2019 Annual Financial Results

Phoenix Group announces strong results and new cash generation target. ReAssure acquisition on track to complete mid-2020.

Phoenix Group, Europe's largest life and pensions consolidator¹, announces strong results for the year ended 31 December 2019.

 

Financial highlights

·      Strong cash generation² of £707 million in 2019 (2018: £664 million) exceeding the upper end of its cash generation target range of £600 million - £700 million³ for the year.

·      Solvency II surplus of £3.1 billion⁴ as at 31 December 2019 (£3.2 billion⁵ as at 31 December 2018).

·      Shareholder Capital Coverage Ratio of 161%^4,6 as at 31 December 2019 (167%⁵ as at 31 December 2018) demonstrating continued resilience.

·      Group operating profit of £810 million in 2019 (2018: £708 million).

·      Proposed final dividend of 23.4p per share (2018 final dividend: 23.4p per share) with 2019 full year dividend of 46.8p per share (2018 full year dividend⁷: 46.0p per share).

·      New business in 2019 enhances the sustainability of our dividend by delivering £475 million of incremental long-term cash generation:

·      £240 million from UK Open and Europe businesses (2018 pro forma⁸: £280 million); and

·      £235 million from bulk purchase annuities (2018: £250 million).

·      Assets under administration of £248 billion as at 31 December 2019 (£226 billion as at 31 December 2018).

·      Fitch Ratings affirmed the Group's rating as A+⁹; "positive" outlook. Leverage ratio¹⁰ of 22% as at 31 December 2019 (22% as at 31 December 2018).

 

Cash generation targets

·      2020 cash generation target of £800 - £900 million.

·      5 year cash generation target (2019 - 2023) increased by £0.1 billion to £3.9 billion for new business written during 2019.

·      Long-term cash generation guidance remains at £12 billion after 2019 cash remittance of £707 million, demonstrating offsetting nature of new business written in the year.

 

Standard Life Assurance transition programme

·      Remains on track to deliver the £1.2 billion total synergy target.

·      Enlarged partnership with Tata Consultancy Services announced will support delivery of Hybrid end state Customer Service and IT operating model.

·      £145 million of capital synergies delivered in 2019, taking cumulative capital synergies to £645 million against a target of £720 million (90% of total). 

·      £33 million per annum cost savings delivered to date against a target of £75 million per annum (44% of total).

 

Delivering on strategic priorities

·      £3.2 billion acquisition of ReAssure Group plc on track to complete mid-2020, subject to regulatory approvals.

·      Exceeded all customer service metric targets and continued investment in customer proposition.

·      £7.0 billion gross new business inflows for UK Open and Europe businesses in 2019 (2018 pro forma⁸: £8.5 billion) generating a new business contribution¹¹ of £158 million (2018 pro forma⁸: £154 million).

·      £1.1 billion of bulk purchase annuity liabilities contracted in 2019 (2018: £0.8 billion).

·      £1.1 billion buy-in from the PGL Pension Scheme successfully completed.

·      £1.3 billion of illiquid assets sourced, taking allocation of illiquid assets backing annuity liabilities to 26%.

·      £500 million Solvency II benefit from management actions delivered in the year in addition to £145 million of Standard Life Assurance transition programme capital synergies.

 

Commenting on the results, Group CEO, Clive Bannister said:

"Phoenix has had a strong year - we beat our cash generation target, made significant progress in the transition of Standard Life Assurance and announced the £3.2 billion acquisition of ReAssure.  With circa £0.5 billion of incremental cash generation delivered from new business written in the year, we have demonstrated that our Open businesses and BPA bring sustainability to Phoenix, offsetting the run-off of our in-force business. I am extremely proud of the evolution of Phoenix during my time as CEO and I would like to thank all of the colleagues I have worked with throughout to deliver benefits to both our customers and shareholders."

Nicholas Lyons, Chairman commented:

"I am delighted to welcome Andy Briggs to the Group as Clive's successor as CEO and to announce today that Rakesh Thakrar will succeed Jim McConville as Group Finance Director when he retires in May. Andy and Rakesh inherit a Group that is delivering on its financial and operational targets and is strategically positioned to capture future opportunities in the life and pensions industry. The ReAssure transaction will deliver £7 billion of incremental cash generation and, alongside supporting the dividend, will give us an enhanced platform to pursue further growth opportunities. I would like to reiterate my thanks to both Clive and Jim for everything they have achieved at Phoenix, during which time they have transformed and grown the business to become the largest life and pensions consolidator in Europe."

 

Presentation

There will be a presentation for analysts and investors today at 9.30am (BST) at J.P. Morgan, 1 John Carpenter Street, London, EC4Y 0JP                                                                                                                                                                                                                                                                                                                                         

A link to a live webcast of the presentation, with the facility to raise questions, and a copy of the presentation will be available at www.thephoenixgroup.com

Participants may dial in as follows:

            Dial-in number:              +44 (0)330 336 9105

            Confirmation code:        2736838

Please dial in 10 minutes prior to the beginning of the conference call in order to register.

To register for the live webcast please go to:

https://kvgo.com/IJLO/Phoenix_Group_2019_Full_Year_Results

 

A replay of the presentation will also be available through the website.

 

Dividend

The recommended final dividend of 23.4p per share is expected to be paid on 19 May 2020, subject to shareholder approval at Phoenix Group Holdings plc's AGM on 15 May 2020. 

The ordinary shares will be quoted ex-dividend on the London Stock Exchange as of 2 April 2020. The record date for eligibility for payment will be 3 April 2020.

 

Enquiries

Investors/analysts:
Claire Hawkins, Head of Investor Relations, Phoenix Group
+44 (0)20 3735 0575

Media:
Andy Donald and Vikki Kosmalska, Maitland

+ 44 (0)20 7379 5151

Shellie Wells, Head of Corporate Communications, Phoenix Group

+44 (0)203 735 0922

 

LEI: 2138001P49OLAEU33T68

 

Notes

1.    Phoenix Group is the largest life and pensions consolidator in Europe as at 31 December 2019 with 10 million policies and £248 billion of assets under administration.

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

3.    2019 cash generation target is net of the £250 million cost of capitalising Standard Life International Designated Activity Company for Brexit.

4.    The Solvency II capital position is an estimated position and reflects a regulator approved recalculation of transitionals as at 31 December 2019.

5.    The 31 December 2018 Solvency II capital position includes the impact of a regulator approved recalculation of transitionals for Standard Life Assurance Limited only. Had a dynamic recalculation of transitionals been assumed for the Phoenix Life companies, the Group's Solvency II surplus and the Shareholder Capital Coverage Ratio would increase by £0.1 billion and 3% respectively.

6.    The 2019 Shareholder Capital Coverage Ratio excludes Solvency II own funds and Solvency Capital Requirements of unsupported with-profit funds and the PGL and Pearl Pension Schemes.

7.    2018 full year dividend rebased to take into account the bonus element of the rights issue completed in July 2018.

8.    The pro forma assumes that the acquisition of the Standard Life Assurance businesses took place on 1 January 2018.

9.    Insurer Financial Strength rating of Phoenix Life Limited, Phoenix Life Assurance Limited and Standard Life Assurance Limited.

10.   Current leverage ratio is estimated by management.

11.   "New business contribution" is the increase in Solvency II own funds arising from new business written in the period excluding risk margin and contract boundary restrictions.

12.   This announcement in relation to Phoenix Group Holdings plc and its subsidiaries (the 'Group') contains, and we 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 and expectations relating to future financial conditions, performance, results, strategy and/or objectives.

13.   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.

14.   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 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, new government initiatives related to the financial crisis and the effect of the European Union's "Solvency II" requirements on the Group's capital maintenance requirements; the impact of inflation and deflation; the political, legal and economic effects of the UK's vote to leave the European Union; 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 future acquisitions (including without limitation the acquisition of ReAssure Group plc) 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.

15.   As a result, the Group's actual future financial condition, performance and results may differ materially from the plans, goals 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 should be construed as a profit forecast or estimate.

 

 

Chairman's Statement

Building a sustainable Phoenix

Nicholas Lyons

Chairman

2019 was a year of significant achievement for Phoenix in which the Group met all of its strategic objectives and took another major step forward in its growth journey by announcing the acquisition of ReAssure Group plc.

The acquisition confirms Phoenix's position as the largest life and pensions consolidator in Europe. The additional cash flows, skills and scale the acquisition brings will enhance Phoenix's ability to benefit from a range of available growth opportunities and provide increased sustainability to the Group. The Group's enhanced cashflow profile post the acquisition underpins the Board's proposal to increase the final 2020 dividend per share by 3%. In line with the Group's stable and sustainable dividend policy, the Board has recommended a 2019 final dividend per share of 23.4p.

Following completion of the acquisition of ReAssure Group plc ('ReAssure'), we will be entrusted with the long-term savings of over 14 million customers. It is the Group's duty to be a good custodian of these savings and to help people enjoy a secure and sustainable retirement. We see our role in helping customers to save for the long-term as the very essence of our social purpose as a business.

During 2019 we have been increasingly focused on ensuring Phoenix integrates Environmental, Social, and Governance ('ESG') into our everyday operations. As a business we are uniting behind a new sustainability vision "Committing to a Sustainable Future" and have identified four areas of commitment for our sustainability strategy - deliver for our customers, foster responsible investment, reduce our environmental impact and be a good corporate citizen. These four commitments will be underpinned by our active approach to supply chain management and our strong governance framework.

It is our colleagues who will deliver these commitments and Phoenix's shared values of Passion, Responsibility, Growth, Courage and Difference act as the guiding principles in everything we do. Our focus on creating a rich and diverse working environment is reflected in our continued status as one of the UK's Top Employers.

To foster a deeper connection between the Board and colleagues across the Group, Karen Green has been appointed as Work Place Director for the business as part of Phoenix's 'Employee Voice' programme. Our Non-Executive Directors and I feel strongly about Phoenix's purpose, values and strategy and are acutely aware of the increased engagement and insights that this programme brings.

However, the interaction of the Board with colleagues is not limited to this relationship, and in October the entire Board took part in engagement sessions with Phoenix colleagues across the business.

In 2020, Phoenix bids farewell to two great industry leaders, Clive Bannister, Group Chief Executive Officer, and Jim McConville, Group Finance Director, and Group Director, Scotland.

In November 2019, Clive announced that he will retire on 10 March 2020 after nine years with the business. Clive has led Phoenix in a period of sustained growth to its current position as the largest life and pensions consolidator in Europe.

Clive will be succeeded by Andy Briggs who joined the business as CEO-designate on 1 January 2020 and was appointed to the Board on 10 February 2020 following regulatory approval. Andy has over 30 years of insurance industry leadership experience.

Phoenix, its customers, colleagues and investors will benefit from a smooth succession and, with Andy as the Group's CEO, we will be in the best position to leverage the broad, strategic platform that Clive has created.

Jim will be standing down on 16 May 2020 after eight years with the business.

His experience and authority have been a cornerstone of Phoenix's success and the Group is fortunate to have had the benefit of his financial and strategic expertise.

Succession planning is a key focus for the Board and to that end we are delighted to appoint Rakesh Thakrar, the Group's Deputy Finance Director since 2014, as Jim's successor. The Board believes that Rakesh is a remarkable talent, with a deep and broad understanding of Phoenix and its potential.

On behalf of the Board I would like to thank both Clive and Jim for their outstanding contributions to the Group.

Furthermore, in September 2019, we were pleased to welcome Mike Tumilty as one of the Standard Life Aberdeen nominees to our Board as a replacement for Barry O'Dwyer. I also look forward to welcoming to our Board a nominee from each of our new strategic partners, Swiss Re and MS&AD, on completion of the ReAssure acquisition.

Looking ahead

At a Group level, we start 2020 as we ended 2019, focused on the acquisition of ReAssure which, subject to regulatory approvals, we hope to complete in the middle of the year.

Our strategic priorities are the safe transition of both the Standard Life Assurance and ReAssure businesses. Phase 3 of the Standard Life Assurance transition is the most complex. Our enlarged partnership with the leading technology provider Tata Consulting Services ('TCS'), announced in 2019, will support our long-term growth plans for our Open business and enhance our customers' and advisers' digital experience across both our Open and Heritage businesses.

We see significant potential for further value creation in the Bulk Purchase Annuities ('BPA') market. I remain convinced that the drivers for consolidation are inevitably increasing and will tip the balance toward more institutions seeking to divest their capital-heavy legacy businesses to leaders in the Heritage space such as Phoenix. The Group has the track record and platform to remain at the forefront of life consolidation in the future.

Phoenix is committed to its values and driven by its long-term vision of becoming Europe's Leading Life Consolidator. We are building an enduring organisation, underpinned by mutually beneficial relationships with key stakeholders, and we will continue to take a long-term view to building a sustainable future.

Thank you

All the successes of the past year are testament to a great team effort and I would like to thank the Board, my colleagues, our partners and stakeholders for their continued support.

Nicholas Lyons

Chairman

 

Group Chief Executive Officer's Report

Cash Resilience Growth

Clive Bannister

Group Chief Executive Officer

2019 was a successful year for Phoenix. We delivered Cash, Resilience and Growth whilst meeting all of our strategic priorities.

Phoenix achieved its financial targets, exceeded the 2019 cash generation target range and maintained a resilient capital position throughout a year of macro-economic volatility.

We continued to make strong progress across all phases of the Standard Life Assurance transition programme and announced an enlarged partnership with leading technology and service provider TCS. This strategic partnership will enable us to deliver a hybrid end state Customer Services and IT operating model built on strong innovation and designed to deliver excellence in customer service.

Growth through BPA and new Open business in the UK and Europe was strong in 2019, collectively delivering circa £0.5 billion of incremental long-term cash generation and bringing increased sustainability to our dividend.

On 6 December 2019 we announced the acquisition of ReAssure group plc ('ReAssure'), a strategically compelling transaction which meets all of our acquisition criteria and confirms Phoenix as Europe's largest life and pensions consolidator. The acquisition was approved by shareholders on 13 February 2020 with 99.99% of votes cast in favour.

We also made significant progress across our ESG agenda with the appointment of the Group's first Head of Sustainability. I encourage you to read Phoenix's inaugural Sustainability Report which sets out our new sustainability vision "Committing to a Sustainable Future". This report outlines our progress to date and future aspirations across the sustainability issues that are most material to Phoenix and its stakeholders.

The successes of the year were made possible by the engagement and commitment of my colleagues, the strong governance framework embedded within the Group and leadership by the Group Board.

FINANCIAL TARGETS

For the tenth consecutive year Phoenix delivered on all its publicly stated financial targets. With £707 million of cash generation in 2019, net of a £250 million capital injection into our Irish subsidiary to conclude our preparations for Brexit, we exceeded the upper end of our full year cash generation target range.

Today, we have announced a new one-year cash generation target range for 2020 of £800 to 900 million and we remain on track to deliver our five-year target for 2019 to 2023 which has been "upgraded" for the impact of 2019 new business to £3.9 billion.

We also delivered resilience to our Solvency II balance sheet with a surplus of £3.1 billion and a Shareholder Capital Coverage Ratio of 161%.

The Group's financial strength was recognised by Fitch's affirmation of Phoenix's Insurer Financial Strength Rating of A+ as part of their annual review in June 2019.

Standard Life Assurance Transition Programme

The Group continued to make strong progress across the Standard Life Assurance transition programme which remains on track to meet its £1.2 billion total synergy target.

To date we have achieved £645 million of capital synergies, 90% of our £720 million target. We have also delivered £33 million of cost savings against a target of £75 million per annum and realised £28 million of one-off cost synergies against a target of £30 million.

The transition programme comprises three phases:

•  Phase 1 is substantially complete and delivered the end state operating model for the Head Office functions.

•  Phase 2 is on track to deliver an integrated multi-site Finance and Actuarial function by end 2020 and obtain regulatory approval for our harmonised internal model.

•  Phase 3 will deliver a hybrid Customer Services and IT operating model that brings enhanced capabilities along with operational flexibility and is due to complete by the end of 2022. In November 2019, we announced an enlarged strategic partnership with our technology and service provider TCS to support the delivery of this model. The partnership will bring together the strengths of Standard Life Assurance, Phoenix and TCS and will build on the strong innovation and customer service excellence to which the partners are committed.

New Business

In 2019, new business written across our three business segments - UK Heritage, UK Open and Europe - generated £475 million of incremental cash generation.

This has offset the run-off of our in-force book, bringing sustainability to our long-term cash generation. We therefore estimate that the long-term cash generation from the business in-force as at 31 December 2019 will be £12 billion.

We have used an illustration called "The Wedge" (above) to show that growth through new business has the potential to bring sustainability to long-term cash generation and are encouraged that the experience of 2019 brings credibility to this hypothesis.

UK Heritage

The majority of our Heritage business is in run-off; however, our annuity book is growing through both vesting annuities and BPA. We take a selective and proportionate approach to BPA and invested £98 million of capital in the year to secure over £1.1 billion of BPA liabilities. This new business will generate £235 million of incremental long-term cash generation and has an average payback period of 6-7 years.

UK Open

The Open products we write are "capital-light" and therefore incur a de minimis capital strain. Growth across our Open business has been encouraging, delivering gross new business inflows of £6.0 billion, a new business contribution of £153 million and long-term cash generation of £214 million.

UK Workplace is our most valuable Open business product line, contributing nearly 65% of long-term cash generation. It is the primary channel of customer acquisition; it is our "engine for growth".

Europe

The Irish and German markets continue to be difficult; naturally disturbed by recent Brexit uncertainty. Despite this backdrop, new business in Europe delivered £26 million of incremental long-term cash generation in 2019.

Improving Customer Outcomes

Improving outcomes for our 10 million customers continues to be central to our mission. Therefore, I am delighted to report that we exceeded all of our target metrics for customer service during 2019.

In addition, we distributed circa £250 million of with-profits estate to our customers in 2019, totalling circa £845 million over the past five years.

We grow our customer base through strong distribution and proposition offerings in our chosen markets, with the Workplace channel bringing circa 280,000 new scheme members each year.

We engage our customers through continuous review and enhancement of our customer proposition so that we are relevant, easy to deal with and are seen as a trusted guide.

Our customer initiatives this year centred around listening more and better understanding our customers, improving communications and enhancing our digital proposition.

We have focused on improving customer communication so that customers have a clear understanding of what they can do with the policy or plan they hold with us and make an informed decision should they want to take any action.

We are also ensuring that we connect effectively with our customers. In partnership with Cowry Consulting, a Behavioural Economics consultancy, we have taken actions which are helping to transform customer and employee experiences. This has included redesigning experiences and processes, making the complex simple and removing barriers to create improved outcomes for customers.

In 2019 the Digital proposition has continued to evolve to support our customers in managing their pensions when and how they want. We have grown the rate of engagement amongst our customers and surpassed our target, seeing over 12 million logins in 2019 across Phoenix Life and Standard Life Assurance sites. We have also seen a huge increase in the usage of our Standard Life mobile app which saw over 5.5 million sessions in 2019.

Online top-ups and consolidation of customer pensions also increased to over £560 million in 2019 using our online guidance journey which helps customers consider the key factors when transferring pensions.

Growth Through M&A

On 6 December 2019, Phoenix announced the acquisition of ReAssure. This transaction represents another significant milestone, bringing considerable additional scale and skills to Phoenix's Heritage business.

The deal adheres to Phoenix's strict acquisition criteria of being value accretive, supportive of the dividend and maintaining the Group's Fitch investment grade rating.

Phoenix's cash generation profile will be significantly strengthened with an incremental £7.0 billion of cashflows which will bring the enlarged Group's long-term cash generation to £19.0 billion.

In addition, we expect to deliver cost and capital synergies of £800 million by leveraging Phoenix's industry-leading operating model and efficiency-focused approach to capital management.

The consideration payable of £3.2 billion represented 91% of ReAssure's pro-forma Solvency II Own Funds of £3.5 billion as at 30 September 2019, a ratio that is broadly in line with previous acquisitions. The financing structure for the transaction is efficient and utilises existing debt capacity, ensuring that Phoenix remains within its target leverage range of 25 to 30%.

We have already raised part of the debt financing through the issue of a $750 million Subordinated Restricted Tier 1 bond in January 2020.

The Group's financial discipline and the compelling strategic rationale for the transaction were recognised by Fitch Ratings who revised the Group's rating outlook from "Stable" to "Positive" upon announcement.

outlook

In 2020, following completion of the acquisition of ReAssure, Phoenix will be the UK's largest life and pensions provider with over 14 million customers and circa £330 billion of assets under administration. Whilst our size will have changed, our strategy remains consistent.

We will continue to deliver dependable cash generation from a strong and resilient in-force business whilst pursuing growth opportunities that will build an enduring organisation. Integral to this will be a focus on our key sustainability themes of delivering for our customers, fostering responsible investment, reducing our environmental impact and being a good corporate citizen.

At an operational level, we will continue to progress the Standard Life Assurance transition programme alongside completion of the ReAssure transaction targeted for mid-2020. We are [cognisant] of the high degree of integration work underway at both Phoenix and ReAssure. We expect the phased integration of ReAssure to take three years and will take a coordinated approach to ensure enterprise stability. Both Phoenix and ReAssure are highly experienced in delivering complex integrations and we are confident in our collective abilities to deliver both programmes safely. We look forward to welcoming our future ReAssure colleagues into the Phoenix family.

We are excited at the range of growth opportunities available to us including BPA, new Open Business in the UK and Europe and further M&A in the UK, Germany and Ireland.

We will continue to participate on a selective and proportionate basis in what we expect to be a buoyant BPA market and explore the opportunity to put additional surplus capital to work in this market.

The key focus for our Open business will be staying attuned to our customers' expectations and building relevance as we aim to be our customers' first choice for their life savings. We will achieve this by investing in our proposition, continuing to listen to our customers, being a trusted guide and investing in the transformation of our platforms.

We are confident that with an estimated market size in excess of £600 billion there remains a wealth of additional acquisition opportunities in the UK, Germany and Ireland. Macro-economic factors such as a 'lower for longer' interest rate environment combined with capital inefficiencies and increasing costs of regulatory change will result in institutions looking to off-load their legacy businesses. Phoenix is a safe harbour for this business and a trusted vendor with a proven track record.

Phoenix's values underpin everything that we do and my colleagues have their sights set on the future, fulfilling our mission and working hard toward our vision of becoming Europe's Leading Life Consolidator.

Lastly, both Jim and I will take leave of Phoenix in 2020. I wish to take this opportunity to pay tribute to Jim for his extensive contribution during his eight years with the Group.

During his tenure he significantly strengthened Phoenix's balance sheet, obtained an Investment Grade Rating for the Group, established an unbroken record of delivering on financial targets, and helped deliver transformative acquisitions.

It is testament to Phoenix's bench strength that we are fortunate enough to have the opportunity to appoint Rakesh Thakrar, current Group Deputy Finance Director, as Jim's successor (subject to regulatory approval).

Rakesh has been Jim's deputy since 2014 and, alongside proven skills in managing the Group's finances, has a longstanding knowledge of the Group and the long-term savings industry as a whole.

In November 2019, I informed the Board of my intention to retire. It has been a privilege and pleasure to serve as Phoenix's Group Chief Executive Officer on what has been an extraordinary nine-year journey. I would like to express my deep gratitude to all of my colleagues for their hard work and determination to drive forward Phoenix's strategy during this time and extend a warm welcome to Andy Briggs as my successor.

Clive Bannister

Group Chief Executive Officer

Committing to a SUSTAINABLE FUTURE

Phoenix is uniting behind its new sustainability vision of "Committing to a Sustainable Future" and has identified four areas of commitment for its sustainability strategy which are critical to delivering Phoenix's purpose of inspiring confidence in the future.

www.thephoenixgroup.com/sustainability2019

 

Business Review

Inspiring confidence through financial delivery

"The Group performed strongly in 2019, meeting or exceeding all of its financial targets set for the year. These results demonstrate the continued management of our in-force book to deliver cash generation and resilience together with a focus on growth through new business."

James McConville

Group Finance Director and Group Director, Scotland

Note: Presentation of financial information

IFRS results for the year ended 31 December 2018 include the Standard Life Assurance businesses for the four month period from 1 September, post completion of the acquisition.

IFRS

The Group generated an increased operating profit of £810 million for the year (2018: £708 million), reflecting the contribution of the Standard Life Assurance businesses for a full 12 month period post completion of the acquisition. This has been partly offset by the lower positive impact of management actions and demographic actuarial assumption changes within operating profit compared to the prior period.

The IFRS profit after tax for the year is £116 million (2018: £410 million). As expected the IFRS results continue to be impacted by investment variances arising from the Group's hedging programme, which is calibrated to protect the Group's Solvency II surplus. Improving equity markets during 2019 generated losses on these hedging instruments, which together with the provision of costs associated with the delivery of transition activity and the recognition of a full year's amortisation charge on intangible assets recognised on acquisition of Standard Life Assurance, has more than offset the increased operating profit.

CASH

Cash generation remains our key reporting metric.

The Group's cash generation of £707 million in the year allowed it to exceed the upper end of its £600 to £700 million target range for that period, and is stated net of a £250 million injection of capital into our European business to prepare it for Brexit.

capital position

The Group's Solvency II capital surplus position of £3.1 billion (2018: £3.2 billion) remains resilient with the adverse impacts of economic variances, the Part VII transfer of the Standard Life Assurance Limited European business to the Group's Irish domiciled subsidiary, and the capital strain of writing new business being largely offset by the delivery of management actions.

Our solvency ratio of 161% (2018: 167%) remains comfortably in the middle of our target range of 140 to 180%.

The Group's strong financial position has been recognised by Fitch Ratings who revised its Insurer Financial Strength rating of A+ for Phoenix from a 'stable' to 'positive' outlook in December 2019, following announcement of the acquisition of ReAssure Group.

GROWTH

Group Assets under Administration ('AUA') increased to £248.3 billion in the year (2018: £226.5 billion) benefiting from positive market movements, notably strong performance in global equity markets and net inflows from the Group's UK Open business. This was partly offset by net outflows from the Group's Heritage businesses. Gross in-flows for the UK Open business are down on the prior year, principally reflecting challenging market conditions for the Wrap product.

Long-term cash generation is expected to increase by £475 million as a result of new business transacted in the year (2018: £530 million). This includes the impact of four BPA transactions executed in the period, together with new business from our UK Open and Europe segments.

LOOKING AHEAD

Phoenix continues to be on track to achieve its long-term cash generation target for the five-year period 2019 to 2023 which has been updated by £0.1 billion to £3.9 billion, reflecting new business written in 2019. The Group looks forward to the future from a position of financial strength.

Alternative performance measures

The Group assesses its financial performance based on a number of measures, some of which are not defined or specified in accordance with Generally Accepted Accounting Principles ('GAAP') or statutory reporting framework. These metrics are known as Alternative Performance Measures ('APMs').

The Group's strategic focus prioritises the generation of sustainable cash flows from its operating companies through the margins earned on different life and pension products and the release of capital requirements. Performance metrics are monitored where they support this strategic purpose, which includes ensuring the capital strength of the Group is maintained.

As a result, GAAP measures typically used to assess financial performance, such as IFRS profit after tax, are considered by the Board to be of lower importance when assessing Phoenix's performance against its strategy. IFRS results exclude any changes to the capital requirements and therefore do not fully reflect the performance of the Group.

As such, the key performance indicators for the Group mainly focus on cash generation and capital strength. Further information on the Group's APMs can be found on page 264, including definitions, why the measure is used and if applicable, how the APM can be reconciled to the nearest GAAP measure.

 

CASH GENERATION

Operating companies' cash generation represents cash remitted by the Group's operating companies to the holding companies. Please see the APM section on page 264 for further details of this measure. Maintaining strong cash flow delivery underpins debt servicing and repayments as well as shareholder dividends.

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.

Cash receipts

Cash generated by the operating companies during 2019 was £707 million (2018: £664 million). Cash generation is reported net of a £250 million cash remittance into the Group's Irish domiciled subsidiary, Standard Life International. This capital injection preceded a Part VII transfer of the Irish, German and Austrian policies of Standard Life Assurance Limited to Standard Life International, completed in March 2019 as part of preparations to ready the business for Brexit.

	Year ended 31 December 2019 £m	Year ended 31 December 2018 £m
Cash and cash equivalents at 1 January	346	535
Operating companies' cash generation:
Cash receipts from Phoenix Life	367	664
Cash receipts from Standard Life Assurance	565	-
Cash receipts from Management Services companies	25	-
Cash remittances to Standard Life International	(250)	-
Total cash receipts1	707	664
Uses of cash:
Operating expenses	(43)	(32)
Pension scheme contributions	(50)	(49)
Debt interest	(112)	(88)
Non-operating cash outflows	(137)	(216)
Uses of cash before debt repayments and shareholder dividend	(342)	(385)
Shareholder dividend	(338)	(262)
Total uses of cash	(680)	(647)
Equity raise (net of fees)	-	934
Debt issuance (net of fees)	-	932
Cost of acquisitions	-	(1,971)
Support of BPA activity	(98)	(101)
Cash and cash equivalents at 31 December	275	346

1  Includes £58 million and £54 million received by the holding companies in respect of tax losses surrendered to Phoenix Life and Standard Life Assurance respectively (2018: £39 million - Phoenix Life).

All amounts in the Business Review section marked with an 'APM' are alternative performance measures. See 'Alternative Performance Measures' section on page 264 for further details of these measures.

All amounts in the Business Review section marked with a 'REM' are KPIs linked to executive remuneration. See 'Directors' Remuneration Report' on page 99 for further details of executive remuneration including the financial and non-financial performance measures on which it is based.

Cash outflows

The operating expenses of £43 million (2018: £32 million) principally comprise corporate office costs, net of income earned on holding company cash and investment balances.

Annual pension scheme contributions of £50 million (2018: £49 million) are made on a monthly basis and include total contributions of £40 million into the Pearl Group Scheme and £10 million into the Abbey Life Scheme, including £4 million paid into Charged Accounts and held in escrow.

Debt interest of £112 million (2018: £88 million) increased principally as a result of the annual coupon payment on the £445 million (€500 million) Tier 2 bond issued in September 2018.

Non-operating net cash outflows

Non-operating net cash outflows of £137 million (2018: £216 million) principally comprises £69 million of recharged staff costs and Group expenses associated with corporate related projects, including £54 million of costs related to the transition of the acquired Standard Life Assurance businesses and £9 million of costs related to the acquisition of the ReAssure Group. It also includes £45 million of premium, collateral pledged and cash paid to close out derivative instruments entered into by the holding companies to hedge the Group's exposure to currency risk as well as equity risk arising from the Group's acquisition of the ReAssure Group.

The remainder of the balance includes £4 million of costs related to the separation of businesses from Standard Life Aberdeen plc and £19 million of net other items.

Shareholder dividend

The shareholder dividend of £338 million represents the payment of £169 million in May for the 2018 final dividend and the payment of the 2019 interim dividend of £169 million in September. The final 2019 dividend per share proposed is 23.4 pence.

Equity raise (net of fees)

The £934 million equity issuance in 2018 relates to proceeds, net of fees, from the rights issue associated with the financing of the acquisition of the Standard Life Assurance businesses.

Debt issuance (net of fees)

The £932 million debt issuance in 2018 comprises the net proceeds of the Tier 1 Notes of £500 million completed in April 2018 and the £445 million (€500 million) Tier 2 bond issuance in September 2018.

Cost of acquisitions

Cost of acquisitions of £1,971 million in 2018 relates to the cash consideration settlement to finance the acquisition of the Standard Life Assurance businesses.

Support of BPA activity

£98 million (2018: £101 million) of funding has been provided to the life companies to support BPA new business.

Target cash flows

The Group set a short-term cash generation target of £600 to £700 million for 2019 (net of the £250 million cash remittance into Standard Life International as part of Brexit preparations) and with £707 million of cash generation achieved, the Group has exceeded the upper end of its target range.

The Group's cash generation target for the five year period 2019 to 2023 has been upgraded by £0.1 billion to £3.9 billion, to reflect new business written in the year. The resilience of the target is demonstrated by the illustrative stress testing in the table to the left.

Expected cash flows after 2024

There is an expected £8.8 billion of cash to emerge from 2024. This does not include any management actions from 2024 onwards or any additional value from future new business from the Group's Open business and BPA transactions. It also does not reflect the impact of any future M&A including the ReAssure Group acquisition.

Illustrative stress testing1	1 Jan 2019 to 31 Dec 2023 £bn
Base case five-year target	3.9
Following a 20% fall in equity markets	4.0
Following a 15% fall in property values	3.6
Following a 73bps interest rates rise2	4.0
Following a 88bps interest rates fall2	3.7
Following credit spread widening3	3.6
Following 6% decrease in annuitant mortality rates4	3.3
Following a 10% increase in assurance mortality rates	3.8
Following a 10% change in lapse rates5	3.5

1  Assumes stress occurs on 1 January 2020.

2  Assumes recalculation of transitionals (subject to PRA approval).

3  Credit stress equivalent to an average 120bps spread widening across ratings, and includes an allowance for defaults/downgrades.

4  Equivalent of six months increase in longevity applied to the annuity portfolio.

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

£707m

Operating companies' cash generation

ASSETS UNDER ADMINISTRATION AND NEW BUSINESS

The Group's AUA represent assets administered by or on behalf of the Group, covering both policyholder funds and shareholder assets. This includes assets recognised in the Group's IFRS consolidated statement of financial position together with certain assets administered by the Group but for which beneficial ownership resides with customers.

AUA provides 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 consolidated statement of financial position to the Group's AUA is provided on page 256. Please see the Alternative Performance Measure ('APM') section on page 264 for further details of this measure.

Group AUA

Group AUA increased to £248.3 billion in the year (2018: £226.3 billion) benefiting from positive market movements, notably strong performance in global equity markets, and net inflows from the Group's UK Open business; partly offset by net outflows from the Group's Heritage businesses.

UK Heritage net flows

UK Heritage net outflows of £(6.0) billion (2018 pro forma1: £(7.1) billion) reflect policyholder outflows on claims such as maturities, surrenders and annuities in payment, net of total premiums received in the period from in-force contracts.

It includes £1.1 billion (2018: nil) of inflows arising from the Group's buy-in of the remaining pensioner liabilities of the PGL Pension Scheme and £1.1 billion (2018: £1.5 billion) of new business inflows arising from BPA transactions completed in the year.

UK Open flows

The UK Open segment experienced gross inflows of £9.8 billion (2018 pro forma1: £10.7 billion) during the year, of which £6.0 billion (2018 pro forma¹: £7.4 billion) was received in respect of new contracts transacted in the period.

Strong gross inflows in the Workplace product of £4.9 billion (2018 pro forma1: £4.4 billion) benefited from statutory pensions auto-enrolment increases.

Gross inflows in the Wrap product of £3.0 billion (2018 pro forma1 : £4.1 billion) were adversely impacted by challenging market conditions, notably market uncertainty arising from Brexit combined with a decline in transfers from defined benefit to defined contribution pension schemes.

Retail products experienced gross inflows of £1.9 billion (2018 pro forma1: £2.1 billion).

Outflows for the UK Open business were £8.1 billion (2018 pro forma: £7.0 billion) mainly due to run-off, resulting in net inflows of £1.7 billion (2018 pro forma¹ : £3.7 billion).

Europe net flows

The European business contributed a small net outflow of £0.1 billion to the Group's AUA.

Other movements including markets

AUA increased by £26.4 billion as a result of other movements, largely driven by the impact of strong global equity market performance in the year, together with the positive impact of falling yields on the fair value of fixed interest rate securities.

New business contribution

In respect of our Open and Europe business segments, we monitor new business contribution as the Group's measure of the future value delivered through the writing of new business.

