

-

-

£428 million Tier 2 subordinated notes

426

-

-

 

-

-

1

-

427

£450 million Tier 3 subordinated notes

449

-

-

 

-

-

1

-

450

US $500 million Tier 2 bonds

364

-

-

 

-

4

-

-

368

€500 million Tier 2 notes

442

-

-

 

-

(26)

-

-

416

US $750 million Contingent Convertible Tier 1 notes

545

-

-

 

-

5

1

-

551

£500 million Tier 2 notes

484

-

-

 

-

-

1

-

485

US $500 million Fixed Rate Reset Tier 2 notes

364

-

-

 

-

4

-

-

368

£500 million 5.867% Tier 2 subordinated notes

556

-

-

 

-

-

(6)

-

550

£250 million Fixed Rate Reset Callable Tier 2 subordinated notes

272

-

-

 

-

-

(6)

-

266

£250 million 4.016% Tier 3 subordinated notes

259

-

-

 

-

-

(2)

-

257

Derivative assets 2

-

-

-

 

-

-

-

48

48

Derivative liabilities 2

-

-

-

 

-

-

-

(5)

(5)

 

4,567

17

(340)

 

4

(13)

(10)

43

4,268

1  Comprises amortisation under the effective interest method applied to borrowings held at amortised cost. No interest was capitalised in the year.

2  Cross currency swaps to hedge against adverse currency movements in respect of Group's Euro and US Dollar denominated borrowings.

 

 

 

Cash movements

 

Non-cash movements

 

 

At
1 January 2020
£m

New borrowings, net of costs £m

Repayments £m

 

Changes in fair value
£m

Movement
in foreign exchange
£m

Other movements1 £m

Movements in fair value

£m

At
31 December 2020
£m

Limited recourse bonds 2022 7.59%

35

-

(36)

 

-

-

-

1

-

Property Reversions loan

99

-

(19)

 

-

4

-

-

84

£200 million 7.25% unsecured
subordinated loan

196

-

-

 

-

-

-

4

200

£300 million senior unsecured bond

121

-

-

 

-

-

-

1

122

£428 million Tier 2 subordinated notes

426

-

-

 

-

-

-

-

426

£450 million Tier 3 subordinated notes

449

-

-

 

-

-

-

-

449

US $500 million Tier 2 bonds

376

-

-

 

-

-

(12)

-

364

€500 million Tier 2 notes

417

-

-

 

-

-

24

1

442

US $750 million Contingent
Convertible Tier 1 notes

-

566

-

 

-

-

(23)

2

545

£500 million Tier 2 notes

-

483

-

 

-

-

-

1

484

US $500 million Fixed Rate Reset
Tier 2 notes

-

396

-

 

-

-

(32)

-

364

£500 million 5.867% Tier 2
subordinated notes

-

-

-

 

559

-

-

(3)

556

£250 million Fixed Rate Reset

Callable Tier 2 subordinated notes

-

-

-

 

275

-

-

(3)

272

£250 million 4.016% Tier 3
subordinated notes

-

-

-

 

259

-

-

-

259

 

2,119

1,445

(55)

 

1,093

4

(43)

4

4,567

1  Comprises amortisation under the effective interest method applied to borrowings held at amortised cost. No interest was capitalised in the year.

E6. Risk management - financial and other risks

This note forms one part of the risk management disclosures in the consolidated financial statements. An overview of the Group's approach to risk management is outlined in note I3 and the Group's management of insurance risk is detailed in note F4.

E6.1 Financial risk and the Asset Liability Management ('ALM') framework

The use of financial instruments naturally exposes the Group to the risks associated with them, chiefly market risk, credit risk and financial soundness risk.

Responsibility for agreeing the financial risk profile rests with the board of each life company, as advised by investment managers, internal committees and the actuarial function. In setting the risk profile, the board of each life company will receive advice from the Chief Investment Officer, the relevant with-profit actuary and the relevant actuarial function holder as to the potential implications of that risk profile with regard to the probability of both realistic insolvency and of failing to meet the regulatory Minimum Capital Requirement. The Chief Actuary will also advise the extent to which the investment risk taken is consistent with the Group's commitment to deliver fair customer outcomes.

Derivatives are used in many of the Group's funds, within policy guidelines agreed by the board of each life company and overseen by investment committees of the boards of each life company supported by management oversight committees. Derivatives are primarily used for risk hedging purposes or for efficient portfolio management, including the activities of the Group's Treasury function.

More detail on the Group's exposure to financial risk is provided in note E6.2 below.

The Group is also exposed to insurance risk arising from its Life, Pensions and Savings business. Life insurance risk in the Group arises through its exposure to longevity, persistency, mortality and to other variances between assumed and actual experience. These variances can be in factors such as administrative expenses and new business pricing. More detail on the Group's exposure to insurance risk is provided in note F4.

The Group's overall exposure to market and credit risk is monitored by appropriate committees, which agree policies for managing each type of risk on an ongoing basis, in line with the investment strategy developed to achieve investment returns in excess of amounts due in respect of insurance contracts. The effectiveness of the Group's ALM framework relies on the matching of assets and liabilities arising from insurance and investment contracts, taking into account the types of benefits payable to policyholders under each type of contract. Separate portfolios of assets are maintained for with-profit business funds (which include all of the Group's participating business), non-linked non-profit funds and unit-linked funds.

LIBOR transition

The Group has largely completed its transition from LIBOR to the replacement Risk Free Rates. The programme has gone through a systematic process to identify and address balance sheet exposures with LIBOR dependencies. All derivative exposures and the majority of non-derivative asset exposures have successfully been transitioned over the course of the programme. Insurance contract liabilities and related items have transitioned to the SONIA Solvency II curve published by the PRA with an adjustment of 36bps. The remaining residual exposures relate to indirect exposures in a small proportion of liquid and illiquid credit assets, and a direct exposure of £55 million in relation to two illiquid credit assets referencing Sterling LIBOR. These residual exposures do not give rise to material solvency or liquidity risks for the Group.

The indirect liquid credit exposures are in relation to fixed rate loans, with LIBOR only relevant if the issuer cannot repay the debt at the expected maturity date. Cessation of LIBOR will have no impact on trading or liquidity. The indirect illiquid credit exposure relates to two loans where LIBOR is only relevant on a prepayment. The Group does not anticipate a prepayment and this issue does not affect the fair value of the loans.

The liquid indirect exposures will be resolved through liability management transactions launched by issuers, which either already include sufficient fallback provisions or the asset managers will continue to engage directly with the issuers to amend the fallback clauses. For all of the remaining illiquid exposures, progress on transitioning away from LIBOR is well advanced and is expected to complete before the next interest rate reset date.

E6.2 Financial risk analysis

Transactions in financial instruments result in the Group assuming financial risks. These include credit risk, market risk and financial soundness risk. Each of these are described below, together with a summary of how the Group manages the risk, along with sensitivity analysis where appropriate. The sensitivity analysis does not take into account second order impacts of market movements, for example, where a market movement may give rise to potential indicators of impairment for the Group's intangible balances.

A Group-wide project was undertaken to enhance the Group's approach to managing the financial risks of climate change, including embedding climate risk considerations into the Group's overall Risk Management Framework. The project has enabled the Group to embed the requirements and demonstrate compliance with the PRA Supervisory Statement SS3/19. Further details on managing the related climate change risks are provided in the Task Force for Climate-related Financial Disclosures ('TCFD') on page 51 of the Annual Report and Accounts and details of the impact of climate change on the financial statements are included in note A3.8.

E6.2.1 Credit risk

Credit risk is defined as the risk of reductions in earnings and/or value, through financial or reputational loss, as a result of the default of a counterparty or an associate of such a counterparty to a financial transaction (i.e. failure to honour their financial obligations, or failing to perform them in a timely manner), whether on or off balance sheet.

There are two principal sources of credit risk for the Group:

credit risk which results from direct investment activities, including investments in debt securities, derivatives counterparties, collective investment schemes, hedge funds and the placing of cash deposits; and

credit risk which results indirectly from activities undertaken in the normal course of business. Such activities include premium payments, outsourcing contracts, reinsurance agreements, exposure from material suppliers and the lending of securities.

The amount disclosed in the statement of consolidated financial position in respect of all financial assets, together with rights secured under off balance sheet collateral arrangements, but excluding the minority interest in consolidated collective investment schemes and those assets that back policyholder liabilities, represents the Group's maximum exposure to credit risk.

The impact of non-government debt securities and, inter alia, the change in market credit spreads during the year is fully reflected in the values shown in these consolidated financial statements. Credit spreads are the excess of corporate bond yields over gilt yields to reflect the higher level of risk. Similarly, the value of derivatives that the Group holds takes into account fully the changes in swap rates.

There is an exposure to spread changes affecting the prices of corporate bonds and derivatives. This exposure applies to with-profit funds (where risks and rewards fall wholly to shareholders), non-profit funds and shareholders' funds.

The Group holds £21,668 million (2020: £23,799 million) of corporate bonds which are used to back annuity liabilities in non-profit funds. These annuity liabilities include an aggregate credit default provision of £1,036 million (2020: £1,156 million) to fund against the risk of default.

A 100bps widening of credit spreads, with all other variables held constant and no change in assumed expected defaults, would result in an increase in the profit after tax in respect of a full financial year, and in equity, of £28 million (2020: decrease £5 million).

A 100bps narrowing of credit spreads, with all other variables held constant and no change in assumed expected defaults, would result in a decrease in the profit after tax in respect of a full financial year, and in equity, of £37 million (2020: increase £2 million).

Credit risk is managed by the monitoring of aggregate Group exposures to individual counterparties and by appropriate credit risk diversification. The Group manages the level of credit risk it accepts through credit risk tolerances and limits. Additional controls for illiquid asset concentration risk are set out via specific risk limits within the risk appetite framework. Credit risk on derivatives and securities lending is mitigated through the use of collateral with appropriate haircuts. The credit risk borne by the shareholder on with-profit policies is dependent on the extent to which the underlying insurance fund is relying on shareholder support.

Credit quality of assets

An indication of the Group's exposure to credit risk is the quality of the investments and counterparties with which it transacts. The following table provides information regarding the aggregate credit exposure split by credit rating.

2021

AAA
£m

AA
£m

A
£m

BBB
£m

BB and below
£m

Non-rated
 m

Unit-linked £m

Total
£m

Less amounts classified as held for sale £m

Total
£m

Loans and deposits

-

6

-

-

-

414

55

475

-

475

Derivatives

-

965

1,737

388

-

1,343

138

4,571

(4)

4,567

Debt securities1,2

9,097

40,142

22,782

16,290

3,292

6,788

8,599

106,990

(2,229)

104,761

Reinsurers' share of insurance contract liabilities

-

4,963

3,539

37

-

48

-

8,587

-

8,587

Reinsurers' share of investment contract liabilities

-

-

-

-

-

-

10,009

10,009

(27)

9,982

Cash and cash equivalents

382

1,686

5,161

181

-

3

1,775

9,188

(76)

9,112

 

9,479

47,762

33,219

16,896

3,292

8,596

20,576

139,820

(2,336)

137,484

1  For financial assets that do not have credit ratings assigned by external ratings agencies, the Group assigns internal ratings for use in management and monitoring of credit risk. £110 million of AAA, £1,110 million of AA, £2,556 million of A, £2,480 million of BBB and £518 million of BB and below debt securities are internally rated. If a financial asset is neither rated by an external agency nor internally rated, it is classified as 'non-rated'.

2  Non-rated debt securities includes equity release mortgages with a value of £4,214 million (further details are set out in note E2.3) and non-rated bonds.

2020

AAA
£m

AA
£m

A
£m

BBB
£m

BB and
below
£m

Non-rated
£m

Unit-linked £m

Total
£m

Loans and deposits

-

6

195

-

-

368

78

647

Derivatives

-

1,220

2,263

1,967

-

1,231

199

6,880

Debt securities1,2

9,041

35,184

24,747

14,960

2,497

6,658

16,368

109,455

Reinsurers' share of insurance contract liabilities

-

6,524

2,966

-

-

52

-

9,542

Reinsurers' share of investment contract liabilities

-

16

-

1

-

-

9,542

9,559

Cash and cash equivalents

30

1,728

7,049

173

-

10

2,008

10,998

 

9,071

44,678

37,220

17,101

2,497

8,319

28,195

147,081

1  For financial assets that do not have credit ratings assigned by external ratings agencies, the Group assigns internal ratings for use in management and monitoring of credit risk. £117 million of AAA, £963 million of AA, £2,446 million of A, £1,741 million of BBB and £219 million of BB and below debt securities are internally rated. If a financial asset is neither rated by an external agency nor internally rated, it is classified as 'non-rated'.

2  Non-rated debt securities includes equity release mortgages with a value of £3,484 million (further details are set out in note E2.3) and non-rated bonds.

Credit ratings have not been disclosed in the above tables for the assets of the unit-linked funds since the shareholder is not directly exposed to credit risks from these assets. Included in unit-linked funds are assets which are held as reinsured external fund links. Under certain circumstances, the shareholder may be exposed to losses relating to the default of the reinsured external fund link.

Credit ratings have not been disclosed in the above tables for holdings in unconsolidated collective investment schemes and investments in associates. The credit quality of the underlying debt securities within these vehicles is managed by the safeguards built into the investment mandates for these vehicles.

The Group maintains accurate and consistent risk ratings across its asset portfolio. This enables management to focus on the applicable risks and to compare credit exposures across all lines of business, geographical regions and products. The rating system is supported by a variety of financial analytics combined with market information to provide the main inputs for the measurement of counterparty risk. All risk ratings are tailored to the various categories of assets and are assessed and updated regularly.

The Group operates an Internal Credit Rating Committee and a Portfolio Credit Committee to perform oversight and monitoring of internal credit ratings for externally rated and internally rated assets. A variety of methods are used to validate the appropriateness of credit assessments from external institutions and fund managers. Internally rated assets are those that do not have a public rating from an external credit assessment institution. The internal credit ratings used by the Group are provided by fund managers or for certain assets (in particular, equity release mortgages) determined by the Life Companies. The Committees review the policies, processes and practices to ensure the appropriateness of the internal ratings assigned to asset classes, in line with regulatory requirements.

Throughout 2021, the Group has continued to take de-risking action to increase the overall credit quality of its asset portfolio and mitigate the impact of future downgrades on risk capital. Further details are included in the Risk Management section of the Strategic Report.

The Group has increased exposure to an array of illiquid credit assets such as equity release mortgages, local authority loans, social housing, infrastructure and commercial real estate loans with the aim of achieving greater diversification and investment returns, consistent with the Strategic Asset Allocation approved by the Board.

A further indicator of the quality of the Group's financial assets is the extent to which they are neither past due nor impaired. All of the amounts in the table above for the current and prior year are neither past due nor impaired.

Additional life company asset disclosures are included on page 313 and include information on the Group's market exposure analysed by credit rating, sector and country of exposure for the shareholder debt portfolio. In light of developments regarding the Russia-Ukraine conflict, this includes the shareholders' debt exposure to Russia and Ukraine. The Group's exposure to Russia and Ukraine is small when compared to the size of its overall investment portfolio.

Concentration of credit risk

Concentration of credit risk might exist where the Group has significant exposure to an individual counterparty or a group of counterparties with similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic and other conditions. The Group has most of its counterparty risk within its life business and this is monitored by the counterparty limit framework contained within the Group Credit Risk Policy and further provided in investment management agreements, overlaid by regulatory requirements and the monitoring of aggregate counterparty exposures across the Group against additional Group counterparty limits. Counterparty risk in respect of OTC derivative counterparties is monitored using a Potential Future Exposure ('PFE') value metric.

The Group is also exposed to concentration risk with outsource partners. This is due to the nature of the outsourced services market. The Group operates a policy to manage outsourcer service counterparty exposures and the impact from default is reviewed regularly by executive committees and measured through stress and scenario testing.

Reinsurance

The Group is exposed to credit risk as a result of insurance risk transfer contracts with reinsurers. The Group's policy is to place reinsurance only with highly rated counterparties. The Group is restricted from assuming concentrations of risk with individual external reinsurers by specifying limits on ceding and minimum conditions for acceptance and retention of reinsurers. However, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings, some concentration risk does arise with individual reinsurers. The Group manages its exposure to reinsurance credit risk through the operation of a credit policy, collateralisation where appropriate, and regular monitoring of exposures at the Reinsurance Management Committee.

Collateral

The credit risk of the Group is mitigated, in certain circumstances, by entering into collateral agreements. The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and the valuation parameters. Collateral is mainly obtained in respect of stock lending, certain reinsurance arrangements and to provide security against the daily mark to model value of derivative financial instruments. Management monitors the market value of the collateral received, requests additional collateral when needed, and performs an impairment valuation when impairment indicators exist and the asset is not fully secured (and is not carried at fair value). See note E4 for further information on collateral arrangements.

E6.2.2 Market risk

Market risk is defined as the risk of reductions in earnings and/or value, through financial or reputational loss, from unfavourable market movements. The risk typically arises from exposure to equity, property and fixed income asset classes and the impact of changes in interest rates, inflation rates and currency exchange rates.

The Group is mainly exposed to market risk as a result of:

the mismatch between liability profiles and the related asset investment portfolios;

the investment of surplus assets including shareholder reserves yet to be distributed, surplus assets within the with-profit funds and assets held to meet regulatory capital and solvency requirements; and

the income flow of management charges derived from the value of invested assets of the business.

The Group manages the levels of market risk that it accepts through the operation of a market risk policy and an approach to investment management that determines:

the constituents of market risk for the Group;

the basis used to fair value financial assets and liabilities;

the asset allocation and portfolio limit structure;

diversification from and within benchmarks by type of instrument and geographical area;

the net exposure limits by each counterparty or group of counterparties, geographical and industry segments;

control over hedging activities;

reporting of market risk exposures and activities; and

monitoring of compliance with market risk policy and review of market risk policy for pertinence to the changing environment.

All operations comply with regulatory requirements relating to the taking of market risk.

Markets remain volatile, particularly given concerns over inflation and how quickly central banks will act to reduce these pressures on economies whilst balancing the need to aid post pandemic recovery. This is discussed in more detail on page 64 of the Risk Management section of the Annual Report and Accounts.

Interest rate and inflation risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate relative to the respective liability due to the impact of changes in market interest rates on the value of interest-bearing assets and on the value of future guarantees provided under certain contracts of insurance. The paragraphs in this section also apply to inflation risk, but references to fixed rate assets and liabilities would be replaced with index-linked assets and liabilities.

The Group is required to manage its interest rate exposures in line with qualitative risk appetite statements, quantitative risk metrics and any additional hedging benchmarks. Interest rate risk is managed by matching assets and liabilities where practicable and by entering into derivative arrangements for hedging purposes where appropriate. This is particularly the case for the non-participating funds and supported participating funds. For unsupported participating business, some element of investment mismatching is permitted where it is consistent with the principles of treating customers fairly. The with-profit funds of the Group provide capital to allow such mismatching to be effected. In practice, the life companies of the Group maintain an appropriate mix of fixed and variable rate instruments according to the underlying insurance or investment contracts and will review this at regular intervals to ensure that overall exposure is kept within the risk profile agreed for each particular fund. This also requires the maturity profile of these assets to be managed in line with the liabilities to policyholders.

The sensitivity analysis for interest rate and inflation risk indicates how changes in the fair value or future cash flows of a financial instrument arising from changes in market interest and inflation rates at the reporting date result in a change in profit after tax and in equity. It takes into account the effect of such changes in market interest and inflation rates on all assets and liabilities that contribute to the Group's reported profit after tax and in equity. Changes in the value of the Group's holdings in swaptions as a result of time decay or changes to interest rate volatility are not captured in the sensitivity analysis.

With-profit business and non-participating business within the with-profit funds are exposed to interest rate risk as guaranteed liabilities are valued relative to market interest rates and investments include fixed interest securities and derivatives. For unsupported with-profit business the profit or loss arising from mismatches between such assets and liabilities is largely offset by increased or reduced discretionary policyholder benefits dependent on the existence of policyholder guarantees. The contribution of unsupported participating business to the Group result is largely limited to the shareholders' share of the declared annual bonus. The contribution of the supported participating business to the Group result is determined by the shareholders' interest in any change in value in the capital advanced to the with-profit funds.

In the non-participating funds, policy liabilities' sensitivity to interest rates are matched primarily with debt securities and hedging if necessary to match duration, with the result that sensitivity to changes in interest rates is very low. The Group's exposure to interest rates principally arises from the Group's hedging strategy to protect the regulatory capital position, which results in an adverse impact on profit on an increase in interest rates.

The Group is exposed to inflation risk through certain contracts, such as annuities, which may provide for future benefits to be paid taking account of changes in the level of experienced and implied inflation, and also through the Group's cost base. The Group seeks to manage inflation risk within the ALM framework through the holding of derivatives, such as inflation swaps, or physical positions in relevant assets, such as index-linked gilts, where appropriate.

Due to the correlation between interest rates and inflation, a combined sensitivity has been presented. Comparative information has been restated to incorporate a movement in the rate of inflation.

An increase of 1% in interest rates and 0.6% in the rate of inflation, with all other variables held constant, would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £364 million (2020 restated: £399 million).

A decrease of 1% in interest rates and 0.6% in the rate of inflation, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £415 million (2020 restated: £585 million).

Equity and property risk

The Group has exposure to financial assets and liabilities whose values will fluctuate as a result of changes in market prices other than from interest rate and currency fluctuations. This is due to factors specific to individual instruments, their issuers or factors affecting all instruments traded in the market. Accordingly, the Group limits its exposure to any one counterparty in its investment portfolios and to any one foreign market.

The portfolio of marketable equity securities and property investments which is carried in the statement of consolidated financial position at fair value, has exposure to price risk. The Group's objective in holding these assets is to earn higher long-term returns by investing in a diverse portfolio of equities and properties. Portfolio characteristics are analysed regularly and price risks are actively managed in line with investment mandates. The Group's holdings are diversified across industries and concentrations in any one company or industry are limited.

Equity and property price risk is primarily borne in respect of assets held in with-profit funds, unit-linked funds or equity release mortgages in the non-profit funds. For unit-linked funds this risk is borne by policyholders and asset movements directly impact unit prices and hence policy values. For with-profit funds policyholders' future bonuses will be impacted by the investment returns achieved and hence the price risk, whilst the Group also has exposure to the value of guarantees provided to with-profit policyholders. In addition some equity investments are held in respect of shareholders' funds. For the non-profit fund property price risk from equity release mortgages is borne by the Group with the aim of achieving greater diversification and investment returns, consistent with the Strategic Asset Allocation approved by the Board. The Group as a whole is exposed to price risk fluctuations impacting the income flow of management charges from the invested assets of all funds; this is primarily managed through the use of derivatives.

Equity and property price risk is managed through the agreement and monitoring of financial risk profiles that are appropriate for each of the Group's life funds in respect of maintaining adequate regulatory capital and treating customers fairly. This is largely achieved through asset class diversification and within the Group's ALM framework through the holding of derivatives or physical positions in relevant assets where appropriate.

The sensitivity analysis for equity and property price risk illustrates how a change in the fair value of equities and properties affects the Group result. It takes into account the effect of such changes in equity and property prices on all assets and liabilities that contribute to the Group's reported profit after tax and in equity (but excludes the impact on the Group's pension schemes).

A 10% decrease in equity prices, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £294 million (2020: £281 million).

A 10% increase in equity prices, with all other variables held constant, would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £263 million (2020: £263 million).

A 10% decrease in property prices, with all other variables held constant, would result in a decrease in profits after tax in respect of a full financial year, and in equity, of £6 million (2020: £25 million).

A 10% increase in property prices, with all other variables held constant, would result in an increase in profits after tax in respect of a full financial year, and in equity, of £4 million (2020: £16 million).

The sensitivity to changes in equity prices is primarily driven by the Group's equity hedging arrangements over the value of future management charges that are linked to asset values.

Currency risk

Currency risk is the risk that changes in the value of currencies could lead to reductions in asset values which may result in losses for policyholders and shareholders. With the exception of Standard Life International business sold in Germany and the Republic of Ireland, some historic business written in the Republic of Ireland and Ark Life business (until sold on 1 November 2021), the Group's principal transactions are carried out in sterling. The assets for these books of business are generally held in the same currency denomination as their liabilities, therefore, any foreign currency mismatch is largely mitigated. Consequently, the foreign currency risk relating to this business mainly arises when the assets and liabilities are translated into sterling.