New business contribution represents the increase in Solvency II shareholder Own Funds (net of tax) arising from new business written in the year, adjusted to exclude the associated risk margin and any restrictions recognised in respect of contract boundaries. It is stated net of 'Day 1' acquisition costs and is calculated as the value of expected cash flows from new business sold, discounted at the risk-free rate.

New business contribution for 2019 was £158 million (2018 pro forma¹: £154 million). This includes £153 million (FY18 pro forma1: £137 million) from the Group's UK Open business which benefited from the statutory pensions auto-enrolment increases; and £5 million (2018 pro forma1: £17 million) from the Europe business which was adversely impacted by lower gross flows and the impact of assumption changes.

Long-term cash generation

As a result of new business transacted in the year, long-term cash generation is expected to increase by £475 million (2018 pro forma¹: £530 million), comprising £240 million from the UK Open and European business segments (2018 pro forma¹: £280 million) and £235 million from BPA transactions (2018 pro forma¹: £250 million).

The UK Open long-term cash generation is down on the prior year, reflecting the overall decline in gross in-flows, primarily from Wrap inflows. Long-term cash generation from the Workplace product benefited by circa £50 million as a result of auto-enrolment increases in the year.

Four BPA transactions were completed in the year, reflecting the Group's selective and proportionate approach to its participation in this market.

£475m

Incremental long-term cash generation

£248bn

Assets under administration

£158m

UK open and Europe new business contribution

1 The pro forma position assumes the acquisition of the Standard life Assurance businesses took place on 1 January 2018.

CAPITAL MANAGEMENT

Group Solvency II Surplus

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.

The SCR is calibrated so that the likelihood of a loss exceeding the SCR is less than 0.5% over one year. This ensures that capital is sufficient to withstand a broadly '1-in-200 year event'.

The Group has approval from the PRA for the use of its Internal Model ('Phoenix Internal Model') to assess capital requirements, the scope of which was extended to include the acquired AXA Wealth and Abbey Life businesses in March 2017 and March 2018 respectively.

The Standard Life Assurance businesses determine their capital requirements in accordance with an approved Internal Model ('Standard Life Internal Model'), which was in place prior to the acquisition of the Standard Life Assurance businesses. The one exception to this is Standard Life International, the Group's Irish subsidiary, which remains on Standard Formula. As a result, the Group currently uses a Partial Internal Model to calculate Group SCR, aggregating outputs from the existing Phoenix Internal Model, the Standard Life Internal Model and Standard Life International's Standard Formula, without further diversification. A harmonisation programme to combine the two Internal Models into a single Internal Model is ongoing.

The Group Solvency II surplus position at 31 December is set out in the table below:

	Estimated position as at 31 December 2019 £bn	Estimated position as at 31 December 2018 £bn
Own Funds1	10.8	10.3
SCR2	(7.7)	(7.1)
Surplus3	3.1	3.2

1  Own Funds includes the net assets of the life and holding companies calculated under Solvency II rules, pension scheme surpluses calculated on an IAS19 basis not exceeding the holding companies' contribution to the Group SCR and qualifying subordinated liabilities. It is stated net of restrictions for assets which are non-transferable and fungible between Group companies within a period of nine months.

2  The SCR reflects the risks and obligations to which Phoenix Group Holdings plc is exposed.

3  The surplus equates to a regulatory coverage ratio of 140% as at 31 December 2019 (2018: 146%).

£3.1bn

Group Solvency II surplus (estimated)

161%

Group shareholder capital coverage ratio (estimated)

Change in Group Solvency II Surplus (estimated)

The Group Solvency II surplus has decreased to £3.1 billion (2018: £3.2 billion).

Surplus generation and the impact of the reduction in capital requirements for the Group added £0.4 billion to the surplus during the year.

Management actions undertaken increased the surplus by £0.6 billion. This includes £0.1 billion in respect of capital synergies associated with the acquisition of the Standard Life Assurance businesses, primarily as a result of internal group restructuring activities. Other management actions of £0.5 billion include further investment in illiquid assets within annuity portfolios, the optimisation of matching adjustment portfolios and asset de-risking initiatives.

The impact of new business written during the year reduced the surplus by £0.2 billion. This primarily reflects the capital strain associated with BPA transactions executed in the period and vesting annuities in the Heritage business segment. The Open business continues to be capital light.

The Part VII transfer of Standard Life Assurance Limited's Irish, German and Austrian policies to Standard Life International resulted in a £0.2 billion reduction in the surplus reflecting increases in the SCR and risk margin as a result of the more onerous capital requirements and a loss of diversification under Standard Formula compared to the Standard Life Internal Model, together with the recognition of counterparty default risk.

Financing costs, pension contributions and dividend payments (including accrual for the 2019 final dividend) amount to £0.5 billion and reduced the surplus in the period.

The adverse impact of economic and other variances reduced the surplus by £0.2 billion. The positive impact of changes to longevity assumptions of circa £0.1 billion, including updates to the latest Continuous Mortality Investigation 2018 projection tables, has been more than offset by the strengthening of assumptions used to determine the SCR held in respect of the Group's £2.8 billion Equity Release Mortgages portfolio, and the adverse impact of updates to other demographic assumptions including mortality.

Other variances also include the net adverse impact of economic and market movements in the period, notably falling yields and foreign exchange, together with the costs of corporate related projects.

Group Own Funds have benefitted by circa £0.3 billion as a result of recognising the benefits (net of associated costs) that will be delivered by our Standard Life transition activities including the end state Customer Service and IT operating model. This is largely offset in Solvency II surplus by an increase in SCR associated with the risk of this transition.

Standard Life Assurance Limited and the Phoenix Life entities undertook a mandatory recalculation of Transitional Measures on Technical Provisions ('TMTP') as at 31 December 2019.

Group Shareholder Capital Coverage Ratio (estimated)

The Solvency II surplus excludes the surpluses arising in the Group's unsupported with-profit funds and unsupported Group pension schemes of £2.1 billion (2018: £2.1 billion). Surpluses within the with-profit funds and the Group Pension Schemes, whilst not included in the Solvency II surplus, are available to absorb economic shocks. This means that the headline surplus is resilient to economic stresses.

In the calculation of the Solvency II surplus, the SCR of the unsupported with-profit funds and the unsupported Group Pension Schemes is included, but the related Own Funds are recognised only to a maximum of the SCR amount. This approach suppresses the regulatory capital coverage ratio calculated as eligible own funds as a percentage of SCR.

As a result, the Group focuses on a shareholder view of the capital coverage ratio which it considers to give a more accurate reflection of the capital strength of the Group. The Shareholder Capital Coverage Ratio is calculated as the ratio of Eligible Own Funds to SCR adjusted to exclude Own Funds and the associated SCR relating to the unsupported with-profit funds and the unsupported Group Pension Schemes.

The Group targets a shareholder capital coverage ratio in the range of 140% to 180%.

Please see the Alternative Performance Measures section on page 264 for further details of this measure.

The Group Shareholder Capital Coverage ratio is 161% as at 31 December 2019 (2018: 167%).

Sensitivity and scenario analysis

As part of the Group's internal risk management processes, the regulatory capital requirements are tested against a number of financial scenarios. The results of that stress testing are provided opposite and demonstrate the resilience of the Group Solvency II surplus.

The sensitivities reflect the impact of any strong with-profit funds or pension schemes that may become weak after application of the stress.

Life Company Free Surplus (estimated)

Life Company Free Surplus represents the Solvency II surplus of the Life Companies that is in excess of their Board approved capital management policies.

As at 31 December 2019, the Life Company Free Surplus is £1.2 billion (2018: £1.0 billion). The table below analyses the movement during the period.

As the analysis is presented on a net of tax basis, cash remittances to the holding companies excludes £112 million of amounts received by the holding companies in respect of tax losses surrendered to the Life companies that is included in the Group's Cash Generation metric.

Cash remittances from holding companies relate to the £250 million capital injection into Standard Life International as part of the Group's Brexit planning activities.

Illustrative stress testing1	Estimated PGH  Solvency II  surplus £bn
Base: 1 January 2020	3.1
Following a 20% fall in equity markets	3.2
Following a 15% fall in property values	2.9
Following a 73bps interest rates rise2	3.1
Following a 88bps interest rates fall2	3.0
Following credit spread widening3	2.8
Following 6% decrease in annuitant mortality rates4	2.5
Following 10% increase in assurance mortality rates	3.0
Following a 10% change in lapse rates5	2.7

1  Assumes stress occurs on 1 January 2020.

2  Assumes recalculation of transitionals (subject to PRA approval).

3  Credit stress equivalent to an average 120bps spread widening across ratings and includes allowance for defaults/downgrades.

4  Equivalent of six months increase in longevity applied to the annuity portfolio.

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

	Estimated position as at 31 December 2019  £bn
Opening Free Surplus	1.0
Surplus generation and run-off of capital requirements	0.5
Management actions	0.6
Part VII transfer	(0.3)
New business	(0.1)
Economic, financing and other	0.1
Free Surplus before cash remittances	1.8
Cash remittances to holding companies	(0.9)
Cash remittances from holding companies	0.3
Closing Free Surplus	1.2

 

IFRS Results

Operating profit

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 264 for further details of this measure.

The Group has generated an operating profit of £810 million (2018: £708 million). The increase compared to the prior year is primarily driven by the inclusion of the Standard Life Assurance businesses for a full 12 month period post completion of the acquisition in August 2018. This has been partly offset by the lower positive impact of management actions and demographic actuarial assumption changes within operating profit compared to the prior period.

IFRS profit after tax

The IFRS profit after tax attributable to owners is £116 million (2018: £410 million). The decrease primarily reflects net negative economic variances arising on hedging positions held by the life companies to protect the Group's Solvency II surplus position, compared to net positive variances in the prior year together with a full year's amortisation charge on intangibles arising on acquisition of the Standard Life Assurance businesses. The 2018 result also included a £141 million gain recognised on the acquisition of the Standard Life Assurance businesses. These negative factors have been partly offset by the improved operating profit detailed above.

Basis of operating profit

Operating profit generated by the UK Heritage, UK Open and Europe 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 prudential 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 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. 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 accounted for outside of operating profit. Operating profit is net of policyholder finance charges and policyholder tax.

UK Heritage operating profit

The Group's UK Heritage business segment does not actively sell new life or pension policies and runs-off gradually over time.

The with-profit operating profit of £126 million (2018: £101 million) represents the shareholders' one-ninth share of the policyholder bonuses. The increase on prior year primarily reflects the full 12 months contribution from the Standard Life Assurance businesses.

The with-profit funds where internal capital support has been provided generated an operating profit of £18 million (2018: £20 million). The profit is principally driven by the net positive impact of updating actuarial assumptions, including longevity.

The non-profit and unit-linked funds operating profit increased to £577 million (2018: £524 million), reflecting the full 12 months contribution from the Standard Life Assurance businesses and the impact of BPA transactions entered into in the period. This has been partly offset by the lower positive impact of management actions and the delivery of actuarial modelling enhancements in the prior period. Updating actuarial assumptions had a net positive impact of £183 million on the result for the year (2018: £205 million) and included the impact of updating longevity base and improvement assumptions to reflect latest experience analyses and the most recent Continuous Mortality Investigation 2018 core projection tables.

Profit/(loss) after tax	Year ended 31 December  2019 £m	Year ended 31 December  2018 £m
UK Heritage	694	640
UK Open	73	41
Europe	52	22
Management Services companies	26	25
Group costs	(35)	(20)
Operating profit	810	708
Investment return variances and economic assumption changes on long term business	(177)	283
Variance on owners' funds	13	(193)
Amortisation of acquired in-force business,  customer relationships and other intangibles	(395)	(207)
Other non-operating items	(169)	(38)
Profit before finance costs and tax attributable to owners	82	553
Finance costs attributable to owners	(127)	(114)
(Loss)/Profit before the tax attributable to owners of the parent	(45)	439
Profit before tax attributable to non-controlling interests	31	31
(Loss)/profit before tax attributable to owners	(14)	470
Tax credit/(charge) attributable to owners	130	(60)
Profit after tax attributable to owners	116	410

£810m

Operating profit

£116m

IFRS profit after tax

The long-term return on owners' funds of £(27) million (2018: £(5) million) reflects the return on owners' assets, primarily cash-based assets and fixed interest securities, and the impact of expenses borne by the shareholder. The loss in the period principally reflects certain one-off project costs and the settlement of VAT on certain investment expenses that were borne on behalf of policyholders.

UK Open operating profit

The Group's UK Open business segment delivered an operating profit of £73 million (2018: £41 million). This includes operating profits generated across the Workplace, Retail and Wrap product lines, including new business distributed through our Strategic Partnership with Standard Life Aberdeen plc and under the Group's SunLife brand. The increase in operating profit compared to the prior year reflects the full 12 months contribution from the Standard Life Assurance businesses, partly offset by the adverse impact of updating mortality assumptions on the SunLife business to reflect latest experience.

Europe operating profit

The Europe business segment which comprises business written in Ireland, Germany and Austria and a mix of Heritage and Open products, generated an operating profit of £52 million during the year (2018: £22 million). Again, the increase principally reflects the inclusion of the 12 months contribution of the Standard Life Assurance businesses.

Management services companies operating profit

The operating profit for management services of £26 million (2018: £25 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 increase compared to the prior period is principally driven by a revised management services agreement that was in place for the full period in respect of the acquired Abbey Life business, partly offset by the impacts of run-off. A management services agreement has been signed in respect of the Standard Life Assurance businesses and will be effective from 1 January 2020. See other non-operating items below for further detail.

Group costs

Group costs in the period were £35 million (2018: £20 million). 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 a lower return on the scheme surplus of the PGL Pension Scheme, following the buy-in transaction that took place in March 2019 (see note G1 to the IFRS financial statements).

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

The net adverse investment return variances and economic assumption changes on long-term business of £177 million (2018: £283 million positive) primarily arise as a result of losses on hedging positions held by the life funds and reflect improving equity markets in the year. The Group's exposure to equity movements arising from future profits in relation to with-profit bonuses and unit-linked charges is hedged to benefit the regulatory capital position. The impact of equity market movements on the value of the hedging instruments is reflected in the IFRS results, but the corresponding change in the value of future profits is not. These adverse impacts have been partly offset by the positive impacts of strategic asset allocation activities, including investment in higher yielding illiquid assets, and lower swap curve yields experienced during the period.

Variance on owners' funds

The positive variance on owners' funds of £13 million (2018: £193 million negative) is principally driven by gains on foreign currency swaps held by the holding companies to hedge exposure of future life company profits to movements in exchange rates. The prior year result included realised losses on derivative instruments entered into by the holding companies to hedge exposure to equity risk arising from the Group's acquisition of the Standard Life Assurance businesses. Losses of £143 million were incurred on these instruments, together with option premiums of £22 million.

UK Heritage operating profit	Year ended 31 December 2019 £m	Year ended 31 December  2018 £m
With-profit	126	101
With-profit where internal capital support provided	18	20
Non-profit and unit linked	577	524
Long-term return on owners' funds	(27)	(5)
UK Heritage operating profit before tax	694	640

Amortisation of acquired in-force business and other intangibles

The acquired in-force business is being amortised in line with the expected run-off profile of the profits to which it relates. Amortisation of acquired in-force business during the year totalled £375 million (2018: £189 million) with the increase from the prior year driven by a full 12 months amortisation charge in respect of the acquired-in-force business relating to the Standard Life Assurance businesses. Amortisation of other intangible assets totalled £20 million in the year (2018: £18 million).

Other non-operating items

Other non-operating items of £169 million negative (2018: £38 million negative) includes an £80 million benefit arising from updated expense assumptions for insurance contracts, reflecting reduced future servicing costs as a result of transition activity. Such benefits on the Group's investment contract business will typically be recognised as incurred. This benefit has been more than offset by staff and external costs incurred or provided for in the period with regard to transition activity and the transformation of the Group's operating model and extended relationship with Tata Consultancy Services, totalling £190 million, of which £175 million relates to external costs.

Also included in the net other non-operating items are £5 million of costs associated with preparations to ready the business for Brexit, costs associated with other corporate related projects of £41 million, including the Group's Internal Model harmonisation project and the acquisition of ReAssure Group and net other items totalling an expense of £13 million.

The prior period result included a gain on acquisition of £141 million reflecting the excess of the fair value of the net assets acquired over the consideration paid for the acquisition of the Standard Life Assurance businesses and a net benefit of £45 million reflecting anticipated cost savings associated with the move to a single, digitally enhanced outsourcer platform. These amounts were more than offset by a provision for £68 million in respect of a commitment to reduce ongoing and exit charges for non-workplace pension products, costs of £59 million associated with the equalisation of accrued Guaranteed Minimum Pension benefits within the Group's pension schemes, costs of £43 million associated with the acquisition of the Standard Life Assurance businesses and £7 million incurred under the ongoing transition programme. It also included net other one-off items totalling £47 million, including other corporate project costs.

Finance costs

Finance costs of £127 million (2018: £114 million) have increased by £13 million, reflecting the interest charges on the €500 million Tier 2 debt issuance in September 2018.

Tax credit 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's tax affairs and tax controls are managed by an in-house tax team who report on them to the Board and the Audit Committee on a regular basis throughout the year. The Board believes that its Tax Strategy accords with the Group's approach to its wider Corporate Social Responsibility. The tax strategy was refreshed in August 2019 and published in accordance with the relevant statutory requirements.

Implicit in the Group's Tax Strategy and the management of its tax affairs is a desire for greater transparency and openness that will help the Group's stakeholders better understand the published tax numbers. In this way the Group aims to participate in a substantive manner with HMRC and other insurance industry stakeholders on consultative documents and tax law changes that potentially impact on the insurance sector.

The Group's insurance operations are primarily based in the UK and are liable to tax in accordance with applicable UK legislation. Following the acquisition of the Standard Life Assurance businesses, the Group's overseas operations have increased, in Ireland and Germany in particular. The Group complies with the local tax obligations in the jurisdictions in which it operates. Phoenix Group Holdings was a Jersey resident holding company until 31 January 2018 when it became tax resident in the UK.

The Group tax credit for the period attributable to owners is £130 million (2018: £60 million tax charge) based on a loss (after policyholder tax) of £14 million (2018: £470 million profit). The significant tax adjustments to the Owners' loss before tax are primarily due to the impact of a deferred tax rate reduction relating primarily to AVIF of £(50) million, a prior year credit for shareholders of £(51) million, the impact of non-tax deductible costs of £22 million and profits taxed at a rate other than the statutory rate of £(13) million. See note C6 to the IFRS consolidated financial statements for further analysis.

Financial leverage

The Group seeks to manage the level of debt on its balance sheet by monitoring its financial leverage ratio. This is to ensure the Group maintains its investment grade credit rating as issued by Fitch Ratings and optimises its funding costs and financial flexibility for future acquisitions. The financial leverage ratio as at 31 December 2019 (as calculated by the Group in accordance with Fitch Ratings' stated methodology) is 22% (2018: 22%). This is below the target range management considers to be associated with maintaining an investment grade rating of 25% to 30%.

Financial leverage is calculated as debt as a percentage of the sum of debt and equity. Debt is defined as the IFRS carrying value of shareholder borrowings. Equity is defined as the sum of equity attributable to the owners of the parent, the unallocated surplus, the Tier 1 Notes and non-controlling interests.

 

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, links to the Group's strategic priorities and changes in the risk from the Group's 2018 Annual Report and Accounts, published in March 2019.

Following a review of principal risks, the number of principal risks has increased from ten to eleven with 'Climate Change and wider Environmental, Social and Governance (ESG) risk' moving from an emerging risk to a principal risk. This is due to the increasing understanding of the potential risks associated with the transition to a low carbon economy and longer-term financial risks. Potential impacts for the Group are wide ranging including material changes in asset valuations, reduced proposition attractiveness and reputational risk if the Group does not respond appropriately.

The current assessment of the residual risk in respect of each of the Group's Level 1 Risk Universe categories is illustrated in the chart opposite. The residual risk is the remaining risk after controls and mitigating actions have been taken into account.

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).

Risk		Impact	Mitigation	Strategic priorities	Change from last year
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. This includes acquisitions of life and pensions books of business and further investment in the Bulk Purchase Annuity ('BPA') market. The transition of acquired businesses into the Group could introduce structural or operational challenges that result in Phoenix failing to deliver the expected outcomes for customers or value for shareholders.	The Group applies a clear set of criteria to assess inorganic opportunities. Our acquisition strategy is supported by the Group's financial strength and flexibility, its strong regulatory relationships and its track record of managing customer outcomes and generating value. 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. Our Corporate Development team continues to assess new Merger & Acquisition and BPA opportunities. The Group continues to actively manage operational capacity required to deliver its strategy; this includes transition activity. A Life Company operational capacity dashboard is regularly reviewed by both Life and Group Boards.	1 2 3	No Change Execution of the Standard Life Assurance Limited transition into the Group is progressing well and remains on track to deliver our synergy targets. In December, Phoenix announced its acquisition of ReAssure Group plc; this brings additional scale to Phoenix's Heritage business and enhances our key attributes of cash generation, resilience and growth. This transaction meets all of our acquisition criteria: it is value accretive; it supports our dividend; and it is consistent with maintenance of our investment grade rating. On completion, the acquisition would be expected to heighten existing risks that the Group is exposed to, in particular this principal risk.
The Group's Strategic Partnerships fail to deliver the expected benefits		Our Strategic Partnerships are a core enabler for delivery of the Group's strategy; they allow us to meet the needs of our customers and clients, and deliver value for our shareholders. Phoenix's end state operating model will leverage the strengths of our strategic partners whilst retaining in-house key skills which differentiate us. There is a risk that the Group's strategic partnerships do not deliver the expected benefits. The Strategic Partnership with Standard Life Aberdeen plc ('SLA plc') is expected to provide additional growth opportunities through our Open business. In addition, SLA plc provides investment-management services to around two thirds of our assets under administration. Our recently enlarged partnership with TCS is also expected to support growth plans for our Workplace Open business, enabling further digital and technology capabilities to be developed to support enhanced customer outcomes.	The Joint Operating Forum ('JOF') between SLA plc and Phoenix continues to develop the partnership with SLA plc in existing areas, and to identify areas for future growth and partnership, for the benefit of customers and shareholders of each Group. The JOF also oversees the operation of the Client Service and Proposition Agreement ('CSPA'), ensuring that each of the parties to the CSPA is performing against their CSPA obligations. The Transitional Services Agreement ('TSA') Oversight Committee between SLA plc and Phoenix oversees TSA performance and activity to exit the TSAs in future. 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 our enlarged partnership.	1 2	Risk Heightened The Group is currently engaged in ongoing discussions with members of the Standard Life Aberdeen group in respect of disagreements over the operation of certain aspects of the share purchase agreement with SLA plc relating to services and expenses, and the scope and cost of services provided pursuant to the TSA, the CSPA and certain other agreements between the Group and members of the Standard Life Aberdeen group.  The Group and SLA plc are currently seeking a commercial resolution to this. While the Group's pre-existing, functional relationship with Diligenta and its parent TCS remains strong and both parties have significant experience working together, the heightened risk reflects the increased dependency that we now place on our partnerships, particularly TCS, to enable successful delivery of the Group's strategy.
The Group fails to ensure that its propositions continue to meet the evolving needs of customers and clients		The Group's ability to deliver growth assumed in business plans could be adversely impacted if our propositions fail to meet the needs of customers and clients. The risk could materialise through increased outflows or reduced new business levels.	Our propositions are designed and developed with our customers and clients at the heart. We actively review and invest in our propositions to ensure they remain competitive and meet expectations. We also regularly seek customer feedback on our propositions, using this to inform future developments.	1 2	No Change The Group continues to progress propositional enhancements, in particular across our Workplace business. In October 2019 we launched a new passive investment solution for our Workplace business. We continue to invest in our digital propositions in line with their importance in delivering our strategy; most recently through the announcement of an enhanced strategic partnership with TCS to increase the Group's digital and technology capabilities. This aims to build on the strong innovation and customer service excellence to which we are committed.
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 ESG risks; for example failing to meet our corporate and social responsibility commitments. This can result in reputational damage and lead to a reduction in earnings or value.	In March 2020, the Group became a signatory to the Task Force on Climate-related Financial Disclosures ('TCFD'). The disclosure included on page 58 outlines the Group's progress to date in incorporating climate-related risks and opportunities within our governance, strategy, risk management and metrics and targets frameworks.	1 2 3	New Principal Risk
Customer risk
The Group fails to deliver fair outcomes for its customers		The Group is exposed to the risk that it fails to deliver fair outcomes for its customers, leading to adverse customer experience and/or potential detriment. This could also lead to reputational damage for the Group and/or financial losses.	Our Conduct Risk Appetite sets the boundaries within which the Group expects customer outcomes to be managed. This consists of a set of principles and standards for all Group colleagues to follow to meet the changing needs of our customers and  ur business. The Group Conduct Risk Framework, which overarches our Risk Universe and all risk policies, is designed to detect where our customers are at risk of poor outcomes, minimise conduct risks, and respond with timely and appropriate mitigating actions. The Group also has a suite of customer policies which set out key customer risks and minimum control standards in place to mitigate them. We maintain a strong and open relationship with the FCA and other regulators, particularly on matters involving customer outcomes.	1	No Change As part of RMF harmonisation, an enhanced Conduct Risk Framework is being rolled out across the Group. The Conduct Risk Framework provides a mechanism for enhanced oversight of customer outcomes across the Group. Our remediation programme for customers affected by the outcome of the FCA's industry-wide annuity review is now substantially complete. Over the year, two external asset managers (Woodford and M&G) suspended funds that some of the Group's customers invest in through our products. The Group has a small exposure to these funds in terms of both assets and customer numbers. As part of the suspensions we have followed our standard fund deferral process.
Operational risk
The Group is impacted by significant changes in the regulatory, legislative or political environment		Changes in regulation could increase the Group's costs, impact profitability or reduce demand for our propositions. Changes in legislation, such as the implications of Brexit, can also impact the Group's operations or financial position. Political uncertainty or changes in the government could see changes in policy that could impact the industry in which we operate.	The Group actively engages with regulators and governments in order to understand potential changes in the regulatory and legislative landscape. The Group assesses the risks and benefits of regulatory and legislative changes to our customers and to the Group and actively engages with regulators and governments as appropriate. The Group has contingency plans in place to ensure we can continue to service our non-UK policyholders after the UK leaves the EU.	1 3	Risk Improved There remains uncertainty around the final outcome of Brexit; however, the 'Improved' rating was noted in our Interim Report and reflects actions the Group implemented in March 2019, through a Part VII transfer, to protect the interests of our non-UK European customers in the event of a 'No Deal' Brexit. The Group is well prepared for operational impacts as a result of potential Brexit outcomes and political changes. While the industry is susceptible to new regulatory deliverables, the Group continually reviews the PRA and FCA 2019/2020 business plan and there are currently no large, unexpected changes that the Group has to manage.
The Group or its outsourcers are not sufficiently operationally resilient		The Group is exposed to the risk of being unable to maintain provision of services in the event of major operational disruption, either within our own organisation or those of our outsourcers. The Group now relies on a wide range of IT systems, including those we provide to SLA plc through the terms of the Standard Life Assurance businesses acquisition. In addition, the Group is increasing its use of online functionality to meet customer preferences. This exposes us to the risk of failure of key systems and cyber-attacks. Regulators' expectations of the speed and effectiveness of firms' responses to business resilience incidents are increasing.	The Group has a business continuity management framework that is subject to annual refresh and regular testing. Following the FCA and PRA December 2019 update on Operational Resilience, the Group is working to ensure that we will be inside disruption tolerances within three years of the publication of final guidelines. The Group operates an oversight framework to ensure that our outsource partners and critical suppliers adhere to the same business continuity principles. The Group continues to utilise cyber security tools and capabilities in order to mitigate Information Security and Cyber risk. Our specialist Line 2 Information Security & Cyber Risk Assurance team also provides independent oversight and challenge of Line 1 IT and information security controls; identifying trends, internal and external threats and advising on appropriate mitigation solutions.	1 2 3	No Change Outsourcer service delivery levels remain good against a backdrop of heightened change activity across the Group. Our Reverse Stress Testing and Recovery Planning Processes demonstrate the Group is resilient to specific Board-approved scenarios. Whilst cyber-attacks show no sign of decreasing in volume and sophistication, the Group continues to adapt its approach in order to keep up to date with the latest threats.
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 and engaged workforce. Periods of 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 our strategy. This risk is inherent in our business model given the nature of our acquisition activity. Potential areas of uncertainty include the transition of the Standard Life Assurance business into the Group; the recently expanded strategic partnership with TCS; and the acquisition of ReAssure Group plc.	Timely communications to our people aim to provide clarity around corporate activities. Communications include details of key milestones to deliver against our plans. We regularly benchmark terms and conditions against the market. We maintain and review succession plans for key individuals. The Group continues to actively manage operational capacity required to deliver our strategy. This is particularly pertinent across the Life Companies given the increasing demands on our workforce in this part of the business. A Life Company operational capacity dashboard is regularly reviewed by both Life and Group Boards.	1 2 3 4	No Change Organisational changes from across the Group as a result of the Standard Life Assurance Limited transition continue to progress as planned. Activity is underway to monitor colleague engagement and protect customer service and IT operations following the announcement of the extended partnership with TCS.
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 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 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. The Group continues to implement de-risking strategies to mitigate against unwanted customer and shareholder outcomes from certain market movements such as equities and interest rates. The Group also 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, particularly given the low interest rate environment, and potential for adverse market impacts arising from prospective Brexit outcomes.	1 2 3	Risk Heightened The UK general election result in December 2019 has provided greater political certainty; the potential for adverse market risk remains due to ongoing uncertainty regarding Brexit, geopolitical tensions and the impacts of COVID-19.. Markets have recently stabilised; whilst yields have recovered, they remain at low levels. We continue to take management actions to provide resilience against unanticipated market movements. Our business planning process stresses our balance sheet to ensure it remains resilient to market movements; contingency actions are available to help us manage markets risks, e.g. as a result of Brexit or global economic downturn. Our exposure to residential property remains within appetite; however, as noted in our Interim Report this continues to increase in line with investment in Equity Release Mortgages.
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 our 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 actively manage its longevity risk exposures which includes the use of 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.	2 3	No Change The Group secured over £1.1 billion of BPA liabilities in the year. Consistent with previous transactions, we continue to reinsure the vast majority of the longevity risk. Whilst the low yield environment and market volatility continue to impact longevity and persistency risk exposures, we are comfortable with current exposures when considered against our Board-approved risk appetites.
Credit risk
The Group is exposed to the failure of a significant counterparty		The Life Companies are exposed to deterioration in the actual or perceived creditworthiness or default of investment, reinsurance or banking counterparties. This could cause immediate financial loss or a reduction in future profits. An increase in credit spreads (particularly if accompanied by a higher level of actual or expected issuer defaults) could adversely impact the value of the Group's assets. 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 exposures, counterparty credit rating, sector and geography. Where possible, exposures are diversified through the use of a range of counterparty providers. All material reinsurance and derivative positions are appropriately collateralised. For mitigation of risks associated with stocklending, additional protection is provided through indemnity insurance.		No Change As part of BPA deals, the Group continues to increase investment in illiquid credit assets.This is in line with our strategic asset allocation plan and within our risk appetite. Investment counterparty exposures continue to be managed and monitored across the Group and remain within risk appetite.

EMERGING RISKS

The Group's senior management and Board also take emerging risks into account when considering potentially adverse outcomes and appropriate management actions prior to the risk crystallising.

Examples of some emerging risks the Group currently considers are listed in the table opposite.

Risk Title	Description	Risk Universe Category
Market Disruptors	The impact of alternative providers in the market or those with more comprehensive digital propositions.	Strategic
Solvency II Changes	Changes to the solvency regime as a result of EIOPA review and evolution of the UK's regulatory regime following its exit from the EU.	Financial soundness
Retail Price Index (RPI) Reform	The potential financial impacts from anticipated reform of RPI towards a variant of the Consumer Price Index (CPI).	Financial soundness/Operational
COVID-19	COVID-19 may have operational, financial and demographic impacts for the Group.	Market/Operational/Insurance

 

 

Directors Report

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 the preparation of the Annual Report and Accounts, the Strategic Report, the Directors' Report, the Directors' Remuneration Report, the consolidated financial statements and the Company financial statements in accordance with applicable 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 2019, 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.

The Directors have prepared the consolidated financial statements and the Company financial statements in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union ('EU'). 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 and then apply them consistently.

•  make judgements and accounting estimates that are reasonable and prudent.

•  state whether IFRS, as adopted by the EU, have been followed, subject to any material departures disclosed and explained in the Group and the Company financial statements.

•  repare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's and the Company's transactions and disclose, with reasonable accuracy at any time, the financial position of the Group and the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulations. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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 report, whose names and functions are listed in the Board of Directors section on pages 78 and 79, confirm that, to the best of their knowledge:

•  The Group's consolidated financial statements and the Company financial statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit and loss of the Group and the Company.

•  The Strategic Report and the Corporate Governance and Directors' Report include a fair review of the development and the performance of the business and the position of the Company and its consolidated subsidiaries taken as a whole, together with a description of the principal risks and uncertainties that they face.

In addition, the Directors as at the date of this report consider that the Annual Report and Accounts, taken as a whole, provides users (who have a reasonable knowledge of business and economic activities) with the information necessary for shareholders to assess the Group's position,performance, business model and strategy, and is fair, balanced and understandable.

The Strategic Report and the Directors' Report were approved by the Board of Directors on 6 March 2020.