The Group's financial assets are primarily denominated in the same currencies as its insurance and investment liabilities. Thus, the main foreign exchange risk arises from recognised assets and liabilities denominated in currencies other than those in which insurance and investment liabilities are expected to be settled and, indirectly, from the non-UK earnings of UK companies.

Some of the Group's with-profit funds have an exposure to overseas assets which is not driven by liability considerations. The purpose of this exposure is to reduce overall risk whilst maximising returns by diversification. This exposure is limited and managed through investment mandates which are subject to the oversight of the investment committees of the boards of each life company. Fluctuations in exchange rates from certain holdings in overseas assets are hedged against currency risks

During the year, the Group entered into four hedging relationships to hedge the currency risk on its Euro and US dollar denominated hybrid debt (US $500 million Tier 2 bonds, €500 million Tier 2 notes, US $750 million contingent convertible Tier 1 notes and US $500 million Fixed Rate Reset Tier 2 notes as set out in note E5) through cross currency rate swaps.

Sensitivity of profit after tax and equity to fluctuations in currency exchange rates is not considered significant at 31 December 2021, since unhedged exposure to foreign currency was relatively low (2020: not considered significant).

E6.2.3 Financial soundness risk

Financial soundness risk is a broad risk category encompassing capital management risk, tax risk and liquidity and funding risk.

Capital management risk is defined as the failure of the Group, or one of its separately regulated subsidiaries, to maintain sufficient capital to provide appropriate security for policyholders and meet all regulatory capital requirements whilst not retaining unnecessary capital. The Group has exposure to capital management risk through the requirements of the Solvency II capital regime, as implemented by the PRA, to calculate regulatory capital adequacy at a Group level. The Group's UK life subsidiaries have exposure to capital management risk through the Solvency II regulatory capital requirements mandated by the PRA at the solo level. The Group's approach to managing capital management risk is described in detail in note I3.

Tax risk is defined as the risk of financial failure, reputation damage, loss of earnings/value arising from a lack of liquidity, funding or capital, and/or the inappropriate recording, reporting, understanding of tax legislation and disclosure of financial, taxation and regulatory information. Tax risk can be caused by:

the Group, or one of its subsidiaries, making a material error in its tax reporting;

incorrect calculation of tax provisions;

failure to implement the optimum financial arrangements to underpin a commercial transaction; and

incorrect operation of policyholder tax requirements.

Tax risk is managed by maintaining an appropriately staffed tax team who have the qualifications and experience to make judgements on tax issues, augmented by advice from external specialists where required. In addition, the Group has a formal tax risk policy, which sets out its risk appetite in relation to specific aspects of tax risk, and which details the controls the Group has in place to manage those risks.

Liquidity risk is defined as failure to maintain adequate levels of financial resources to meet obligations as they fall due. Funding risk relates to the potential inability to raise additional capital or liquidity when required in order to maintain the resilience of the balance sheet. The Group has exposure to liquidity risk as a result of servicing its external debt and equity investors, and from the operating requirements of its subsidiaries. The Group's subsidiaries have exposure to liquidity risk as a result of normal business activities, specifically the risk arising from an inability to meet short-term cash flow requirements and to meet obligations to policy liabilities. The Board of Phoenix Group Holdings plc has defined a number of governance objectives and principles and the liquidity risk frameworks of each subsidiary are designed to ensure that:

liquidity risk is managed in a manner consistent with the subsidiary company boards' strategic objectives, risk appetite and Principles and Practices of Financial Management ('PPFM');

cash flows are appropriately managed and the reputation of the Group is safeguarded; and

appropriate information on liquidity risk is available to those making decisions.

The Group's liquidity risk management strategy is based on a risk appetite of less than a 1 in 200 chance of having insufficient liquid or tangible assets to meet financial obligations as they fall due and is supported by:

holding appropriate assets to meet liquidity buffers;

holding high quality liquid assets to support day to day operations;

an effective stress testing framework to ensure survival horizons are met under different plausible scenarios;

effective liquidity portfolio management; and

liquidity risk contingency planning.

The Group's funding strategy aims to maintain the appropriate level of debt and equity in order to support the Group's acquisition ambitions, while maintaining sufficient headroom for hybrid capital under Solvency II rules.

Liquidity forecasts showing headroom against liquidity buffers are prepared regularly to predict required liquidity levels over both the short and medium-term allowing management to respond appropriately to changes in circumstances. In the event of a liquidity shortfall, this would be managed in line with the Group's Contingency Liquidity Plan where the latest available contingency management actions would be considered.

In extreme circumstances, the Group could be exposed to liquidity risk in its unit-linked funds. This could occur where a high volume of surrenders coincides with a tightening of liquidity in a unit-linked fund to the point where assets of that fund have to be sold to meet those withdrawals. Where the fund affected consists of less liquid assets such as property, it can take several months to complete a sale and this would impede the proper operation of the fund. In these situations, the Group considers its risk to be low since there are steps that can be taken first within the funds themselves both to ensure the fair treatment of all investors in those funds and to protect the Group's own risk exposure.

The vast majority of the Group's derivative contracts are traded OTC and have a two-day collateral settlement period. The Group's derivative contracts are monitored daily, via an end-of-day valuation process, to assess the need for additional funds to cover margin or collateral calls.

Some of the Group's commercial property investments, cash and cash equivalents are held through collective investment schemes. The collective investment schemes have the power to restrict and/or suspend withdrawals, which would, in turn, affect liquidity.

The following table provides a maturity analysis showing the remaining contractual maturities of the Group's undiscounted financial liabilities and associated interest. Liabilities under insurance contract contractual maturities are included based on the estimated timing of the amounts recognised in the statement of consolidated financial position in accordance with the requirements of IFRS 4 Insurance Contracts:

2021

1 year or less or on demand
£m

1-5 years
£m

Greater than
5 years
 m

No fixed
term
£m

Total
£m

Less amounts classified as held for sale (see note A6.1)
 m

Total
£m

Liabilities under insurance contracts

14,319

36,061

78,484

-

128,864

-

128,864

Investment contracts

172,093

-

-

-

172,093

(11,676)

160,417

Borrowings1

664

1,380

2,772

70

4,886

-

4,886

Deposits received from reinsurers1

419

834

2,355

-

3,608

-

3,608

Derivatives1

259

517

583

-

1,359

(4)

1,355

Net asset value attributable to unitholders

3,568

-

-

-

3,568

-

3,568

Obligations for repayment of collateral received

3,442

-

-

-

3,442

-

3,442

Reinsurance payables

80

13

50

-

143

-

143

Payables related to direct insurance contracts

1,864

-

-

-

1,864

-

1,864

Lease liabilities1

11

59

72

-

142

-

142

Accruals and deferred income

548

59

7

7

621

(54)

567

Other payables

721

-

-

-

721

-

721

 

2020

1 year or less or on demand
£m

1-5 years
£m

Greater than
5 years
 m

No fixed
term
£m

Total
£m

Liabilities under insurance contracts

20,027

32,703

81,177

-

133,907

Investment contracts

165,106

-

-

-

165,106

Borrowings1

551

1,661

3,145

84

5,441

Deposits received from reinsurers1

699

832

2,569

-

4,100

Derivatives1

274

526

224

-

1,024

Net asset value attributable to unitholders

3,791

-

-

-

3,791

Obligations for repayment of collateral received

5,205

-

-

-

5,205

Reinsurance payables

134

-

-

-

134

Payables related to direct insurance contracts

1,669

-

-

-

1,669

Lease liabilities1

12

36

84

-

132

Accruals and deferred income

509

4

8

-

521

Other payables

1,265

-

1

-

1,266

1  These financial liabilities are disclosed at their undiscounted value and therefore differ from amounts included in the statement of consolidated financial position which discloses the discounted value.

Investment contract policyholders have the option to terminate or transfer their contracts at any time and to receive the surrender or transfer value of their policies. Although these liabilities are payable on demand, and are therefore included in the contractual maturity analysis as due within one year, the Group does not expect all these amounts to be paid out within one year of the reporting date.

A significant proportion of the Group's financial assets are held in gilts, cash, supranationals and investment grade securities which the Group considers sufficient to meet the liabilities as they fall due. The vast majority of these investments are readily realisable immediately since most of them are quoted in an active market.

E6.2.4 Strategic risk

Strategic risks threaten the achievement of the Group strategy through poor strategic decision-making, implementation or response to changing circumstances. The Group recognises that core strategic activity brings with it exposure to strategic risk. However, the Group seeks to proactively review, manage and control these exposures.

The Group's strategy and business plan are exposed to external events that could prevent or impact the achievement of the strategy; events relating to how the strategy and business plan are executed; and events that arise as a consequence of following the specific strategy chosen. The identification and assessment of strategic risks is an integrated part of the Risk Management Framework. Strategic risk should be considered in parallel with the Risk Universe as each of the risks within the Risk Universe can impact the Group's strategy.

A Strategic Risk Policy is maintained and reported against regularly, with a particular focus on risk management, stakeholder management, corporate activity and overall reporting against the Group's strategic ambitions.

E6.2.5 Operational risk

Operational risk is the risk of reductions in earnings and/or value, through financial or reputational loss, from inadequate or failed internal processes and systems, or from people related or external events. Operational risk arises due to failures in one or more of the following aspects of our business:

indirect exposures through outsourcing service providers and suppliers;

direct exposures through internal practices, actions or omissions;

external threats from individuals or groups focused on malicious or criminal activities, or on external events occurring which are not within the Group's control; and

negligence, malpractice or failure of employees, or suppliers to follow good practice in delivering operational processes and practices.

It is accepted that it is neither possible, appropriate nor cost effective to eliminate operational risks from the business as operational risk is inherent in any operating environment particularly given the regulatory framework under which the Group operates. As such the Group will tolerate a degree of operational risk subject to appropriate and proportionate levels of control around the identification, management and reporting of such risks. A set of operational risk policies are maintained that set out the nature of the operational risk exposure and minimum control standards in place to control the risk.

E6.2.6 Customer risk

Customer risk is the risk of financial failure, reputational loss, loss of earnings and/or value through inappropriate or poor customer treatment (including poor advice). It can arise as a result of:

Customer Treatment: Failure to have a customer centric culture which drives appropriate behaviours and decisions leading to customer interactions and outcomes which meet or exceed reasonable customer and regulator expectations and which take account of potential customer vulnerability.

Customer Transformation: The design, governance and oversight of Strategic Customer Transformation Activity in retained functions and service providers, fails to deliver on reasonable customer expectations, taking account of the Group's customer treatment risk appetite and regulatory requirements.

Product and Propositions: Failure to design and/or manage products/propositions appropriately, or failure of the manufacturer to ensure that products/propositions are distributed to the appropriate target market, perform as intended and in line with the expectations set.

Sales and Distribution: Inappropriate (unclear, unfair or misleading) financial promotions, sales practices and/or distribution agreements resulting in poor customer outcomes leading to reputational, financial and/or operational detriment.

The Group's Conduct Risk Appetite, sets the boundaries within which the Group expect customer outcomes to be managed. In addition, the Group Conduct Risk Framework, which overarches our Risk Universe and all risk policies, consists of a set of outcomes, intents and standards for all staff to follow to ensure that we have embedded and effective controls in place across our business activities to detect where our customers are at risk of poor outcome, minimise conduct risks, and respond with timely and appropriate mitigating actions. From a qualitative perspective, the customer risks for the Group are regularly reported to management oversight committees.

F. Insurance contracts, investment contracts with DPF and reinsurance

F1. Liabilities under insurance contracts

Classification of contracts

Contracts are classified as insurance contracts where the Group accepts significant insurance risk from the policyholder by agreeing to compensate the policyholder if a specified uncertain event adversely affects the policyholder.

Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified as investment contracts or derivatives and accounted for as financial liabilities (see notes E1 and E3 respectively).

Some insurance and investment contracts contain a Discretionary Participation Feature ('DPF'). This feature entitles the policyholder to additional discretionary benefits as a supplement to guaranteed benefits. Investment contracts with a DPF are recognised, measured and presented as insurance contracts.

Contracts with reinsurers are assessed to determine whether they contain significant insurance risks. Contracts that do not give rise to a significant transfer of insurance risk to the reinsurer are classified as financial instruments and are valued at fair value through profit or loss.