By order of the Board

Clive Bannister

Group Chief Executive Officer

James McConville

Group Finance Director And Group Director, Scotland

6 March 2020

 

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2019

	Notes	2019 £m	2018  restated  (note A1) £m
Gross premiums written		4,038	2,645
Less: premiums ceded to reinsurers	F3	(556)	(481)
Net premiums written		3,482	2,164
Fees and commissions	C1	700	385
Total revenue, net of reinsurance payable		4,182	2,549
Net investment income	C2	24,876	(9,457)
Other operating income		106	37
Gain on acquisition	H2	-	141
Net income		29,164	(6,730)
Policyholder claims		(7,792)	(5,295)
Less: reinsurance recoveries		1,177	866
Change in insurance contract liabilities		(5,229)	4,768
Change in reinsurers' share of insurance contract liabilities		(320)	(20)
Transfer from unallocated surplus	F2	84	88
Net policyholder claims and benefits incurred		(12,080)	407
Change in investment contract liabilities		(14,080)	7,832
Change in present value of future profits	G2	70	1
Amortisation of acquired in-force business	G2	(382)	(196)
Amortisation of other intangibles	G2	(20)	(18)
Administrative expenses	C3	(1,549)	(1,056)
Net (expense)/income under arrangements with reinsurers	F3.3	(274)	2
Net (income)/expense attributable to unitholders		(336)	159
Total operating expenses		(28,651)	7,131
Profit before finance costs and tax		513	401
Finance costs	C5	(162)	(142)
Profit for the year before tax		351	259
Tax (charge)/credit attributable to policyholders' returns	C6	(365)	211
(Loss)/profit before the tax attributable to owners		(14)	470
Tax (charge)/credit	C6	(235)	151
Add: tax attributable to policyholders' returns	C6	365	(211)
Tax credit/(charge) attributable to owners	C6	130	(60)
Profit for the year attributable to owners		116	410
Attributable to:
Owners of the parent		85	379
Non-controlling interests	D4	31	31
		116	410
Earnings per ordinary share
Basic (pence per share)	B3.1	8.7p	66.8p
Diluted (pence per share)	B3.2	8.6p	66.7p

 

 

STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2019

	Notes	2019 £m	2018  £m
Profit for the year		116	410
Other comprehensive (expense)/income:
Items that are or may be reclassified to profit or loss:
Cash flow hedges:
Fair value (losses)/gains arising during the year		(40)	31
Reclassification adjustments for amounts recognised in profit or loss		41	(28)
Exchange differences on translating foreign operations		(29)	2
Items that will not be reclassified to profit or loss:
Remeasurements of net defined benefit asset/liability	G1	(24)	(54)
Tax charge relating to other comprehensive income items	C6	(57)	(10)
Total other comprehensive expense for the year		(109)	(59)
Total comprehensive income for the year		7	351
Attributable to:
Owners of the parent		(24)	320
Non-controlling interests	D4	31	31
		7	351

 

 

STATEMENT OF CONSOLIDATED FINANCIAL POSITION

As at 31 December 2019

	Notes	2019 £m	2018 restated  (note A1)  £m
ASSETS
Pension scheme asset	G1	314	255
Intangible assets
Goodwill		57	57
Acquired in-force business		3,651	4,033
Other intangibles		271	221
	G2	3,979	4,311
Property, plant and equipment	G3	109	48
Investment property	G4	5,943	6,520
Financial assets
Loans and deposits		516	423
Derivatives	E3	4,454	3,798
Equities		58,979	52,716
Investment in associate		513	496
Debt securities		76,113	71,365
Collective investment schemes		69,415	67,692
Reinsurers' share of investment contract liabilities		8,881	8,331
	E1	218,871	204,821
Insurance assets
Reinsurers' share of insurance contract liabilities	F1	7,324	7,564
Reinsurance receivables		50	42
Insurance contract receivables		54	67
		7,428	7,673
Current tax	G8	75	145
Prepayments and accrued income		259	234
Other receivables	G5	1,233	1,047
Cash and cash equivalents	G6	4,466	4,926
Total assets		242,677	229,980

 

	Notes	2019 £m	2018  £m
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital	D1	72	72
Share premium		2	3,077
Shares held by employee benefit trust	D2	(7)	(6)
Foreign currency translation reserve		69	98
Owner-occupied property revaluation reserve		5	5
Cash flow hedging reserve		(7)	(8)
Retained earnings		4,651	1,923
Total equity attributable to owners of the parent		4,785	5,161
Tier 1 Notes	D3	494	494
Non-controlling interests	D4	314	294
Total equity		5,593	5,949
Liabilities
Pension scheme liability	G1	1,712	596
Insurance contract liabilities
Liabilities under insurance contracts	F1	95,643	91,211
Unallocated surplus	F2	1,367	1,358
		97,010	92,569
Financial liabilities
Investment contracts		120,773	114,463
Borrowings	E5	2,119	2,186
Deposits received from reinsurers		4,213	4,438
Derivatives	E3	734	1,093
Net asset value attributable to unitholders		3,149	2,659
Obligations for repayment of collateral received		3,671	2,645
	E1	134,659	127,484
Provisions	G7	328	377
Deferred tax	G8	873	843
Reinsurance payables		101	30
Payables related to direct insurance contracts	G9	890	902
Current tax	G8	-	20
Lease liabilities	G10	84	-
Accruals and deferred income	G11	384	337
Other payables	G12	1,043	873
Total liabilities		237,084	224,031
Total equity and liabilities		242,677	229,980

 

 

STATEMENT OF CONSOLIDATED
CHANGES IN EQUITY

For the year ended 31 December 2019

	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	Owner- occupied property revaluation reserve £m	Cash flow hedging reserve £m	Retained earnings £m	Total  £m	Tier 1 Notes (note D3) £m	Non-controlling interests (note D4) £m	Total equity £m
At 1 January 2019	72	3,077	(6)	98	5	(8)	1,923	5,161	494	294	5,949
Profit for the year	-	-	-	-	-	-	85	85	-	31	116
Other comprehensive (expense)/income for the year	-	-	-	(29)	-	1	(81)	(109)	-	-	(109)
Total comprehensive income for the year	-	-	-	(29)	-	1	4	(24)	-	31	7
Issue of ordinary share capital, net of associated commissions and expenses (note D1)	-	2	-	-	-	-	-	2	-	-	2
Dividends paid on ordinary shares	-	-	-	-	-	-	(338)	(338)	-	-	(338)
Credit to equity for equity-settled share-based payments	-	-	-	-	-	-	11	11	-	-	11
Shares distributed by the employee benefit trust	-	-	3	-	-	-	(3)	-	-	-	-
Shares acquired by the employee benefit trust	-	-	(4)	-	-	-	-	(4)	-	-	(4)
Dividends paid to non-controlling interests	-	-	-	-	-	-	-	-	-	(11)	(11)
Transfer of reserve (note A1)	-	(3,077)	-	-	-	-	3,077	-	-	-	-
Coupon paid on Tier 1 Notes, net of tax relief	-	-	-	-	-	-	(23)	(23)	-	-	(23)
At 31 December 2019	72	2	(7)	69	5	(7)	4,651	4,785	494	314	5,593

 

 

STATEMENT OF CONSOLIDATED CHANGES IN EQUITY

For the year ended 31 December 2018

 

	Share capital (note D1)  £m	Share premium (note D1) £m	Shares held by employee benefit trust (note D2) £m	Foreign currency translation reserve  £m	Owner-occupied property revaluation reserve  £m	Cash flow hedging reserve  £m	Retained earnings £m	Total  £m	Tier 1 Notes (note D3) £m	Non-controlling interests (note D4) £m	Total equity £m
At 1 January 2018	39	1,413	(2)	96	5	(11)	1,615	3,155	-	-	3,155
Profit for the year	-	-	-	-	-	-	379	379	-	31	410
Other comprehensive income/(expense) for the year	-	-	-	2	-	3	(64)	(59)	-	-	(59)
Total comprehensive income for the year	-	-	-	2	-	3	315	320	-	31	351
Issue of ordinary share capital, net of associated commissions and expenses (note D1)	33	1,926	-	-	-	-	-	1,959	-	-	1,959
Dividends paid on ordinary shares	-	(262)	-	-	-	-	-	(262)	-	-	(262)
Credit to equity for equity-settled share based payments	-	-	-	-	-	-	9	9	-	-	9
Shares distributed by employee benefit trust	-	-	4	-	-	-	(4)	-	-	-	-
Shares acquired by employee benefit trust	-	-	(8)	-	-	-	-	(8)	-	-	(8)
Non-controlling interests recognised on acquisition	-	-	-	-	-	-	-	-	-	265	265
Dividends paid to non-controlling interests	-	-	-	-	-	-	-	-	-	(2)	(2)
Issue of Tier 1 Notes	-	-	-	-	-	-	-	-	494	-	494
Coupon paid on Tier 1 Notes, net of tax relief	-	-	-	-	-	-	(12)	(12)	-	-	(12)
At 31 December 2018	72	3,077	(6)	98	5	(8)	1,923	5,161	494	294	5,949

 

 

STATEMENT OF CONSOLIDATED CASH FLOWS

For the year ended 31 December 2019

	Notes	2019 £m	2018 £m
Cash flows from operating activities
Cash generated/(utilised) by operations	I2	273	(324)
Taxation paid		(205)	(29)
Net cash flows from operating activities		68	(353)
Cash flows from investing activities
Acquisition of Standard Life Assurance subsidiaries, net of cash acquired		-	1,607
Net cash flows from investing activities		-	1,607
Cash flows from financing activities
Proceeds from issuing ordinary shares, net of associated commission and expenses		2	936
Ordinary share dividends paid	B4	(338)	(262)
Dividends paid to non-controlling interests	D4	(11)	(2)
Repayment of policyholder borrowings	E5.2	(34)	(69)
Repayment of shareholder borrowings	E5.2	(100)	(295)
Repayment of lease liabilities	G10	(15)	-
Proceeds from new shareholder borrowings, net of associated expenses	E5.2	100	733
Proceeds from issuance of Tier 1 Notes, net of associated expenses		-	494
Coupon paid on Tier 1 Notes		(29)	(14)
Interest paid on policyholder borrowings		(4)	(5)
Interest paid on shareholder borrowings		(99)	(89)
Net cash flows from financing activities		(528)	1,427
Net (decrease)/increase in cash and cash equivalents		(460)	2,681
Cash and cash equivalents at the beginning of the year		4,926	2,245
Cash and cash equivalents at the end of the year		4,466	4,926

 

 

Notes to the Consolidated Financial Statements

A. SIGNIFICANT ACCOUNTING POLICIES

A1. Basis of Preparation

The consolidated financial statements for the year ended 31 December 2019 set out on pages 147 to 243 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 6 March 2020.

In 2018, following a scheme of arrangement in accordance with section 86 of the Cayman Islands Companies Law between Phoenix Group Holdings ('Old PGH'), the former ultimate parent company of the Group, and its shareholders, all of the issued shares in Old PGH were cancelled and an equivalent number of new shares in Old PGH were issued to the Company in consideration for the allotment to Old PGH shareholders of one ordinary share in the Company for each ordinary share in Old PGH that they held on the scheme record date, 12 December 2018.

The scheme of arrangement had the effect of the Company being inserted above Old PGH in the Group legal entity organisational structure and constituted a group reconstruction. It was accounted for in accordance with the principles of a reverse acquisition under IFRS 3 Business Combinations.

In applying the principles of reverse acquisition accounting, the consolidated financial statements were presented as a continuation of the Old PGH business and the Group is presented as if the Company had always been the ultimate parent company. The equity structure as at 1 January 2018 was restated to reflect the difference between the par value of shares issued by the Company (£39 million) and the shares issued by Old PGH (£nil) prior to the share for share exchange, with a corresponding adjustment to share premium. In addition, the presentation within the consolidated statement of changes in equity of the impact of shares issued during 2018 by Old PGH up to the date of the share for share exchange reflected the par value of the shares issued by the Company.

At 31 December 2018, the share premium reserve continued to reflect the position of Old PGH. During 2019, Old PGH, in accordance with Cayman Islands Companies Law, made a distribution of its entire share premium reserve to Phoenix Group Holdings plc. This has been reflected as a transfer of share premium in the statement of consolidated changes in equity in the year.

No other adjustments have been reflected in equity, and as a consequence, the carrying values of the components of equity recognised in the consolidated financial statements are different to the corresponding balances in the financial statements of the Company.

The consolidated financial statements have been prepared on a going concern basis and on a historical cost basis 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 IFRSs as adopted by the European Union ('EU').

Restatement of prior period information

Following the acquisition of the Standard Life Assurance businesses in 2018, the Group has revised the presentation of certain balances within the statement of consolidated financial position and consolidated income statement. These presentational changes have been made to ensure consistency of accounting treatment for all similar items across the Group's subsidiaries.

	2018 As previously reported £m	Adjustments £m	2018 restated £m
Consolidated income statement:
Net investment income	(9,600)	143	(9,457)
Change in investment contract liabilities	7,975	(143)	7,832
Statement of consolidated financial position:
Financial assets:
Loans and deposits	3,612	(3,189)	423
Debt securities	67,932	3,433	71,365
Collective investment schemes	70,606	(2,914)	67,692
Reinsurers' share of investment contract liabilities	5,417	2,914	8,331
Prepayments and accrued income	478	(244)	234

Debt securities has been restated to include reclassified loans and deposits designated at fair value through profit and loss and an uplift to the value of certain assets for accrued interest previously classified within prepayments and accrued interest. These reclassifications have resulted in an increase to the fair value hierarchy totals for debt securities as follows: £195 million for level 1; £45 million for level 2; and £3,193 million for level 3 assets.

External Fund Link assets have been reclassified from collective investment schemes to reinsurers' share of investment contract liabilities also as a level 1 asset. This has had an associated impact within the consolidated income statement as shown above. Following on from this change, the previously reported reinsurers' share of investment contract liabilities balance of £5,381 million was reclassified from level 2 to level 1.

The reclassifications noted above are also reflected in notes C2 investment income, E1.1 fair value analysis, E2 fair value hierarchy, E6 financial risk analysis, H4 structured entities and I2 cash flows from operating activities.

None of the restatements of prior period information have impacted the total equity attributable to the owners of the parent.

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.

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. The impacts of changes in accounting policies during the year are detailed in note A6.

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.

Foreign currency transactions are translated into the functional currency of the transacting Group entity using exchange rates prevailing at the date of 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, valuation of intangibles on initial recognition and measurement of provisions.

The application of critical accounting judgements that could have the most significant effect on the recognised amounts include 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 197 in note F4.

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. Where possible, financial assets and liabilities are valued on the basis of listed market prices by reference to quoted market bid prices for assets and offer prices for liabilities. These are categorised as Level 1 financial instruments and do not involve estimates. If prices are not readily determinable, fair value is determined using valuation techniques including pricing models, discounted cash flow techniques or broker quotes. Financial instruments valued using valuation techniques based on observable market data at the period end are categorised as Level 2 financial instruments. Financial instruments valued using valuation techniques 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 detail of these estimates and the sensitivity of the defined benefit obligation to key assumptions is 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 gives stakeholders a better understanding 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, 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 Standard Life Assurance businesses

The identification and valuation of identifiable intangible assets, such as acquired in-force business or brand intangibles, arising from the Group's acquisition of the Standard Life Assurance businesses in 2018, required the Group to make a number of judgements and estimates. Further details are included in notes G2 'Intangible assets' and H2 'Acquisitions'.

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 Provisions

The Group holds a number of provisions and the amount of each provision is determined based on the Group's estimation of the outflow of resources required to settle each obligation as at 31 December 2019. The recognition and measurement of these provisions involves a high degree of judgement and estimation uncertainty. Further details of these provisions and the key uncertainties identified are included in note G7.

A4. Adoption of New Accounting Pronouncements in 2019

In preparing the consolidated financial statements, the Group has adopted the following standards, interpretations and amendments effective from 1 January 2019:

•  IFRS 16 Leases. The new standard replaces IAS 17 Leases and removes the classification of leases as operating or finance leases for the lessee, thereby treating all leases as finance leases. This has resulted in the recognition of the Group's previously classified operating leases on balance sheet as right of use assets (see note G3) and lease liabilities (see note G10). The Group's finance leases
in respect of ground rents payable in connection with investment properties were previously accounted for in accordance with IAS 17 and included within investment properties and other payables. Amounts included in other payables have been reclassified to lease liabilities. Short-term leases (less than 12 months) and leases of low-value assets are exempt from the requirements. The Group has applied IFRS 16 using the modified retrospective approach. Accordingly, the comparative information for 2018 has not been restated and continues to be reported under IAS 17 and related interpretations. Further details of the impact of applying IFRS 16 as at 1 January 2019 are included in note A6.

•  IFRIC Interpretation 23 Uncertainty over Income Tax Treatments. The Interpretation explains how to recognise and measure deferred and current tax assets and liabilities where there is uncertainty over a tax treatment. There are no new disclosure requirements; however, the Group has reviewed whether further information should be provided about judgements and estimates made in preparing the consolidated financial statements. No specific issues have been identified that require disclosure in the period.

•  Amendments to IAS 19 Employee Benefits - Plan Amendment, Curtailment or Settlement. The amendments address the accounting when a defined benefit plan amendment, curtailment or settlement occurs during a reporting period and apply prospectively from 1 January. The Group is required to update the assumptions about its obligation and fair value of its plan assets to calculate costs related to these changes. The proposed amendments to IAS 19 specify that the Group is required to use the updated information to determine current service cost and net interest for the period followed by these changes. There have been no plan amendments, curtailments or settlements within any Group pension scheme during the year and retrospective application is not required.

•  Annual Improvements Cycle 2015-2017: Amendments to IAS 12 Income Taxes, IAS 23 Borrowing Costs and IFRS 3 Business combinations/IFRS 11 Joint Arrangements. These amendments do not currently have any impact on the Group.

A5. New Accounting Pronouncements not yet Effective

The IASB has issued the following new 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 (2018 - recommended implementation date extended to 2022). 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. 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 2021 (recommended deferral period extended by IASB to 2022) 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 Standard Life Assurance businesses on 31 August 2018, 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 2021 (IASB recommended extending the implementation date to 2022). During the year, the Group commenced its implementation activities in respect of IFRS 9 and these will continue through 2020.The Group 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.

IFRS 9 also amends the general hedge accounting requirements for the Group's hedging relationships that are currently accounted for under IAS 39. It is expected that the existing hedging relationships will continue to be accounted for as cash flow hedges under IFRS 9 and hedge effectiveness testing processes and documentation will be updated to reflect the new more principles based requirements. 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.

•  Amendments to IFRS 9 Financial Instruments: Prepayment Features with Negative Compensation (2019 - recommended implementation date extended to 2022 for those companies applying the IFRS 4 deferral option). The proposed amendments would allow for a narrow exception to IFRS 9 that would permit particular financial instruments with prepayment features with negative compensation to be eligible for measurement at amortised cost or at fair value through other comprehensive income. It is not currently expected that these amendments will have an impact on the Group and its consolidated financial statements.

•  Amendments to IAS 28 Investments in Associates and Joint Ventures: Long-term Interests in Associates and Joint Ventures (2019 - recommended implementation date extended to 2022 for those companies applying the IFRS 4 deferral option). The amendments to IAS 28 clarify that an entity applies IFRS 9 Financial Instruments to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied. These amendments do not currently have any impact on the Group.

•  Amendments to References to the Conceptual Framework in IFRS Standards (2020).

•  Amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (2020). The amendments clarify the definition of material and how it should be applied and ensures that the definition of material is consistent across all IFRS Standards.

•  Amendments to IFRS 3 Business Combinations (2020).
The amendments have revised the definition of a business and aim to assist companies to determine whether an acquisition made is of a business or a group of assets. The amended definition emphasises that the output of a business is to provide goods and services to customers, whereas the previous definition focused on returns in the form of dividends, lower costs or other economic benefits to investors and others. These amendments do not currently have any impact on the Group.

•  Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7) (2020). The amendments have arisen following the phasing out of interest-rate benchmarks such as interbank offered rates ('IBOR'). Specific hedge accounting requirements have been modified to provide relief from potential effects of the uncertainty caused by IBOR reform. In addition, these amendments require entities to provide additional information to investors about their hedging relationships which are directly affected by these uncertainties. There is not expected to be an impact for the Group from these amendments but a review will be undertaken in 2020 to confirm this.

•  IFRS 17 Insurance contracts (2021 - IASB recommended extension of implementation date to 2022). 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. The new standard uses three measurement approaches and the principles underlying two of these measurement approaches will significantly change the way the Group measures its insurance contracts and investment contracts with Discretionary Participation Features ('DPF'). These changes will impact profit emergence patterns and add complexity to valuation processes, data requirements and assumption setting. The Group's IFRS 17 project continued through 2019 with an increasing focus on implementation activities alongside ongoing financial and operational impact assessments and methodology development.

In June 2019, the IASB published an exposure draft of amendments to IFRS 17 in response to feedback received. Whilst the IASB has confirmed many of the changes that will be made to the standard, there remains significant uncertainty in respect of certain key areas of the standard. In relation to the implementation date, the IASB staff have recently proposed to the IASB board that the implementation date is extended to annual periods beginning on or after 1 January 2023. The IASB board is expected to approve this change at their March 2020 meeting. Development of the Group's methodologies and accounting policies is progressing; however, these will not be finalised until after the amended standard is published in mid-2020. All activities will continue throughout 2020.

•  Classification of Liabilities as Current and Non-current (Amendments to IAS 1 Presentation of Financial Statements) (2022). 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.

•  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. This amendment is currently not applicable to the Group.

All of the above have been endorsed by the EU with the exception
of the following:

•  IFRS 17 Insurance contracts;

•  Amendments to IFRS 3 Business Combinations; and

•  Classification of Liabilities as Current and Non-current (Amendments to IAS 1 Presentation of Financial Statements).

On 31 January 2020, the UK left the EU and consequently EFRAG will no longer endorse IFRSs for use in the UK. Legislation is already in place that will onshore and freeze EU-adopted IFRSs from the date of the exit, and the European Commission's powers to endorse and adopt IFRSs will be delegated by the Secretary of State to a UK endorsement board which will be set up by the UK Financial Reporting Council. IFRSs in the UK will be known as 'UK-adopted International Accounting Standards'.

A6. Change in Accounting Policy - IFRS 16 Leases

IFRS 16 introduced a single, on-balance sheet accounting model for lessees effective from 1 January 2019. IFRS 16 supersedes IAS17 'Leases', IFRIC 4 'Determining whether an Arrangement contains a Lease', SIC-15 'Operating Leases - Incentives' and SIC-27 'Evaluating the Substance of Transactions Involving the Legal Form of a Lease'. As a result, the Group as a lessee has recognised right-of-use assets representing its rights to use underlying assets and lease liabilities representing its obligation to make lease payments in respect of both its operating and finance leases. Lessor accounting remains similar to previous accounting policies.

The Group has applied IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application
is recognised in retained earnings at 1 January 2019. Accordingly, the comparative information for 2018 has not been restated and continues to be reported under IAS 17 and related interpretations.

As a lessee, the Group previously classified certain property leases as operating leases where a significant element of the risks and rewards of title to the asset was retained by the lessor. Under IFRS 16, the Group recognises right-of-use assets and lease liabilities in respect of these property leases in the statement of consolidated financial position. The Group's finance leases are in respect of ground rents payable in connection with a number of investment properties that the Group owns. These were previously accounted for in accordance with IAS 17 and included within investment properties and other payables in the statement of consolidated financial position.

At 1 January 2019, the carrying value of the right of use assets and lease liabilities for the Group's finance leases is measured in accordance with IAS 17, as permitted by IFRS 16, and the new standard will be applied to these leases from 1 January 2019.The details of the changes in accounting policies are discussed below.

Definition of a lease

Previously, the Group determined at contract inception whether an arrangement was or contained a lease under IFRIC 4 'Determining Whether an Arrangement contains a Lease'. The Group now assesses whether a contract is or contains a lease based on IFRS16 which states that 'a contract is, or contains, a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration'.

On transition to IFRS 16, the Group elected to apply the practical expedient to grandfather the assessment of which transactions are leases. It applied IFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17 and IFRIC 4 were not reassessed. Therefore, the definition of a lease under IFRS 16 has been applied only to contracts entered into or changed on or after 1 January 2019.

The Group excludes non-lease components such as service charges and accounts for these on a straight-line basis over the lease term.

Accounting policy

The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The property, plant and equipment right-of-use assets are initially measured at cost, and subsequently at cost less any accumulated depreciation and impairments, and adjusted for certain remeasurements of the lease liability. These right-of-use assets are depreciated over the remaining lease term which is between 1 and 11 years. The ground rent right-of-use asset is classified as investment property and measured at fair value. Gains and losses arising from the change in fair value are recognised in the consolidated income statement.

Lease liabilities are presented as a separate line item and right-of-use assets are presented within 'property, plant and equipment' and 'investment property' in the statement of consolidated financial position.

The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low value assets, including IT equipment. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the Group's incremental borrowing rate as the interest rate implicit in the lease cannot be readily determined. For leases classified as finance leases, the incremental borrowing rate of investment funds holding the associated investment properties is used as the discount rate.

The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from, for example, rent reviews or from changes in the assessment of whether a termination option is reasonably certain not to be exercised. The Group has applied judgement to determine the lease term for some lease contracts with break clauses.

Transition

Previously, the Group classified certain property leases as operating leases under IAS 17. Payments made under operating leases, net of any incentives received from the lessor, were recognised as an expense in the consolidated income statement on a straight-line basis over the period of the lease.

At transition, for leases classified as operating leases under IAS 17, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Group's incremental borrowing rate as at 1 January 2019. Right-of-use assets were measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments.

The Group used a further practical expedient when applying IFRS 16 to leases previously classified as operating leases under IAS 17 to exclude initial direct costs from measuring the right-of-use asset at the date of initial application.

At transition the carrying value of the right of use assets and lease liabilities for the Group's finance leases is measured in accordance with IAS 17 and the requirements of IFRS 16 are applied to these leases from 1 January 2019.

Impact on consolidated financial statements

The impact to the statement of consolidated financial position on transition to IFRS 16 is outlined below:

	1 January 2019 £m
Right-of-use assets	77
Lease liabilities	(158)
Other payables1	80
Derecognition of accrual for rent free period	1
Total	-

1  At 1 January 2019 leased assets of £80 million included within investment properties were classified as right-of-use assets.

The Group's weighted average incremental borrowing rate applied to operating lease liabilities in the statement of consolidated financial position at the date of initial application was 2.84%. For leases classified as finance leases, the weighted average incremental borrowing rate of investment funds holding the associated investment properties applied at the date of initial application was 2.91%.

The table below reconciles closing operating lease commitments at 31 December 2018 to opening lease liabilities as classified under IFRS16 at 1 January 2019.

	1 January 2019 £m
Operating lease commitment as at 31 December 2018	91
Finance lease liability as at 31 December 2018	80
Restatement of opening operating lease commitment1	(8)
Restated lease liabilities as at 31 December 2018	163
Effect of discounting using the incremental borrowing rate as at 1 January 2019	(11)
Less: Low value leases recognised on a straight-line basis as expense	(1)
Add: Adjustments as a result of different treatment of extension and termination options	7
Lease liabilities as at 1 January 2019	158

1  The opening restatement relates to service agreements incorrectly categorised as operating lease commitments at 31 December 2018.

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.

Following the acquisition of the Standard Life Assurance businesses in 2018, the Group reassessed its operating segments to reflect the way the business was subsequently being managed. 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, and will provide annuities to existing policyholders with vesting products. Bulk Purchase Annuity contracts are included in this segment.

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 Standard Life Aberdeen plc ('SLA plc'), and also products sold under the SunLife brand.

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.

Segmental measure of performance: Operating Profit

The Company 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 Company'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 Company'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 B2.2 and B2.3);

•  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 Company'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 Company therefore considers that operating profit provides a more representative 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.

B1.1 Segmental result

	Notes	2019  £m	2018  £m
Operating profit
UK Heritage		694	640
UK Open		73	41
Europe		52	22
Management Services		26	25
Unallocated Group		(35)	(20)
Total segmental operating profit		810	708
Investment return variances and economic assumption changes on long-term business	B2.2	(177)	283
Variance on owners' funds	B2.3	13	(193)
Amortisation of acquired in-force business		(375)	(189)
Amortisation of other intangibles	G2	(20)	(18)
Other non-operating items		(169)	(38)
Finance costs on borrowing attributable to owners		(127)	(114)
(Loss)/profit before the tax attributable to owners of the parent		(45)	439
Profit before tax attributable to non-controlling interests		31	31
(Loss)/profit before the tax attributable to owners		(14)	470

Other non-operating items in respect of 2019 include:

•  an £80 million benefit arising from updated expense assumptions for insurance contracts reflecting reduced future servicing costs as a result of transition activity. Such benefits on the Group's investment contract business will typically be recognised as incurred. This benefit has been more than offset by staff and external costs incurred or provided for in the period with regard to transition activity and the transformation of the Group's operating model and extended relationship with Tata Consultancy Services, totalling £190 million, of which £175 million relates to external costs;

•  £5 million of costs associated with preparations to ready the business for Brexit;

•  £41 million of other corporate project costs, including the Group's Internal Model harmonisation project and acquisition of ReAssure Group; and

•  net other one-off items totalling a cost of £13 million.

Other non-operating items in respect of 2018 include:

•  a provision for £68 million in respect of a commitment to reduce ongoing and exit charges for non-workplace pension products;

•  costs of £43 million associated with the acquisition of the Standard Life Assurance businesses, and £7 million incurred under the on-going transition programme;

•  costs of £59 million associated with the equalisation of accrued Guaranteed Minimum Pension ('GMP') benefits within the Group's pension schemes (see note G1 for further details);

•  a net benefit of £45 million reflecting anticipated costs savings associated with process improvements and continued investment in the digitalisation of the customer journey;

•  a gain on acquisition of £141 million reflecting the excess of the fair value of the net assets acquired over the consideration paid for the acquisition of the Standard Life Assurance businesses (see note H2 for further details); and

•  net other one-off items totalling a cost of £47 million, including other corporate project costs of £42 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

2019	UK Heritage £m	UK Open  £m	Europe £m	Management Services  £m	Unallocated Group  £m	Total  £m
Revenue from external customers:
Gross premiums written	2,525	229	1,284	-	-	4,038
Less: premiums ceded to reinsurers	(528)	-	(28)	-	-	(556)
Net premiums written	1,997	229	1,256	-	-	3,482
Fees and commissions	360	278	62	-	-	700
Income from other segments	-	-	-	894	(894)	-
Total segmental revenue	2,357	507	1,318	894	(894)	4,182

 

2018	UK Heritage £m	UK Open £m	Europe £m	Management Services £m	Unallocated Group  £m	Total  £m
Revenue from external customers:
Gross premiums written	1,959	200	486	-	-	2,645
Less: premiums ceded to reinsurers	(478)	(1)	(2)	-	-	(481)
Net premiums written	1,481	199	484	-	-	2,164
Fees and commissions	272	91	22	-	-	385
Income from other segments	-	-	-	505	(505)	-
Total segmental revenue	1,753	290	506	505	(505)	2,549

Of the revenue from external customers presented in the table above, £3,131 million (2018: £2,199 million) is attributable to customers in the United Kingdom ('UK') and £1,051 million (2018: £350 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 £6,005 million (2018: £6,479 million) located in the UK and £375 million (2018: £367 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 350bps is added to the risk-free yield for equities (2018: 350bps), 250bps for properties (2018: 250bps), 120bps for other fixed interest assets (2018: 150bps) and 50bps for gilts (2018: 50bps).

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

	2019 %	2018  %
Equities	5.2	5.2
Properties	4.2	4.2
Gilts	2.2	2.2
Other fixed interest	2.9	3.2

B2.2 Life assurance business

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.

The investment return variances and economic assumption changes excluded from the long-term business operating profit are as follows:

	2019  £m	2018  £m
Investment return variances and economic assumption changes on long-term business	(177)	283

The net adverse investment return variances and economic assumption changes on long-term business of £177 million (2018: £283 million positive) primarily arise as a result of losses on hedging positions held by the life funds reflecting improving equity markets in the year. The Group's exposure to equity movements arising from future profits in relation to with-profit bonuses and unit-linked charges is hedged to benefit the regulatory capital position. The impact of equity market movements on the value of the hedging instruments is reflected in the IFRS results, but the corresponding change in the value of future profits is not. These adverse impacts have been partly offset by the positive impacts of strategic asset allocation activities, including investment in higher yielding illiquid assets, and lower fixed interest yields experienced during the period.

B2.3 Owners' funds

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 variances excluded from operating profit in relation to owners' funds are as follows:

	2019  £m	2018  £m
Variances on owners' funds of subsidiary undertakings	13	(193)

The positive variance on owners' funds of £13 million (2018: £193 million negative) is principally driven by gains on foreign currency swaps held by the holding companies to hedge exposure of future life company profits to movements in exchange rates. The prior year result included realised losses on derivative instruments entered into by the holding companies to hedge exposure to equity risk arising from the Group's acquisition of the Standard Life Assurance businesses. Losses of £143 million were incurred on these instruments, together with option premiums of £22 million.

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 and warrants.

The basic and diluted earnings per share calculations are also presented based on the Group's operating profit as this non-GAAP performance measure 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.

B3.1 Basic earnings per share

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.

	2019 £m	2018  £m
Profit for the period attributable to owners	116	410
Share of result attributable to non-controlling interests	(31)	(31)
Coupon payable in respect of Tier 1 Notes, net of tax relief	(23)	(12)
Profit attributable to ordinary equity holders of the parent	62	367

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

	2019 Number  million	2018 Number  million
Issued ordinary shares at beginning of the period	721	437
Effect of ordinary shares issued	-	115
Own shares held by the employee benefit trust	(1)	(1)
Weighted average number of ordinary shares	720	551

Basic earnings per share is as follows:

	2019 pence	2018 pence
Basic earnings per share	8.7	66.8

B3.2 Diluted earnings per share

The result attributable to ordinary equity holders of the parent used in the calculation of diluted earnings per share is the same as that used in the basic earnings per share calculation in B3.1 above. The diluted weighted average number of ordinary shares outstanding during the period is 722 million (2018: 551 million). The Group's long-term incentive plan, deferred bonus share scheme and sharesave share-based schemes increased the weighted average number of shares on a diluted basis by 1,474,170 shares for the year ended 31 December 2019 (2018: 375,020 shares).

Diluted earnings per share is as follows:

	2019 pence	2018 pence
Diluted earnings per share	8.6	66.7

B3.3 Operating earnings per share

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

	Group operating profit 2019 £m	Non- operating items 2019 £m	Total 2019 £m	Group operating profit 2018 £m	Non- operating items 2018 £m	Total 2018 £m
Profit/(loss) before the tax attributable to owners	810	(824)	(14)	708	(238)	470
Tax credit attributable to owners	(163)	293	130	(129)	69	(60)
Profit for the period attributable to owners	647	(531)	116	579	(169)	410
Share of result attributable to non-controlling interests	-	(31)	(31)	-	(31)	(31)
Coupon payable in respect of Tier 1 Notes, net of tax relief	-	(23)	(23)	-	(12)	(12)
Profit for the period attributable to ordinary equity holders of the parent	647	(585)	62	579	(212)	367

The basic and diluted weighted average number of ordinary shares outstanding during the year are the same as those included in B3.1 and B3.2 above. Basic operating earnings per share and diluted operating earnings per share are as follows:

					2019 pence	2018 pence
Basic operating earnings per share					89.8	105.0
Diluted operating earnings per share					89.6	104.9

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.

Prior to the creation of the UK-registered holding company (see note A1), dividends were charged within equity against the share premium account, as permitted by Cayman Islands Companies Law. From the date of the scheme of arrangement, dividends are charged to retained earnings in accordance with the UK Companies Act 2006.

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.

	2019 £m	2018 £m
Dividends declared and paid in the year	338	262

On 4 March 2019, the Board recommended a final dividend of 23.4p per share in respect of the year ended 31 December 2018. The dividend was approved at the Group's Annual General Meeting, which was held on 2 May 2019. The dividend amounted to £169 million and was paid on 7 May 2019.

On 6 August 2019, the Board declared an interim dividend of 23.4p per share for the half year ended 30 June 2019. The dividend amounted to £169 million and was paid on 30 September 2019.

C. OTHER CONSOLIDATED 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.

The table below details the 'Disaggregation of Revenue' disclosures required by IFRS15 Revenue from contracts with customers.

2019	UK Heritage £m	UK Open £m	Europe £m	Total £m
Fee income from investment contracts without DPF	354	268	70	692
Initial fees deferred during the year	-	-	(8)	(8)
Revenue from investment contracts without DPF	354	268	62	684
Other revenue from contracts with customers	6	10	-	16
Fees and commissions	360	278	62	700

 

2018	UK Heritage £m	UK Open £m	Europe £m	Total £m
Fee income from investment contracts without DPF	271	84	25	380
Initial fees deferred during the year	-	-	(3)	(3)
Revenue from investment contracts without DPF	271	84	22	377
Other revenue from contracts with customers	1	7	-	8
Fees and commissions	272	91	22	385

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.

Significant judgements in determining costs to obtain or fulfil investment contracts

No significant judgements are required in determining the costs incurred to obtain or fulfil contracts with customers, and no amortisation is required, as income directly matches costs with management charges being applied on an ongoing (or pro-rata) basis.

In the period no amortisation or impairment losses 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 net defined benefit 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.

	2019 £m	2018   restated1 £m
Investment income
Interest income on loans and deposits at amortised cost	6	10
Interest income on financial assets designated at FVTPL on initial recognition	2,113	1,260
Dividend income	3,712	1,936
Rental income	298	108
Net interest expense on Group defined benefit pension scheme (liability)/asset	(29)	(6)
	6,100	3,308
Fair value gains/ (losses)
Financial assets and financial liabilities at FVTPL:
Designated upon initial recognition	17,574	(12,873)
Held for trading - derivatives	1,257	126
Investment property	(55)	(18)
	18,776	(12,765)
Net investment income	24,876	(9,457)

1  See note A1 for details of restatements.

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.

	2019 £m	2018 £m
Employee costs	334	188
Outsourcer expenses	141	202
Movement in provision for transition and transformation programme (see note G7)	159	-
Professional fees	135	97
Commission expenses	135	63
Office and IT costs	116	74
Investment management expenses and transaction costs	415	263
Direct costs of life companies	4	2
Direct costs of collective investment schemes	18	14
Depreciation	18	2
Pension service costs	-	57
Pension administrative expenses	4	6
Advertising and sponsorship	64	59
Stamp duty payable on acquisition of Standard Life Assurance businesses	-	15
Other	36	28
	1,579	1,070
Acquisition costs deferred during the year	(33)	(15)
Amortisation of deferred acquisition costs	3	1
Total administrative expenses	1,549	1,056

Employee costs comprise:

	2019 £m	2018 £m
Wages and salaries	304	170
Social security contributions	30	18
	334	188

 

	2019 Number	2018 Number
Average number of persons employed	4,403	2,034

C4. Auditor's Remuneration

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

	2019 £m	2018 £m
Audit of the consolidated financial statements	0.9	2.0
Audit of the Company's subsidiaries	5.1	5.2
	6.0	7.2
Audit-related assurance services	1.0	0.7
Reporting accountant assurance services	0.4	0.2
Total fee for assurance services	7.4	8.1
Corporate finance services	3.3	3.7
Tax services fees	-	0.1
Other non-audit services	-	0.3
Total fees for other services	3.3	4.1
Total auditor's remuneration	10.7	12.2

No services were provided by the Company's auditors to the Group's pension schemes in either 2019 or 2018.

Audit of the consolidated financial statements includes amounts in respect of reporting to the auditor of SLA plc given their status as a significant investor in both 2019 and 2018. The 2018 balance also includes amounts in respect of the audit of the acquisition balance sheet of the acquired Standard Life Assurance 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 2019, this includes public reporting associated with the acquisition of ReAssure Group. In 2018, this included public reporting associated with the acquisition of the Standard Life Assurance businesses and issuance of the Group's Tier 1 Notes.

Corporate finance services fees were £3.3 million (2018: £3.7 million). These fees principally relate to services provided in connection with the acquisition of ReAssure. £1.6 million of the fees related to actuarial and finance due diligence procedures conducted in relation to the acquisition where synergies were anticipated to arise with subsequent audit work. The remaining balance of £1.7 million relates to the provision of assurance services to the Board and the sponsoring banks in support of disclosures made in the public transaction documents. The 2018 fees principally related to services provided in connection with the acquisition of the Standard Life Assurance businesses and the Premium Listing of the Company undertaken as part of the Group's on-shoring activities. £1.6 million of the fees related to the engagement of the external auditors to perform actuarial and finance due diligence procedures where synergies were anticipated to arise with subsequent audit work. The remaining balance of £2.0 million related to the provision of assurance to the Board and the sponsoring banks in support of disclosures made in the public transaction documentation relating to the Standard Life Assurance acquisition and the Premium Listing.

No tax services were provided by the Company's auditors in 2019 (2018: £0.1 million). The 2018 fees principally related to services provided to Standard Life Assurance for which the Group's external auditor was engaged prior to the completion of the acquisition (and their appointment as auditors of those entities), and were terminated as permitted within a period of three months following completion of the acquisition. See page 95 for details of tax services provided by the Group's external auditor to Aberdeen Standard Investments where the benefit of those services arose in funds controlled by the Group.

No other non-audit services were provided by the Company's auditors in 2019 (2018: £0.3 million). The 2018 fees related to services provided to Standard Life Assurance 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 92 to 96.

C5. Finance Costs

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

	2019 £m	2018 restated £m
Interest expense
On financial liabilities at amortised cost	156	140
On financial liabilities at FVTPL	3	2
On leases	3	-
	162	142
Attributable to:
•  policyholders	12	12
•  owners	150	130
	162	142

 

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/(credit)

	2019 £m	2018 £m
Current tax:
UK corporation tax	210	83
Overseas tax	62	20
	272	103
Adjustment in respect of prior years	(11)	(54)
Total current tax charge	261	49
Deferred tax:
Origination and reversal of temporary differences	52	(195)
Change in the rate of corporation tax	(50)	(4)
Write-up of deferred tax assets	(28)	(1)
Total deferred tax credit	(26)	(200)
Total tax charge/(credit)	235	(151)
Attributable to:
•  policyholders	365	(211)
•  owners	(130)	60
Total tax charge/(credit)	235	(151)

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 £365 million (2018: £211 million credit).

C6.2 Tax charged to other comprehensive income

	2019 £m	2018 £m
Current tax charge	1	-
Deferred tax charge on defined benefit schemes	56	8
Deferred tax charge on share schemes	-	2
	57	10

 

C6.3 Tax credited to equity

	2019 £m	2018 £m
Current tax credit on Tier 1 Notes	(6)	(3)

C6.4 Reconciliation of tax charge/(credit)

	2019 £m	2018 £m
Profit before tax	351	259
Policyholder tax (charge)/credit	(365)	211
(Loss)/profit before the tax attributable to owners	(14)	470
Tax (credit)/charge at standard UK rate of 19%1	(3)	89
Non-taxable income, gains and losses2	3	(31)
Disallowable expenses3	22	21
Prior year tax credit for shareholders4	(51)	(5)
Movement on acquired in-force amortisation at less than 19%	9	-
Profits taxed at rates other than 19%5	(13)	(14)
Recognition of previously unrecognised deferred tax assets6	(47)	-
Deferred tax rate change7	(50)	(4)
Other	-	4
Owners' tax (credit)/charge	(130)	60
Policyholder tax charge/(credit)	365	(211)
Total tax charge/(credit) for the period	235	(151)

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

2  2019 non-taxable income, gains and losses includes non-taxable dividends and gains and non-taxable pension scheme valuation movement.

3  2019 disallowable deductions are primarily in relation to a consolidation adjustment on the PGL Pension scheme 'buy-in' agreement of £14 million, company acquisition costs of £1 million and a FCA thematic review provision in Standard Life Assurance Limited of £6 million.

4  The 2019 prior year credit primarily relates to the utilisation of trading losses in Standard Life Assurance Limited and Standard Life International DAC of £(4) million, Standard Life Assurance Limited YE18 tax provision true-up £(8) million, deferred tax asset recognition on software intangibles of £(20) million and deferred acquisition costs of £(6) million and the revised use of tax losses and other items £(13) million.

5  The 2019 profits taxed at rates other than 19% relates to overseas profits and UK life company profits subject to marginal shareholder tax rates.

6  The 2019 tax credit represents the recognition of tax losses in the Group companies
£(12) million and intangible assets within Standard Life International DAC £(35) million.

7  The deferred tax rate change credit predominately relates to the Part VII transfer between Standard Life Assurance Limited and Standard Life International DAC of £(31) million and a reduction in AVIF tax rate relating to the German branch of £(19) million.

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.

	2019 £m	2018 £m
Issued and fully paid: 721.5 million ordinary shares of £0.10 each (2018: 721.2 million)	72	72

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:

2019	Number	£
Shares in issue at 1 January	721,199,214	72,119,921
Other ordinary shares issued in the period	315,730	31,573
Shares in issue at 31 December	721,514,944	72,151,494

During the year, 315,730 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).

2018	Number	£
Shares in issue at 1 January	393,232,644	39,323,264
Ordinary shares issued under the rights issue	183,581,978	18,358,198
Ordinary shares issued to SLA plc	144,114,450	14,411,445
Other ordinary shares issued in the period	270,142	27,014
Shares in issue at 31 December	721,199,214	72,119,921

On 10 July 2018, the Group issued 183,581,978 shares following a rights issue undertaken in association with the acquisition of the Standard Life Assurance businesses where 7 rights issue shares were issued at 518 pence per new share for every 15 existing Old PGH shares held. The rights issue raised £951 million and proceeds, net of deduction of commission and expenses, were £934 million.

On 31 August 2018, the Group issued 144,114,450 shares to SLA plc, giving them a 19.98% equity stake in the Group valued at £1,023 million, based on the share price at that date.

During 2018, 270,142 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.

	2019 £m	2018 £m
At 1 January	6	2
Shares acquired by the EBT	4	8
Shares awarded to employees by the EBT	(3)	(4)
At 31 December	7	6

During the year 508,639 (2018: 518,322) shares were awarded to employees by the EBT and 614,193 (2018: 1,188,435) shares were purchased. The number of shares held by the EBT at 31 December 2019 was 1,096,356 (2018: 990,802).

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

D3 Tier 1 Notes

The Fixed Rate Reset Perpetual Restricted Tier 1 Write Down 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.

	2019 £m	2018 £m
Tier 1 Notes	494	494

On 26 April 2018, Old PGH 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. Coupon paid in the year was £29 million (2018: £14 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. Furthermore, on occurrence of a trigger event, linked to the Solvency II capital position and as documented in the terms of the Tier 1 Notes, the Tier 1 Notes will be subject to a permanent write-down in value to zero.

D4. 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 2019		294
Profit for the year		31
Dividends paid		(11)
At 31 December 2019		314

 

		SLPET £m
At 1 January 2018		-
Non-controlling interests recognised on acquisition of the Standard Life Assurance business (see note H2)		265
Profit for the year		31
Dividends paid		(2)
At 31 December 2018		294

The non-controlling interests of £314 million (2018: £294 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 2019, the Group held 55.2% of the issued share capital of SLPET (2018: 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		2019 £m	2018 £m
Statement of financial position:
Investments		286	271
Other assets		40	23
Total assets		326	294
Total liabilities		12	-
Income statement:
Revenue		34	33
Profit after tax		31	31
Comprehensive income		31	31
Cash flows:
Net decrease in cash equivalents		4	3

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 Measurement as permitted by IAS 28 Investments in Associates and Joint Ventures. These are measured at fair value through profit or loss. There is no investment 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 is 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 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.

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 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.

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. Note E3 sets out details of the fair values of the derivative instruments used for hedging purposes.

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 2019:

	Carrying value
2019	Total £m	Amounts due for settlement  after 12 months £m	Fair value £m
Financial assets measured at carrying and fair values
Financial assets at fair value through profit or loss:
Held for trading - derivatives	4,454	4,023	4,454
Designated upon initial recognition:
Equities1	58,979	-	58,979
Investment in associate1 (see note H3)	513	-	513
Debt securities	76,113	69,165	76,113
Collective investment schemes1	69,415	-	69,415
Reinsurers' share of investment contract liabilities1	8,881	-	8,881
Financial assets measured at amortised cost:
Loans and deposits	516	62	516
Total financial assets2	218,871		218,871

 

	Carrying value
	Total £m	Amounts due for settlement  after 12 months £m	Fair value £m
Financial liabilities measured at carrying and fair values
Financial liabilities at fair value through profit or loss:
Held for trading - derivatives	734	387	734
Designated upon initial recognition:
Borrowings	99	99	99
Net asset value attributable to unitholders1	3,149	-	3,149
Investment contract liabilities1	120,773	-	120,773
Financial liabilities measured at amortised cost:
Borrowings	2,020	2,008	2,223
Deposits received from reinsurers	4,213	3,751	4,213
Obligations for repayment of collateral received	3,671	-	3,671
Total financial liabilities	134,659		134,862

1  These assets and liabilities have no expected settlement date.

2  Total financial assets includes £2,050 million of assets held in a collateral account pertaining to the PGL pension scheme buy-in agreement. See note G1.2 for further details.

 

	Carrying value
2018  restated	Total £m	Amounts due for settlement  after 12 months £m	Fair value £m
Financial assets measured at carrying and fair values
Financial assets at fair value through profit or loss:
Held for trading - derivatives	3,798	3,608	3,798
Designated upon initial recognition:
Equities1	52,716	-	52,716
Investment in associate1	496	-	496
Debt securities2	71,365	65,448	71,365
Collective investment schemes1, 2	67,692	-	67,692
Reinsurers' share of investment contract liabilities1, 2	8,331	-	8,331
Financial assets measured at amortised cost:
Loans and deposits	423	77	423
Total financial assets3	204,821		204,821

 

	Carrying value
	Total £m	Amounts due for settlement  after 12 months £m	Fair value £m
Financial liabilities measured at carrying and fair values
Financial liabilities at fair value through profit or loss:
Held for trading - derivatives	1,093	936	1,093
Designated upon initial recognition:
Borrowings	127	113	127
Net asset value attributable to unitholders1	2,659	-	2,659
Investment contract liabilities1	114,463	-	114,463
Financial liabilities measured at amortised cost:
Borrowings	2,059	2,048	2,011
Deposits received from reinsurers	4,438	4,077	4,438
Obligations for repayment of collateral received	2,645	-	2,645
Total financial liabilities	127,484		127,436

1  These assets and liabilities have no expected settlement date.

2  Comparative figures have been restated to ensure a consistent presentation for all similar items across the Group's subsidiaries, following the acquisition of the Standard Life Assurance businesses in 2018. See note A1 for further details.

3  Total financial assets includes £1,063 million of assets held in a collateral account pertaining to the PGL pension scheme buy-in agreement. See note G1.2 for further details.

 

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.

		2019 £m	2018   £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		516	423
Cash and cash equivalents		4,466	4,926
Accrued income		160	151
Other receivables1		1,199	1,026
All other financial assets that are measured at fair value through profit or loss2		218,355	204,398

1  Other receivables excludes deferred acquisition costs.

2  The change in fair value during 2019 of all other financial assets that are measured at fair value through profit or loss is a £20,231 million gain (2018: £12,962 million loss).

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:

2019 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	-	21	47	164	-	284	-	516
Cash and cash equivalents	295	733	3,105	23	-	270	40	4,466
Accrued income	-	-	-	-	-	160	-	160
Other receivables	-	-	-	-	-	1,199	-	1,199
	295	754	3,152	187	-	1,913	40	6,341
2018 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	-	7	46	-	-	370	-	423
Cash and cash equivalents	327	947	1,836	1,265	-	450	101	4,926
Accrued income	-	-	-	-	-	151	-	151
Other receivables	-	-	-	-	-	1,026	-	1,026
	327	954	1,882	1,265	-	1,997	101	6,526

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

E2. Fair Value Hierarchy

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 at 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.

E2.2 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.

2019	Level 1 £m	Level 2 £m	Level 3 £m	Total fair value £m
Financial assets measured at fair value
Derivatives	284	3,995	175	4,454
Financial assets designated at FVTPL upon initial recognition:
Equities	57,383	-	1,596	58,979
Investment in associate	513	-	-	513
Debt securities	38,176	31,911	6,026	76,113
Collective investment schemes	67,513	1,256	646	69,415
Reinsurers' share of investment contract liabilities	8,856	25	-	8,881
	172,441	33,192	8,268	213,901
Total financial assets measured at fair value	172,725	37,187	8,443	218,355
Financial assets for which fair values are disclosed
Loans and deposits at amortised cost	-	516	-	516
	172,725	37,703	8,443	218,871

 

2019	Level 1 £m	Level 2 £m	Level 3 £m	Total fair value £m
Financial liabilities measured at fair value
Derivatives	76	584	74	734
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings	-	-	99	99
Net asset value attributable to unit-holders	3,149	-	-	3,149
Investment contract liabilities	-	120,773	-	120,773
	3,149	120,773	99	124,021
Total financial liabilities measured at fair value	3,225	121,357	173	124,755
Financial liabilities for which fair values are disclosed
Borrowings at amortised cost	-	1,974	249	2,223
Deposits received from reinsurers	-	4,213	-	4,213
Total financial liabilities for which fair values are disclosed	-	6,187	249	6,436
	3,225	127,544	422	131,191

 

2018 restated1	Level 1 £m	Level 2 £m	Level 3 £m	Total fair value £m
Financial assets measured at fair value
Derivatives	348	3,288	162	3,798
Financial assets designated at FVTPL upon initial recognition:
Equities	51,347	-	1,369	52,716
Investment in associate	496	-	-	496
Debt securities	39,735	27,220	4,410	71,365
Collective investment schemes	65,680	1,219	793	67,692
Reinsurers' share of investment contract liabilities	8,295	36	-	8,331
	165,553	28,475	6,572	200,600
Total financial assets measured at fair value	165,901	31,763	6,734	204,398
Financial assets for which fair values are disclosed
Loans and deposits at amortised cost	-	423	-	423
	165,901	32,186	6,734	204,821

 

2018	Level 1 £m	Level 2 £m	Level 3 £m	Total fair value £m
Financial liabilities measured at fair value
Derivatives	73	911	109	1,093
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings	-	-	127	127
Net asset value attributable to unitholders	2,659	-	-	2,659
Investment contract liabilities	-	114,463	-	114,463
	2,659	114,463	127	117,249
Total financial liabilities measured at fair value	2,732	115,374	236	118,342
Financial liabilities for which fair values are disclosed
Borrowings at amortised cost	-	1,752	259	2,011
Deposits received from reinsurers	-	4,438	-	4,438
Total financial liabilities for which fair values are disclosed	-	6,190	259	6,449
	2,732	121,564	495	124,791

1  See note A1 for details of the restatements.

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		2019 £m	2018 restated1 £m
Unquoted corporate bonds:
Local authority loans		262	225
Private placements		1,147	776
Infrastructure loans		341	170
Equity release mortgages		2,781	2,020
Commercial real estate loans		388	449
Income strips		690	654
Bridging loans to private equity funds		320	-
Corporate transactions (see E2.3.3)		43	66
Other		54	50
Total Level 3 debt securities		6,026	4,410

1  See note A1 for details of the restatements.

Debt securities categorised as Level 3 investments predominantly comprise unquoted corporate bonds, equity release mortgages, commercial real estate loans, income strips, bridging loans to private equity funds and corporate transactions. The remaining Level 3 debt securities are valued using broker quotes. Although such valuations are sensitive to estimates, it is believed that changing one or more of the assumptions to reasonably possible alternative assumptions would not change the fair value significantly. These assets are typically held to back investment contract liabilities and participating investments contracts and therefore fair value movements in such financial assets will typically be offset by corresponding movements in liabilities.

The Group holds unquoted corporate bonds comprising investments in local authority loans, private placements and infrastructure loans with a total value of £1,750 million (2018 restated: £1,171 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 35bps would decrease the value by £81 million (2018: £50 million) and a decrease of 35bps would increase the value by £87 million (2018: £52 million).

Included within debt securities are investments in equity release mortgages with a value of £2,781 million (2018: £2,020 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 Office for Budget Responsibility forecasts in the short term and according to an RPI based assumption thereafter.

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 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 and house prices. An increase of 100bps in the yield curve would decrease the value by £265 million (2018: £183 million) and a decrease of 100bps would increase the value by £296 million (2018: £205 million). An increase of 1% in the inflation rate would increase the value by £26 million (2018: £11 million) and a decrease of 1% would decrease the value by £43 million (2018: £21 million).

An increase of 10% in house prices would increase the value by £15 million (2018: £6 million) and a decrease of 10% would decrease the value by £25 million (2018: £14 million). An increase of 5% in mortality would decrease the value by £8 million (2018: £5 million) and a decrease of 5% in mortality would increase the value by £5 million (2018: £3 million). An increase of 15% in the voluntary redemption rate would decrease the value by £17 million (2018: £9 million) and a decrease of 15% in the voluntary redemption rate would increase the value by £15 million (2018: £7 million).

Also included within debt securities are investments in commercial real estate loans of £388 million (2018: £449 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 35bps in the discount rate would decrease the value by £7 million (2018: £7 million) and a decrease of 35bps would increase the value by £7 million (2018: £8 million).

Also included within debt securities are income strips with a value of £690 million (2018: £654 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 £66 million (2018: £70 million) and a decrease of 35bps would increase the value by £79 million (2018: £79 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 £99 million (2018: £127 million), measured using an internally developed model. The valuation is sensitive to key assumptions of the discount rate and the house price inflation rate. An increase in the discount rate of 1% would increase the value by £1 million (2018: £2 million) and a decrease of 1% would decrease the value by £1 million (2018: £2 million). An increase of 1% in the house price inflation rate would decrease the value by £1 million (2018: £2 million) and a decrease of 1% would increase the value by £1 million (2018: £1 million).

E2.3.3 Corporate transactions

Included within financial assets and liabilities are related debt securities of £43 million (2018: £66 million), borrowings of £nil (2018:
£13 million) and derivative liabilities of £4 million (2018: £13 million) pertaining to a reinsurance and retrocession arrangement (see note E3.2 for further information on these arrangements). These assets and liabilities are valued using a discounted cash flow model that includes valuation adjustments in respect of liquidity and credit risk. At 31 December 2019, the net of these balances was an asset of £39 million (2018: asset of £40 million). The valuation is sensitive to movements in the euro swap curve. An increase of 100bps in the swap curve would decrease the aggregate value by £2 million (2018: £2 million) and a decrease of 100bps would increase the aggregate value by £2 million (2018: £2 million).

Included within derivative assets and derivative liabilities are longevity swap contracts with corporate pension schemes with a fair value of £134 million (2018: £162 million) and £70 million (2018: £96 million) respectively. These derivatives are valued on a discounted cash flow basis, key inputs to which are the EIOPA interest rate swap curve and RPI and CPI inflation rates.

An increase of 100bps in the swap curve would decrease the net value by £13 million (2018: £16 million) and a decrease of 100bps would increase the net value by £17 million (2018: £22 million). An increase of 1% in the RPI and CPI inflation rates would increase the value by £10 million (2018: £13 million) and a decrease of 1% would decrease the value by £10 million (2018: £15 million).

E2.3.4 Derivatives

Included within derivative liabilities are forward local authority loans, forward private placements and forward infrastructure loans with a value of £41 million (2018: £nil). 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 35bps would decrease the value by £25 million (2018: £16 million) and a decrease of 35bps would increase the value by £28 million (2018: £17 million).

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

2019	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:
Collective investment schemes	19	16
Debt securities	349	25
2018	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	86	162

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 financial assets from Level 1 to Level 2 in the current period and from Level 2 to Level 1 in the comparative period.

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

2019	At 1 January 2019 £m	Net gains/(losses) in income statement £m	Effect of purchases £m	Sales £m	Transfers from Level 1 and Level 2 £m	Transfers to Level 1 and Level 2 £m	At 31 December 2019 £m	Unrealised gains/ (losses) on assets held at end of period £m
Financial assets
Derivatives	162	13	-	-	-	-	175	13
Financial assets designated at FVTPL upon initial recognition:
Equities	1,369	65	307	(387)	242	-	1,596	32
Debt securities	4,410	378	1,961	(721)	1	(3)	6,026	322
Collective investment schemes	793	(135)	1	(13)	-	-	646	(136)
	6,572	308	2,269	(1,121)	243	(3)	8,268	218
	6,734	321	2,269	(1,121)	243	(3)	8,443	231

 

2019	At 1 January 2019 £m	Net gains in income statement £m	Effect of purchases £m	Repayments £m	Transfers from Level 1 and Level 2 £m	Transfers to Level 1 and Level 2 £m	At 31 December 2019 £m	Unrealised gains on liabilities held at end of period £m
Financial liabilities
Derivatives	109	(35)	-	-	-	-	74	(35)
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings	127	(6)	-	(22)	-	-	99	(6)
	236	(41)	-	(22)	-	-	173	(40)

 

2018 restated1	At 1 January 2018 £m	Net gains/ (losses) in income statement £m	Effect of acquisitions/ purchases £m	Sales £m	Transfers to Level 1 and Level 2 £m	At 31 December 2018 £m	Unrealised gains/(losses) on assets held at end of period £m
Financial assets
Derivatives	144	18	-	-	-	162	18
Financial assets designated at FVTPL upon initial recognition:
Equities	607	205	839	(282)	-	1,369	147
Debt securities	1,855	20	2,717	(174)	(8)	4,410	35
Collective investment schemes	49	(51)	802	(7)	-	793	(47)
	2,511	174	4,358	(463)	(8)	6,572	135
	2,655	192	4,358	(463)	(8)	6,734	153
2018	At 1 January 2018 £m	Net losses in income statement £m	Effect of acquisitions/ purchases £m	Repayments £m	Transfers to Level 1 and Level 2 £m	At 31 December 2018 £m	Unrealised losses on liabilities held at end of period £m
Financial liabilities
Derivatives	100	11	-	-	(2)	109	11
Financial liabilities designated at FVTPL upon initial recognition:
Borrowings	182	2	-	(57)	-	127	2
	282	13	-	(57)	(2)	236	13

1  See note A1 for details of the restatements.

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 2019 £m	Liabilities 2019 £m	Assets 2018 £m	Liabilities 2018 £m
Forward currency	138	90	60	79
Credit default swaps	138	33	13	17
Contracts for difference	1	-	1	2
Interest rate swaps	1,738	143	1,959	695
Total return bond swaps	33	-	10	4
Swaptions	1,800	16	912	3
Inflation swaps	46	111	34	46
Equity options	344	161	553	59
Stock index futures	10	52	45	23
Fixed income futures	70	54	47	50
Retrocession contracts	-	4	-	13
Longevity swap contracts	134	70	162	96
Currency futures	2	-	-	3
Foreign exchange options	-	-	2	-
Total return equity swaps	-	-	-	3
	4,454	734	3,798	1,093

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 £134 million and derivative liabilities of £70 million have been recognised as at 31 December 2019 (2018: £162 million and £96 million respectively).

In addition, the Group has entered into a transaction under which it has accepted reinsurance on a portfolio of single and regular premium life insurance policies and retroceded the majority of the insurance risk. Taken as a whole, this transaction does not give rise to the transfer of significant insurance risk to the Group and therefore does not meet the definition of an insurance contract under the Group's accounting policies. The fair value of amounts due from the cedant are recognised within debt securities (see note E1). The fair value of amounts due to the retrocessionaire are recognised as a derivative liability and totalled £4 million at 31 December 2019 (2018: £13 million).

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.

Collateral received in the form of cash, where the Group has contractual rights to receive the cash flows generated, is recognised as an asset in the statement of consolidated financial position with a corresponding 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 2019 (2018: 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
2019 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	3,908	3,542	43	323
Exchange traded derivatives	546	6	-	540
Stock lending	3,050	3,050	-	-
Total	7,504	6,598	43	863

 

		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	650	313	43	294
Exchange traded derivatives	84	10	-	74
Total	734	323	43	368

 

		Related amounts not offset
2018 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	3,435	2,804	455	176
Exchange traded derivatives	363	34	-	329
Stock lending	2,417	2,417	-	-
Total	6,215	5,255	455	505

 

		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	1,009	554	455	-
Exchange traded derivatives	84	8	-	76
Total	1,093	562	455	76

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 £437 million (2018: £374 million).

The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2019 are set out below.

	OTC derivatives
	2019 £m	2018 £m
Financial assets	3,671	2,619
Financial liabilities	(3,671)	(2,619)

The maximum exposure to credit risk in respect of OTC derivative assets is £3,908 million (2018: £3,435 million) of which credit risk of £3,585 million (2018: £3,259 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 £546 million (2018: £363 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 2019 in respect of OTC derivative liabilities of £650 million (2018: £1,009 million) amounted to £692 million (2018: £554 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 £3,306 million (2018: £2,746 million).

The maximum exposure to credit risk in respect of stock lending transactions is £3,050 million (2018: £2,417 million) of which credit risk of £3,050 million (2018: £2,417 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.

E5.1Analysis of borrowings

	Carrying value			Fair value
	2019 £m	2018 £m		2019 £m	2018 £m
Limited recourse bonds 2022 7.59% (note a)	35	45		38	50
Property reversions loan (note b)	99	114		99	114
Retrocession contracts (note c)	-	13		-	13
Total policyholder borrowings	134	172		137	177
£200 million 7.25% unsecured subordinated loan (note d)	196	186		211	209
£300 million senior unsecured bond (note e)	121	121		130	132
£428 million Tier 2 subordinated notes (note h)	426	426		503	441
£450 million Tier 3 subordinated notes (note i)	449	448		473	447
US $500 million Tier 2 bonds (note j)	376	390		396	342
€500 million Tier 2 bonds (note k)	417	443		472	390
Total shareholder borrowings	1,985	2,014		2,185	1,961
Total borrowings	2,119	2,186		2,322	2,138
Amount due for settlement after 12 months	2,107	2,174

a. In 1998, Mutual Securitisation plc raised £260 million of capital through the securitisation of Embedded Value on a block of existing unit-linked and unitised with-profit life and pension policies. The bonds were split between two classes, which ranked pari passu and were listed on the Irish Stock Exchange. The £140 million 7.39% class A1 limited recourse bonds matured in 2012 with no remaining outstanding principal. The £120 million 7.59% class A2 limited recourse bonds with an outstanding principal of £36 million (2018: £48 million) have an average remaining life of 1 year and mature in 2022. Phoenix Life Assurance Limited ('PLAL') has provided collateral of £14 million (2018: £21 million) to provide security to the holders of the recourse bonds in issue. During 2019, repayments totalling £12 million were made (2018: £12 million).

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. Repayment will be on a policy-by-policy basis and is expected to occur over the next 10 to 20 years. During 2019, repayments totalling £22 million were made (2018: £25 million). Note G4 contains details of the assets that support this loan.

c. In July 2012, AXIA Insurance Limited ('AXIA') provided financing to Abbey Life, a Group company, for Abbey Life to in turn provide the financing for the securitisation of the future surplus arising on a block of 1.7 million life insurance policies originating from the wholly owned Spanish and Portuguese insurance subsidiaries of Banco Santander, S.A. (the 'Cedants'). This transaction was executed in the form of a reinsurance and retrocession arrangement that, taken as a whole, does not meet the definition of an insurance contract under the Group's accounting policies (see note E3.2). Abbey Life received an upfront reinsurance commission from AXIA and makes monthly repayments based on the surplus emerging from the securitised policies as defined in the contracts. The repayments comprise a minimum guaranteed surplus amount and a share of any excess surplus, net of a fee and certain other amounts. Any excess amount serves to accelerate the repayment of the principal. Repayments are contingent on the receipt of payments due from the Cedants. Repayment of the loan principal is expected to occur by 2021. The contracts are recognised in the consolidated financial statements at fair value. On 31 December 2018, the retrocession contracts were transferred from Abbey Life to Phoenix Life Limited ('PLL'), another Group company, under the terms of a scheme under Part VII of the Financial Services and Markets Act 2000.

    The contracts are recognised in the consolidated financial statements at fair value, which in the prior year was a liability of £13 million presented within borrowings and in the current year is an asset of £24 million presented within debt securities. The asset represents the excess of the fair value of the future fees under the reinsurance agreement over the remaining financing liability.

d.             Scottish Mutual Assurance Limited issued £200 million 7.25% undated, unsecured subordinated loan notes on 23 July 2001 ('PLL subordinated debt'). The earliest repayment date of the notes is 25 March 2021 and thereafter on each fifth anniversary so long as the notes are outstanding. With effect from 1 January 2009, following a Part VII transfer, these loan notes were transferred into the shareholder fund of PLL. In the event of the winding-up of PLL, the right of payment under the notes is subordinated to the rights of the higher-ranking creditors (principally policyholders). As a result of the acquisition of the Phoenix Life businesses in 2009, these subordinated loan notes were acquired at their fair value and as such, the outstanding principal of these subordinated loan notes differs from the carrying value in the statement of consolidated financial position. The fair value adjustments, which were recognised on acquisition, will unwind over the remaining life of these subordinated loan notes. With effect from 23 December 2014, minor modifications were made to the terms of the notes to enable them to qualify as Tier 2 capital for regulatory reporting purposes. Expenses incurred in effecting these modifications amounted to £10 million. Given the modifications were not substantial, the carrying amount of the liability was adjusted accordingly and the expenses are being amortised over the life of the notes.

e. 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 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. 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 7 year senior unsecured bond.

f.  In 2018, the Group had in place an unsecured revolving credit facility ('the facility'), maturing in June 2022. Old PGH drew down £295 million under the facility on 31 August 2018. Following the issuance of €500 million Tier 2 bond on 24 September 2018, the facility was fully repaid
and remained undrawn at 31 December 2018. On 12 December 2018, the Company became an additional borrower and guarantor under the facility. On 27 June 2019, the Company replaced this facility with a new £1.25 billion unsecured revolving credit facility (see item l).

g.             On 23 February 2018, Old PGH entered into an acquisition facility with an aggregate principal amount of £600 million and the Company became an additional borrower and guarantor under the acquisition facility on 12 December 2018. On 27 June 2019, the facility was cancelled.

h.             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.

i.  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.

j.  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.

k. 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.

l.  On 27 June 2019, the Company replaced its £900 million unsecured revolving credit facility (see item f) with a new £1.25 billion unsecured revolving credit facility (the 'revolving facility'), maturing in June 2024. There are no mandatory or target amortisation payments associated with the facility but the facility does include customary mandatory prepayment obligations and voluntary prepayments are permissible. The facility accrues interest at a margin over LIBOR that is based on credit rating. On 23 October 2019 the Company drew down £100 million under the revolving facility, the balance was fully repaid on 25 November 2019 and the facility remains undrawn as at 31 December 2019.

Changes to the Group's borrowings since 31 December 2019 have been detailed in note I7.

E5.2 Reconciliation of liabilities arising from financing

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 2019 £m		New borrowings, net of costs £m	Repayments £m		Changes in fair value £m	Movement in foreign exchange £m	Other   movements1 £m		At 31 December 2019 £m
Limited recourse bonds 2022 7.59%	45		-	(12)		-	-	2		35
Property Reversions loan	114		-	(22)		7	-	-		99
Retrocession contracts	13		-	-		(13)	-	-		-
£200 million 7.25% unsecured subordinated loan	186		-	-		-	-	10		196
£300 million senior unsecured bond	121		-	-		-	-	-		121
£1.25 billion revolving credit facility	-		100	(100)		-	-	-		-
£428 million Tier 2 subordinated notes	426		-	-		-	-	-		426
£450 million Tier 3 subordinated notes	448		-	-		-	-	1		449
US $500 million Tier 2 bonds	390		-	-		-	(14)	-		376
€500 million Tier 2 notes	443		-	-		-	(27)	1		417
	2,186		100	(134)		(6)	(41)	14		2,119

 

			Cash movements			Non-cash movements
	At 1 January 2018 £m		New borrowings, net of costs £m	Repayments £m		Changes in fair value £m	Movement in foreign exchange £m	Other   movements1 £m		At 31 December 2018 £m
Limited recourse bonds 2022 7.59%	56		-	(12)		-	-	1		45
Property Reversions loan	131		-	(25)		8	-	-		114
Retrocession contracts	51		-	(32)		(6)	-	-		13
£200 million 7.25% unsecured subordinated loan	177		-	-		-	-	9		186
£300 million senior unsecured bond	121		-	-		-	-	-		121
£900 million unsecured revolving credit facility	-		295	(295)		-	-	-		-
£428 million subordinated notes	426		-	-		-	-	-		426
£450 million Tier 3 subordinated notes	448		-	-		-	-	-		448
US $500 million Tier 2 bonds	368		-	-		-	22	-		390
€500 million Tier 2 notes	-		438	-		-	5	-		443
	1,778		733	(364)		2	27	10		2,186

1  Comprises amortisation under the effective interest method applied to borrowings held at amortised cost.

E6. Risk Management - Financial Risk

This note forms one part of the risk management disclosures in the consolidated financial statements. 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 appointed investment managers, 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 treat customers fairly.