Insurance contracts and investment contracts with DPF

Insurance liabilities

Insurance contract liabilities for non-participating business, other than unit-linked insurance contracts, are calculated on the basis of current data and assumptions, using either a net premium or gross premium method. Where a gross premium method is used, the liability includes allowance for prudent lapses. Negative policy values are allowed for on individual policies:

where there are no guaranteed surrender values; or

in the periods where guaranteed surrender values do not apply even though guaranteed surrender values are applicable after a specified period of time.

For unit-linked insurance contract liabilities the provision is based on the fund value, together with an allowance for any excess of future expenses over charges, where appropriate.

For participating business, the liabilities under insurance contracts and investment contracts with DPF are calculated in accordance with the following methodology:

liabilities to policyholders arising from the with-profit business are stated at the amount of the realistic value of the liabilities, adjusted to exclude the owners' share of projected future bonuses;

acquisition costs are not deferred; and

reinsurance recoveries are measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies.

The With-Profit Benefit Reserve ('WPBR') for an individual contract is determined by either a retrospective calculation of 'accumulated asset share' approach or by way of a prospective 'bonus reserve valuation' method. The cost of future policy related liabilities is determined using a market consistent approach, mainly based on a stochastic model calibrated to market conditions at the end of the reporting period. Non-market related assumptions (for example, persistency, mortality and expenses) are based on experience adjusted to take into account future trends.

The realistic liability for any contract is equal to the sum of the WPBR and the cost of future policy-related liabilities. The cost of future policy-related liabilities includes the unallocated surplus attributable to policyholders for the Group's with-profit funds.

Where policyholders have valuable guarantees, options or promises in respect of the with-profit business, these costs are generally valued using a stochastic model.

In calculating the realistic liabilities, account is taken of the future management actions consistent with those set out in the Principles and Practices of Financial Management ('PPFM').

 

Standard Life Assurance Limited ('SLAL'), a wholly owned subsidiary of the Group, includes the Heritage With Profits Fund ('HWPF'). In 2006, the Standard Life Assurance Company demutualised. The demutualisation was governed by its Scheme of Demutualisation ('the Scheme'). Under the Scheme substantially all of the assets and liabilities of the Standard Life Assurance Company were transferred to SLAL.

The Scheme provides that certain defined cash flows (recourse cash flows) arising in the HWPF on specified blocks of UK and Ireland business, both participating and non-participating, may be transferred out of that fund when they emerge, being transferred to the Shareholder Fund ('SHF') or the Proprietary Business Fund ('PBF') of SLAL, and thus accrue to the ultimate benefit of equity holders of the Company. Under the Scheme, such transfers are subject to certain constraints in order to protect policyholders. The Scheme also provides for additional expenses to be charged by the PBF to the HWPF in respect of German branch business in SLAL.

Under the realistic valuation, the discounted value of expected future cash flows on participating contracts not reflected in the WPBR is included in the cost of future policy related liabilities (as a reduction where future cash flows are expected to be positive). The discounted value of expected future cash flows on non-participating contracts not reflected in the measure of non-participating liabilities is recognised as a separate asset (where future cash flows are expected to be positive). The Scheme requirement to transfer future recourse cash flows out of the HWPF is recognised as an addition to the cost of future policy related liabilities. The discounted value of expected future cash flows on non-participating contracts can be apportioned between those included in the recourse cash flows and those retained in the HWPF for the benefit of policyholders.

Applying the policy noted above for the HWPF:

The value of participating investment contract liabilities on the consolidated statement of financial position is reduced by future expected (net positive) cash flows arising on participating contracts.

Future expected cash flows on non-participating contracts are not recognised as an asset of the HWPF on the consolidated statement of financial position. However, future expected cash flows on non-participating contracts that are not recourse cash flows under the Scheme are used to reduce the value of participating insurance and participating investment contract liabilities on the consolidated statement of financial position

Present value of future profits on non-participating business in the with-profit funds

For UK with-profit life funds, an amount may be recognised for the present value of future profits ('PVFP') on non-participating business written in a with-profit fund where the determination of the realistic value of liabilities in that with-profit fund takes account, directly or indirectly, of this value.

Where the value of future profits can be shown to be due to policyholders, this amount is recognised as a reduction in the liability rather than as an intangible asset. This is then apportioned between the amounts that have been taken into account in the measurement of liabilities and other amounts which are shown as an adjustment to the unallocated surplus.

Where it is not possible to apportion the future profits on this non-participating business to policyholders, the PVFP on this business is recognised as an intangible asset and changes in its value are recorded as a separate item in the consolidated income statement (see note G2).

The value of the PVFP is determined in a manner consistent with the realistic measurement of liabilities. In particular, the methodology and assumptions involve adjustments to reflect risk and uncertainty, are based on current estimates of future experience and current market yields and allow for market consistent valuation of any guarantees or options within the contracts. The value is also adjusted to remove the value of capital backing the non-profit business if this is included in the realistic calculation of PVFP. The principal assumptions used to calculate the PVFP are the same as those used in calculating the insurance contract liabilities given in note F4.

Embedded derivatives

Embedded derivatives, including options to surrender insurance contracts, that meet the definition of insurance contracts or are closely related to the host insurance contract, are not separately measured. All other embedded derivatives are separated from the host contract and measured at fair value through profit or loss.

 

 

Liability adequacy

At each reporting date, liability adequacy tests are performed to assess whether the insurance contract and investment contract with DPF liabilities are adequate. Current best estimates of future cash flows are compared to the carrying value of the liabilities. Any deficiency is charged to the consolidated income statement.

The Group's accounting policies for insurance contracts meet the minimum specified requirements for liability adequacy testing under IFRS 4 Insurance Contracts, as they allow for current estimates of all contractual cash flows and of related cash flows such as claims handling costs. Cash flows resulting from embedded options and guarantees are also allowed for, with any deficiency being recognised in the consolidated income statement.

Reinsurance

Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision or settled claims associated with the reinsured policy.

Reinsurance ceded

The Group cedes insurance risk in the normal course of business. Reinsurance assets represent balances due from reinsurance providers. Reinsurers' share of insurance contract liabilities is dependent on expected claims and benefits arising under the related reinsured policies.

Reinsurance assets are reviewed for impairment at each reporting date, or more frequently, when an indication of impairment arises during the reporting period. Impairment occurs when there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all outstanding amounts due under the terms of the contract and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. The impairment loss is recognised in the consolidated income statement. The reinsurers' share of investment contract liabilities is measured on a basis that is consistent with the valuation of the liability to policyholders to which the reinsurance applies.

Reinsurance premiums payable in respect of certain reinsured individual and group pensions annuity contracts are payable by quarterly instalments and are accounted for on a payable basis. Due to the period of time over which reinsurance premiums are payable under these arrangements, the reinsurance premiums and related payables are discounted to present values using a pre-tax risk-free rate of return. The unwinding of the discount is included as a charge within the consolidated income statement.

Reinsurance accepted

The Group accepts insurance risk under reinsurance contracts. Amounts paid to cedants at the inception of reinsurance contracts in respect of future profits on certain blocks of business are recognised as a reinsurance asset. Changes in the value of the reinsurance assets created from the acceptance of reinsurance are recognised as an expense in the consolidated income statement, consistent with the expected emergence of the economic benefits from the underlying blocks of business.

At each reporting date, the Group assesses whether there are any indications of impairment. When indications of impairment exist, an impairment test is carried out by comparing the carrying value of the asset with the estimate of the recoverable amount. When the recoverable amount is less than the carrying value, an impairment charge is recognised as an expense in the consolidated income statement. Reassurance assets are also considered in the liability adequacy test for each reporting period.

Consolidated income statement recognition

Gross premiums

In respect of insurance contracts and investment contracts with DPF, premiums are accounted for on a receivable basis and exclude any taxes or duties based on premiums. Funds at retirement under individual pension contracts converted to annuities with the Group are, for accounting purposes, included in both claims incurred and premiums within gross premiums written.

Reinsurance premiums

Outward reinsurance premiums are accounted for on a payable basis. Reinsurance premiums include amounts receivable as refunds of premiums in cases where the Group cancels arrangements for the reinsurance of risk to another reinsurer.

 

Gross benefits and claims

Claims on insurance contracts and investment contracts with DPF reflect the cost of all claims arising during the period, including policyholder bonuses allocated in anticipation of a bonus declaration. Claims payable on maturity are recognised when the claim becomes due for payment and claims payable on death are recognised on notification. Surrenders are accounted for at the earlier of the payment date or when the policy ceases to be included within insurance contract liabilities. Where claims are payable and the contract remains in-force, the claim instalment is accounted for when due for payment. Claims payable include the costs of settlement.

Reinsurance claimsare recognised when the related gross insurance claim is recognised according to the terms of the relevant contract.

Gains or losses on purchasing reinsurance are recognised in the consolidated income statement at the date of purchase and are not amortised. They are the difference between the premiums ceded to reinsurers and the related change in the reinsurers' share of insurance contract liabilities.

The table below shows a summary of the liabilities under insurance contracts and the related reinsurers' share included within assets in the statement of consolidated financial position.

 

Gross liabilities
2021
£m

Reinsurers' share
2021
 m

Gross liabilities 2020
£m

Reinsurers' share
2020
£m

Life assurance business:

 

 

 

 

Insurance contracts

99,169

8,587

103,012

9,542

Investment contracts with DPF

29,695

-

30,895

-

 

128,864

8,587

133,907

9,542

 

 

 

 

 

Amounts due for settlement after 12 months

114,545

7,472

113,880

8,546

 

 

Gross liabilities
2021
£m

Reinsurers' share
2021
 m

Gross liabilities 2020
£m

Reinsurers'
share
2020
£m

At 1 January

133,907

9,542

95,643

7,324

Premiums

7,455

2,079

4,706

796

Claims

(9,656)

(1,597)

(7,808)

(1,613)

Foreign exchange adjustments

(1,168)

(48)

851

4

Disposal of Ark Life (see note H3)

(799)

(730)

-

-

Acquisition of ReAssure businesses (see note H2.1)

-

-

24,606

2,782

L&G Part VII portfolio transfer (see note H2.2)

-

-

9,558

-

Other changes in liabilities1

(875)

(659)

6,351

249

At 31 December

128,864

8,587

133,907

9,542

1  Other changes in liabilities principally comprise changes in economic and non-economic assumptions and experience.

F2. Unallocated surplus

The unallocated surplus comprises the excess of the assets over the policyholder liabilities of the with-profit business of the Group's life operations. For the Group's with-profit funds this represents amounts which have yet to be allocated to owners since the unallocated surplus attributable to policyholders has been included within liabilities under insurance contracts.

If the realistic value of liabilities to policyholders exceeds the value of the assets in the with-profit fund, the unallocated surplus is valued at £nil.

In relation to the HWPF, amounts are considered to be allocated to shareholders when they emerge as recourse cash flows within the HWPF.

The unallocated surplus of the HWPF comprises the value of future recourse cash flows in participating contracts (but not the value of future cash flows on non-participating contracts), the value of future additional expenses to be charged on German branch business and the effect of any measurement differences between the realistic value and the IFRS accounting policy value of all assets and liabilities other than participating contract liabilities recognised in the HWPF.

The recourse cash flows are recognised as they emerge as an addition to shareholders' profits if positive or as a deduction if negative. As the additional expenses are charged in respect of the German branch business they are recognised as an addition to equity holders' profits.

 

 

2021
£m

2020
£m

At 1 January

1,768

1,367

Transfer (to)/from consolidated income statement

(106)

113

Acquisition of ReAssure businesses (see note H2.1)

-

136

L&G Part VII transfer (see note H2.2)

-

261

Foreign exchange movements

139

(109)

At 31 December

1,801

1,768

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 £2,079 million (2020: £796 million).

F3.2 Collateral arrangements

It is the Group's practice to obtain collateral to mitigate the counterparty risk related to reinsurance transactions usually in the form of cash or marketable financial instruments.

Where the Group receives collateral in the form of marketable financial instruments which it is not permitted to sell or re-pledge except in the case of default, it is not recognised in the statement of consolidated financial position. The fair value of financial assets accepted as collateral for reinsurance transactions but not recognised in the statement of consolidated financial position amounts to £4,882 million (2020: £4,324 million).