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 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 persistency levels and management, 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.

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.

E6.2.1 Credit risk

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. These obligations can relate to both on and off balance sheet assets and liabilities.

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 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, 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, and 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 (to the extent that risks and rewards fall wholly to shareholders), non-profit funds and shareholders' funds.

The Group holds £10,800 million (2018: £9,917 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 £583 million (2018: £496 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 a decrease in the profit after tax in respect of a full financial year, and in equity, of £70 million (2018: £108 million).

A 100bps narrowing 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 £26 million (2018: £100 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. 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.

Quality of credit 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.

2019	AAA £m	AA £m	A £m	BBB £m	BB and below £m	Non-rated £m	Unit-linked £m	Total £m
Loans and deposits	-	21	47	164	-	284	-	516
Derivatives	-	11	2,194	1,484	-	759	6	4,454
Debt securities1,2	9,630	32,188	15,778	10,947	2,252	5,317	1	76,113
Reinsurers' share of insurance contract liabilities	-	5,913	1,366	-	-	45	-	7,324
Reinsurers' share of investment contract liabilities	-	-	-	-	-	-	8,881	8,881
Cash and cash equivalents	295	733	3,105	23	-	270	40	4,466
	9,925	38,866	22,490	12,618	2,252	6,675	8,928	101,754

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. £51 million of AAA, £433 million of AA, £1,354 million of A, £272 million of BBB and £90 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 £2,781 million. Further details are set out in note E2.3.

2018 restated1	AAA £m	AA £m	A £m	BBB £m	BB and below £m	Non-rated £m	Unit-linked £m	Total £m
Loans and deposits	-	7	46	-	-	370	-	423
Derivatives	-	5	2,092	1,032	-	659	10	3,798
Debt securities2,3	9,743	31,446	13,712	10,894	2,248	3,123	199	71,365
Reinsurers' share of insurance contract liabilities	-	6,227	1,292	-	-	45	-	7,564
Reinsurers' share of investment contract liabilities	-	-	-	-	-	-	8,331	8,331
Cash and cash equivalents	327	947	1,836	1,265	-	450	101	4,926
	10,070	38,632	18,978	13,191	2,248	4,647	8,641	96,407

1  See note A1 for details of restatements.

2  For financial assets that do not have credit ratings assigned by external ratings the Group assigns internal ratings for use in management and monitoring credit risk. £64 million of AAA, £641 million of AA, £1,084 million of A, £291 million of BBB and £24 million of BB and below debt securities are internally rated.

3  Non-rated debt securities includes equity release mortgages with a value of £2,020 million. Further details are set out in note E2.3.

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 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 Committee reviews the policies, processes and practices to ensure the appropriateness of the internal ratings assigned to asset classes.

The Group has increased exposure to illiquid credit assets (eg equity release mortgages and commercial real estate loans) with the aim of achieving greater diversification and investment returns.

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.

Please refer to page 255 for additional life company asset disclosures which include the life companies' exposure to peripheral Eurozone debt securities. Peripheral Eurozone is defined as Portugal, Spain, Italy, Ireland and Greece. The Group's exposure to peripheral Eurozone debt continues to be relatively small compared to total assets.

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 limits contained within the investment guidelines and 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. This also gives rise to concentration of risk with individual reinsurers, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. 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 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 the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market influences. Market risk comprises interest rate risk, currency risk and other price risk (comprising equity risk, property risk, inflation risk and alternative asset class risk).

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.

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.

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 risk indicates how changes in the fair value or future cash flows of a financial instrument arising from changes in market interest 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 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 the 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.

An increase of 1% in interest rates, 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 £114 million (2018: £141 million).

A decrease of 1% in interest rates, 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 £233 million (2018: £211 million).

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.

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 £254 million (2018: £202 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 £200 million (2018: £197 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 £26 million (2018: £15 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 £16 million (2018: £7 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

With the exception of Standard Life business sold in Germany and the Republic of Ireland, and some historic business written in the latter, 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.

The Group has hedged the currency risk on its foreign currency hybrid debt ($500 million Tier 2 bonds and €500 million Tier 2 bonds as set out in note E5) through cross currency interest rate swaps.

Sensitivity of profit after tax and equity to fluctuations in currency exchange rates is not considered significant at 31 December 2019, since unhedged exposure to foreign currency was relatively low (2018: 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 or reputational loss arising from a lack of liquidity, funding or capital due to an unforeseen tax cost, or by the inappropriate reporting and disclosure of information in relation to taxation. 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.

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. These controls are subject to a regular review process. The Group's subsidiaries have exposure to tax risk through the annual statutory and regulatory reporting and through the processing of policyholder tax requirements.

Liquidity and funding risk is defined as the failure of the Group to maintain adequate levels of financial resources to enable it to meet its obligations as they fall due. 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. 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 policy is to maintain sufficient liquid assets of suitable credit quality at all times including, where appropriate, by having access to borrowings so as to be able to meet all foreseeable current liabilities as they fall due in a cost-effective manner. Forecasts 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 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 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 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. This was invoked as a result of the market volatility experienced following the result of the referendum on membership of the European Union in 2016 in line with other firms across the industry. In 2018 and 2019, all unit trusts processed investments and realisations in a normal manner and have not imposed any restrictions or delays.

Some of the Group's cash and cash equivalents are held through collective investment schemes. The collective investment schemes have the power, in an extreme stress, to restrict and/or suspend withdrawals, which would, in turn, affect liquidity. To date, the collective investment schemes have continued to process both investments and realisations in a normal manner and have not imposed any restrictions or delays.

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 contracts' 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:

2019	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	16,135	23,299	56,209	-	95,643
Investment contracts	120,773	-	-	-	120,773
Borrowings1	122	1,119	1,382	99	2,722
Deposits received from reinsurers1	463	907	2,886	-	4,256
Derivatives1	347	103	346	-	796
Net asset value attributable to unitholders	3,149	-	-	-	3,149
Obligations for repayment of collateral received	3,671	-	-	-	3,671
Reinsurance payables	101	-	-	-	101
Payables related to direct insurance contracts	890	-	-	-	890
Lease liabilities1	13	32	78	-	123
Accruals and deferred income	375	6	3	-	384
Other payables	1,002	16	25	-	1,043

 

2018	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	15,511	22,049	53,651	-	91,211
Investment contracts	114,463	-	-	-	114,463
Borrowings1	105	1,189	1,500	114	2,908
Deposits received from reinsurers1	361	1,371	2,767	-	4,499
Derivatives1	156	147	1,092	-	1,395
Net asset value attributable to unitholders	2,659	-	-	-	2,659
Obligations for repayment of collateral received	2,645	-	-	-	2,645
Reinsurance payables	30	-	-	-	30
Payables related to direct insurance contracts	902	-	-	-	902
Accruals and deferred income	329	5	3	-	337
Other payables	777	22	74	-	873

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.

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 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 of future trends.

The realistic liability for any contract is equal to the sum of the WPBR and the cost of future policy-related liabilities.

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 of Demutualisation ('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 on 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 statement of consolidated 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 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.

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.

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

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 claims are 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.

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.

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 2019 £m	Reinsurers' share 2019 £m	Gross liabilities 2018 £m	Reinsurers' share 2018 £m
Life assurance business:
Insurance contracts	70,685	7,324	66,872	7,564
Investment contracts with DPF	24,958	-	24,339	-
	95,643	7,324	91,211	7,564
Amounts due for settlement after 12 months	79,508	6,532	75,700	6,801

 

	Gross liabilities 2019  £m	Reinsurers' share 2019 £m	Gross liabilities 2018  £m	Reinsurers' share 2018 £m
At 1 January	91,211	7,564	44,435	3,320
Premiums	4,038	556	2,645	481
Claims	(7,792)	(1,177)	(5,295)	(866)
Foreign exchange adjustments	(841)	(3)	35	-
Acquisition of Standard Life Assurance businesses	-	-	51,487	4,264
Other changes in liabilities1	9,027	384	(2,096)	365
At 31 December	95,643	7,324	91,211	7,564

1  Other changes in liabilities principally comprise changes in economic and non-economic assumptions and experience. Other changes in liabilities also includes the recognition of an additional £44 million (2018: £22 million) of policyholder liabilities on the crystallisation of obligations initially included within the FCA thematic reviews provision.

 

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.

	2019 £m	2018 £m
At 1 January	1,358	925
Transfer to consolidated income statement	(84)	(88)
Acquisition of Standard Life Assurance	-	525
Foreign exchange movements	93	(4)
At 31 December	1,367	1,358

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 £556 million (2018: £481 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 £3,217 million (2018: £3,253 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 income under arrangements with reinsurers' (see note F3.3). The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2019 are set out below.

		Reinsurance transactions
		2019 £m	2018 £m
Financial assets		333	373
Financial liabilities		333	373

F3.3 Net (expense)/income 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 £3.9 billion as at 31 December 2019 (31 December 2018: £4.1 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 in investment return in the consolidated income statement is equal to an equivalent amount recognised in expenses under arrangements with reinsurers.

	2019 £m	2018 £m
Interest payable on deposits from reinsurers	(33)	(11)
Premium adjustments	(241)	13
Net (expense)/income under arrangements with reinsurers	(274)	2

F4. Risk Management - Insurance Risk

This note forms one part of the risk management disclosures in the consolidated financial statements. Financial risk is included in note E6.

Insurance risk refers to the risk that the frequency or severity of insured events may be worse than expected and includes expense risk. The contracts for the Life businesses include the following sources 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	higher than expected number of serious illness claims or more sickness claims which last longer on income protection policies;
Expenses	unexpected timing or value of expenses incurred;
Lapses	adverse movement in surrender rates, GAO surrender rates, GAO take-up rates, policyholder retirement dates or the occurrence of a mass lapse event leading to losses; and
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

The Group uses several 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. In addition to this, mortality, longevity and morbidity risks may in certain circumstances be mitigated by the use of reinsurance.

The profitability of the run-off of the closed long-term insurance businesses within the Group depends, to a significant extent, on the values of claims paid in the future relative to the assets accumulated to the date of claim. Typically, over the lifetime of a contract, premiums and investment returns exceed claim costs in the early years and it is necessary to set aside these amounts to meet future obligations. The amount of such future obligations is assessed on actuarial principles by reference to assumptions about the development of financial and insurance risks.

It is therefore necessary for the Directors of each life company to make decisions, based on actuarial advice, which ensure an appropriate accumulation of assets relative to liabilities. These decisions include investment policy, bonus policy and, where discretion exists, the level of payments on early termination.

The Group's longevity risk exposures have increased 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.

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 £58 million (2018: £54 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 £58 million (2018: £54 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 £288 million (2018: £265 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 £298 million (2018: £273 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 £20 million (2018: £27 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 £20 million (2018: £26 million).

F4.1 Assumptions

For participating business which is with-profit business (insurance and investment contracts), the insurance contract liability is calculated on a realistic basis, adjusted to exclude the shareholders' share of future bonuses and the associated tax liability. This is a market consistent valuation, which involved 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 10bps.

For certain non-participating insurance contract liabilities (eg. annuities), the Group makes a further explicit adjustment to the risk-free rate to reflect illiquidity in respect of the assets backing those liabilities.

Expense inflation

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 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. Surrender or voluntary premium discontinuances are only assumed for realistic basis companies. Withdrawal rates used in the valuation of with-profit policies are based on observed experience and adjusted when it is considered that future policyholder behaviour will be influenced by different considerations than in the past. In particular, it is assumed that withdrawal rates for unitised with-profit contracts will be higher on policy anniversaries on which Market Value Adjustments do not apply.

Discretionary participating bonus rate

For realistic basis 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.

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 £1,986 million (2018: £1,865 million) and £109 million (2018: £93 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 £225 million (2018: £298 million) and £6 million (2018: £7 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 companies, 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 2019 £m	(Decrease)/ increase in insurance liabilities 2018 £m
Change in longevity assumptions	(186)	(168)
Change in persistency assumptions	19	(12)
Change in mortality assumptions	17	(16)
Change in expenses assumptions	(68)	(28)

2019:

The £186 million positive impact of changes in longevity assumptions reflects updates to base and improvement assumptions to reflect latest experience analyses and where applicable the most recent Continuous Mortality Investigation 2018 projection tables.

The £19 million and £17 million negative impact of changes in persistency and mortality assumptions respectively reflects the results of the latest experience investigations.

The £68 million positive impact of changes in expense assumptions principally reflects updated expense assumptions for insurance contracts reflecting reduced future servicing costs as a result of transition activity.

2018:

The £168 million positive impact of changes in longevity assumptions reflects updates to base and improvement assumptions to reflect latest experience analyses and where applicable the most recent Continuous Mortality Investigation 2017 projection tables.

The £12 million and £16 million positive impact of changes in persistency and mortality assumptions respectively reflects the results of the latest experience investigations.

The £28 million positive impact of changes in expense assumptions principally reflects updated investment expenses in light of updates made to the asset mix and to reflect changes to agreements with the Group's external funds managers.

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
2019	Insurance contracts £m	Investment contracts with DPF £m		Insurance contracts £m	Investment contracts with DPF £m
With-profit funds:
Pensions:
Deferred annuities - with guarantees	8,468	63		924	-
Deferred annuities - without guarantees	1,133	-		-	-
Immediate annuities	7,178	-		4,580	-
Unitised with-profit	12,940	23,021		-	-
Total pensions	29,719	23,084		5,504	-
Life:
Immediate annuities	173	-		4	-
Unitised with-profit	6,386	774		-	-
Life with-profit	2,171	-		4	-
Total life	8,730	774		8	-
Other	1,061	-		205	-
Non-profit funds:
Deferred annuities - without guarantees	824	-		-	-
Immediate annuities	19,635	-		1,567	-
Protection	686	-		76	-
Unit-linked	10,182	1,083		33	-
Other	(152)	17		(69)	-
	70,685	24,958		7,324	-

1  £5,320 million (2018: £4,605 million) of liabilities are subject to longevity swap arrangements.

 

	Gross			Reinsurance
2018	Insurance contracts £m	Investment contracts with DPF £m		Insurance contracts £m	Investment contracts with DPF £m
With-profit funds:
Pensions:
Deferred annuities - with guarantees	8,329	69		807	-
Deferred annuities - without guarantees	1,111	-		-	-
Immediate annuities	7,583	-		4,808	-
Unitised with-profit	11,717	22,449		(3)	-
Total pensions	28,740	22,518		5,612	-
Life:
Immediate annuities	171	-		4	-
Unitised with-profit	6,145	791		(79)	-
Life with-profit	2,391	-		3	-
Total life	8,707	791		(72)	-
Other	1,237	-		208	-
Non-profit funds:
Deferred annuities - without guarantees	844	-		-	-
Immediate annuities	17,600	-		1,776	-
Protection	488	-		80	-
Unit-linked	9,440	1,021		44	-
Other	(184)	9		(84)	-
	66,872	24,339		7,564	-

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 FI-NANCIAL 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 defined benefit asset/liability represents the economic surplus net of all adjustments noted above.

The Group determines the net interest expense or income on the net defined benefit asset/liability for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the opening net defined benefit asset/liability. The discount rate is the yield at the period end on AA credit rated bonds that have maturity dates approximating to the terms of the Group's obligations. The calculation is performed by a qualified actuary using the projected unit credit method.

The movement in the net defined benefit asset/liability is analysed between the service cost, past service cost, curtailments and settlements (all recognised within administrative expenses in the consolidated income statement), the net interest cost on the net defined benefit asset/liability, including any reimbursement assets (recognised within net investment income in the consolidated income statement), remeasurements of the net defined asset/liability (recognised in other comprehensive income) and employer contributions.

This note describes the Group's three main staff pension schemes for its employees, the Pearl Group Staff Pension Scheme ('the Pearl Scheme'), the PGL Pension Scheme, and the Abbey Life Staff Pension Scheme ('Abbey Life Scheme') and explains how the pension asset/liability is calculated.

An analysis of the defined benefit asset/(liability) for each pension scheme is set out below:

	2019 £m	2018 £m
Pearl Group Staff Pension Scheme
Economic surplus	521	449
Minimum funding requirement obligation	(24)	(37)
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme	(183)	(157)
Net defined benefit asset	314	255
PGL Pension Scheme
Economic surplus (including £nil million (2018: £432 million) available as a refund on a winding-up of the Scheme)	37	506
Adjustment for amounts due to subsidiary eliminated on consolidation	13	-
Adjustment for insurance policies eliminated on consolidation	(1,687)	(877)
Net economic deficit	(1,637)	(371)
Provision for tax on that part of the economic surplus available as a refund on a winding-up of the Scheme	-	(151)
Net defined benefit liability	(1,637)	(522)
Abbey Life Staff Pension Scheme
Net defined benefit liability	(75)	(74)

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, so increases in life expectancy will result in an increase in the liabilities. For the PGL scheme, 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 note 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 need to be equalised. The Group has undertaken an initial assessment, and has included an allowance for the potential cost of equalising GMP for the impact between males and females in its IAS 19 actuarial liabilities as at 31 December 2018, pending further discussions with the scheme Trustees and the issuance of guidance as to how equalisation should be achieved. The cost of GMP equalisation across all schemes of £59 million (Pearl Scheme: £32 million; PGL Scheme: £23 million; and Abbey Scheme £4 million) was recognised as a past service cost in the 2018 consolidated income statement. As at 31 December 2019 it is considered that the current rate of uplift to the liabilities as a result of the GMP equalisation remains appropriate.

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 final salary and hybrid sections of the Pearl Scheme are closed to new members, and since 1 July 2011 are also closed to future accrual by active members.

Defined benefit scheme

The Pearl Scheme is established under, and governed by, the trust deeds and rules and is 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 two representatives from the Group, three member nominated representatives and one independent trustee in accordance with the Trustee company's articles of association. The Trustee is required by law to act in the interest of all relevant beneficiaries and is responsible for the investment policy with regard to the assets.

To the extent that an economic surplus will be available as a refund, the economic surplus is stated after a provision for tax that would be borne by the scheme administrators when the refund is made. Additionally, pension funding contributions are considered to be a minimum funding requirement and, to the extent that the contributions payable will not be available to the Group after they are paid into the Scheme, a liability is recognised when the obligation arises.

The valuation has been based on an assessment of the liabilities of the Pearl Scheme as at 31 December 2019, 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 cash flows utilised in the IFRS valuation as at 31 December 2018 were updated to reflect the latest data available from the 30 June 2018 funding valuation and together with the impact of modelling enhancements implemented during 2018, this resulted in the recognition of an experience loss of £145 million in 2018. 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 gilt-based 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.

On 27 November 2012 the principal employer and the Trustee of the Pearl Scheme entered into a revised pensions funding agreement (the 'Pensions Agreement'), the principal terms of which were not altered following finalisation of the 30 June 2018 triennial valuation. The principal terms of the Pensions Agreement are:

•  annual cash payments into the Scheme of £70 million in 2013 and 2014 payable on 30 September, followed by payments of £40 million each year from 2015 to 2021. The timing of payment of contributions changed during 2017 so that the contributions are paid on a monthly basis following the last annual payment of £40 million completed in September 2016. The Pensions Agreement includes a sharing mechanism, related to the level of dividends paid out of PGH2, that in certain circumstances allows for an acceleration of the contributions to be paid to the Pearl Scheme;

•  additional contributions may become payable if the Scheme is not anticipated to meet the two agreed funding targets:

(i)         to reach full funding on the technical provisions basis by 30 June 2022; and

(ii)        to reach full funding on a gilts flat basis by 30 June 2031;

•  the Trustee continues to benefit from a first charge over shares in Phoenix Life Assurance Limited, National Provident Life Limited, Pearl Group Services Limited and PGS2 Limited. The security claim granted under the share charges is capped at the lower of £600 million and 100% of the Pearl Scheme deficit (calculated on a basis linked to UK government securities) revalued every three years thereafter; and

•  covenant tests relating to the Embedded Value of certain companies with the Group.

It should be noted that the terms of the £1.25 billion facility agreement (see note E5) restrict the Group's ability, with certain exceptions, to transfer assets into the secured companies over which the Trustee holds a charge over shares.

An additional liability of £24 million (2018: £37 million) has been recognised, reflecting a charge on any refund of the resultant IAS 19 surplus that arises after adjustment for discounted future contributions of £69 million (2018: £106 million) in accordance with the minimum funding requirement. A deferred tax asset of £12 million (2018: £18 million) has also been recognised to reflect tax relief at a rate of 17% (2018: 17%) that is expected to be available on the contributions, once paid into the Scheme.

Contributions totalling £40 million were paid into the Pearl Scheme in 2019 (2018: £40 million) reflecting the monthly instalments.

Liability management exercise

In June 2018, the Group commenced a pension increase exchange ('PlE') exercise in respect of the Pearl Scheme. Existing in-scope pensioners were offered the option to exchange future non-statutory pension increases for a one-off uplift to their current pension, thereby reducing longevity and inflation risk for the Group. The financial effect of all acceptances received was recognised in the 2018 consolidated financial statements as a reduction in scheme liabilities of £2 million shown as past service credit in the consolidated income statement.

Summary of amounts recognised in the consolidated financial statements

The amounts recognised in the consolidated financial statements are as follows:

 

2019	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	2,631	(2,182)	(157)	(37)	255
Interest income/(expense)	73	(60)	(4)	(1)	8
Included in profit or loss	73	(60)	(4)	(1)	8
Remeasurements:
Return on plan assets excluding amounts included in interest income	202	-	-	-	202
Gain from changes in demographic assumptions	-	12	-	-	12
Loss from changes in financial assumptions	-	(206)	-	-	(206)
Experience gain	-	11	-	-	11
Change in provision for tax on economic surplus available as a refund	-	-	(22)	-	(22)
Change in minimum funding requirement obligation	-	-	-	14	14
Included in other comprehensive income	202	(183)	(22)	14	11
Employer's contributions	40	-	-	-	40
Benefit payments	(112)	112	-	-	-
At 31 December	2,834	(2,313)	(183)	(24)	314

 

2018	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	2,722	(2,150)	(200)	(50)	322
Interest income/(expense)	67	(52)	(5)	(1)	9
Past service cost	-	(30)	-	-	(30)
Included in profit or loss	67	(82)	(5)	(1)	(21)
Remeasurements:
Return on plan assets excluding amounts included in interest income	(81)	-	-	-	(81)
Gain from changes in demographic assumptions	-	8	-	-	8
Gain from changes in financial assumptions	-	70	-	-	70
Experience loss	-	(145)	-	-	(145)
Change in provision for tax on economic surplus available as a refund	-	-	48	-	48
Change in minimum funding requirement obligation	-	-	-	14	14
Included in other comprehensive income	(81)	(67)	48	14	(86)
Employer's contributions	40	-	-	-	40
Benefit payments	(117)	117	-	-	-
At 31 December	2,631	(2,182)	(157)	(37)	255

Scheme assets

The distribution of the scheme assets at the end of the year was as follows:

	2019			2018
	Total £m	Of which not quoted in an active market £m		Total £m	Of which not quoted in an active market £m
Hedging portfolio	1,569	(18)		2,012	(4)
Equities	-	-		-	-
Fixed interest gilts	56	-		54	-
Other debt securities	1,329	-		1,251	-
Properties	266	266		294	294
Private equities	19	19		28	28
Hedge funds	6	6		15	15
Cash and other	111	-		92	-
Obligations for repayment of stock lending collateral received	(522)	-		(1,115)	-
	2,834	273		2,631	333

The Group ensures that the investment positions are managed within an Asset Liability Matching ('ALM') framework that has been developed to achieve long-term investments that are in line with the obligations under the Pearl Scheme. Within this framework an allocation of 25% of the scheme assets is invested in collateral for interest rate and inflation rate hedging where the intention is to hedge greater than 90% of the interest rate and inflation rate risk measured on the Technical Provisions basis.

The Pearl Scheme uses swaps, UK Government bonds and UK Government stock lending to hedge the interest rate and inflation exposure arising from the liabilities which are disclosed in the table above as 'Hedging Portfolio' assets. Under the Scheme's stock lending programme, the Scheme lends a Government bond to an approved counterparty and receives a similar value in the form of cash in return which is typically reinvested into other Government bonds. The Scheme retains economic exposure to the Government bond, hence the bonds continue to be recognised as scheme assets with a corresponding liability to repay the cash received as disclosed in the table above.

Defined benefit obligation

The calculation of the defined benefit obligation can be allocated to the scheme's members as follows:

•  Deferred scheme members: 40% (2018: 40%); and

•  Pensioners: 60% (2018: 60%)

The weighted average duration of the defined benefit obligation at 31 December 2019 is 16 years (2018: 16 years).

Principal assumptions

The principal financial assumptions of the Pearl Scheme are set out in the table below:

	2019 %	2018 %
Rate of increase for pensions in payment (5% per annum or RPI if lower)	2.90	3.10
Rate of increase for deferred pensions ('CPI')	2.20	2.40
Discount rate	2.00	2.80
Inflation - RPI	3.00	3.20
Inflation - CPI	2.20	2.40

The discount rate and inflation rate assumptions have been determined by considering the shape of the appropriate yield curves and the duration of the Pearl Scheme's liabilities. This method determines an equivalent single rate for each of the discount and inflation rates, which is derived from the profile of projected benefit payments.

It has been assumed that post-retirement mortality is in line with a scheme-specific table which was derived from the actual mortality experience in recent years based on the SAPS standard tables for males and for females based on year of use. Future longevity improvements from 1 January 2017 are based on amended CMI 2018 Core Projections (2018: CMI 2017 Core Projections) and a long-term rate of improvement of 1.60% (2018: 1.75%) per annum for males and 1.30% (2018: 1.50%) 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 32.2 years for male and female members respectively (2018: 29.9 and 32.2 respectively).

A quantitative sensitivity analysis for significant actuarial assumptions is shown below:

2019
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)	2,313		(85)	93		71	(65)		84	(84)
2018
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)	2,182		(82)	85		65	(76)		79	(79)

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method has been applied as when calculating the pension asset recognised within the statement of financial position.

G1.2 PGL Pension Scheme

The PGL Pension Scheme comprises a final salary section and a defined contribution section.

Scheme details

Defined contribution scheme

Contributions in the year amounted to £7 million (2018: £7 million).

Defined benefit scheme

The defined benefit section of the PGL Pension Scheme is a final salary arrangement which is closed to new entrants and has been closed to future accrual by active members since 1 July 2011.

The PGL Scheme is administered by a separate trustee company, PGL Pension Trustee Ltd. The trustee company is comprised of two representatives from the Group, three member nominated representatives and one independent trustee in accordance with the trustee company's articles of association. The Trustee is required by law to act in the interest of all relevant beneficiaries and is responsible for the investment policy with regard to the assets plus the day to day administration of the benefits.

The valuation has been based on an assessment of the liabilities of the PGL Pension Scheme as at 31 December 2019, 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 have been updated to reflect the latest valuation data.

There are no further committed contributions to pay in respect of the defined benefit section of the Scheme.

Insurance policies with Group entities

In June 2014, the PLL non-profit fund entered into a longevity swap with the PGL Pension Scheme with effect from 1 January 2014, under which the Scheme transferred the risk of longevity improvements to PLL. The financial effect of this contract was eliminated on consolidation.

In December 2016, the PGL Pension Scheme entered into a 'buy-in' agreement with PLL, which converted the longevity swap contract into a bulk annuity contract. The Scheme transferred certain additional risks in respect of the benefits payable to the deferred members covered by the longevity swap arrangement, including the investment risk associated with the assets covering those benefits. The Scheme transferred £1,164 million of plan assets to a collateral account and this transfer constituted the payment of premium to PLL, and was net of a £23 million prepayment by PLL to the Scheme in respect of benefits up to 31 May 2017. The assets transferred to PLL are recognised in the relevant line within financial assets in the statement of consolidated financial position (see note E1). An adjustment of £6 million to the value of the premium was paid by PLL to the PGL Scheme in 2017. The economic effect of the 'buy-in' transaction in the Scheme is to replace the plan assets transferred with a single line insurance policy reimbursement asset which is eliminated on consolidation. The value of this insurance policy in December 2016 was £892 million.

At the same time as the December 2016 buy-in transaction, there was a rule change made with respect to pre-1997 excess benefits for members of the Phoenix section of the PGL Pension Scheme. Pension increases are now increased in line with CPI inflation subject to a maximum of 5% per annum. Prior to this, members received discretionary increases in payment on these benefits with the discretionary increases not allowed for in the defined benefit obligation.

In March 2019, the PGL Pension Scheme entered into a further 'buy-in' agreement with Phoenix Life Limited ('PLL') which covered the remaining pensioner and deferred members of the Scheme. The scheme transferred £1,115 million of plan assets to a collateral account and this transfer constituted the payment of premium to PLL. An adjustment of £13 million to the value of the premium is due to be paid to PLL in 2020. The assets transferred to PLL are recognised in the relevant line within financial assets in the statement of consolidated financial position. As with the initial 'buy-in' transaction completed in December 2016, the economic effect of the transaction in the Scheme is to replace the plan assets transferred with a single line insurance policy reimbursement asset which is eliminated on consolidation. The value of this insurance policy at the date of the buy-in was £670 million.

The value of the insurance policies with Group entities at 31 December 2019 is £1,687 million (2018: £877 million).

Summary of amounts recognised in the consolidated financial statements

The amounts recognised in the consolidated financial statements are as follows:

2019		Fair value of scheme assets £m	Defined benefit obligation £m	Provision for tax on the economic surplus available as a refund £m	Total £m
At 1 January		1,157	(1,528)	(151)	(522)
Interest income/(expense)		10	(39)	(5)	(34)
Administrative expenses		(3)	-	-	(3)
Included in profit or loss		7	(39)	(5)	(37)
Remeasurements:
Return on plan assets excluding amounts included in interest income		10	-	-	10
Experience loss		-	(34)	-	(34)
Loss from changes in financial assumptions		-	(175)	-	(175)
Gain from changes in demographic assumptions		-	11	-	11
Change in provision for tax on economic surplus available as a refund		-	-	156	156
Included in other comprehensive income		10	(198)	156	(32)
Benefit payments		(74)	74	-	-
Income received from insurance policies		69	-	-	69
Assets transferred as premium for 2019 scheme buy-in		(1,115)	-	-	(1,115)
At 31 December		54	(1,691)	-	(1,637)
2018		Fair value of scheme assets £m	Defined benefit obligation £m	Provision for tax on the economic surplus available as a refund £m	Total £m
At 1 January		1,206	(1,622)	(147)	(563)
Interest income/(expense)		30	(40)	(3)	(13)
Administrative expenses		(4)	-	-	(4)
Past service costs		-	(23)	-	(23)
Included in profit or loss		26	(63)	(3)	(40)
Remeasurements:
Return on plan assets excluding amounts included in interest income		(41)	-	-	(41)
Experience gain		-	17	-	17
Gain from changes in financial assumptions		-	62	-	62
Loss from changes in demographic assumptions		-	(3)	-	(3)
Change in provision for tax on economic surplus available as a refund		-	-	(1)	(1)
Included in other comprehensive income		(41)	76	(1)	34
Benefit payments		(81)	81	-	-
Income received from insurance policies		47	-	-	47
At 31 December		1,157	(1,528)	(151)	(522)

Scheme assets

The distribution of the scheme assets at the end of the year was as follows:

	2019			2018
	Total £m	Of which not quoted in an active market £m		Total £m	Of which not quoted in an active market £m
Fixed interest gilts	-	-		291	-
Index-linked bonds	-	-		848	-
Swaps	-	-		5	5
Corporate Bonds	-	-		16	-
Cash and other	54	-		12	-
Obligations for repayment of stock lending collateral received	-	-		(24)	-
European Investment Bank Bonds	-	-		9	-
Reported scheme assets	54	-		1,157	5
Add back:
Insurance policies eliminated on consolidation	1,687	1,687		877	877
Adjustment for amounts due to subsidiary eliminated on consolidation	(13)	-		-	-
Economic value of assets	1,728	1,687		2,034	882

Defined benefit obligation

The calculation of the defined benefit obligation can be allocated to the scheme's members as follows:

•  Deferred scheme members: 36% (2018: 36%); and

•  Pensioners: 64% (2018: 64%)

The weighted average duration of the defined benefit obligation at 31 December 2019 is 16 years (2018: 16 years).

Principal assumptions

The principal financial assumptions of the PGL Pension Scheme are set out in the table below:

	2019 %	2018 %
Rate of increase for pensions in payment (7.5% per annum or RPI if lower)	3.00	3.20
Rate of increase for deferred pensions ('CPI')	2.20	2.40
Discount rate	2.00	2.80
Inflation - RPI	3.00	3.20
Inflation - CPI	2.20	2.40

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.

It has been assumed that post-retirement mortality is in line with 86%/94% of S1PL base tables with future longevity improvements from 1 January 2017 are based on modified CMI 2018 Core Projections (2018: CMI 2017 Core Projections) and a long-term rate of improvement of 1.60% (2018: 1.75%) per annum for males and 1.30% (2018: 1.50%) per annum for females. Under these assumptions, the average life expectancy from retirement for a member currently aged 40 retiring at age 62 is 28.3 years (2018: 28.3 years) and 29.6 years (2018: 29.6 years) for male and female members respectively.

A quantitative sensitivity analysis for significant actuarial assumptions is shown below:

2019
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)	1,691		(65)	67		53	(51)		63	(63)

 

2018
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)	1,528		(59)	60		48	(51)		57	(57)

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. The last active member ceased employment with the Group during the year and consequently the Abbey Life Scheme no longer recognises a current service cost.

The valuation has been based on an assessment of the liabilities of the Abbey Life Scheme as at 31 December 2019 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 2018 and showed a deficit of £98 million.

Prior to 19 November 2018, the following schedule of contributions was applicable from 1 July 2017 and PeLHL was required to pay 39.5% of gross pensionable earnings and the following amounts in respect of deficit contributions:

•  a lump sum of £25 million into the Scheme settled on 31 July 2017;

•  fixed monthly contributions of £400,000 payable up to 30 June 2026 and monthly contributions of £83,552 in respect of administration expenses which are payable up to 30 June 2028 and will increase annually in line with the Retail Prices Index assumption; and

•  annual payments of £4 million into the 2016 Charged Account by 31 July each year, with the first payment being made on 31 July 2017, and the last payment due by 31 July 2025.

Following the completion of the triennial funding valuation a revised schedule of contributions was agreed effective from 19 November 2018, for PeLHL to pay the following amounts in respect of deficit contributions:

•  fixed monthly contributions of £400,000 payable up to 30 June 2026;

•  monthly contributions in respect of administration expenses of £85,640 payable up to 31 March 2019, then £100,000 payable up to 30 June 2028 increasing annually in line with the Retail Prices Index assumption; and

•  annual payments of £4 million into the 2016 Charged Account by 31 July each year, with the next payment being made by 31 July 2019, 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 dated 28 June 2013, the funding position of the Abbey Life Scheme will be assessed as at 31 March 2021. A payment will be made from the 2013 Charged Account to the Abbey Life Scheme if the results of the assessment reveal a shortfall calculated in accordance with the terms of the 2013 Funding Agreement. The amount of the payment will be the lower of the amount of the shortfall and the amount held in the 2013 Charged Account.

Under the terms of the 2016 Funding Agreement dated 23 June 2016, the funding position of the Abbey Life Scheme will be assessed as at 31 March 2027. A payment will be made from the 2016 Charged Account to the Scheme if the results of the assessment reveal a shortfall calculated in accordance with the terms of the 2016 Funding Agreement. The amount of the payment will be the lower of the amount of the shortfall and the amount held in the 2016 Charged Account.

Summary of amounts recognised in the consolidated financial statements

The amounts recognised in the consolidated financial statements are as follows:

2019	Fair value of scheme assets £m	Defined benefit obligation £m	Total £m
At 1 January	233	(307)	(74)
Interest income/(expense)	6	(9)	(3)
Administrative expenses	(1)	-	(1)
Included in profit or loss	5	(9)	(4)
Remeasurements:
Return on plan assets excluding amounts included in interest income	26	-	26
Experience gain	-	2	2
Loss from changes in financial assumptions	-	(33)	(33)
Gain from changes in demographic assumptions	-	2	2
Included in other comprehensive income	26	(29)	(3)
Employer's contributions	6	-	6
Benefit payments	(16)	16	-
At 31 December	254	(329)	(75)

 

2018	Fair value of scheme assets £m	Defined benefit obligation £m	Total £m
At 1 January	251	(321)	(70)
Past service cost	-	(4)	(4)
Interest income/(expense)	6	(8)	(2)
Administrative expenses	(2)	-	(2)
Included in profit or loss	4	(12)	(8)
Remeasurements:
Return on plan assets excluding amounts included in interest income	(13)	-	(13)
Experience loss	-	(5)	(5)
Gain from changes in financial assumptions	-	12	12
Gain from changes in demographic assumptions	-	4	4
Included in other comprehensive income	(13)	11	(2)
Employer's contributions	6	-	6
Benefit payments	(15)	15	-
At 31 December	233	(307)	(74)

Scheme assets

The distribution of the scheme assets at the end of the year was as follows:

	2019			2018
	Total £m	Of which not quoted in an active market £m		Total £m	Of which not quoted in an active market £m
Equities - UK	-	-		24	-
Diversified income fund	105	-		-	-
Fixed interest government bonds	73	-		84	-
Corporate bonds	71	-		148	-
Derivatives	(10)	(10)		(40)	(40)
Cash and cash equivalents	15	-		17	-
Pension scheme assets	254	(10)		233	(40)

Derivative values above include interest rate and inflation rate swaps and foreign exchange forward contracts. The Abbey Life Scheme has hedged its inflation risk through an inflation swap. It is currently exposed to interest rate risk to the extent that the holdings in bonds are mismatched to the scheme liabilities. The long-term intention is to fully hedge this risk through an interest rate swap. Further key risks that will remain are longevity and credit spread exposures.

Defined benefit obligation

The calculation of the defined benefit obligation can be allocated to the Abbey Life Scheme's members as follows:

•  Deferred scheme members: 49% (2018: 49%); and

•  Pensioners: 51% (2018: 51%)

The weighted average duration of the defined benefit obligation at 31 December 2019 is 17 years (2018: 17 years).

Principal assumptions

The principal financial assumptions of the Abbey Life Scheme are set out in the table below:

	2019 %	2018 %
Rate of increase for pensions in payment (5% per annum or RPI if lower)	2.90	3.10
Rate of increase for deferred pensions ('CPI' subject to caps)	2.20	2.40
Discount rate	2.00	2.80
Inflation - RPI	3.00	3.20
Inflation - CPI	2.20	2.40

The discount rate and inflation assumptions have been determined by considering the shape of the appropriate yield curves and the duration of the Abbey Life Scheme liabilities. This method determines an equivalent single rate for each of the discount and inflation rates, which is derived from the profile of projected benefit payments.

It has been assumed that post-retirement mortality is in line with a scheme-specific table which was derived from the actual mortality experience in recent years, performed as part of the actuarial funding valuation as at 31 March 2015, using the SAPS S2 'Light' tables for males and for females based on year of use. Future longevity improvements are based on amended CMI 2018 Core Projections (2018: CMI 2017 Core Projections) and a long-term rate of improvement of 1.60% (2018: 1.75%) per annum for males and 1.30% (2018: 1.50%) per annum for females. Under these assumptions the average life expectancy from retirement for a member currently aged 45 retiring at age 65 is 25.7 years and 27.2 years for male and female members respectively (2018: 25.7 years and 27.2 years respectively).

A quantitative sensitivity analysis for significant actuarial assumptions is shown below:

2019
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)	329		(13)	14		10	(9)		12	(12)

 

2018
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)	307		(12)	13		9	(9)		12	(11)

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.

G2. Intangible Assets

Goodwill

Business combinations are accounted for by applying the acquisition method. Goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.

Goodwill is measured on initial recognition at cost. Following initial recognition, goodwill is stated at cost less any accumulated impairment losses. It is tested for impairment annually or when there is evidence of possible impairment. Goodwill is not amortised. For impairment testing, goodwill is allocated to relevant cash generating units. Goodwill is impaired when the recoverable amount is less than the carrying value.

In certain acquisitions an excess of the acquirer's interest in the net fair value of the acquiree's identifiable assets, liabilities, contingent liabilities and non-controlling interests over cost may arise. Where this occurs, the surplus of the fair value of net assets acquired over the fair value of the consideration is recognised in the consolidated income statement.

Acquired in-force business

Insurance and investment contracts with DPF acquired in business combinations and portfolio transfers are measured at fair value at the time of acquisition. The difference between the fair value of the contractual rights acquired and obligations assumed and the liability measured in accordance with the Group's accounting policies for such contracts is recognised as acquired in-force business. This acquired in-force business is amortised over the estimated life of the contracts on a basis which recognises the emergence of the economic benefits.

The value of acquired in-force business related to investment contracts without DPF is recognised at its fair value and is amortised on a diminishing balance basis.

An impairment review is performed whenever there is an indication of impairment. When the recoverable amount is less than the carrying value, an impairment loss is recognised in the consolidated income statement. Acquired in-force business is also considered in the liability adequacy test for each reporting period.

The acquired in-force business is allocated to relevant cash generating units for the purposes of impairment testing.

Customer relationships

The customer relationship intangible asset includes vesting pension premiums and is measured on initial recognition at cost. The cost of this intangible asset acquired in a business combination is the fair value as at the date of acquisition. Following initial recognition, the customer relationship intangible asset is carried at cost less any accumulated amortisation and any accumulated impairment losses.

The intangible asset is amortised on a straight-line basis over its useful economic life and assessed for impairment whenever there is an indication that the recoverable amount of the intangible asset is less than its carrying value. The customer relationship intangible asset is allocated to relevant cash generating units for the purposes of impairment testing.

Present value of future profits on non-participating business in the with-profit fund

The present value of future profits ('PVFP') is determined in a manner consistent with the realistic measurement of insurance contract liabilities. The Group's accounting policy for PVFP is described in note F1.

Brands and other contractual arrangements

Brands and other contractual arrangements acquired in a business combination are recognised at fair value at the acquisition date, and measured on initial recognition at cost. Amortisation is calculated using the straight-line method to allocate the cost of brands and other contractual arrangements over their estimated useful lives. They are tested for impairment whenever there is evidence of possible impairment. For impairment testing, they are allocated to the relevant cash generating unit. Brands and other contractual arrangements are impaired when the recoverable amount is less than the carrying value.

			Other intangibles
2019	Goodwill £m	Acquired in-force business £m	Customer relationships £m	Present value of future profits £m	Brands and other £m	Total other intangibles £m	Total £m
Cost or valuation
At 1 January	57	5,197	297	12	56	365	5,619
Revaluation	-	-	-	70	-	70	70
At 31 December	57	5,197	297	82	56	435	5,689
Amortisation and impairment
At 1 January	-	(1,164)	(139)	-	(5)	(144)	(1,308)
Amortisation charge for the year	-	(382)	(15)	-	(5)	(20)	(402)
At 31 December	-	(1,546)	(154)	-	(10)	(164)	(1,710)
Carrying amount at 31 December	57	3,651	143	82	46	271	3,979
Amount recoverable after 12 months	57	3,296	128	82	40	250	3,603

 

			Other intangibles
2018	Goodwill £m	Acquired in-force business £m	Customer relationships £m	Present value of future profits £m	Brands and other £m	Total other intangibles £m	Total £m
Cost or valuation
At 1 January	57	2,266	297	11	20	328	2,651
On acquisition of Standard Life Assurance businesses	-	2,931	-	-	36	36	2,967
Revaluation	-	-	-	1	-	1	1
At 31 December	57	5,197	297	12	56	365	5,619
Amortisation and impairment
At 1 January	-	(968)	(124)	-	(2)	(126)	(1,094)
Amortisation charge for the year	-	(196)	(15)	-	(3)	(18)	(214)
At 31 December	-	(1,164)	(139)	-	(5)	(144)	(1,308)
Carrying amount at 31 December	57	4,033	158	12	51	221	4,311
Amount recoverable after 12 months	57	3,651	143	12	47	202	3,910

G2.1 Goodwill

The carrying value of goodwill has been tested for impairment at the year end. No impairment has been recognised because the value in use of this intangible continues to exceed its carrying value.

£47 million of goodwill is attributable to the Management Services segment including £8 million that arose on acquisition of Abbey Life. Value in use has been determined as the present value of certain future cash flows associated with this business. The cash flows used in this calculation have been valued using a risk adjusted discount rate of 8.3% (2018: 8.9%) and are consistent with those adopted by management in the Group's operating plan and, for the period 2025 and beyond, reflect the anticipated run-off of the Phoenix Life insurance business. The underlying assumptions of these projections include management's best estimates with regards to longevity, persistency, mortality and morbidity.

The remaining £10 million relates to the goodwill recognised on the acquisition of AXA Wealth during 2016 and has been allocated to the UK Open segment. This represents the value of the workforce assumed and the potential for future value creation, which relates to the ability to invest in and grow the SunLife brand. Value in use has been determined as the present value of certain future cashflows associated with that business. The cash flows used in the calculation are consistent with those adopted by management in the Group's operating plan, and for the period 2025 and beyond assume a zero growth rate. The underlying assumptions of these projections include market share, customer numbers, commission rates and expense inflation. The cashflows have been valued at a risk adjusted discount rate of 11% that makes prudent allowance for the risk that future cash flows may differ from that assumed.

Impairment tests have been performed using assumptions which management consider reasonable. Given the magnitude of the excess of the value in use over carrying value, management does not believe that a reasonably foreseeable change in key assumptions would cause the carrying value to exceed value in use.

G2.2 Acquired in-force business

Acquired in-force business on insurance contracts and investment contracts with DPF represents the difference between the fair value of the contractual rights under these contracts and the liability measured in accordance with the Group's accounting policies for such contracts. This intangible is being amortised in accordance with the run-off of the book of business.

Acquired in-force business on investment contracts without DPF is amortised in line with emergence of economic benefits.

Acquired in-force business of £2,931 million was recognised during 2018 upon acquisition of the Standard Life Assurance businesses (see note H2).

G2.3 Customer relationships

The customer relationships intangible at 31 December 2019 relates to vesting pension premiums which captures the new business arising from policies in-force at the acquisition date, specifically top-ups made to existing policies and annuities vested from matured pension policies.

The total value of this customer relationship intangible at acquisition was £297 million and has been allocated to the UK Heritage segment. This intangible is being amortised over a 20 year period, and had a remaining useful life as at 31 December 2019 of 9.9 years.

G2.4 Present value of future profits on non-participating business in the with-profit fund

The principal assumptions used to calculate the present value of future profits are the same as those used in calculating the insurance contract liabilities given in note F4.1. Revaluation of the present value of future profits is charged or credited to the consolidated income statement as appropriate.

G2.5 Other intangibles

Other intangibles include £20 million which was recognised at cost on acquisition of the AXA Wealth businesses and £36 million recognised at cost on acquisition of the Standard Life Assurance businesses.

The amount recognised in respect of AXA Wealth represents the value attributable to the SunLife brand as at 1 November 2016. The intangible asset was valued on a 'multi-period excess earnings' basis. Impairment testing was performed in a combined test with the AXA goodwill (see section G2.1). The value in use continues to exceed its carrying value.

This brand intangible is being amortised over a 10 year period.

The amount recognised in respect of the Standard Life Assurance businesses represents the value attributable to the Client Services and Proposition Agreement ('CSPA') with SLA plc and the Group's contractual rights to use the Standard Life brand. The CSPA formalises the Strategic Partnership between the two companies and establishes the contractual terms by which SLA plc will continue to market and distribute certain products that will be manufactured by Group companies.

This intangible was valued on a 'multi-period excess earnings' basis and is being amortised over a period of 15 years. The remaining useful life as at 31 December 2019 was 13.7 years.

G3. Property, Plant and Equipment

Owner-occupied property is stated at its revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and impairment. Owner-occupied property is depreciated over its estimated useful life, which is taken as 20-50 years. Land is not depreciated. Gains and losses on owner-occupied property are recognised in the statement of consolidated comprehensive income.

The right-of-use assets are initially measured at cost, and subsequently at cost less any accumulated depreciation and impairments, and adjusted for certain remeasurements of the lease liability. The right-of-use assets are depreciated over the remaining lease term which is between 1 and 11 years.

Equipment consists primarily of computer equipment and fittings. Equipment is stated at historical cost less deprecation. Where acquired in a business combination, historical cost equates to the fair value at the acquisition date. Depreciation on equipment is charged to the consolidated income statement over its estimated useful life of between 2 and 15 years.

2019	Owner-occupied properties £m	Right-of-use assets - property £m	Right-of-use assets - equipment £m	Equipment £m	Total £m
Cost or valuation
At 1 January 2019	31	-	-	19	50
Transition to IFRS 16 (see note A6)	-	75	2	-	77
At 1 January 2019 restated	31	75	2	19	127
Additions	2	-	-	8	10
Disposals	(1)	-	-	-	(1)
Reclassification to investment property	(7)	-	-	-	(7)
At 31 December 2019	25	75	2	27	129
Depreciation
At 1 January 2019	-	-	-	(2)	(2)
Depreciation	-	(11)	-	(7)	(18)
At 31 December 2019	-	(11)	-	(9)	(20)
Carrying amount at 31 December 2019	25	64	2	18	109
2018			Owner-occupied properties £m	Equipment £m	Total £m
Cost or valuation
At 1 January 2018			26	-	26
On acquisition of Standard Life Assurance businesses			5	14	19
Additions			-	5	5
At 31 December 2018			31	19	50
Depreciation
At 1 January 2018			-	-	-
Depreciation			-	(2)	(2)
At 31 December 2018			-	(2)	(2)
Carrying amount at 31 December 2018			31	17	48

Owner-occupied properties have been valued by accredited independent valuers at 31 December 2019 on an open market basis in accordance with the Royal Institution of Chartered Surveyors' requirements, which is deemed to equate to fair value. The fair value measurement for the properties of £25 million (2018: £31 million) has been categorised as Level 3 based on the non-observable inputs to the valuation technique used. Unrealised gains for the current and prior years are £nil.

The fair value of the owner-occupied properties was derived using the investment method supported by comparable evidence. The significant non-observable inputs used in the valuations are the expected rental values per square foot and the capitalisation rates.

The fair value of the owner-occupied properties valuation would increase (decrease) if the expected rental values per square foot were to be higher (lower) and the capitalisation rates were to be lower (higher).

G4. Investment Property

Investment property, including right-of-use assets, is stated at fair value. Fair value is the price that would be received to sell a property in an orderly transaction between market participants at the measurement date. Gains and losses arising from the change in fair value are recognised in the consolidated income statement.

Leases, where a significant portion of the risks and rewards of ownership are retained by the lessor, are classified as operating leases. Where investment property is leased out by the Group, rental income from these operating leases is recognised as income in the consolidated income statement on a straight-line basis over the period of the lease.

	2019 £m	2018 £m
At 1 January	6,520	612
On acquisition of the Standard Life Assurance businesses	-	5,878
Additions	214	119
Improvements	5	3
Disposals	(722)	(74)
Reclassified from owner-occupied property	7	-
Remeasurement of right-of-use asset	(15)	-
Movement in foreign exchange	(11)	-
Losses on adjustments to fair value (recognised in consolidated income statement)	(55)	(18)
At 31 December	5,943	6,520
Unrealised losses on properties held at end of period	(124)	(28)

As at 31 December 2019, a property portfolio of £5,824 million (2018: £6,401 million) is held by the life companies in a mix of commercial sectors, spread geographically throughout the UK and Europe.

Investment properties also include £101 million (2018: £119 million) of property reversions arising from sales of the NPI Extra Income Plan (see note E5 for further details).

Certain investment properties held by the life companies possess a ground rent obligation which gives rise to both a right-of-use asset and a lease liability under IFRS 16. Under IAS 17, these leases were accounted for as finance leases. The right-of-use asset associated with the ground rent obligation is valued at fair value and is included within the total investment property valuation. The IAS 17 value of the ground rent right-of-use asset on the date of transition to IFRS 16 totalled £80 million (see note A6 for further details) and the remeasurement of this balance gives rise to a reduction of £15 million. There were disposals of right-of-use assets of £47 million. The value of the ground rent right-of-use asset as at 31 December 2019 was £18 million.

Commercial investment property is measured at fair value by independent property valuers having appropriate recognised professional qualifications and recent experiences in the location and category of the property being valued. The valuations are carried out in accordance with the Royal Institute of Chartered Surveyors ('RICS') guidelines with expected income and capitalisation rate as the key non-observable inputs.

The residential property reversions, an interest in customers' properties which the Group will realise upon their death, are valued using a DCF model based on the Group's proportion of the current open market value, and discounted for the expected lifetime of the policyholder derived from published mortality tables. The open market value is measured by independent local property surveyors having appropriate recognised professional qualifications with reference to the assumed condition of the property and local market conditions. The individual properties are valued triennially and indexed using regional house price indices to the year end date. The discount rate is a risk-free rate appropriate for the duration of the asset, adjusted for the deferred possession rate of 3.6%. Assumptions are also made in the valuation for future movements in property prices, based on a risk free rate. The residential property reversions have been substantially refinanced under the arrangements with Santander as described in note E5.

The fair value measurement of the investment properties has been categorised as Level 3 based on the inputs to the valuation techniques used. The following table shows the valuation techniques used in measuring the fair value of the investment properties, the significant non-observable inputs used, the inter-relationship between the key non-observable inputs and the fair value measurement of the investment properties:

Description	Valuation techniques	Significant non-observable inputs	Weighted average 2019	Weighted average 2018
Commercial Investment Property	RICS valuation	Expected income per sq. ft.	£25.46	£28.88
		Estimated rental value per hotel room	£8,298	£8,948
		Estimated rental value per parking space	£1,170	£1,170
		Capitalisation rate	5.15%	5.10%

The estimated fair value of commercial properties would increase (decrease) if:

•  the expected income were to be higher (lower); or

•  the capitalisation rate were to be lower (higher).

The estimated fair value of the residential property reversions would increase (decrease) if:

•  the deferred possession rate were to be lower (higher);

•  the mortality rate were to be higher (lower).

Direct operating expenses (offset against rental income in the consolidated income statement) in respect of investment properties that generated rental income during the year amounted to £22 million (2018: £11 million). The direct operating expenses arising from investment property that did not generate rental income during the year amounted to £1 million (2018: £2 million).

Future minimum lease rental receivables in respect of non-cancellable operating leases on investment properties were as follows:

	2019 £m	2018 £m
Not later than 1 year	259	262
Later than 1 year and not later than 5 years	850	884
Later than 5 years	2,654	2,815

G5. Other Receivables

Other receivables are recognised when due and measured on initial recognition at the fair value of the amount receivable. Subsequent to initial recognition, these receivables are measured at amortised cost using the effective interest rate method.

	2019  £m	2018 £m
Investment broker balances	167	176
Cash collateral pledged	380	339
Reimbursement assets (note G7)	15	22
Property related receivables	99	110
Deferred acquisition costs	34	21
Other debtors	538	379
	1,233	1,047
Amount recoverable after 12 months	20	8

G6. Cash and Cash Equivalents

Cash and cash equivalents comprise cash balances and short-term deposits with an original maturity term of three months or less at the date of placement. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are deducted from cash and cash equivalents for the purpose of the statement of consolidated cash flows.

	2019 £m	2018 £m
Bank and cash balances	2,706	1,673
Short-term deposits (including notice accounts and term deposits)	1,760	3,253
	4,466	4,926

Deposits are subject to a combination of fixed and variable interest rates. The carrying amounts approximate to fair value at the period end. Cash and cash equivalents in long-term business operations and consolidated collective investment schemes of £4,201 million (2018: £4,572 million) are primarily held for the benefit of policyholders and so are not generally available for use by the owners.

G7. Provisions

A provision is recognised when the Group has a present legal or constructive obligation, as a result of a past event, which is likely to result in an outflow of resources and where a reliable estimate of the amount of the obligation can be made. If the effect is material, the provision is determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

A provision is recognised for onerous contracts when the expected benefits to be derived from the contracts are less than the related unavoidable costs. The unavoidable costs reflect the net cost of exiting the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it.

Where it is expected that a part of the expenditure required to settle a provision will be reimbursed by a third party the reimbursement is recognised when, and only when, it is virtually certain that the reimbursement will be received. This reimbursement shall be recognised as a separate asset within other receivables and will not exceed the amount of the provision.

						Restructuring provisions
2019	Leasehold properties £m	Staff related £m	Known incidents £m	PA(GI) provision £m	FCA thematic reviews provision £m	Transition and Transformation provision £m	AXA provision £m	Transfer of policy administration provision £m	Other £m	Total £m
At 1 January	5	15	33	17	208	-	4	73	22	377
Additions in the year	-	1	19	11	36	159	-	-	26	252
Utilised during the year	(1)	-	(9)	(21)	(145)	-	(4)	(14)	(11)	(205)
Released during the year	-	-	(1)	-	(93)	-	-	-	(2)	(96)
At 31 December	4	16	42	7	6	159	-	59	35	328

Leasehold properties

The leasehold properties provision includes a £3 million (2018: £3 million) dilapidations provision in respect of obligations under operating leases and £1 million (2018: £2 million) in respect of the excess of lease rentals and other payments on properties that are currently vacant or are expected to become vacant, over the amounts to be recovered from subletting these properties.

Staff related

Staff related provisions include provisions for unfunded pensions of £13 million (2018: £12 million), private medical and other insurance costs for former employees of £3 million (2018: £3 million).

Known incidents

The known incidents provision was created for historical data quality, administration systems problems and process deficiencies on the policy administration, financial reconciliations and operational finance aspects of business outsourced.

On acquisition of the Standard Life Assurance businesses on 31 August 2018, obligations arising as a result of the areas described above were recognised at £37 million on a fair value basis. Additional incidents were identified during the year and the provision was increased by £19 million. The balance at 31 December 2019 is £42 million.

PA(GI) provision

In 2015, PA(GI) Limited, a subsidiary of the Group, was subject to a Companies Court judgement that directed that PA(GI) is liable to claimants for redress relating to creditor insurance policies within a book of insurance underwritten by PA(GI) until 2006. As a consequence, PA(GI) is liable for complaint handling and redress with regard to the complaints.

The PA(GI) provision of £7 million (2018: £17 million) represents the Group's best estimate of the likely future costs. The FCA deadline of 29 August 2019 for submission of complaints has now passed and consequently no new claims are expected. Following the passing of the FCA deadline the level of uncertainty with respect to the remaining exposure has reduced. At 31 December 2019, a reimbursement asset of £15 million (2018: £8 million) has been recognised in other receivables in connection with the Group's exposure to these complaints. This represents recoveries due from third parties under contractual arrangements. Recoveries of £10 million (2018: £18 million) have been received during the year.

FCA thematic reviews provision - Abbey Life

On 3 March 2016, the FCA published a thematic review report on the fair treatment of long-standing customers in the life insurance sector. Following completion of the review, Abbey Life was subject to additional investigations. Specifically, the FCA explored whether remedial and/or disciplinary action was necessary or appropriate in respect of exit or paid-up charges being applied. Additionally, Abbey Life was investigated for potential contravention of regulatory requirements across a number of other areas assessed in the thematic review. On 14 December 2018 the Group was informed by the FCA that it had closed its investigation into Abbey Life, having found that the conduct of Abbey Life did not warrant enforcement action. Accordingly the remaining provision was released in 2018.

In addition, on 14 October 2016, the FCA published its thematic review of non-advised annuity sales. In its findings, the FCA identified concerns in a small number of firms relating to significant communications that took place orally, usually on the telephone. The FCA also identified other areas of possible concern, including in relation to the recording and maintenance of records of calls. The FCA encouraged all firms to consider its feedback and take appropriate action to address the points raised. The Group has recognised provisions in respect of its best estimate of the likely costs associated with its obligations in this regard and the opening provision of £27 million was increased by £5 million during 2019. During the year, £18 million was utilised and the balance of the provision was released.

Under the terms of the Abbey Life acquisition, Deutsche Bank provided Phoenix Life Holdings Limited ('PLHL') with an indemnity, with a duration of up to eight years, in respect of exposures that may arise in Abbey Life as a result of the FCA's final thematic review findings. The indemnity was subject to a limit of £175 million and applied to all regulatory fines and to 80%-90% of the costs of customer remediation. Reflecting the status of the review and remediation processes, agreement was reached with Deutsche Bank during 2019 to close out this indemnity and a payment was received to reflect this closure. Recoveries of £15 million (2018: £9 million) have been received during the year and the reimbursement asset recognised in other receivables was £nil (2018: £14 million).

FCA thematic reviews provision - SLAL

Standard Life Assurance Limited was also a participant in the thematic review of non-advised annuity sales issued by the FCA on 14 October 2016. On acquisition of the Standard Life Assurance businesses on 31 August 2018, obligations arising as a result of past practices in the area described above were assessed. As a result, it was determined appropriate to recognise a provision of £225 million in respect of SLAL on a fair value basis. The provision recognised the estimated costs associated with redress payable to customers, the costs of the review and other expenses. It did not make allowance for any financial penalties that may arise as a result of the completion of the FCA investigation as it was not possible to determine a reliable estimate in this regard.

The FCA's review has now completed and SLAL received a final notice in July 2019 which imposed a financial penalty on the entity of £31 million. SLAL agreed to settle in accordance with the final notice and accordingly a provision of that amount was recognised. As at 31 December 2019, the amount has been settled.

During the period, in addition to the payment of the £31 million noted above, £96 million has been utilised, £79 million has been released, and £6 million remains as at 31 December 2019.

Under the terms of the Standard Life Assurance acquisition, SLA plc provided the Company with a deed of indemnity, with a duration of up to four years from the date of the acquisition, in respect of certain liabilities arising out of the FCA-mandated, and SLA plc's voluntary, review and redress programme in respect of SLAL's historical non-advised sales of pension annuities, and the FCA's ongoing investigation of historical non-advised annuity sales practices. To the extent that total costs post 31 August 2018 exceed £225 million, such amounts will be recoverable under the deed of indemnity and related caps up to a maximum of £155 million. During the period recoveries of £31 million were received from SLA plc in respect of the financial penalty referred to above.

To the extent that total costs are less than £225 million, Old PGH is required to pay the balance to SLA plc, together with any interest that may have accrued on such sum, and subject to recovery of any lost tax relief on the £225 million. In light of the release from the thematic review provision in the year, a liability of £64 million has been recognised within other payables at 31 December 2019 to reflect obligations to SLA plc in this regard.

Restructuring provisions

AXA restructuring provision

Following the acquisition of AXA Wealth in 2016, the Group commenced the restructuring of these businesses to align their operating model with that of the other Group companies. These activities involved separation and integration activities associated with the exiting of interim services agreements entered into with the vendor, and costs involved with implementing the Group's preferred outsourcer model. A provision of £30 million was recognised in 2016, of which £4 million remained at the start of the 2019. This provision was fully utilised in the year.

Transfer of policy administration

A significant proportion of the Group's policy administration is outsourced to Diligenta Limited ('Diligenta'), a UK-based subsidiary of Tata Consultancy Services ('TCS'). Diligenta provide life and pension business process services to a large number of the Group's policyholders. During 2018, the Group announced its intention to move to a single outsourcer platform and as a result a further 2 million of the Group's legacy policies will be transferred to Diligenta by 31 December 2021.

A provision of £76 million was recognised in 2018 for the expected cost of the platform migration. During the year £14 million of this balance was utilised and the remaining £59 million is expected to be utilised within two years.

Transition and Transformation provision

Following the acquisition of the Standard Life Assurance businesses in August 2018, the Group established a transition and transformation programme which aims to deliver the integration of the Group's operating models via a series of phases. During the year, the Group announced its intention to extend its strategic partnership with TCS to provide customer servicing, to develop a digital platform and for migration of existing Standard Life policies to this platform by 2022 which raised a valid expectation of the impacts in those likely to be affected. It is envisaged that £159 million of costs will be incurred over a three year period and will include migration costs, severance costs and other expenses. Migration costs payable to TCS are subject to limited uncertainty as they are fixed under the terms of the agreement entered into. The severance costs are subject to uncertainty and will be impacted by the number of staff that transfer to TCS, and the average salaries and number of years' service of those affected.

Other provisions

Other provisions comprises a number of items including litigation and onerous contract provisions, obligations arising under a gift voucher scheme operated by the SunLife business and a commission clawback provision which represents the expected future clawback of commission income earned by the SunLife business as a result of assumed lapses of policies or associated benefits.

G8. Tax Assets and Liabilities

Deferred tax is provided for on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not provided in respect of temporary differences arising from the initial recognition of goodwill and the initial recognition of assets or liabilities in a transaction that is not a business combination and that, at the time of the transaction, affects neither accounting nor taxable profit. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates and laws enacted or substantively enacted at the period end.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

	2019 £m	2018 £m
Current tax:
Current tax receivable	75	145
Current tax payable	-	(20)
Deferred tax:
Deferred tax liabilities	(873)	(843)

Movement in deferred tax assets/(liabilities)

2019		1 January £m	Recognised in consolidated income statement £m	Recognised in other comprehensive income £m	31 December £m
Trading losses		13	1	-	14
Expenses and deferred acquisition costs carried forward		50	(30)	-	20
Provisions and other temporary differences		9	23	-	32
Non refundable pension scheme surplus		(13)	2	(57)	(68)
Committed future pension contributions		18	(6)	-	12
Pension scheme deficit		13	-	1	14
Accelerated capital allowances		7	1	-	8
Intangibles		-	40	-	40
Acquired in-force business		(810)	119	-	(691)
Customer relationships		(37)	4	-	(33)
Unrealised gains		(60)	(139)	-	(199)
IFRS transitional adjustments		(32)	8	-	(24)
Other		(1)	3	-	2
		(843)	26	(56)	(873)

 

2018	1 January £m	Recognised in consolidated income statement £m	Recognised in other comprehensive income £m	Acquisition of Standard Life Assurance businesses £m	31 December £m
Trading losses	48	(36)	-	1	13
Expenses and deferred acquisition costs carried forward	24	20	-	6	50
Provisions and other temporary differences	8	3	(2)	-	9
Non refundable pension scheme surplus	(13)	3	(3)	-	(13)
Committed future pension contributions	25	(2)	(5)	-	18
Pension scheme deficit	12	1	-	-	13
Accelerated capital allowances	9	(2)	-	-	7
Unpaid interest	16	(16)	-	-	-
Acquired in-force business	(341)	33	-	(502)	(810)
Customer relationships	(33)	3	-	(7)	(37)
Unrealised gains	(81)	188	-	(167)	(60)
IFRS transitional adjustments	(40)	8	-	-	(32)
Other	-	(3)	-	2	(1)
	(366)	200	(10)	(667)	(843)

The Finance Act 2016 reduced the rates of corporation tax from 20% to 19% in April 2017 and to 17% from April 2020. Consequently a blended rate of tax has been used for the purposes of providing for deferred tax in these consolidated financial statements.

Deferred income tax assets are recognised for tax losses carried forward only to the extent that realisation of the related tax benefit is probable.

	2019 £m	2018 £m
Deferred tax assets have not been recognised in respect of:
Tax losses carried forward	30	53
Intangibles	13	-
Deferred tax assets not recognised on capital losses1	2	21

1  These can only be recognised against future capital gains and have no expiry date.

On 31 January 2020, the UK formally left the EU. There is some uncertainty about how the existing tax legislation will evolve following the UK's exit. No changes are required to the measurement of tax in these financial consolidated statements but this will be monitored and reassessed at each reporting period.

The Group in conjunction with a number of other companies has challenged HMRC's position on the corporation tax treatment of overseas portfolio dividends from companies resident in the EU ('EU dividends') using a Group Litigation Order ('GLO'). The issue relates to whether the UK tax rules, which taxed EU dividends received prior to 1 July 2009 was contrary to EU law given that dividends received from UK companies were exempt from tax. In 2009 UK tax law was changed with both overseas and UK dividends being treated as exempt from corporation tax.

The Supreme Court concluded in favour of the tax payer in July 2018 and a tax benefit of £13 million was recognised at the end of 2018 in relation to enhanced double tax relief claims which the Group is entitled to in accordance with the Court judgement. The tax refund is for the benefit of Group with-profits funds (total c£11 million) and unit linked life funds (£2 million). In the case of the with-profits funds there was an increase in unallocated surplus and for the unit linked life funds there is a corresponding increase in investment contract liabilities as a result of the recognition of the tax asset.

HMRC issued a communication to taxpayers who are affected by the dividend GLO but not direct participants of it, in January 2020, setting out HMRC's intended approach to settling enquiries into the amount of double tax relief available for statutory protective or other claims. In view of the large number of cases involved HMRC are currently unable to offer a specific date by which HMRC will be able to deal with the various claims outstanding.

Some companies of the Group were late joiners or not members of the GLO but have made statutory protective tax claims totalling c£14 million for the benefit of unit linked life funds based on the Supreme Court decision. HMRC has challenged the validity of such claims and is currently considering further tax litigation in this area against other third parties. Due to the uncertainty around the potential success of the claims a tax asset has not been recognised in respect of these claims.

G9. Payables Related to Direct Insurance Contracts

Payables related to direct insurance contracts primarily include outstanding claims provisions. Outstanding claims under insurance and investment contracts with DPF are valued using a best estimate method under IFRS 4 'Insurance Contracts'. Outstanding claims under investment contracts without DPF are measured at full settlement value in accordance with IAS 39 'Financial Instruments': Recognition and Measurement.

	2019 £m	2018 £m
Payables related to direct insurance contracts	890	902
Amount due for settlement after 12 months	-	-

G10. Lease Liabilities

The operating lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the Group's incremental borrowing rate as the interest rate implicit in the lease cannot be readily determined. For leases classified as finance leases, the incremental borrowing rate of investment funds holding the associated investment properties is used as discount rate. The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from, for example, rent reviews or from changes in the assessment of whether a termination option is reasonably certain not to be exercised. The Group has applied judgement to determine the lease term for some lease contracts with break clauses.

		£m
As at 1 January 2019 restated (see note A6)		158
Termination of finance leases following the disposal of associated investment properties		(47)
Interest expense		3
Lease payments		(15)
Remeasurement of finance leases under IFRS 16		(15)
As at 31 December 2019		84
Amount due within twelve months		11
Amount due after twelve months		73

The Group has elected not to apply the measurement requirements of IFRS 16 to its low value leases and as such costs of these leases are recognised on a straight-line basis as expense within administrative expenses. The expense for the year was £1 million.

The Group adopted IFRS 16 effective from 1 January 2019 and as noted in note A6 has applied the standard using the modified retrospective approach. As a result, the comparative information for 2018 has not been restated and continues to be reported under IAS 17. The following disclosures are in respect of the operating leases previously reported in the 2018 consolidated financial statements.

In 2018, leases where a significant portion of the risks and rewards of ownership are retained by the lessor were classified as operating leases. Where the Group is the lessee, payments made under operating leases, net of any incentives received from the lessor were charged to the consolidated income statement on a straight-line basis over the period of the lease.

Operating lease rentals charged within administrative expenses in 2018 amounted to £10 million.

The Group had commitments under non-cancellable operating leases as set out below.