Where the Group receives collateral on reinsurance transactions in the form of cash it is recognised in the statement of consolidated financial position along with a corresponding liability to repay the amount of collateral received, disclosed as 'Deposits received from reinsurers'. Where there is interest payable on such collateral, it is recognised within 'Net expense under arrangements with reinsurers' (see note F3.3). The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2021 are set out below.

 

Reinsurance transactions

 

2021
£m

2020
£m

Financial assets

373

427

Financial liabilities

373

427

F3.3 Net income/(expense) under arrangements with reinsurers

The Group has reinsured the longevity and investment risk related to a portfolio of annuity contracts held within the HWPF. At inception of the reinsurance contract the reinsurer was required to deposit an amount equal to the reinsurance premium with the Group. The amount recognised in the statement of consolidated financial position in respect of this deposit is £3.2 billion as at 31 December 2021 (31 December 2020: £3.7 billion). Interest is payable to the reinsurer on the deposit at a floating rate. The Group maintains a ring fenced pool of assets to back this deposit liability. Annuity payments under the reinsured contracts are made by the Group from the ring-fenced assets and the deposit liability is reduced by the amount of these payments. Periodically the Group is required to pay to the reinsurer or receive from the reinsurer Premium Adjustments defined as the difference between the fair value of the ring-fenced assets and the deposit amount, such that the deposit amount equals the fair value of the ring-fenced assets. This has the effect of ensuring that the investment risk on the ring-fenced pool of assets falls on the reinsurer. The investment return on the ring-fenced assets included within net investment return in the consolidated income statement is equal to an equivalent amount recognised in net expense under arrangements with reinsurers.

 

2021
£m

2020
£m

Interest payable on deposits from reinsurers

(11)

(13)

Premium adjustments

33

(206)

Net income/(expense) under arrangements with reinsurers

22

(219)

F4. Risk management - insurance risk

This note forms one part of the risk management disclosures in the consolidated financial statements. An overview of the Group's approach to risk management is outlined in note I3 and the Group's management of financial and other risks is detailed in note E6.

Insurance risk refers to the risk of reductions in earnings and/or value, through financial or reputational loss, due to fluctuations in the timing, frequency and severity of insured/underwritten events and to fluctuations in the timing and amount of claim settlements. This includes fluctuations in profits due to customer behaviour. The Life businesses are exposed to the following elements of insurance risk:

Mortality

higher than expected death claims on assurance products or lower than expected improvements in mortality;

Longevity

lower than expected number of deaths experienced on annuity products or greater than expected improvements in annuitant mortality;

Morbidity/Disability

higher than expected number of inceptions on critical illness or income protection policies and lower than expected termination rates on income protection policies;

Expenses

unexpected timing or value of expenses incurred;

Persistency

adverse movement in surrender rates, premium paying rates, premium indexation rates, cash withdrawal/drawdown rates, GAO surrender rates, GAO take-up rates, policyholder retirement dates, propensity to commute benefits, transfer out rates or the occurrence of a mass lapse event leading to losses;

New business pricing

inappropriate pricing of new business that is not in line with the underlying risk factors for that business.

Objectives and policies for mitigating insurance risk

Insurance risks are managed by monitoring risk exposure against predefined appetite limits. If a risk is moving out of appetite, the Group can choose to mitigate it via reinsurance in the case of longevity, mortality and morbidity risks, or by taking other risk reducing actions.

This is supported by additional methods to assess and monitor insurance risk exposures for both individual types of risks insured and overall risks. These methods include internal risk measurement models, experience analyses, external data comparisons, sensitivity analyses, scenario analyses and stress testing. Assumptions that are deemed to be financially significant are reviewed at least annually for pricing and reporting purposes.

The profitability of the run-off of the Heritage business within the Group depends, to a significant extent, on the values of claims paid in the future relative to the assets accumulated to the date of claim. Typically, over the lifetime of a contract, premiums and investment returns exceed claim costs in the early years and it is necessary to set aside these amounts to meet future obligations. The amount of such future obligations is assessed on actuarial principles by reference to assumptions about the development of financial and insurance risks.

It is therefore necessary for the Directors of each life company to make decisions, based on actuarial advice, which ensure an appropriate accumulation of assets relative to liabilities. These decisions include investment policy, bonus policy and, where discretion exists, the level of payments on early termination.

For the Group's Open business, longevity risk exposures continue to increase as a result of the Bulk Purchase Annuity deals it has successfully acquired, however the vast majority of these exposures are reinsured to third parties. New business growth driven by product segments such as Workplace unit-linked pensions exposes the Group to persistency and expense risks.

There remains uncertainty around future demographic experience as a result of COVID-19, as outlined in page 64 of the Annual Report and Accounts. The impact over the longer term continues to be monitored, however given the uncertainty no adjustments to assumptions as a result of the impacts of COVID-19 have been deemed necessary to date.

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 £70 million (2020: £70 million).

An increase of 5% in assurance mortality, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £70 million (2020: £70 million).

A decrease of 5% in annuitant longevity, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £517 million (2020: £619 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 £530 million (2020: £627 million).

A decrease of 10% in lapse rates, with all other variables held constant, would result in a decrease in the profit after tax in respect of a full year, and a decrease in equity of £27 million (2020: £40 million).

An increase of 10% in lapse rates, with all other variables held constant, would result in an increase in the profit after tax in respect of a full year, and an increase in equity of £27 million (2020: £44 million).

F4.1 Assumptions

For participating business which is with-profit business (insurance and investment contracts with DPF), the insurance contract liability is calculated on a realistic basis, adjusted to exclude the shareholders' share of future bonuses and the associated tax liability. This is a market consistent valuation, which involves placing a value on liabilities similar to the market value of assets with similar cash flow patterns.

The non-participating insurance contract liabilities are determined using either a net premium or gross premium valuation method.

The assumptions used to determine the liabilities, under these valuation methods are updated at each reporting date to reflect recent experience. Material judgement is required in calculating these liabilities and, in particular, in the choice of assumptions about which there is uncertainty over future experience. The principal assumptions are as follows:

Discount rates

The Group discounts participating and non-participating insurance contract liabilities at a risk-free rate derived from the swap yield curve, plus an illiquidity premium of 36bps.

For certain non-participating insurance contract liabilities (e.g. annuities), the Group makes a further explicit adjustment to the risk-free rate to reflect illiquidity in respect of the assets backing those liabilities.

Expenses

Insurance contract liabilities include an allowance for the best estimate of future expenses associated with the administration of in-force policies. This requires the allocation of the Group's future expenses between those that relate to the administration of in-force policies, those attributable to the acquisition of new business and other costs, such as corporate costs. There is a level of judgement applied in the analysis that supports this allocation. Additionally, judgement is applied in the determination of the projected costs of the Group, in particular where those projections include the impact of transition and integration activity.

Expenses are assumed to increase at either the rate of increase in the Retail Price Index ('RPI'), or a rate derived from the UK inflation swaps curve, plus fixed margins in accordance with the various management service agreements ('MSAs') the Group has in place with outsource partners. For with-profit business the rate of RPI inflation is determined within each stochastic scenario. For other business it is based on the Bank of England inflation spot curve. For MSAs with contractual increases set by reference to national average earnings inflation, this is approximated as RPI inflation or RPI inflation plus 1%. In instances in which inflation risk is not mitigated, a further margin for adverse deviations may then be added to the rate of expense inflation.

Mortality and longevity rates

Mortality rates are based on company experience and published tables, adjusted appropriately to take account of changes in the underlying population mortality since the table was published, company experience and forecast changes in future mortality. Where appropriate, a margin is added to assurance mortality rates to allow for adverse future deviations. Annuitant mortality rates are adjusted to make allowance for future improvements in pensioner longevity.

Lapse and surrender rates (persistency)

The assumed rates for surrender and voluntary premium discontinuance depend on the length of time a policy has been in force and the relevant company experience. Surrender or voluntary premium discontinuances are only assumed for realistic basis funds. Withdrawal rates used in the valuation of with-profit policies are based on observed experience and adjusted when it is considered that future policyholder behaviour will be influenced by different considerations than in the past. In particular, it is assumed that withdrawal rates for unitised with-profit contracts will be higher on policy anniversaries on which Market Value Adjustments do not apply.

Discretionary participating bonus rate

For realistic basis funds, the regular bonus rates assumed in each scenario are determined in accordance with each company's PPFM. Final bonuses are assumed at a level such that maturity payments will equal asset shares subject to smoothing rules set out in the PPFM and the value of guaranteed benefits.

Policyholder options and guarantees

Some of the Group's products give potentially valuable guarantees, or give options to change policy benefits which can be exercised at the policyholders' discretion. These products are described below.

Most with-profit contracts give a guaranteed minimum payment on a specified date or range of dates or on death if before that date or dates. For pensions contracts, the specified date is the policyholder's chosen retirement date or a range of dates around that date. For endowment contracts, it is the maturity date of the contract. For with-profit bonds it is often a specified anniversary of commencement, in some cases with further dates thereafter. Annual bonuses when added to with-profit contracts usually increase the guaranteed amount.

There are guaranteed surrender values on a small number of older contracts.

Some pensions contracts include guaranteed annuity options. The total amount provided in the with-profit and non-profit funds in respect of the future costs of guaranteed annuity options are £1,968 million (2020: £2,590 million) and £111 million (2020: £131 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 £349 million (2020: £374 million) and £6 million (2020: £6 million) respectively.

With-profit deferred annuities participate in profits only up to the date of retirement. At retirement, a guaranteed cash option allows the policyholder to commute the annuity benefit into cash on guaranteed terms.

Demographic prudence margin

For non-participating insurance contract liabilities, the Group sets assumptions at management's best estimates and recognises an explicit margin for demographic risks. For participating business in realistic basis funds, the assumptions about future demographic trends represent 'best estimates'.

Assumption changes

During the year a number of changes were made to assumptions to reflect changes in expected experience or to reflect transition activity. The impact of material changes during the year was as follows:

 

(Decrease)/
increase in insurance liabilities
2021
£m

(Decrease)/
increase in insurance liabilities 2020
£m

Change in longevity assumptions

(272)

(369)

Change in persistency assumptions

(12)

6

Change in mortality assumptions

(7)

31

Change in expenses assumptions

275

(36)

2021:

The £272 million positive impact of changes in longevity assumptions reflects updates to base and improvement assumptions to reflect latest experience analyses and the most recent Continuous Mortality Investigation 2020 projection tables.

The £12 million and £7 million positive impact of changes in persistency and mortality assumptions respectively reflects the results of the latest experience investigations.

The £275 million negative impact of changes in expense assumptions principally reflects the impact of investment in the Group's growth agenda on the maintenance cost base, including the development of capabilities within the Group's Open business, asset management capabilities and within certain Group functions. The increase in reserves also reflects provision for the anticipated costs associated with the implementation of IFRS 17 and delivery of the Group Target Operating Model for IT and Operations.

2020:

The £369 million positive impact of changes in longevity assumptions reflects updates to base and improvement assumptions to reflect latest experience analyses and the most recent Continuous Mortality Investigation 2019 projection tables.

The £6 million and £31 million negative impact of changes in persistency and mortality assumptions respectively reflects the results of the latest experience investigations.

The £36 million positive impact of changes in expense assumptions principally reflects synergies generated upon the completion of the Part VII transfer of the L&G Mature Savings business, partially offset by an increase in reserves in respect of expected costs associated with the delivery of the Group Target Operating Model for IT and Operations and updates to investment expense assumptions, principally reflecting changes to asset mix.

F4.2 Managing product risk

The following sections give an assessment of the risks associated with the Group's main life assurance products and the ways in which the Group manages those risks.