		2018 restated1 £m
Not later than 1 year		12
Later than 1 year and not later than 5 years		31
Later than five years		40

1  The disclosures have been restated to reflect the adjustments made to the 2018 operating lease commitments as discussed in note A6.

G11. Accruals and Deferred Income

This note analyses the Group's accruals and deferred income at the end of the year.

	2019 £m	2018 £m
Accruals and deferred income	384	337
Amount due for settlement after 12 months	9	9

G12. Other Payables

Other payables are recognised when due and are measured on initial recognition at the fair value of the consideration payable. Subsequent to initial recognition, these payables are measured at amortised cost using the effective interest rate method.

	2019 £m	2018 £m
Investment broker balances	616	199
Property related payables	35	117
Investment management fees	8	39
Amount due to SLA plc on deed of indemnity (see note G7)	64	-
Other payables	320	518
	1,043	873
Amount due for settlement after 12 months	42	97

H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES

H1. Subsidiaries

Subsidiaries are consolidated from the date that effective control is obtained by the Group (see basis of consolidation in note A1) and are excluded from consolidation from the date they cease to be subsidiary undertakings. For subsidiaries disposed of during the year, any difference between the net proceeds, plus the fair value of any retained interest, and the carrying amount of the subsidiary including non-controlling interests, is recognised in the consolidated income statement.

The Group uses the acquisition method to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the consideration. Any excess of the cost of acquisition over the fair value of the net assets acquired is recognised as goodwill. In certain acquisitions an excess of the acquirer's interest in the net fair value of the acquiree's identifiable assets, liabilities, contingent liabilities and non-controlling interests over cost may arise. Where this occurs, the surplus of the fair value of net assets acquired over the fair value of the consideration is recognised in the consolidated income statement.

Directly attributable acquisition costs are included within administrative expenses, except for acquisitions undertaken prior to 2010 when they are included within the cost of the acquisition. Costs directly related to the issuing of debt or equity securities are included within the initial carrying amount of debt or equity securities where these are not carried at fair value. Intra-group balances and income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements.

The Group has invested in a number of collective investment schemes such as Open-ended Investments Companies ('OEICs'), unit trusts, Société d'Investissement à Capital Variable ('SICAVs'), investment trusts and private equity funds. These invest mainly in equities, bonds, property and cash and cash equivalents. The Group's percentage ownership in these collective investment schemes can fluctuate according to the level of Group and third party participation in the structures.

When assessing control over collective investment schemes, the Group considers those factors described under the 'Basis of consolidation' in note A1. In particular, the Group considers the scope of its decision-making authority, including the existence of substantive rights (such as power of veto, liquidation rights and the right to remove the fund manager) that give it the ability to direct the relevant activities of the investee. The assessment of whether rights are substantive rights, and the circumstances under which the Group has the practical ability to exercise them, requires the exercise of judgement. This assessment includes a qualitative consideration of the rights held by the Group that are attached to its holdings in the collective investment schemes, rights that arise from contractual arrangements between the Group and the entity or fund manager and the rights held by third parties. In addition, consideration is made of whether the Group has de facto power, for example, where third party investments in the collective investment schemes are widely dispersed.

Where Group companies are deemed to control such collective investment schemes they are consolidated in the Group financial statements, with the interests of external third parties recognised as a liability (see the accounting policy for 'Net asset value attributable to unitholders' in note E1 for further details).

Certain of the collective investment schemes have non-coterminous period ends and are consolidated on the basis of additional financial statements prepared to the period end.

H1.1 Significant restrictions

The ability of subsidiaries to transfer funds to the Group in the form of cash dividends or to repay loans and advances is subject to local laws, regulations and solvency requirements.

Each UK Life company and the Group must retain sufficient capital at all times to meet the regulatory capital requirements mandated by or otherwise agreed with the PRA. Further information on the capital requirements applicable to Group entities are set out in the Capital Management note (I3). Under UK company law, dividends can only be paid if a UK company has distributable reserves sufficient to cover the dividend.

In addition, contractual requirements may place restrictions on the transfer of funds as follows:

•  the Pearl Pension Scheme funding agreement includes certain covenants which restrict the transfer of funds within the Group. Details are provided in note G1.1.

•  Pearl Life Holdings Limited ('PeLHL') is required to make payments of contributions into charged accounts on behalf of the Abbey Life Scheme. These amounts do not form part of the pension scheme assets and at 31 December 2019, PeLHL held £49 million (2018: £46 million) within debt securities and £7 million (2018: £1 million) within cash and cash equivalents in respect of these charged accounts. Further details of when these amounts may become payable to the pensions scheme are included in note G1.3.

H2. Acquisition of Standard Life Assurance Businesses

On 31 August 2018, the Group acquired 100% of the issued share capital of Standard Life Assurance Limited, Standard Life Pensions Fund Limited, Standard Life International Designated Activity Company, Vebnet (Holdings) Limited, Vebnet Limited, Standard Life Lifetime Mortgages Limited, Standard Life Assets and Employee Services Limited and Standard Life Investment Funds Limited (together known as 'the Standard Life Assurance businesses') from SLA plc for total consideration of £2,994 million. The consideration consisted of £1,971 million of cash funded by a fully underwritten rights issue of £950 million, with the remaining balance of
£1,021 million funded by a mix of new debt and Phoenix's own resources. In addition, SLA plc took a 19.98% equity stake in the Enlarged Group on completion valued at £1,023 million, based on
the share price at 31 August 2018.

The fair values of the identifiable assets acquired, liabilities assumed and the resultant gain arising on acquisition of £141 million determined at the date of acquisition have not been adjusted within the 12 month period since the date of acquisition.

H3. Associates: Investment in UK Commercial Property Trust Limited ('UKCPT')

UKCPT is a property investment company which is domiciled in Guernsey and is admitted to the official list of the UK Listing Authority and to trading on the London Stock Exchange.

The Group's interest in UKCPT is held in the with-profit funds of the Group's life companies. Therefore, the shareholder exposure to fair value movements in the Group's investment in UKCPT is limited to the impact of those movements on the shareholder share of distributed profits of the relevant fund.

As at 31 December 2019, the Group held 44.6% (2018: 44.7%) of the issued share capital of UKCPT and the value of this investment, measured at fair value, was £513 million (2018: £496 million). Management has concluded that the Group did not control UKCPT in either the current or comparative periods. The Group does not hold a unilateral power of veto in general meetings and is restricted by the terms of an existing relationship agreement it has with UKCPT.

Summary financial information (at 100%) for UKCPT is shown below:

	2019 £m	2018 £m
Non-current assets	1,309	1,431
Current assets	128	67
Non-current liabilities	(247)	(249)
Current liabilities	(23)	(36)
	1,167	1,213
Revenue	29	85
Profit before tax	2	59
Taxation	-	(6)
Profit for the year after tax	2	53

H4. Structured Entities

A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only, and the relevant activities are directed by means of contractual arrangements. A structured entity often has some or all of the following features or attributes: (a) restricted activities; (b) a narrow and well-defined objective, such as to provide investment opportunities for investors by passing on risks and rewards associated with the assets of the structured entity to investors; (c) insufficient equity to permit the structured entity to finance its activities without subordinated financial support; and (d) financing in the form of multiple contractually linked instruments to investors that create concentrations of credit or other risks (tranches).

The Group has determined that all of its investments in collective investment schemes are structured entities. In addition, a number of debt security structures and private equity funds have been identified as structured entities. The Group has assessed that it has interests in both consolidated and unconsolidated structured entities as shown below:

•  Unit trusts;

•  OEICs;

•  SICAVs;

•  Private Equity Funds;

•  Asset backed securities;

•  Collateralised Debt Obligations ('CDOs');

•  Other debt structures; and

•  Phoenix Group EBT.

The Group's holdings in the above investments are subject to the terms and conditions of the respective fund's prospectus and are susceptible to market price risk arising from uncertainties about future values. The Group holds redeemable shares or units in each
of the funds. The funds are managed by internal and external fund managers who apply various investment strategies to accomplish their respective investment objectives. All of the funds are managed by fund managers who are compensated by the respective funds for their services. Such compensation generally consists of an asset-based fee and a performance-based incentive fee and is reflected in the valuation of each fund.

H4.1 Interests in consolidated structured entities

The Group has determined that where it has control over funds, these investments are consolidated structured entities.

The EBT is a consolidated structured entity that holds shares to satisfy awards granted to employees under the Group's share-based payment schemes.

During the year, the Group granted further loans to the EBT of £4 million (2018: £8 million). Further loans are expected to be granted in 2020.

As at the reporting date the Group has no intention to provide financial or other support in relation to any other consolidated structured entity.

H4.2 Interests in unconsolidated structured entities

The Group has interests in unconsolidated structured entities. These investments are held as financial assets in the Group's consolidated statement of financial position held at fair value through profit or loss. Any change in fair value is included in the consolidated income statement in 'net investment income'. Dividend and interest income is received from these investments.

A summary of the Group's interest in unconsolidated structured entities is included below. These are shown according to the financial asset categorisation in the consolidated statement of financial position.

	2019 Carrying value of financial assets £m	2018 restated Carrying value of financial assets £m
Equities	528	463
Collective investment schemes1	69,415	67,692
Debt securities2	3,975	3,864
	73,918	72,019

1  See note A1 for details of the restatement.

2  The Group's interests in unconsolidated structured entities within debt securities in 2018 has been restated following a re-assessment of the nature of the Group's interests in certain investment structures.

The Group's maximum exposure to loss with regard to the interests presented above is the carrying amount of the Group's investments. Once the Group has disposed of its shares or units in a fund, it ceases to be exposed to any risk from that fund. The Group's holdings in the above unconsolidated structured entities are largely less than 50% and as such the size of these structured entities are likely to be significantly higher than their carrying value.

Details of commitments to subscribe to private equity funds and other unlisted assets are included in note I5.

H5. Group Entities

The table below sets out the Group's subsidiaries (including collective investment schemes that have been consolidated within the Group's financial statements), associates and significant holdings in undertakings (including undertakings where holding amounts to 20% or more of the nominal value of the shares or units and they are not classified as a subsidiary or associate).

	Registered address of incorporated entities		If unincorporated, address of principal place of business		Type of investment (including class of shares held)		% of shares/ units held
Subsidiaries:
Phoenix Life Limited (life assurance company)	Wythall2				Ordinary Shares		100.00%
Phoenix Life Assurance Limited (life assurance company)	Wythall2				Ordinary Shares		100.00%
Standard Life Assurance Limited (life assurance company - directly owned by the Company)	Edinburgh26				Ordinary Shares		100.00%
Standard Life International Designated Activity Company (life assurance company - directly owned by the Company)	Dublin6				Ordinary Shares		100.00%
Standard Life Pension Funds Limited (life assurance company)	Edinburgh26				Limited by Guarantee		100.00%
Pearl Group Management Services Limited (management services company)	Wythall2				Ordinary Shares		100.00%
Pearl Group Services Limited (management services company)	Wythall2				Ordinary Shares		100.00%
Standard Life Assets and Employee Services Limited (management services company)	Edinburgh26				Ordinary Shares		100.00%
Britannic Finance Limited (finance and insurance services company)1	Wythall2				Ordinary Shares		100.00%
Pearl Customer Care Limited (financial services company)1	Wythall2				Ordinary Shares		100.00%
Pearl Group Holdings (No. 1) Limited (finance company)	London3				Ordinary Shares		100.00%
Phoenix Customer Care Limited (financial services company)1	Wythall2				Ordinary Shares		100.00%
Phoenix ER1 Limited (finance company)	Wythall2				Ordinary Shares		100.00%
PGH (LC1) Limited (finance company)	Wythall2				Ordinary Shares		100.00%
PGH (LC2) Limited (finance company)	Wythall2				Ordinary Shares		100.00%
PGH (LCA) Limited (finance company)1	Wythall2				Ordinary Shares		100.00%
PGH (LCB) Limited (finance company)1	Wythall2				Ordinary Shares		100.00%
PGH (MC1) Limited (finance company)1	Wythall2				Ordinary Shares		100.00%
PGH (MC2) Limited (finance company)1	Wythall2				Ordinary Shares		100.00%
PGH Capital plc (finance company - directly owned by the Company)	Dublin8				Ordinary Shares		100.00%
PGMS (Ireland) Limited (management services company)	Dublin7				Ordinary Shares		100.00%
Phoenix ER3 Limited (finance company)	Wythall2				Ordinary Shares		100.00%
Phoenix ER4 Limited (finance company)	Wythall2				Ordinary Shares		100.00%
Phoenix ER6 Limited (finance company)	Wythall2				Ordinary Shares		100.00%
Phoenix SL Direct Limited (management services company)1	Wythall2				Ordinary Shares		100.00%
Phoenix Unit Trust Managers Limited (unit trust manager)	Wythall2				Ordinary Shares		100.00%
Phoenix Wealth Services Limited (management services company)	Wythall2				Ordinary Shares		100.00%
Phoenix Wealth Trustee Services Limited (management services company)	Wythall2				Ordinary Shares		100.00%
SLACOM (No. 8) Limited (loan provider company)	Edinburgh26				Ordinary Shares		100.00%
Standard Life Lifetime Mortgages Limited (mortgage provider company)	Edinburgh26				Ordinary Shares		100.00%
The Standard Life Assurance Company of Europe B.V. (financial holding company)	Amsterdam10				Ordinary Shares		100.00%
Vebnet Limited (services company)	Wythall2				Ordinary Shares		100.00%
Mutual Securitisation plc (finance company)	Dublin27				N/A		100.00%
Britannic Money Investment Services Limited (investment advice company)1	Wythall2				Ordinary Shares		100.00%
Inesia SA (investment company)	Luxembourg20				Ordinary Shares		100.00%
Axial Fundamental Strategies (US Investments) LLC	Wilmington18				Limited Liability Company		100.00%
IH (Jersey) Limited (investment company)	Jersey15				Ordinary Shares		100.00%
Pearl (WP) Investments LLC (investment company)	Wilmington18				Limited Liability Company		100.00%
Pearl Assurance Group Holdings Limited (investment company)	Wythall2				Ordinary Shares		100.00%
PGMS (Glasgow) Limited (investment company)1	Edinburgh26				Ordinary Shares		100.00%
PGS 2 Limited (investment company)	Wythall2				Ordinary Shares		100.00%
Phoenix SCP Limited (investment company)	Wythall2				Ordinary Shares		100.00%
Phoenix SPV1 Limited (investment company)1	Wythall2				Ordinary Shares		100.00%
Phoenix SPV2 Limited (investment company)1	Wythall2				Ordinary Shares		100.00%
Phoenix SPV3 Limited (investment company)1	Wythall2				Ordinary Shares		100.00%
Phoenix SPV4 Limited (investment company)1	Wythall2				Ordinary Shares		100.00%
Standard Life Private Equity Trust plc (investment company)	Edinburgh25				Ordinary Shares		55.20%
CH Management Limited (investment company)	Delaware19				Ordinary Shares		100.00%
3 St Andrew Square Apartments Limited (property management company)	Edinburgh25				Ordinary Shares		100.00%
Abbey Life Assurance Company Limited (non-trading company)	Wythall2				Ordinary Shares		100.00%
Abbey Life Trust Securities Limited (pension trustee company)	Wythall2				Ordinary Shares		100.00%
Abbey Life Trustee Services Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Alba LAS Pensions Management Limited (dormant company)	Glasgow11				Ordinary Shares		100.00%
Alba Life Trustees Limited (non-trading company)	Edinburgh26				Ordinary Shares		100.00%
BA (FURBS) Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Britannic Group Services Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Century Trustee Services Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Cityfourinc (dormant company)	Wythall2				Unlimited with Shares		100.00%
Evergreen Trustee Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
G Park Management Company Limited (property management company)	London17				Ordinary Shares		100.00%
Gallions Reach Shopping Park (Nominee) Limited (dormant company)	London17				Ordinary Shares		100.00%
Iceni Nominees (No. 2) Limited (dormant company)	London17				Ordinary Shares		100.00%
Impala Holdings Limited (holding company)	Wythall2				Ordinary Shares		100.00%
Impala Loan Company 1 Limited (dormant company)1	Edinburgh26				Ordinary Shares		100.00%
Inhoco 3107 Limited (dormant company)	London17				Ordinary Shares		100.00%
Lake Meadows Management Company Limited (property management company)	London17				Ordinary Shares		100.00%
London Life Limited (non-trading company)	Wythall2				Ordinary Shares		100.00%
London Life Trustees Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
National Provident Institution (dormant company)	Wythall2				Unlimited without Shares		100.00%
National Provident Life Limited (non-trading company)	Wythall2				Ordinary Shares		100.00%
NP Life Holdings Limited (holding company)	Wythall2				Ordinary Shares		100.00%
NPI (Printworks) Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
NPI (Westgate) Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
PA (GI) Limited (non-trading company)	Wythall2				Ordinary Shares		100.00%
Pearl (Barwell 2) Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Pearl (Chiswick House) Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Pearl (Covent Garden) Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Pearl (Martineau Phase 1) Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Pearl (Martineau Phase 2) Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Pearl (Moor House 1) Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Pearl (Moor House 2) Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Pearl (Moor House) Limited (dormant company)1	Wythall2				Ordinary Shares		100.00%
Pearl (Printworks) Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Pearl (Stockley Park) Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Pearl AL Limited (dormant company)	Glasgow11				Ordinary Shares		100.00%
Pearl Group Holdings (No. 2) Limited (holding company)	Wythall2				Ordinary Shares		100.00%
Pearl Group Secretariat Services Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Pearl Life Holdings Limited (holding company)	Wythall2				Ordinary Shares		100.00%
Pearl MG Birmingham Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Pearl MP Birmingham Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Pearl RLG Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Pearl Trustees Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Pearl ULA Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Phoenix Group Capital Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
PG Dormant (No 4) Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
PG Dormant (No 5) Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
PG Dormant (No 6) Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
PG Dormant (No. 7) Limited (dormant company)	London3				Ordinary Shares		100.00%
PGH (TC1) Limited (holding company - directly owned by the Company)	Wythall2				Ordinary Shares		100.00%
PGH (TC2) Limited (holding company - directly owned by the Company)	Wythall2				Ordinary Shares		100.00%
PGMS (Ireland) Holdings Unlimited Company (holding company)	Dublin7				Unlimited with Shares		100.00%
Phoenix & London Assurance Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Phoenix AW Limited (non-trading company)1	Wythall2				Ordinary Shares		100.00%
Phoenix ER2 Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Phoenix ER5 Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Phoenix Group Holdings (holding company - directly owned by the Company)	Cayman Islands5				Private Company		100.00%
Phoenix Life Holdings Limited (holding company - directly owned by the Company)	Wythall2				Ordinary Shares		100.00%
Phoenix Life Pension Trust Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Phoenix Pension Scheme (Trustees) Limited	Wythall2				Ordinary Shares		100.00%
Phoenix Pensions Trustee Services Limited (dormant company)	Wythall2				Ordinary Shares		100.00%
Phoenix SCP Pensions Trustees Limited (trustee company)	Wythall2				Ordinary Shares		100.00%
Phoenix SCP Trustees Limited (trustee company)	Edinburgh26				Ordinary Shares		100.00%
Phoenix Wealth Holdings Limited (holding company)1	Wythall2				Ordinary Shares		100.00%
Scottish Mutual Assurance Limited (dormant company)1	Edinburgh26				Ordinary Shares		100.00%
Scottish Mutual Nominees Limited (dormant company)	Edinburgh26				Ordinary Shares		100.00%
Scottish Mutual Pension Funds Investment Limited (trustee company)	Edinburgh26				Ordinary Shares		100.00%
SL (NEWCO) Limited (dormant company)	Edinburgh26				Ordinary Shares		100.00%
SL Liverpool plc (dormant company)	Wythall2				Public Limited Company		100.00%
SLA Belgium No.1 SA (property company)	Belgium4				Société Anonyme		100.00%
SLA Netherlands No.1 B.V. (financial holding company)	Amsterdam10				Ordinary Shares		100.00%
SLACOM (No. 10) Limited (dormant company)	Edinburgh26				Ordinary Shares		100.00%
SLACOM (No. 9) Limited (dormant company)	Edinburgh26				Ordinary Shares		100.00%
SLIF Property Investment GP Limited (General Partner to SLIF Property Investment)	Edinburgh25				Ordinary Shares		100.00%
SLIF Property Investment LP Limited (General Partner to SLIF Property Investment)	Edinburgh25				Limited partnership		100.00%
Standard Life Agency Services Limited (dormant)	Edinburgh26				Ordinary Shares		100.00%
Standard Life Investment Funds Limited (dormant company)	Edinburgh26				Ordinary Shares		100.00%
Standard Life Master Trust Co. Ltd (dormant company)	Wythall2				Ordinary Shares		100.00%
Standard Life Property Company Limited (dormant)	Edinburgh26				Ordinary Shares		100.00%
Standard Life Trustee Company Limited (trustee company)	Edinburgh26				Ordinary Shares		100.00%
SunLife Limited (financial services distribution company)	Wythall2				Ordinary Shares		100.00%
The Heritable Securities and Mortgage Investment Association Ltd (dormant company)	Edinburgh26				Ordinary Shares		100.00%
The London Life Association Limited (dormant company)	Wythall2				Limited by Guarantee		100.00%
The Pearl Martineau Galleries Limited Partnership (dormant company)	Wythall2				Limited Partnership		100.00%
The Pearl Martineau Limited Partnership (dormant company)	Lynch Wood21				Limited Partnership		100.00%
The Phoenix Life SCP Institution (dormant company)	Edinburgh26				Limited by Guarantee		100.00%
The Scottish Mutual Assurance Society (dormant company)	Glasgow11				Limited by Guarantee		100.00%
Vebnet (Holdings) Limited (holding company)	Wythall2				Ordinary Shares		100.00%
Welbrent Property Investment Company Limited (dormant company)	London17				Ordinary Shares		100.00%
Pearl Private Equity LP	Edinburgh25				Limited Partnership		100.00%
Pearl Strategic Credit LP	Edinburgh25				Limited Partnership		100.00%
European Strategic Partners LP	Edinburgh25				Limited Partnership		72.70%
Pilangen Logistik AB	Stockholm22				Ordinary Shares		100.00%
Pilangen Logistik I AB	Stockholm22				Ordinary Shares		100.00%
SLA Germany No.1 S.A.R.L	Luxembourg24				Ordinary Shares		100.00%
SLA Germany No.2 S.A.R.L	Luxembourg24				Ordinary Shares		100.00%
SLA Germany No.3 S.A.R.L	Luxembourg24				Ordinary Shares		100.00%
SLA Ireland No.1 S.A.R.L	Luxembourg24				Ordinary Shares		100.00%
Standard Life Assurance (HWPF) Luxembourg SARL	Luxembourg24				Ordinary Shares		100.00%
Phoenix Group Employee Benefit Trust	Jersey16				Trust		100.00%
28 Ribera del Loira SA (dormant company)	Madrid36				Ordinary Shares		100.00%
330 Avenida de Aragon SL (property management company)	Madrid36				Ordinary Shares		100.00%
Hundred S.à r.l. (property management company)	Luxembourg24				Ordinary Shares		100.00%
Janus Henderson Institutional Short Duration Bond Fund			London29		Authorised unit trust		100.00%
Janus Henderson Institutional Mainstream UK Equity Trust			London29		Authorised Unit Trust		100.00%
Janus Henderson Institutional UK Equity Tracker Trust			London29		Authorised Unit Trust		100.00%
Janus Henderson Institutional High Alpha UK Equity Fund			London29		Authorised Unit Trust		81.90%
Janus Henderson Global Funds - Janus Henderson Institutional Overseas Bond Fund			London29		OEIC, sub fund		99.08%
Janus Henderson Strategic Investment Funds - Janus Henderson Institutional North American Index Opportunities Fund			London29		OEIC, sub fund		86.37%
Janus Henderson Strategic Investment Funds - Janus Henderson Institutional Asia Pacific ex Japan Index Opportunities Fund			London29		OEIC, sub fund		82.55%
Janus Henderson Diversified Growth Fund			London29		OEIC, sub fund		81.83%
Janus Henderson Institutional UK Index Opportunities Fund			London29		OEIC, sub fund		54.37%
Janus Henderson Strategic Investment Funds - Janus Henderson Institutional Japan Index Opportunities Fund			London29		OEIC, sub fund		75.40%
PUTM Cautious Unit Trust			Wythall2		Unit Trust		100.00%
PUTM European Unit Trust			Wythall2		Unit Trust		99.36%
PUTM Far Eastern Unit Trust			Wythall2		Unit Trust		99.67%
PUTM Growth Unit Trust			Wythall2		Unit Trust		100.00%
PUTM Opportunity Unit Trust			Wythall2		Unit Trust		100.00%
PUTM International Growth Unit Trust			Wythall2		Unit Trust		100.00%
PUTM UK Stock Market Fund			Wythall2		Unit Trust		100.00%
PUTM UK Stock Market Fund (Series 3)			Wythall2		Unit Trust		100.00%
PUTM UK All-Share Index Unit Trust			Wythall2		Unit Trust		99.90%
PUTM UK Equity Unit Trust			Wythall2		Unit Trust		99.85%
PUTM Bothwell Asia Pacific (Excluding Japan) Fund			Wythall2		Unit Trust		99.54%
PUTM Bothwell Europe Fund			Wythall2		Unit Trust		98.82%
PUTM Bothwell Emerging Market Debt Unconstrained Fund				Wythall2		Unit Trust		100.00%
PUTM Bothwell European Credit Fund				Wythall2	Unit Trust			84.95%
PUTM Bothwell Global Bond Fund				Wythall2	Unit Trust			99.98%
PUTM Bothwell Global Credit Fund				Wythall2	Unit Trust			100.00%
PUTM Bothwell Floating Rate ABS Fund				Wythall2	Unit Trust			100.00%
PUTM Bothwell Index-Linked Sterling Hedged Fund				Wythall2	Unit Trust			100.00%
PUTM Bothwell Japan Tracker Fund				Wythall2	Unit Trust			99.57%
PUTM Bothwell Long Gilt Sterling Hedged Fund				Wythall2	Unit Trust			100.00%
PUTM Bothwell Emerging Markets Equity Fund				Wythall2	Unit Trust			99.94%
PUTM Bothwell North America Fund				Wythall2	Unit Trust			99.40%
PUTM Bothwell Sterling Government Bond Fund				Wythall2	Unit Trust			99.56%
PUTM Bothwell Euro Sovereign Fund				Wythall2	Unit Trust			87.75%
PUTM Bothwell Sterling Credit Fund				Wythall2	Unit Trust			99.85%
PUTM Bothwell Tactical Asset Allocation Fund				Wythall2	Unit Trust			100.00%
PUTM Bothwell UK All Share Listed Equity Fund				Wythall2	Unit Trust			99.17%
PUTM Bothwell UK Equity Income Fund				Wythall2	Unit Trust			100.00%
PUTM Bothwell Institutional Credit Fund				Wythall2	Unit Trust			100.00%
PUTM Bothwell Sub-Sovereign Bd B GBP Acc				Wythall2	Unit Trust			100.00%
PUTM ACS UK All Share Listed Equity Fund				Wythall2	Unit Trust			100.00%
PUTM ACS European ex UK Fund				Wythall2	Unit Trust			100.00%
PUTM ACS Japan Equity Fund				Wythall2	Unit Trust			100.00%
PUTM ACS North American Fund				Wythall2	Unit Trust			100.00%
PUTM Bothwell Short Duration Credit Fund				Wythall2	Unit Trust			100.00%
Standard Life Investments Strategic Bond Fund				Edinburgh25	Unit Trust			72.38%
Standard Life Multi Asset Trust				Edinburgh25	Unit Trust			100.00%
Standard Life European Trust II				Edinburgh25	Unit Trust			100.00%
Standard Life Investment Company Global Emerging Markets Equity				Edinburgh25	OEIC, sub fund			80.60%
Standard Life Investment Company Japanese Equity Growth Fund				Edinburgh25	OEIC, sub fund			83.87%
Standard Life Investment Company II Euro Ethical Equity Fund				Edinburgh25	OEIC, sub fund			83.03%
Standard Life Investment Company II Corporate Debt Fund				Edinburgh25	OEIC, sub fund			100.00%
Standard Life Trust Management European Trust				Edinburgh25	Unit Trust			92.73%
Standard Life Trust Management Japanese Trust				Edinburgh25	Unit Trust			84.77%
Standard Life Trust Management North American Trust				Edinburgh25	Unit Trust			86.80%
Standard Life Trust Management Standard Life Short Dated UK Government Bond Trust				Edinburgh25	Unit Trust			99.99%
Standard Life Trust Management Standard Life Global Equity Trust II				Edinburgh25	Unit Trust			99.99%
Standard Life Trust Management UK Government Bond Trust				Edinburgh25	Unit Trust			99.98%
Standard Life Trust Management UK Corporate Bond trust				Edinburgh25	Unit Trust			100.00%
Standard Life Trust Management Standard Life Active Plus Bond Trust				Edinburgh25	Unit Trust			99.99%
Standard Life Trust Management Pacific Trust				Edinburgh25	Unit Trust			94.40%
Standard Life Trust Management Standard Life International Trust				Edinburgh25	Unit Trust			99.98%
Standard Life Trust Management Pan European Trust				Edinburgh25	Unit Trust			99.97%
Standard Life Trust Management UK Equity General Trust				Edinburgh25	Unit Trust			99.75%
Standard Life Investment Company III MyFolio Managed III Fund				Edinburgh25	OEIC, sub fund			77.28%
Standard Life Investment Company III Enhanced-Diversification Growth Fund				Edinburgh25	OEIC, sub fund			98.06%
Standard Life Investments Global SICAV II Global Short Duration Corporate Bond Fund				Luxembourg30	SICAV, sub fund			83.63%
Standard Life Investments Global SICAV II Myfolio Multi-Manager II Fund				Luxembourg30	SICAV, sub fund			66.67%
Standard Life Investments Global SICAV II Myfolio Multi-Manager IV Fund				Luxembourg30	SICAV, sub fund			59.04%
Standard Life Investments Global SICAV II Myfolio Multi-Manager V Fund				Luxembourg30	SICAV, sub fund			55.18%
Standard Life Investments Global SICAV European Equities Fund				Luxembourg30	SICAV, sub fund			99.02%
Standard Life Investments Global SICAV Indian Equity Midcap Opportunities Fund				Luxembourg30	SICAV, sub fund			64.89%
Standard Life Investments Global SICAV European Equity Unconstrained Fund				Luxembourg30	SICAV, sub fund			98.97%
Standard Life Investments Global SICAV Global Equities				Luxembourg30	SICAV, sub fund			85.09%
Standard Life Investments Global SICAV European Government All Stocks				Luxembourg30	SICAV, sub fund			100.00%
Standard Life Investments Global SICAV Japanese Equities				Luxembourg30	SICAV, sub fund			96.29%
Standard Life Investments Global SICAV Global Bond				Luxembourg30	SICAV, sub fund			75.98%
Standard Life Investments Global SICAV Global High Yield Bond				Luxembourg30	SICAV, sub fund			75.05%
Standard Life Investments Global SICAV Global REIT Focus				Luxembourg30	SICAV, sub fund			96.14%
Standard Life Investments Global SICAV China Equities				Luxembourg30	SICAV, sub fund			75.36%
Standard Life Investments Global SICAV Absolute Return Global Bond Strategies				Luxembourg30	SICAV, sub fund			59.18%
Standard Life Investments Global SICAV Global Emerging Markets Unconstrained				Luxembourg30	SICAV, sub fund			87.46%
Standard Life Investments Global SICAV Global Emerging Markets Local CCY Debt				Luxembourg30	SICAV, sub fund			80.46%
Standard Life Investments Global SICAV Emerging Market Debt				Luxembourg30	SICAV, sub fund			97.81%
Seabury Assets Fund Standard Life Investments The Sterling VNAV Liquidity Fund				Dublin28	UCITS, sub fund			99.57%
Seabury Assets Fund Standard Life Investments The Euro VNAV Liquidity Fund				Dublin28	UCITS, sub fund			100.00%
Ignis Private Equity Fund LP				Cayman Islands5	Limited Partnership			100.00%
Ignis Strategic Credit Fund LP				Cayman Islands5	Limited Partnership			100.00%
ASI Phoenix Fund Financing SCSp (PLFF)				Luxembourg33	Special Limited Partnership			100.00%
North American Strategic Partners 2008 L.P.			Wilmington18		Limited Partnership		100.00%
North American Strategic Partners (Feeder) 2008 L.P.			Edinburgh25		Limited Partnership		100.00%
North American Strategic Partners 2006 L.P.			Wilmington18		Limited Partnership		70.00%
North American Strategic Partners (Feeder) 2006 L.P.			Edinburgh25		Limited Partnership		70.00%
Crawley Unit Trust			Jersey12		Unit Trust		100.00%
Ignis Strategic Solutions Funds plc - Fundamental Strategies Fund			Dublin9		OEIC, sub fund		100.00%
Ignis Strategic Solutions Funds plc - Systematic Strategies Fund			Dublin9		OEIC, sub fund		100.00%
AB SICAV I - ESG Responsible Global Factor Portfolio SF1 GBP (Acc)			Luxembourg30		OEIC, sub fund		64.36%
ASI Financial Equity Fund A Inc			London17		OEIC, sub fund		80.78%
Associates:
UK Commercial Property Estates Limited (property investment company)			Guernsey13		Ordinary Shares		44.62%
UK Commercial Property GP Limited			Guernsey13		Ordinary Shares		44.62%
UK Commercial Property Holdings Limited (property investment company)			Guernsey13		Ordinary Shares		44.62%
UK Commercial Property Nominee Limited (property investment company)			Guernsey13		Ordinary Shares		44.62%
The Moor House Limited Partnership			London14		Limited Partnership		33.27%
Moor House General Partner Limited			London14		Limited Partnership		33.30%
UK Commercial Property REIT Limited			Guernsey13		Ordinary Shares		44.62%
UK Commercial Property Estates Holdings Limited (property investment company)			Guernsey13		Ordinary Shares		44.62%
UKCPT Limited Partnership			Guernsey13		Ordinary Shares		44.62%
UK Commercial Property Finance Holdings Limited			Guernsey13		Ordinary Shares		44.62%
UK Commercial Property Estates (Reading) Limited			London17		Ordinary Shares		44.62%
Brixton Radlett Property Limited			London17		Ordinary Shares		44.62%
Significant holdings:
Janus Henderson Institutional Global Responsible Managed Fund			London29		OEIC, sub fund		55.00%
Standard Life Capital Infrastructure I L.P.			Edinburgh25		Limited Partnership		26.30%
Standard Life Investment Company - Global Emerging Market Equity Income Fund			Edinburgh25		OEIC, sub fund		69.68%
Standard Life Investments Global Absolute Return Strategies Retail Acc			Edinburgh25		Unit Trust		68.12%
Standard Life Investments Dynamic Distribution Fund			Edinburgh25		Unit Trust		53.60%
Standard Life Investments UK Real Estate Accumulation Feeder Fund			Edinburgh25		Unit Trust		45.64%
Standard Life Investments Real Estate Income Feeder Fund			London17		Unit Trust		37.75%
Standard Life Investment Company UK Equity Recovery Fund			Edinburgh25		OEIC, sub fund		36.71%
Standard Life Investment Company American Equity Income			Edinburgh25		OEIC, sub fund		42.09%
Standard Life Investment Company UK Equity Growth Fund			Edinburgh25		OEIC, sub fund		25.62%
Standard Life Investment Company UK Equity High Income Fund			Edinburgh25		OEIC, sub fund		31.66%
Standard Life Investment Company UK Equity High Alpha Fund			Edinburgh25		OEIC, sub fund		25.99%
Standard Life Investment Company Global Equity Unconstrained			Edinburgh25		OEIC, sub fund		45.19%
Standard Life Investment Company Higher Income Fund			Edinburgh25		OEIC, sub fund		39.91%
Standard Life Investment Company UK Opportunities Fund			Edinburgh25		OEIC, sub fund		55.36%
Standard Life Investment Company Short Duration Credit Fund			Edinburgh25		OEIC, sub fund		25.61%
Standard Life Investment Company Smaller Companies Fund			Edinburgh25		OEIC, sub fund		29.40%
Standard Life Investment Company European Equity Growth Fund			Edinburgh25		OEIC, sub fund		35.76%
Standard Life Investment Company II Short Dated Corporate Bond			Edinburgh25		OEIC, sub fund		21.81%
Standard Life Investment Company II UK Equity Unconstrained Fund			Edinburgh25		OEIC, sub fund		43.67%
Standard Life Investment Company II Ethical Corporate Bond Fund			Edinburgh25		OEIC, sub fund		41.79%
Standard Life Investment Company II GLOBAL REIT OEIC			Edinburgh25		OEIC, sub fund		26.72%
Standard Life Managed Trust - American Equity Unconstrained			Edinburgh25		Unit Trust		48.89%
Standard Life Managed Trust - Standard Life Japan Fund			Edinburgh25		Unit Trust		46.33%
Standard Life Managed Trust - Standard Life Global REIT Fund			Edinburgh25		Unit Trust		59.26%
Standard Life Investments Global Real Estate Fund			Edinburgh25		Unit Trust		46.97%
Standard Life Investment Company III MyFolio Market I Fund			Edinburgh25		OEIC, sub fund		45.32%
Standard Life Investment Company III MyFolio Market II Fund			Edinburgh25		OEIC, sub fund		41.19%
Standard Life Investment Company III MyFolio Market III Fund			Edinburgh25		OEIC, sub fund		55.75%
Standard Life Investment Company III MyFolio Market IV Fund			Edinburgh25		OEIC, sub fund		54.58%
Standard Life Investment Company III MyFolio Market V Fund			Edinburgh25		OEIC, sub fund		63.10%
Standard Life Investment Company III MyFolio Multi-Manager I Fund			Edinburgh25		OEIC, sub fund		54.31%
Standard Life Investment Company III MyFolio Multi-Manager II Fund			Edinburgh25		OEIC, sub fund		52.75%
Standard Life Investment Company III MyFolio Multi-Manager III Fund			Edinburgh25		OEIC, sub fund		59.12%
Standard Life Investment Company III MyFolio Multi-Manager IV Fund			Edinburgh25		OEIC, sub fund		53.80%
Standard Life Investment Company III MyFolio Multi-Manager V Fund			Edinburgh25		OEIC, sub fund		51.83%
Standard Life Investment Company III MyFolio Managed I Fund			Edinburgh25		OEIC, sub fund		68.15%
Standard Life Investment Company III MyFolio Managed II Fund			Edinburgh25		OEIC, sub fund		67.64%