 

Gross1

 

Reinsurance

2021

Insurance contracts £m

Investment contracts with DPF £m

 

Insurance contracts £m

Investment contracts with DPF £m

With-profit funds:

 

 

 

 

 

Pensions:

 

 

 

 

 

Deferred annuities - with guarantees

8,746

53

 

728

-

Deferred annuities - without guarantees

1,753

341

 

-

-

Immediate annuities

6,506

-

 

3,787

-

Unitised with-profit

13,344

27,078

 

-

-

Total pensions

30,349

27,472

 

4,515

-

 

 

 

 

 

 

Life:

 

 

 

 

 

Immediate annuities

348

-

 

1

-

Unitised with-profit

9,364

1,137

 

-

-

Life with-profit

2,166

-

 

6

-

Total life

11,878

1,137

 

7

-

 

 

 

 

 

 

Other

1,245

(1)

 

192

-

 

 

 

 

 

 

Non-profit funds:

 

 

 

 

 

Deferred annuities - with guarantees

555

-

 

-

-

Deferred annuities - without guarantees

983

-

 

158

-

Immediate annuities

37,329

-

 

2,885

-

Protection

2,076

-

 

876

-

Unit-linked

14,891

1,084

 

22

-

Other

(137)

3

 

(68)

-

 

99,169

29,695

 

8,587

-

1  £9,864 million (2020: £7,883 million) of liabilities are subject to longevity swap arrangements.

 

 

Gross

 

Reinsurance

2020

Insurance contracts
£m

Investment contracts with DPF
 m

 

Insurance contracts
£m

Investment contracts with DPF
£m

With-profit funds:

 

 

 

 

 

Pensions:

 

 

 

 

 

Deferred annuities - with guarantees

10,095

62

 

917

-

Deferred annuities - without guarantees

1,835

340

 

-

-

Immediate annuities

7,478

-

 

4,377

-

Unitised with-profit

14,375

28,210

 

-

-

Total pensions

33,783

28,612

 

5,294

-

 

 

 

 

 

 

Life:

 

 

 

 

 

Immediate annuities

365

-

 

2

-

Unitised with-profit

9,869

1,210

 

-

-

Life with-profit

2,445

-

 

7

-

Total life

12,679

1,210

 

9

-

 

 

 

 

 

 

Other

1,348

-

 

212

-

 

 

 

 

 

 

Non-profit funds:

 

 

 

 

 

Deferred annuities - with guarantees

636

-

 

-

 

Deferred annuities - without guarantees

1,966

-

 

(115)

-

Immediate annuities

35,641

-

 

2,459

-

Protection

3,012

-

 

1,713

-

Unit-linked

14,062

1,064

 

31

-

Other

(115)

9

 

(61)

-

 

103,012

30,895

 

9,542

-

With-profit fund (unitised and traditional)

The Group operates a number of with-profit funds in which the with-profit policyholders benefit from a discretionary annual bonus (guaranteed once added in most cases) and a discretionary final bonus. Non-participating business is also written in some of the with-profit funds and some of the funds may include immediate annuities and deferred annuities with Guaranteed Annuity Rates ('GAR').

The investment strategy of each fund differs, but is broadly to invest in a mixture of fixed interest investments and equities and/or property and other asset classes in such proportions as is appropriate to the investment risk exposure of the fund and its capital resources.

The Group has significant discretion regarding investment policy, bonus policy and early termination values. The process for exercising discretion in the management of the with-profit funds is set out in the PPFM for each with-profit fund and is overseen by with-profit committees. Advice is also taken from the with-profit actuary of each with-profit fund. Compliance with the PPFM is reviewed annually and reported to the PRA, Financial Conduct Authority ('FCA') and policyholders.

The bonuses are designed to distribute to policyholders a fair share of the return on the assets in the with-profit funds together with other elements of the experience of the fund. The shareholders of the Group are entitled to receive one-ninth of the cost of bonuses declared for some funds and £nil for others. For the HWPF, under the Scheme, shareholders are entitled to receive certain defined cash flows arising on specified blocks of UK and Irish business.

Unitised and traditional with-profit policies are exposed to equivalent risks, the main difference being that unitised with-profit policies purchase notional units in a with-profit fund whereas traditional with-profit policies do not. Benefit payments for unitised policies are then dependent on unit prices at the time of a claim, although charges may be applied. A unitised with-profit fund price is typically guaranteed not to fall and increases in line with any discretionary bonus payments over the course of one year.

Deferred annuities

Deferred annuity policies are written to provide either a cash benefit at retirement, which the policyholder can use to buy an annuity on the terms then applicable, or an annuity payable from retirement. The policies contain an element of guarantee expressed in the form that the contract is written in, i.e. to provide cash or an annuity. Deferred annuity policies written to provide a cash benefit may also contain an option to convert the cash benefit to an annuity benefit on guaranteed terms; these are known as GAR policies. Deferred annuity policies written to provide an annuity benefit may also contain an option to convert the annuity benefit into cash benefits on guaranteed terms; these are known as Guaranteed Cash Option ('GCO') policies. In addition, certain unit prices in the HWPF are guaranteed not to decrease.

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 (see note E6.2.2).

The Group seeks to manage this risk in accordance with both the terms of the issued policies and the interests of customers, and has obtained external advice supporting the manner in which it operates the long-term funds in this respect.

Immediate annuities

This type of annuity is purchased with a single premium at the outset, and is paid to the policyholder for the remainder of their lifetime. Payments may also continue for the benefit of a surviving spouse or partner after the annuitant's death. Annuities may be level, or escalate at a fixed rate, or may escalate in line with a price index and may be payable for a minimum period irrespective of whether the policyholder remains alive.

The main risks associated with this product are longevity and investment risks. Longevity risk arises where the annuities are paid for the lifetime of the policyholder, and is managed through the initial pricing of the annuity and through reinsurance (appropriately collateralised) or transfer of existing liabilities. Annuities may also be a partial 'natural hedge' against losses incurred in protection business in the event of increased mortality (and vice versa) although the extent to which this occurs will depend on the similarity of the demographic profile of each book of business. In addition, the Group has in place longevity swaps that provide downside protection over longevity risk.

The pricing assumption for mortality risk is based on both historic internal information and externally generated information on mortality experience, including allowances for future mortality improvements. Pricing will also include a contingency margin for adverse deviations in assumptions.

Market and credit risk is influenced by the extent to which the cash flows under the contracts have been matched by suitable assets which is managed under the ALM framework. Asset/liability modelling is used to monitor this position on a regular basis.

Protection

These contracts are typically secured by the payment of a regular premium payable for a period of years providing benefits payable on certain events occurring within the period. The benefits may be a single lump sum or a series of payments and may be payable on death, serious illness or sickness.

The main risk associated with this product is the claims experience and this risk is managed through the initial pricing of the policy (based on actuarial principles), the use of reinsurance and a clear process for administering claims.

Market and credit risk is influenced by the extent to which the cash flows under the contracts have been matched by suitable assets which is managed under the ALM framework. Asset/liability modelling is used to monitor this position on a regular basis.

G. Other statement of consolidated financial position notes

G1. Pension schemes

Defined contribution pension schemes

Obligations for contributions to defined contribution pension schemes are recognised as an expense in the consolidated income statement as incurred.

Defined benefit pension schemes

The net surplus or deficit (the economic surplus or deficit) in respect of the defined benefit pension schemes is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior years; that benefit is discounted to determine its present value and the fair value of any scheme assets is deducted.

The economic surplus or deficit is subsequently adjusted to eliminate on consolidation the carrying value of insurance policies issued by Group entities to the defined benefit pension schemes (the reported surplus or deficit). A corresponding adjustment is made to the carrying values of insurance contract liabilities and investment contract liabilities.

As required by IFRIC 14, IAS 19 - 'The limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction', to the extent that the economic surplus (prior to the elimination of the insurance policies issued by Group entities) will be available as a refund, the economic surplus is stated after a provision for tax that would be borne by the scheme administrators when the refund is made. The Group recognises a pension surplus on the basis that it is entitled to the surplus of each scheme in the event of a gradual settlement of the liabilities, due to its ability to order a winding up of the Trust.

Additionally under IFRIC 14 pension funding contributions are considered to be a minimum funding requirement and, to the extent that the contributions payable will not be available to the Group after they are paid into the Scheme, a liability is recognised when the obligation arises. The net pension scheme asset/liability represents the economic surplus net of all adjustments noted above.

The Group determines the net interest expense or income on the net pension scheme asset/liability for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the opening net pension scheme asset/liability. The discount rate is the yield at the period end on AA credit rated bonds that have maturity dates approximating to the terms of the Group's obligations. The calculation is performed by a qualified actuary using the projected unit credit method.

The movement in the net pension scheme asset/liability is analysed between the service cost, past service cost, curtailments and settlements (all recognised within administrative expenses in the consolidated income statement), the net interest cost on the net pension scheme asset/liability, including any reimbursement assets (recognised within net investment income in the consolidated income statement), remeasurements of the net pension scheme asset/liability (recognised in other comprehensive income) and employer contributions.

This note describes the Group's four main defined benefit pension schemes for its employees, the Pearl Group Staff Pension Scheme ('Pearl Scheme'), the PGL Pension Scheme, the Abbey Life Staff Pension Scheme ('Abbey Life Scheme') and the ReAssure Staff Pension Scheme ('ReAssure Scheme') and explains how the pension scheme asset/liability is calculated.

An analysis of the pension scheme (liability)/asset for each pension scheme is set out in the table below and also includes the net pension scheme liability in respect of the Group operated unapproved retirement benefit scheme ('ReAssure Private Retirement Trust'):

 

2021
£m

2020
£m

Pearl Group Staff Pension Scheme

 

 

Economic surplus

263

527

Adjustment for insurance policies eliminated on consolidation

(1,680)

(596)

Net economic deficit

(1,417)

(69)

Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme

(92)

(185)

Net pension scheme liability, as reported

(1,509)

(254)

Reimbursement right in respect of reinsurance, as reported

212

-

Add: value attributed to assets held by PLL within financial assets1

1,896

756

Adjusted net pension scheme asset

599

502

 

 

 

PGL Pension Scheme

 

 

Economic surplus

26

30

Adjustment for insurance policies eliminated on consolidation

(1,618)

(1,749)

Net pension scheme liability, as reported

(1,592)

(1,719)

Add: assets held by PLL within financial assets1

2,084

2,177

Adjusted net pension scheme asset

492

458

 

 

 

Abbey Life Staff Pension Scheme

 

 

Economic surplus/(deficit)

12

(61)

Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme

(4)

-

Minimum funding requirement obligation

(7)

-

Net pension scheme asset/(liability)

1

(61)

 

 

 

ReAssure Staff Pension Scheme

 

 

Economic surplus

54

16

Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme

(19)

(5)

Net pension scheme asset

35

11

 

 

 

ReAssure Private Retirement Trust

 

 

Net pension scheme liability

(2)

(2)

1  The Pearl Scheme and the PGL Pension Scheme have both executed buy-in transactions with a Group life company and subsequently assets supporting the Group's actuarial liabilities are recognised on a line by line basis within financial assets in the statement of consolidated financial position. Further details are included in notes G1.1 and G1.2 below.

  In the current and prior periods, an adjusted net pension scheme asset has been presented for the first time in relation to both the pension schemes. The value of the assets held by PLL within financial assets in respect of the PGL Pension Scheme buy-ins is equal to the assets posted to a ring-fenced collateral account. For the Pearl Scheme the assets held by PLL supporting the buy-ins are not ring-fenced and the value has been determined as the value of the insurance contract liability within the PLL financial statements less the value of the associated reinsurance asset.

Risks

The Group's defined benefit schemes typically expose the Group to a number of risks, the most significant of which are:

Asset volatility - the value of the schemes' assets will vary as market conditions change and as such is subject to considerable volatility. The liabilities are calculated using a discount rate set with reference to corporate bond yields; if assets underperform this yield, this will create a deficit. The majority of the assets are held within a liability driven investment strategy which is linked to the funding basis of the schemes (set with reference to government bond yields). As such, to the extent that movements in corporate bond yields are out of line with movements in government bond yields, volatility will arise.

Inflation risk - a significant proportion of the schemes' benefit obligations are linked to inflation, and higher inflation will lead to higher liabilities (although in most cases, caps on the level of inflationary increases are in place to protect against extreme inflation). The majority of the assets are held within a liability driven investment strategy which allows for movements in inflation, meaning that changes in inflation should not materially affect the surplus.

Life expectancy - the majority of the schemes' obligations are to provide benefits for the life of the member therefore increases in life expectancy will result in an increase in the liabilities. For the Pearl and PGL schemes, this is partially offset by the buy-in policies that move in line with the liabilities. These buy-in policies are eliminated on consolidation (see sections G1.1 and G1.2 for further details).

Information on each of these schemes is set out below.

Guaranteed Minimum Pension ('GMP') equalisation

GMP is a portion of pension that was accrued by individuals who were contracted out of the State Second Pension prior to 6 April 1997. Historically, there was an inequality of benefits between male and female members who have GMP. A High Court case concluded on 26 October 2018 and confirmed that GMPs needed to be equalised. A further ruling in November 2020 clarified requirements in respect of transfers out. During 2020, the Group updated the initial assessment of its allowance for the potential cost of equalising GMP for the impact between males and females included its IAS 19 actuarial liabilities. At 31 December 2021 the GMP equalisation reserve was calculated as a percentage uplift to the defined benefit obligation for each scheme as follows: PGL Scheme: 0.5% (2020: 0.5%); Pearl Scheme: 0.37% (2020: 0.37%); Abbey Life Scheme: 0.37% (2020: 0.37%); and the ReAssure Scheme: 0.1% (2020: 0.1%).

G1.1 Pearl Group Staff Pension Scheme

Scheme details

The Pearl Scheme comprises a final salary section, a money purchase section and a hybrid section (a mix of final salary and money purchase). The Pearl Scheme is closed to new members and has no active members.

Defined benefit scheme

The Pearl Scheme is established under, and governed by, the trust deeds and rules and has been funded by payment of contributions to a separately administered trust fund. A Group company, Pearl Group Holdings No.2 Limited ('PGH2'), is the principal employer of the Pearl Scheme. The principal employer meets the administration expenses of the Pearl Scheme. The Pearl Scheme is administered by a separate trustee company, P.A.T. (Pensions) Limited, which is separate from the Company. The trustee company is comprised of four representatives from the Group, three member nominated representatives and one independent trustee in accordance with the trustee company's articles of association. The trustee is required by law to act in the interest of all relevant beneficiaries and is responsible for the investment policy with regard to the assets.

To the extent that an economic surplus will be available as a refund, the economic surplus is stated after a provision for tax that would be settled by the scheme administrators when the refund is made.

The valuation has been based on an assessment of the liabilities of the Pearl Scheme as at 31 December 2021, undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related interest costs have been measured using the projected unit credit method.

A triennial funding valuation of the Pearl Scheme as at 30 June 2018 was completed in 2019. This showed a surplus as at 30 June 2018 of 104 million, on the agreed technical provisions basis. The triennial funding valuation of the Scheme as at 30 June 2021 commenced during the year and is ongoing as at 31 December 2021. The funding and IFRS accounting bases of valuation can give rise to different results for a number of reasons. The funding basis of valuation is based on general principles of prudence whereas the accounting valuation is based on best estimates. Discount rates are derived from government bond yields for the funding valuation whereas the rate used for IFRS valuation purposes is based on a yield curve for high quality AA-rated corporate bonds. In addition the values are prepared at different dates which will result in differences arising from changes in market conditions and employer contributions made in the subsequent period.

Pension scheme commitment agreement and buy-in

On 17 November 2020, the Pearl Scheme entered into a Commitment Agreement with PGH2 to complete a series of buy-ins that are scheduled to be executed by 31 December 2023. At the same time, the Pearl Scheme completed the first buy-in with Phoenix Life Limited ('PLL') covering 25% of the Scheme's pensioner and deferred member liabilities, transferring the associated risks, including longevity improvement risk, to PLL effective from 30 September 2020.

Two further buy-in transactions were completed in July 2021 and October 2021 covering 35% and 15% respectively of the Scheme's pensioner and deferred member liabilities. Risks, including longevity improvement risk, were transferred to PLL effective from 28 May 2021 and 31 August 2021 respectively.

Upon completion of each buy-in transaction the Scheme transferred the following plan assets to PLL:

in November 2020, £731 million of plan assets were transferred to PLL in satisfaction of the premium of £735 million and was net of a 4 million payment by PLL to the Scheme in respect of members' benefits for October and November 2020;

in July 2021, £1,049 million of plan assets were transferred to PLL in satisfaction of the premium and a further £12 million cash payment was paid by the Scheme in August 2021. PLL paid £5 million to the Scheme in respect of members' benefits for June and July 2021; and

in October 2021, £433 million of plan assets were transferred to PLL in satisfaction of the premium of £435 million and was net of a £2 million payment by PLL to the Scheme in respect of members' benefits for September and October 2021. A further £1 million cash payment in respect of the premium was paid by the Scheme in December 2021.

The assets transferred to PLL are recognised in the relevant line within financial assets in the consolidated statement of financial position. The economic effect of the buy-in transactions in the Scheme is to replace the plan assets transferred with a single line insurance policy reimbursement right asset which is subsequently eliminated on consolidation. The value of this insurance policy at 31 December 2021 was 1,680 million (2020: £596 million) which includes an amount owed by PLL of £12 million (2020: £nil).

The Commitment Agreement replaced the 2012 Pensions Agreement, which had previously included provisions covering contribution payments, additional contributions payable should agreed funding targets not be met, share charge over certain Group entities and covenant tests. The main terms of the Commitment Agreement are detailed below.

The new agreement contains provisions under which payments by PGH2 to the Scheme are required in the event that the Group does not meet the minimum buy-in completion schedule. There are two different types of payments as detailed below:

gilts deficit recovery contributions: These operate in a similar way to the security under the 2012 Pension Agreement. Contributions calculated as amounts required to reach full funding on a gilts-basis by 30 June 2027; and

contingent contributions: These represent a new form of security for the trustee. The amount of these contributions was initially capped at £200 million, with the cap running off in line with completion of the buy-ins. Following the completion of the recent buy-in transactions the cap is £50 million.

The new agreement also introduces a new form of security provided by PGH2 to the trustee which will be in place until the final buy-in is completed. The share charges over certain Group entities have been replaced by a new surety bond arrangement. The surety bonds have been written by two external third-party insurers, each providing £100 million of cover payable to the Scheme following any one of the following trigger events:

insolvency of the Company, PGH2, PGS, Standard Life Assurance Limited, PLL, or Phoenix Life Assurance Limited; and

failure to pay any contributions to the Scheme due under the terms of the Commitment Agreement.

The cover provided by the surety bonds will be reduced from £200 million to £100 million (in aggregate) once the completed aggregate buy-in proportion exceeds 75%. The cover remains at £200 million following completion of the October 2021 buy-in transaction. The agreements between the trustee and the surety providers are backed by a guarantee and an indemnity from the Company, PGH2 and PGS to the surety providers to repay them in the event of a claim under the surety bond.

Contributions totalling £70 million were paid into the Pearl Scheme in 2020. Following the signing of the new Commitment Agreement PGH2 paid the balance of the remaining contributions under the 2012 Pensions Agreement (£37 million) in addition to the monthly instalments paid up to the date of the agreement. No further contributions are to be paid to the Pearl Scheme however, PGH2 will continue to meet the administrative and non-investment running expenses of the Scheme as set out in the schedule of contributions.

Reimbursement right asset in respect of reinsurance arrangement

In November 2021, PLL entered into a quota share reinsurance arrangement with an external insurer to reinsure c.64% of the risks transferred to PLL upon completion of the third buy-in transaction with the Pearl Scheme. A premium of £261 million was paid by PLL to the reinsurer. As PLL expects to use the claims received to pay for its obligations under the insurance contract between it and the Pearl scheme (i.e. to settle the defined benefit obligation) the reinsurance arrangement is considered to be a non-qualifying insurance policy and is classified as a reimbursement right. The reinsurance arrangement is expected to match a proportion of the defined benefit obligation of the Pearl Scheme therefore the valuation of the reimbursement right is consistent with the valuation of the associated defined benefit obligation.

Summary of amounts recognised in the consolidated financial statements

The amounts recognised in the consolidated financial statements are as follows:

2021

Fair value of scheme assets
£m

Defined benefit obligation
£m

Provision for tax on the economic surplus available as a refund
£m

Pension Scheme Liability

£m

Reimburse-ment right asset

£m

At 1 January

2,315

(2,384)

(185)

(254)

-

 

 

 

 

 

 

Interest income/(expense)

24

(33)

(2)

(11)

-

Included in profit or loss

24

(33)

(2)

(11)

-

 

 

 

 

 

 

Remeasurements:

 

 

 

 

 

Return on plan assets excluding amounts included in interest income

27

-

-

27

(49)

Gain from changes in demographic assumptions

-

22

-

22

-

Gain from changes in financial assumptions

-

89

-

89

-

Experience loss

-

(26)

-

(26)

-

Change in provision for tax on economic surplus available as a refund

-

-

95

95

-

Included in other comprehensive income

27

85

95

207

(49)

 

 

 

 

 

 

Income received from insurance policies

46

-

-

46

-

Benefit payments

(108)

108

-

-

-

Assets transferred as premium for Scheme buy-in

(1,497)

-

-

(1,497)

-

Assets transferred as premium for reinsurance arrangement

-

-

-

-

261

At 31 December

807

(2,224)

(92)

(1,509)

212

 

 

2020

Fair value of scheme assets
£m

Defined benefit obligation
£m

Provision for tax on the economic surplus available as a refund
£m

Minimum funding requirement obligation
£m

Total
£m

At 1 January

2,834

(2,313)

(183)

(24)

314

 

 

 

 

 

 

Interest income/(expense)

53

(45)

(4)

(1)

3

Past service cost

-

(1)

-

-

(1)

Included in profit or loss

53

(46)

(4)

(1)

2

 

 

 

 

 

 

Remeasurements:

 

 

 

 

 

Return on plan assets excluding amounts included in interest income

198

-

-

-

198

Gain from changes in demographic assumptions

-

51

-

-

51

Loss from changes in financial assumptions

-

(205)

-

-

(205)

Experience gain

-

19

-

-

19

Change in provision for tax on economic surplus available as a refund

-

-

2

-

2

Change in minimum funding requirement obligation

-

-

-

25

25

Included in other comprehensive income

198

(135)

2

25

90

 

 

 

 

 

 

Employer's contributions

70

-

-

-

70

Income received from insurance policies

5

-

-

-

5

Benefit payments

(110)

110

-

-

-

Assets transferred as premium for Scheme buy-in

(735)

-

-

-

(735)

At 31 December

2,315

(2,384)

(185)

-

(254)

Scheme assets

The distribution of the scheme assets at the end of the year was as follows:

 

2021

 

2020

 

Total
£m

Of which not quoted in an active market
£m

 

Total
£m

Of which not quoted in an active market
£m

Hedging portfolio

438

23

 

1,505

(30)

Fixed interest gilts

-

-

 

50

-

Other debt securities

349

-

 

1,301

-

Properties

104

104

 

140

140

Private equities

4

4

 

5

5

Hedge funds

4

4

 

5

5

Cash and other

67

-

 

98

-

Obligations for repayment of stock lending collateral received

(159)

-

 

(789)

-

Reported scheme assets

807

135

 

2,315

120

Add back:

 

 

 

 

 

Insurance policies eliminated on consolidation

1,680

1,680

 

596

596

Economic value of assets

2,487

1,815

 

2,911

716

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 the scheme assets is invested in collateral for interest rate and inflation rate hedging where the intention is to hedge 100% of the interest rate and inflation rate risk measured on a gilts-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: 40% (2020: 40%); and

pensioners: 60% (2020: 60%)

The weighted average duration of the defined benefit obligation at 31 December 2021 is 16 years (2020: 16 years).

Principal assumptions

The principal financial assumptions of the Pearl Scheme are set out in the table below:

 

2021
%

2020
 %

Rate of increase for pensions in payment (5% per annum or RPI if lower)

3.20

2.85

Rate of increase for deferred pensions ('CPI')

2.70

2.10

Discount rate

2.00

1.40

Inflation - RPI

3.30

2.90

Inflation - CPI

2.70

2.10

The discount rate and inflation rate assumptions have been determined by considering the shape of the appropriate yield curves and the duration of the Pearl Scheme's liabilities. This method determines an equivalent single rate for each of the discount and inflation rates, which is derived from the profile of projected benefit payments.

The post-retirement mortality assumptions are in line with a scheme-specific table which was derived from the actual mortality experience in recent years based on the SAPS standard tables for males and for females based on year of use. Future longevity improvements from 1 January 2021 are based on amended CMI 2020 Core Projections (2020: From 1 January 2017 based on amended CMI 2019 Core Projections) and a long-term rate of improvement of 1.70% (2020: 1.70%) per annum for males and 1.20% (2020: 1.20%) per annum for females. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 60 is 29.8 years and 30.6 years for male and female members respectively (2020: 30.1 years and 31.0 years respectively).

A quantitative sensitivity analysis for significant actuarial assumptions is shown below:

2021

 

 

 

 

 

 

 

 

 

 

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)

2,224

 

(87)

93

 

70

(68)

 

80

(80)

 

2020

 

 

 

 

 

 

 

 

 

 

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)

2,384

 

(95)

98

 

76

(87)

 

86

(86)

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method has been applied as when calculating the pension asset recognised within the statement of consolidated financial position.

G1.2 PGL Pension Scheme

The PGL Pension Scheme comprises a final salary section and a defined contribution section.

Scheme details

Defined contribution scheme

On 1 July 2020 the Group closed the defined contribution section of the PGL Scheme and ceased making contributions from this date. Contributions in the period to 1 July 2020 were £5 million.

Defined benefit scheme

The defined benefit section of the PGL Pension Scheme is a final salary arrangement which is closed to new entrants and has no active members.

The PGL Scheme is administered by a separate trustee company, PGL Pension Trustee Ltd. The trustee company is comprised of two representatives from the Group, three member nominated representatives and one independent trustee in accordance with the trustee company's articles of association. The trustee is required by law to act in the interest of all relevant beneficiaries and is responsible for the day to day administration of the benefits.

The valuation has been based on an assessment of the liabilities of the PGL Pension Scheme as at 31 December 2021, undertaken by independent qualified actuaries.

To the extent that an economic surplus will be available as a refund, the economic surplus is stated after a provision for tax that would be borne by the scheme administrators when the refund is made.

A triennial funding valuation of the PGL Pension Scheme as at 30 June 2018 was completed in 2019. This showed a surplus as at 30 June 2018 of £246 million. The IFRS valuation cash flows reflect current available data and are not limited to being updated following the completion of each funding valuation.

There are no further committed contributions to pay in respect of the defined benefit section of the Scheme.

Insurance policies with Group entities

In March 2019, the PGL Pension Scheme entered into a 'buy-in' agreement with PLL which covered the remaining pensioner and deferred members of the Scheme not covered by the first such agreement concluded in December 2016. The plan assets transferred to PLL as premium are held in a collateral account and are recognised in the relevant line within financial assets in the statement of consolidated financial position. The economic effect of these transactions in the Scheme is to replace the plan assets transferred with a single line insurance policy reimbursement asset which is eliminated on consolidation along with the relevant insurance contract liabilities in PLL.

The value of the insurance policies with Group entities at 31 December 2021 is £1,618 million (2020: £1,749 million).

Summary of amounts recognised in the consolidated financial statements

The amounts recognised in the consolidated financial statements are as follows:

2021

Fair value of scheme assets
£m

Defined benefit obligation £m

Total
£m

At 1 January

35

(1,754)

(1,719)

 

 

 

 

Interest income/(expense)

-

(25)

(25)

Administrative expenses

(4)

-

(4)

Past service cost

-

-

-

Included in profit or loss

(4)

(25)

(29)

 

 

 

 

Remeasurements:

 

 

 

Return on plan assets excluding amounts included in interest income

-

-

-

Gain from changes in demographic assumptions

-

16

16

Gain from changes in financial assumptions

-

70

70

Experience loss

-

(3)

(3)

Included in other comprehensive income

-

83

83

 

 

 

 

Income received from insurance policies

73

-

73

Benefit payments

(73)

73

-

At 31 December

31

(1,623)

(1,592)

 

2020

Fair value of scheme assets
£m

Defined benefit obligation
£m

Total
£m

At 1 January

54

(1,691)

(1,637)

 

 

 

 

Interest income/(expense)

1

(31)

(30)

Administrative expenses

(3)

-

(3)

Past service costs

-

(1)

(1)

Included in profit or loss

(2)

(32)

(34)

 

 

 

 

Remeasurements:

 

 

 

Return on plan assets excluding amounts included in interest income

(4)

-

(4)

Gain from changes in demographic assumptions

-

7

7

Loss from changes in financial assumptions

-

(154)

(154)

Experience gain

-

41

41

Included in other comprehensive income

(4)

(106)

(110)

 

 

 

 

Income received from insurance policies

75

-

75

Benefit payments

(75)

75

-

Assets transferred as premium for 2019 scheme buy-in

(13)

-

(13)

At 31 December

35

(1,754)

(1,719)

Scheme assets

The distribution of the scheme assets at the end of the year was as follows:

 

2021

 

2020

 

Total
£m

Of which not quoted in an active market £m

 

Total
£m

Of which not quoted in an active market £m

Cash and other

31

-

 

35

-

Reported scheme assets

31

-

 

35

-

Add back:

 

 

 

 

 

Insurance policies eliminated on consolidation

1,618

1,610

 

1,749

1,749

Economic value of assets

1,649

1,610

 

1,784

1,749

Defined benefit obligation

The calculation of the defined benefit obligation can be allocated to the scheme's members as follows:

deferred scheme members: 36% (2020: 36%); and

pensioners: 64% (2020: 64%)

The weighted average duration of the defined benefit obligation at 31 December 2021 is 16 years (2020: 16 years).

Principal assumptions

The principal financial assumptions of the PGL Pension Scheme are set out in the table below:

 

2021
%

2020
%

Rate of increase for pensions in payment (7.5% per annum or RPI if lower)

3.30

2.90

Rate of increase for deferred pensions ('CPI')

2.70

2.10

Discount rate

2.00

1.40

Inflation - RPI

3.30

2.90

Inflation - CPI

2.70

2.10

The discount rate and inflation assumptions have been determined by considering the shape of the appropriate yield curves and the duration of the PGL Pension Scheme liabilities. This method determines an equivalent single rate for each of the discount and inflation rates, which is derived from the profile of projected benefit payments.

The post-retirement mortality assumptions are in line with 86%/94% of S1P Light base tables for males and females. Future longevity improvements from 1 January 2017 to 31 December 2020 are based on modified CMI 2019 Core Projections and from 1 January 2021 are based on modified CMI 2020 Core Projections (2020: From 1 January 2017 based on modified CMI 2019 Core Projections) with a long-term rate of improvement of 1.70% (2020: 1.70%) per annum for males and 1.20% (2020: 1.20%) per annum for females. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 62 is 28.0 years (2020: 28.4 years) and 28.9 years (2020: 29.3 years) for male and female members respectively.

A quantitative sensitivity analysis for significant actuarial assumptions is shown below:

2021

 

 

 

 

 

 

 

 

 

 

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)

1,623

 

(62)

66

 

54

(52)

 

60

(60)

 

2020

 

 

 

 

 

 

 

 

 

 

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)

1,754

 

(67)

70

 

55

(53)

 

65

(65)

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method has been applied as when calculating the pension liability recognised within the statement of consolidated financial position.

G1.3 Abbey Life Staff Pension Scheme

Scheme details

On 30 June 2017, the Abbey Life Scheme was transferred from Abbey Life to Pearl Life Holdings Limited ('PeLHL'), a fellow subsidiary. PeLHL assumed the scheme covenant together with all obligations of the scheme following implementation of the transfer. The Abbey Life Scheme is a registered occupational pension scheme, set up under trust, and legally separate from the employer PeLHL. The scheme is administered by Abbey Life Trust Securities Limited (the trustee), a corporate trustee. There are three trustee directors, one of whom is nominated by the Abbey Life Scheme members and two of whom are appointed by PeLHL. The trustee is responsible for administering the scheme in accordance with the trust deed and rules and pensions laws and regulations. The Abbey Life Scheme is closed to new entrants and has no active members.

The valuation has been based on an assessment of the liabilities of the Abbey Life Scheme as at 31 December 2021 undertaken by independent qualified actuaries. The present values of the defined benefit obligation and the related interest costs have been measured using the projected unit credit method.

Funding

The last funding valuation of the Abbey Life Scheme was carried out by a qualified actuary as at 31 March 2021 and showed a deficit of £86 million. Following completion of the funding valuation a recovery plan was agreed between the Group and the trustee of the Abbey Life Scheme and a revised schedule of contributions was agreed effective from November 2021, for PeLHL to pay the following amounts in respect of deficit contributions:

fixed monthly contributions of £400,000 payable from 30 April 2021 to 30 June 2026;

monthly contributions in respect of administration expenses of £106,295 payable up to 31 March 2022, then increasing annually in line with the Retail Prices Index assumption to 30 June 2028; and

annual payments of £4 million into the New 2016 Charged Account by 31 July each year, with the next payment being made by 31 July 2022, and the last payment due by 31 July 2025.

The charged accounts are Escrow accounts which were created in 2010 to provide the trustees with additional security in light of the funding deficit. The amounts held in the charged accounts do not form part of Abbey Life Scheme assets.

Under the terms of the 2013 Funding Agreement the funding position of the Scheme was assessed as at 31 March 2021 and this assessment revealed a shortfall, calculated in accordance with the terms of the New 2013 Funding Agreement, which exceeded the amount held in the New 2013 Charged Account. As such, the entire balance of £42 million was paid from the New 2013 Charged Account to the Abbey Life Scheme in December 2021.

Under the terms of the New 2016 Funding Agreement the funding position of the Abbey Life Scheme will be assessed as at 31 March 2027. A payment will be made from the New 2016 Charged Account to the Scheme if the results of the assessment reveal a shortfall calculated in accordance with the terms of the New 2016 Funding Agreement. The amount of the payment will be the lower of the amount of the shortfall and the amount held in the New 2016 Charged Account.

An additional liability of £7 million (2020: £nil) has been recognised reflecting a charge on any refund of the resultant IAS 19 surplus that arises after adjustment for discounted future contributions of £21 million in accordance with the minimum funding requirement. A deferred tax asset of £4 million (2020: £nil) has also been recognised to reflect tax relief at a rate of 19% that is expected to be available on the contributions once paid into the Scheme.

Summary of amounts recognised in the consolidated financial statements

The amounts recognised in the consolidated financial statements are as follows:

2021

Fair value of scheme assets
 m

Defined benefit obligation £m

Provision for tax on the economic surplus available as a refund
£m

Minimum funding requirement obligation £m

Total
£m

At 1 January

280

(341)

-

-

(61)

 

 

 

 

 

 

Interest income/(expense)

4

(5)

-

-

(1)

Administration expenses

(1)

 

-

-

(1)

Included in profit or loss

3

(5)

-

-

(2)

 

 

 

 

 

 

Remeasurements:

 

 

 

 

 

Return on plan assets excluding amounts included in interest income

11

-

-

-

11

Experience loss

-

(5)

-

-

(5)

Gain from changes in demographic assumptions

-

6

-

-

6

Gain from changes in financial assumptions

-

15

-

-

15

Change in minimum funding requirement obligation

-

-

-

(7)

(7)

Change in provision for tax on economic surplus available as a refund

-

-

(4)

-

(4)

Included in other comprehensive income

11

16

(4)

(7)

16

 

 

 

 

 

 

Employer's contributions

48

-

-

-

48

Benefit payments

(12)

12

-

-

-

At 31 December

330

(318)

(4)

(7)

1

 

 

2020

Fair value of scheme assets £m

Defined benefit obligation
 m

Total
£m

At 1 January

254

(329)

(75)

 

 

 

 

Interest income/(expense)

5

(7)

(2)

Administrative expenses

(1)

-

(1)

Included in profit or loss

4

(7)

(3)

 

 

 

 

Remeasurements:

 

 

 

Return on plan assets excluding amounts included in interest income

28

-

28

Gain from changes in demographic assumptions

-

6

6

Loss from changes in financial assumptions

-

(31)

(31)

Experience gain

-

8

8

Included in other comprehensive income

28

(17)

11

 

 

 

 

Employer's contributions

6

-

6

Benefit payments

(12)

12

-

At 31 December

280

(341)

(61)

Scheme assets

The distribution of the scheme assets at the end of the year was as follows:

 

2021

 

2020

 

Total
£m

Of which not quoted in an active market
 m

 

Total
£m

Of which
not quoted in an active market
£m

Diversified income fund

139

-

 

118

-

Fixed interest government bonds

68

-

 

70

-

Corporate bonds

118

-

 

86

-

Derivatives

1

1

 

2

2

Cash and cash equivalents

4

-

 

4

-