H. INTERESTS IN SUBSIDIARIES AND ASSOCIATES continued

H5. Group Entities continued

	Registered address of incorporated entities	If unincorporated, address of principal place of business	Type of investment (including class of shares held)	% of shares/ units held
Standard Life Investment Company III MyFolio Managed IV Fund		Edinburgh25	OEIC, sub fund	63.99%
Standard Life Investment Company III MyFolio Managed V Fund		Edinburgh25	OEIC, sub fund	69.78%
Standard Life Investment Company III MyFolio Multi-Manager Inc III Fund		Edinburgh25	OEIC, sub fund	53.83%
Standard Life Investments Global SICAV II Enhanced-Diversification Multi Asset Fund		Luxembourg30	SICAV, sub fund	49.94%
Standard Life Investments Global SICAV Euro Smaller Companies		Luxembourg30	SICAV, sub fund	30.36%
Standard Life Investments Global SICAV European Corporate Bond		Luxembourg30	SICAV, sub fund	31.54%
Standard Life Investments Global SICAV Global Absolute Return Strategies		Luxembourg30	SICAV, sub fund	44.54%
Aberdeen Liquidity Fund (Lux) Sterling Fund		Luxembourg35	SICAV, sub fund	37.23%
Aberdeen Liquidity Fund (Lux) Euro Fund		Luxembourg35	SICAV, sub fund	37.55%
Aberdeen Liquid (Lux) Ultra Short Duration Sterling Fund		Luxembourg35	SICAV, sub fund	39.38%
Brent Cross Partnership		London14	Limited Partnership	24.16%
Castlepoint LP		Birmingham38	Ordinary Shares	34.81%
Gallions Reach Shopping Park Unit Trust		Jersey12	Unit Trust	78.30%
Standard Life Investments UK Retail Park Trust		Jersey37	Unit Trust	56.60%
Standard Life Investments UK Shopping Centre Trust		Jersey37	Unit Trust	40.67%
Gallions Reach Shopping Park Limited Partnership		London17	Unit Trust	78.30%
Standard Life Investments Brent Cross LP		Edinburgh25	Unit Trust	40.67%
AXA Fixed Interest Investment ICVC - Sterling Strategic Bond Fund		London31	UCITS, sub fund	58.88%
AB SICAV I - Diversified Yield Plus Portfolio		Luxembourg30	SICAV, sub fund	42.92%
MI Somerset Global Emerging Markets		Essex32	OEIC, sub fund	43.86%
BlackRock Market Advantage X GBP (Acc)		London39	UCITS, sub fund	54.64%
Aberdeen Global Emerging Markets Quantitative Equity Fund		London17	SICAV, sub fund	25.00%
AXA Global High Income Fund		London31	OEIC, sub fund	24.58%
BMO Barclays 1-3 Year Global Corporate Bond (GBP Hedged) UCITS ETF		London34	UCITS, sub fund	54.51%
iShares Bloomberg Roll Select Commodity Swap UCITS ETF GBP (Acc)		Dublin40	UCITS, sub fund	49.74%
Nomura Funds Ireland American Century Concentrated Global Growth Equity Fund (Acc )		Dublin42	Unit Trust	25.36%
Amundi Index Solutions SICAV Funds - AIS Amundi Index Msci World SRI I14 HG Cap		Luxembourg41	SICAV, sub fund	20.38%
Amundi UCITS Funds - Amundi Global Multi-Factor Equity Fund C Cap		Luxembourg41	UCITS, sub fund	53.60%
AQR UCITS Funds - AQR Global Risk Parity C5 GBP (Acc)		USA23	UCITS, sub fund	51.22%

1    These subsidiaries have been granted audit exemption by parental guarantee.

2    1 Wythall Green Way, Wythall, Birmingham, West Midlands, B47 6WG, United Kingdom

3    Juxon House, 100 St. Paul's Churchyard, London, EC4M 8BU, United Kingdom

4    Avenue Louise 326, bte 33 1050 Brussels, Belgium

5    Ugland House, Grand Cayman, KY1-1104, Cayman Islands

6    90 St. Stephen's Green, Dublin, D2, Ireland

7    Goodbody Secretarial Limited, International Financial Services Centre, 25/28 North Wall Quay, Dublin 1, Ireland

8    Arthur Cox Building, 10 Earlsfort Terrace, Dublin 2, Dublin, Ireland

9    25/28 North Wall Quay, Dublin 1, Dublin, Ireland

10  Telestone 8, Teleport, Naritaweg 165, 1043 BW, Amsterdam, Netherlands

11  301 St Vincent Street, Glasgow, G2 5HN, United Kingdom

12  Ogier House, The Esplanade, St Helier, JE4 9WG, Jersey

13  Trafalgar Court, Les Banques, St Peter Port, GY1 3QL, Guernsey

14  Kings Place, 90 York Way, London, N1 9GE, United Kingdom

15  22-24 New Street, St Pauls Gate, 4th Floor, JE1 4TR, Jersey

16  32 Commercial Street, St Helier, Jersey, Channel Islands, JE2 3RU, Jersey

17  Bow Bells House, 1 Bread Street, London, EC4M 9HH, United Kingdom

18  Corporation Service Company, 2711 Centerville Rd Suite 400, Wilmington, DE 19808, United States

19  Suite 202, 103 Foulk Road, Wilmington, Delaware, 19803, USA

20  8 Boulevard Royal, L-2449, Luxembourg, Luxembourg

21  The Pearl Centre, Lynch Wood, Peterborough, PE2 6FY, England

22  Citco (Sweden) Ab Stureplan 4c 4 Tr 114 35 Stockholm

23  Aqr Capital Management LLC, Greenwich, 06830, United States

24  6B, rue Gabriel Lippmann, Parc d'Activité Syrdall 2, L-5365 Münsbach, Luxembourg

25  1 George Street, Edinburgh, EH2 2LL, United Kingdom

26  Standard Life House, 30 Lothian Road, Edinburgh, EH1 2DH, United Kingdom

27  4th Floor, 25-28 Adelaide Road, Dublin 2, D02RY98, Ireland

28  70 Sir Rogerson's Quay, Dublin 2, Republic of Ireland

29  201 Bishopsgate, London, EC2M 3AE, United Kingdom

30  88 2-4, Rue Eugène Ruppert, L-2453 Luxembourg, Luxembourg

31  7 Newgate Street, London EC1A 7NX, United Kingdom

32  Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW, United Kingdom

33  49, Avenue J.F. Kennedy, L-1855 Luxembourg

34  BMO Global Asset Management, Exchange House, Primrose Street, London EC2A 2NY, United Kingdom

35  35a Avenue J.F. Kennedy, L-1855, Luxembourg

36  Avenida de Aragon 330 - Building 5, 3rd Floor, Parque Empresarial Las Mercedes, 28022 - Madrid, Spain

37  Elizabeth House, 9 Castle Street, St Helier, JE4 2QP, Jersey

38  2 Snowhill, Birmingham, B4 6WR, United Kingdom

39  12 Throgmorton Avenue, London EC2N 2DL

40  1st Floor, 2 Ballsbridge Park, Ballsbridge, Dublin, D04 YW83, Ireland

41  5, Allée Scheffer, 2520 Luxembourg, Luxembourg

42  33 Sir John Rogerson's Quay, Dublin 2, Ireland

The following subsidiaries were dissolved during the period. The subsidiaries were deconsolidated from the date of dissolution:

•  Alcobendas Entrust Limited;

•  Century Group Limited;

•  Clearfol Investment Limited;

•  Corunna Limited;

•  NPI Limited;

•  Pearl RLH Limited;

•  Pearl Life Services Limited;

•  Phoenix Life Insurance Services Limited;

•  Phoenix Pensions Limited;

•  Scottish Mutual Customer Care Limited;

•  SPL (Holdings 1) Limited;

•  SPL (Holdings) Limited;

•  Zilmer Limited.

The following subsidiaries were either fully disposed of or holdings became insignificant to the Group. The subsidiaries were deconsolidated either from the date of disposal or from the date when the holdings became insignificant:

•  Janus Henderson Strategic Investment Funds - Janus Henderson Institutional European Index Opportunities Fund;

•  Janus Henderson Institutional UK Gilt Fund;

•  AB SICAV I - Global Factor Portfolio;

•  Aberdeen Capital Trust Inc;

•  Standard Life Investment Company Emerging Market Debt Fund;

•  Standard Life Investments Global SICAV Emerging Market Debt Unconstrained.

The Group no longer has significant holdings in the following undertakings:

•  Scottish Widows Tracker and Specialist Investment Funds - International Bond Fund;

•  AXA Sterling Index Linked Bond Fund;

•  iShares MSCI Taiwan UCITS ETF;

•  Scottish Widows UK and Income - Scottish Widows Ethical Fund;

•  AQR UCITS Funds - AQR Global Risk Parity C4 UCITS Fund;

•  Standard Life Investment Company American Equity Unconstrained Fund;

•  Standard Life Investment Company III MyFolio Managed Income II Fund;

•  Standard Life Investment Company III MyFolio Managed Income III Fund;

•  Standard Life Investments Global SICAV Global Corporate Bond;

•  Standard Life Investments Global SICAV Global Focused Strategies.

I. OTHER NOTES

I1. Share-Based Payment

Equity-settled share-based payments to employees and others providing services are measured at the fair value of the equity instruments at the grant date. The fair value excludes the effect of non-market-based vesting conditions. Further details regarding the determination of the fair value of equity-settled share-based transactions are set out below.

The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of equity instruments that will eventually vest. At each period end, the Group revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in the consolidated income statement such that the cumulative expense reflects the revised estimate with a corresponding adjustment to equity.

I1.1 Share-based payment expense

The expense recognised for employee services receivable during the year is as follows:

	2019 £m	2018 £m
Expense arising from equity-settled share-based payment transactions	11	9

I1.2 Share-based payment schemes

Long-Term Incentive Plan ('LTIP')

The Group implemented a long-term incentive plan to retain and motivate its senior management group. The awards under this plan are in the form of nil-cost options to acquire an allocated number of ordinary shares. Following the scheme of arrangement on 12 December 2018, participants in the Old PGH LTIP plan had their outstanding awards automatically exchanged for equivalent awards over PGH plc ordinary shares.

Assuming no good leavers or other events which would trigger early vesting rights, the 2017 LTIP award is subject to performance conditions tied to the Company's performance in respect of cumulative cash generation and Total Shareholder Return ('TSR'). The 2018 and 2019 LTIP awards are subject to performance conditions tied to the Company's performance in respect of cumulative cash generation, return on Adjusted Shareholder Solvency II Own Funds and TSR.

For all LTIP awards, a holding period applies so that any LTIP awards to Executive Committee members for which the performance vesting requirements are satisfied will not be released for a further two years from the third anniversary of the original award date. Dividends will accrue on LTIP awards until the end of the holding period. There are no cash settlement alternatives.

2019 LTIP awards were granted on 11 March 2019 and are expected to vest on 11 March 2022. The number of shares for all outstanding LTIP awards as at 10 July 2018 were increased to take into account the impact of the Group's rights issue (see note D1). This adjustment was based on the Theoretical Ex-Rights Price. The 2016 LTIP awards vested on 30 March 2019 and 2 June 2019. The 2017 awards will vest on 24 March 2020 and the 2018 awards will vest on 21 March 2021.

The fair value of these awards is estimated at the share price at the grant date, taking into account the terms and conditions upon which the instruments were granted. The fair value of the 2017, 2018 and 2019 LTIP awards is adjusted in respect of the TSR performance condition which is deemed to be a 'market condition'. The fair value of the 2017, 2018 and 2019 TSR elements of the LTIP awards has been calculated using a Monte Carlo model. The inputs to this model are shown below:

	2019 TSR performance condition	2018 TSR performance condition	2017 TSR performance condition
Share price (p)	694.0	709.5	787.5
Expected term (years)	3.0	3.0	2.8
Expected volatility (%)	20	20	24
Risk-free interest rate (%)	0.74	0.96	0.2
Expected dividend yield (%)	Dividends are received by holders of the awards therefore no adjustment to fair value is required

On 21 December 2018 LTIP awards were granted to certain employees under the terms of the new PGH plc scheme rules. There are discreet vesting periods for these awards and the first tranche of awards vested on 24 March 2019. The remaining awards vest on 27 March 2020 and 28 March 2021. These grants of shares are conditional on the employees remaining in employment with the Group for the vesting period.

Each year, the Group issues a Chairman's share award under the terms of the LTIP which is granted to a small number of employees in recognition of their outstanding contribution in the previous year. On 11 March 2019, awards were granted and are expected to vest on 11 March 2022. The 2017 and 2018 awards are expected to vest on 24 March 2020 and 21 March 2021 respectively. These grants of shares are conditional on the employees remaining in employment with the Group for the vesting period and achieving an established minimum performance grading.

Deferred Bonus Share Scheme ('DBSS')

Each year, part of the annual incentive for certain executives is deferred into shares of the parent company. As noted for the LTIP, following the Scheme of Arrangement, participants in the Old PGH DBSS plan had their outstanding awards automatically exchanged for equivalent awards over PGH plc ordinary shares. The grant of these shares is conditional on the employee remaining in employment with the Group for a period of three years from the date of grant. Dividends will accrue for DBSS awards over the three year deferral period.

The 2019 DBSS was granted on 11 March 2019 and is expected to vest on 11 March 2022. The number of shares for all outstanding DBSS awards as at 10 July 2018 were increased to take into account the impact of the Group's rights issue (see note D1). This adjustment has been based on the Theoretical Ex-Rights Price. The 2016 DBSS awards vested during the year. The 2017 awards are expected to vest on 20 March 2020 and the 2018 awards are expected to vest on 15 March 2021.

The fair value of these awards is estimated at the share price at the grant date, taking into account the terms and conditions upon which the options were granted.

Sharesave scheme

The sharesave scheme allows participating employees to save up to £500 each month for the UK scheme and up to €500 per month for the Irish scheme over a period of either three or five years. The Irish sharesave scheme commenced with the 2019 grant. The 2019 sharesave options were granted on 1 April 2019.

Under the sharesave arrangement, participants remaining in the Group's employment at the end of the three or five year saving period are entitled to use their savings to purchase shares at an exercise price at a discount to the share price on the date of grant. Employees leaving the Group for certain reasons are able to use their savings to purchase shares if they leave less than six months before the end of their three or five year periods.

Following the scheme of arrangement, participants in the Old PGH sharesave plan exchanged their options over Old PGH shares for equivalent options over PGH plc ordinary shares. All sharesave options were increased in November 2016 and again in July 2018 following the Group's rights issues (see note D1) and the exercise price of these awards was also amended as a result of these issues.

The fair value of the options has been determined using a Black-Scholes valuation model. Key assumptions within this valuation model include expected share price volatility and expected dividend yield.

The following information was relevant in the determination of the fair value of the 2015 to 2019 UK sharesave options:

	2019 sharesave	2018 sharesave	2017 sharesave	2016 sharesave	2015 sharesave
Share price (£)	6.800	7.685	7.470	8.890	8.430
Exercise price (£) (Revised)	5.610	5.629	5.674	5.746	5.654
Expected life (years)	3.25 and 5.25	3.25 and 5.25	3.25 and 5.25	3.25 and 5.25	3.25 and 5.25
Risk-free rate (%) - based on UK government gilts commensurate with the expected term of the award	1.0 (for 3.25 year scheme) and 1.1 (for 5.25 year scheme)	1.0 (for 3.25 year scheme) and 1.1 (for 5.25 year scheme)	0.2 (for 3.25 year scheme) and 0.4 (for 5.25 year scheme)	0.6 (for 3.25 year scheme) and 1.0 (for 5.25 year scheme)	0.8 (for 3.25 year scheme) and 1.2 (for 5.25 year scheme)
Expected volatility (%) based on the Company's share price volatility to date	30.0	30.0	30.0	30.0	30.0
Dividend yield (%)	6.8	6.5	6.3	6.0	6.3

The information for determining the fair value of the 2019 Irish sharesave options differed from that included in the table above as follows:

•  share price (€): 7.946

•  Exercise price (€) 6.540

•  Risk-free rate (%): (0.1) (for 3.25 year scheme) and nil (for
5.25 year scheme).

Share Incentive Plan

The Group operates two Share Incentive Plans ('SIPs') open to UK and Irish employees which allows participating employees to purchase 'Partnership shares' in the Company through monthly contributions. In respect of the UK SIP, the contributions are limited to the lower of £150 per month and 10% gross monthly salary. During the year the matching element of the UK SIP was amended to give the employee one 'Matching share' for each 'Partnership share' purchased limited to £50. Contributions above £50 are not matched. The Irish SIP was launched during the year and this plan gives the employee 1.4 'Matching shares' for each 'Partnership share' purchased. For this plan monthly contributions are limited to the lower of €40 per month and 7.5% of gross monthly salary.

The fair value of the Matching shares granted is estimated as the share price at date of grant, taking into account terms and conditions upon which the instruments were granted. At 31 December 2019, 146,769 matching shares (including unrestricted shares) were conditionally awarded to employees (2018: 57,918).

I1.3 Movements in the year

The following tables illustrate the number of, and movements in, LTIP, Sharesave and DBSS share options during the year:

			Number of share options 2019
			LTIP	Sharesave	DBSS
Outstanding at the beginning of the year			3,794,061	1,375,620	771,040
Granted during the year			1,657,107	1,669,701	356,872
Forfeited during the year			(588,747)	(186,878)	-
Exercised during the year			(224,866)	(315,679)	(222,045)
Outstanding at the end of the year			4,637,555	2,542,764	905,867

 

			Number of share options 2018
			LTIP	Sharesave	DBSS
Outstanding at the beginning of the year			2,992,327	1,264,992	630,489
Granted during the year			1,215,824	453,167	289,625
Corporate action			416,937	164,896	77,642
Forfeited during the year			(576,218)	(237,293)	(26,141)
Exercised during the year			(254,809)	(270,142)	(200,575)
Outstanding at the end of the year			3,794,061	1,375,620	771,040

The weighted average fair value of options granted during the year was £4.10 (2018: £5.75).

The weighted average share price at the date of exercise for the rewards exercised is £6.81 (2018: £6.82).

The weighted average remaining contractual life for the rewards outstanding as at 31 December 2019 is five years (2018: six years).

I2. Cash Flows From Operating Activities

The following analysis gives further detail behind the 'cash generated/(utilised) by operations' figure in the statement of consolidated cash flows.

		2019 £m	2018 restated1 £m
Profit for the period before tax		351	259
Non-cash movements in profit for the period before tax:
Gain on acquisition		-	(141)
Fair value losses/(gains) on:
Investment property		55	18
Financial assets and derivative liabilities		(18,784)	12,718
Change in fair value of borrowings		(47)	29
Amortisation of intangible assets		402	214
Change in present value of future profits		(70)	(1)
Change in unallocated surplus		(84)	(88)
Share-based payment charge		11	9
Finance costs		162	142
Net interest expense on Group defined benefit pension scheme liability/asset		29	6
Pension past service costs		-	57
Other costs of pension schemes		4	6
Decrease in investment assets		6,131	5,230
(Increase)/decrease in reinsurance assets		(295)	681
Increase/(decrease) in insurance contract and investment contract liabilities		11,792	(19,043)
Decrease in deposits received from reinsurers		(236)	(178)
Increase/(decrease) in obligation for repayment of collateral received		1,026	(568)
Net (increase)/decrease in working capital		(128)	329
Other items:
Contributions to defined benefit pension schemes		(46)	(46)
Acquisition related expenses to be included within cash flows from investing activities		-	43
Cash generated/(utilised) by operations		273	(324)

1  See note A1 for details of restatements.

I3. Capital Management

The Group's capital management is based on the Solvency II framework. This involves a valuation in line with Solvency II principles of the Group's Own Funds and risk-based assessment of the Group's Solvency Capital Requirement ('SCR').

This note sets out the Group's approach to managing capital and provides an analysis of Own Funds and SCR.

Risk and capital management objectives

The risk management objectives and policies of the Group are based on the requirement to protect the Group's regulatory capital position, thereby safeguarding policyholders' guaranteed benefits whilst also ensuring the Group can meet its various cash flow requirements. Subject to this, the Group seeks to use available capital to achieve increased returns, balancing risk and reward, to generate additional value for policyholders and shareholders.

In pursuing these objectives, the Group deploys financial and other assets and incurs insurance contract liabilities and financial and other liabilities. Financial and other assets principally comprise investments in equity securities, debt securities, collective investment schemes, property, derivatives, reinsurance, trade and other receivables, and banking deposits. Financial liabilities principally comprise investment contracts, borrowings for financing purposes, derivative liabilities and net asset value attributable to unit holders.

The risk management disclosures in the consolidated financial statements set out the major risks that the Group businesses are exposed to and describe the Group's approach to managing these. The section on financial risk is included in note E6, the section on insurance risk is included in note F4 and the sections on risk and capital management objectives and other risks are included below. The Group's risk management framework is described in the risk management commentary on pages 48 to 56 of the Annual Report and Accounts.

Other risks

Customer risk

Customer risk is the risk of reductions in earnings and/or value through inappropriate or poor customer treatment (including poor advice).

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.

Capital Management Framework

The Group's Capital Management Framework is designed to achieve the following objectives:

•  to provide appropriate security for policyholders and meet all regulatory capital requirements under the Solvency II regime while not retaining unnecessary excess capital;

•  to ensure sufficient liquidity to meet obligations to policyholders and other creditors;

•  to optimise the Fitch Ratings financial leverage to maintain an investment grade credit rating; and

•  to maintain a stable and sustainable dividend policy.

The framework comprises a suite of capital management policies that govern the allocation of capital throughout the Group to achieve the framework objectives under a range of stress conditions. The policy suite is defined with reference to policyholder security, creditor obligations, owner dividend policy and regulatory capital requirements.

Group capital

Group capital is managed on a Solvency II basis. Under the Solvency II framework, the primary sources of capital managed by the Group comprise the Group's Own Funds as measured under the Solvency II principles adjusted to exclude surplus funds attributable to the Group's unsupported with-profit funds and unsupported pension schemes.

A Solvency II capital assessment involves 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'). Solvency II surplus is the excess of Own Funds over the SCR.

The Group aims to maintain a Solvency II surplus at least equal to its Board-approved capital policy, which reflects Board risk appetite for meeting prevailing solvency requirements.

The capital policy of each Life Company is set and monitored by each Life Company Board. These policies ensure there is sufficient capital within each Life Company to meet regulatory capital requirements under a range of stress conditions. The capital policy of each Life Company varies according to the risk profile and financial strength of the company.

The capital policy of each Group Holding Company is designed to ensure that there is sufficient liquidity to meet creditor obligations through the combination of cash buffers and cash flows from the Group's operating companies.

Own Funds and SCR

Basic Own Funds represents the excess of assets over liabilities from the Solvency II balance sheet adjusted to add back any relevant subordinated liabilities that meet the criteria to be treated as capital items.

The Basic Own Funds are classified into three Tiers based on permanency and loss absorbency (Tier 1 being the highest quality and Tier 3 the lowest). The Group's Own Funds are assessed for their eligibility to cover the Group SCR with reference to both the quality of capital and its availability and transferability. Surplus funds in with-profit funds of the Life companies and in the pension schemes are restricted and can only be included in Eligible Own Funds up to the value of the SCR they are used to support.

Eligible Own Funds to cover the SCR are obtained after applying the prescribed Tiering limits and transferability restrictions to the Basic Own Funds.

The SCR is calibrated so that the likelihood of a loss exceeding the SCR is less than 0.5% over one year. This ensures that capital is sufficient to withstand a broadly '1 in 200 year event'.

In December 2015, the Group was granted the PRA's approval for use of its Internal Model to assess capital requirements. Following the 2016 acquisitions of the AXA Wealth and Abbey Life businesses, the Group obtained the PRA's approval to incorporate the acquired AXA Wealth and Abbey Life businesses within the scope of the Group's Internal Model in March 2017 and March 2018 respectively.

The acquired Standard Life Assurance businesses also determine their capital requirements in accordance with an approved partial Internal Model. In accordance with the approvals received from the PRA, the Enlarged Group operates a partial Internal Model to calculate Group SCR, aggregating outputs from both the existing Phoenix Internal Model and the Standard Life Internal Model with no diversification between the two. A harmonisation programme to combine the two models into a single Internal Model has commenced. The Irish life entity, Standard Life International Designated Activity Company, determines its capital requirements in accordance with the Standard Formula.

Group capital resources - unaudited

The Group capital resources are based on the Group's Eligible Own Funds adjusted to remove amounts pertaining to unsupported with-profit funds and Group pension schemes:

Unaudited		2019 £bn	2018 £bn
PGH plc Eligible Own Funds		10.8	10.3
Remove Own Funds pertaining to unsupported with-profit funds and pension schemes		(2.5)	(2.3)
Group capital resources		8.3	8.0

Solvency II surplus - unaudited

An analysis of the PGH plc Solvency II surplus as at 31 December 2019 is provided in the business review section on pages 42 to 44. The Group has complied with all externally imposed capital requirements during the year.

Additional information on the PGH plc Own Funds, SCR and MCR is included in the additional capital disclosures on pages 262 and 263.

I4. Related Party Transactions

In the ordinary course of business, the Group and its subsidiaries carry out transactions with related parties as defined by IAS 24 'Related party disclosures'.

I4.1 Related party transactions

During the year, the Group entered into the following transactions with related parties. As set out in note H2, SLA plc took a 19.98% equity stake in the Enlarged Group, and as a result became a related party of the Group. SLA plc is considered to have a significant influence over the Group due to their equity stake and representation on the Board of Directors.

	Transactions 2019 £m	Balances outstanding 2019 £m	Transactions 2018 £m	Balances outstanding 2018 £m
Pearl Group Staff Pension Scheme
Payment of administrative expenses	(3)	-	(3)	-
UK Commercial Property Trust Limited
Dividend income	21	-	22	-
Reduction in investment	(17)	-	(35)	-
SLA plc
Investment management fees	(133)	(55)	(87)	(55)
Fees under Transitional Services Arrangement and material outsource agreements	(6)	(4)	(2)	(2)
Receipts under Transitional Services Arrangement	75	10	26	15
Net receipts under Client Service Proposition Agreement	18	23	5	2
Net payments under deed of indemnity	(33)	(64)	-	-
Dividend paid	(67)	-	(33)	-

I4.2 Transactions with key management personnel

The total compensation of key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the Executive and Non-Executive Directors, are as follows:

	2019 £m	2018 £m
Salary and other short-term benefits	5	5
Equity compensation plans	2	2

Details of the shareholdings and emoluments of individual Directors are provided in the Remuneration report on pages 99 to 130.

During the year to 31 December 2019 key management personnel and their close family members contributed £16,395 (2018: £28,000) to Pensions and Savings products sold by the Group. At 31 December 2019, the total value of key management personnel's investments in Group Pensions and Savings products was £2,590,240 (2018: £1,639,000).

I5. Commitments

This note analyses the Group's other commitments.

	2019 £m	2018 £m
To subscribe to private equity funds and other unlisted assets	396	655
To purchase, construct or develop investment property and income strips	161	125
For repairs, maintenance or enhancements of investment property	6	15

I6. Contingent Liabilities

Where the Group has a possible future obligation as a result of a past event, or a present legal or constructive obligation but it is not probable that there will be an outflow of resources to settle the obligation or the amount cannot be reliably estimated, this is disclosed as a contingent liability.

Agreements with Standard Life Aberdeen

On 23 February 2018, the Group entered into the SLA Share Purchase Agreement with Standard Life Aberdeen, in connection with the Group's acquisition of the Standard Life Assurance businesses. In connection with the acquisition, certain members
of the Group entered into the SLA Transitional Services Agreement ('the TSA') with certain members of the Standard Life Aberdeen group, pursuant to which certain services were agreed to be provided from one group to the other group for a specified period.
In addition, certain members of the Group entered into the SLA Client Service and Proposition Agreement ('the CSPA') with certain members of the Standard Life Aberdeen group, which set out the terms under which the parties would provide services and support
 to each other with respect to certain client propositions, products and services. The Group is currently engaged in ongoing discussions with members of the Standard Life Aberdeen group in respect of disagreements over the operation of certain aspects of the SLA Share Purchase Agreement relating to services and expenses, and the scope and cost of services provided pursuant to the TSA, the CSPA and certain other agreements between the Group and members of the Standard Life Aberdeen group. Whilst Phoenix and Standard Life Aberdeen are currently seeking a commercial resolution in respect of such disagreements, it is possible that all
or some of these matters could be escalated to a dispute resolution process provided for in the relevant agreements, or result in legal or arbitration proceedings. There is no certainty as to how the current disagreements will be resolved and the extent to which an outflow of resources will be required to settle any obligation, should it arise.

Legal proceedings

In the normal course of business, the Group is exposed to certain legal issues, which can involve litigation and arbitration. At the period end, the Group has a number of contingent liabilities in this regard, none of which are considered by the Directors to be material, with the exception of the Standard Life Aberdeen agreements matters detailed above.

I7. Events After the Reporting Period

The consolidated financial statements are adjusted to reflect significant events that have a material effect on the financial results and that have occurred between the period end and the date when the financial statements are authorised for issue, provided they give evidence of conditions that existed at the period end. Events that are indicative of conditions that arise after the period end that do not result in an adjustment to the consolidated financial statements are disclosed.

On 29 January 2020, the Company issued US $750 million fixed rate reset perpetual restricted Tier 1 contingent convertible notes with an initial fixed interest rate of 5.625%. Fees associated with these notes will be deferred and amortised over the life of the loan.

On 6 December 2019, the Company announced the proposed acquisition of the entire issued share capital of ReAssure Group plc from Swiss Re Finance Midco (Jersey) ('Swiss Re'). The acquisition was approved at a general meeting of the Company's shareholders on 13 February 2020 and is subject to regulatory approval. Total consideration of £3.2 billion payable to Swiss Re upon completion will be satisfied through cash consideration of £1.2 billion, subject to certain customary adjustments, and the issuance to Swiss Re (or a member of its group) of ordinary shares with a value of £2.0 billion.

On 27 February 2020, the Company entered into a £500 million bridge facility (the 'bridge facility'). The bridge facility matures on the first anniversary of the completion of the acquisition of ReAssure Group plc but can be extended by a further six months on two occasions. The bridge facility is available to be used to finance the acquisition of ReAssure Group plc on a customary certain funds basis, and, subject to the agreement of the lenders, may also be available to be utilised after completion of the acquisition for the general corporate purposes of the Group. There are no mandatory or target amortisation payments associated with the bridge facility but the bridge facility does include mandatory prepayment obligations that are customary for a bridge facility of this nature and voluntary prepayments are permissible. The bridge facility accrues interest at a margin over LIBOR that starts at 0.35% per annum and steps up periodically until maturity.

On 6 March 2020, the Board recommended a final dividend of 23.4p per share (2018: 23.4p per share) for the year ended 31 December 2019. Payment of the final dividend is subject to shareholder approval at the AGM. The cost of this dividend has not been recognised as a liability in the consolidated financial statements for 2019 and will be charged to the consolidated statement of changes in equity in 2020.

N LYONS

C BANNISTER

J MCCONVILLE

A BARBOUR

A BRIGGS

C FLEMING

K GREEN

W MAYALL

J POLLOCK

B RICHARDS

N SHOTT

K SORENSON

M TUMILTY

 

6 March 2020

 

 

PARENT COMPANY FINANCIAL STATEMENTS STATEMENT OF FINANCIAL POSITION

As at 31 December 2019

	Notes	2019 £m	2018 £m
ASSETS
Investments in Group entities	9	6,928	4,146
Financial assets
Equities	11	2	-
Loans and deposits	10	1,227	2,056
Derivatives	6	5	-
Debt securities	11	43	-
Collective investment schemes	11	200	-
Deferred tax	12	15	-
Other amounts due from Group entities	18	198	20
Cash and cash equivalents	13	45	1
Total assets		8,663	6,223
EQUITY AND LIABILITIES
Equity attributable to ordinary shareholders
Share capital	3	72	72
Share premium	3	2	-
Other reserve		(4)	(4)
Retained earnings		5,368	4,075
Total equity attributable to ordinary shareholders		5,438	4,143
Tier 1 Notes	4	411	411
Total equity		5,849	4,554
Liabilities
Financial liabilities
Borrowings	5	2,020	1,634
Derivatives	6	31	1
Other amounts due to Group entities	18	533	1
Provisions	7	172	-
Accruals and deferred income	8	58	33
Total liabilities		2,814	1,669
Total equity and liabilities		8,663	6,223

 

 

STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2019

The notes identified numerically on pages 247 to 254 are an integral part of these separate financial statements. Where items also appear in the consolidated financial statements, reference is made to the notes (identified alphanumerically) on pages 154 to 243.

	Share capital (note 3)  £m	Share premium (note 3)  £m	Other reserve (note 9) £m	Retained earnings £m	Total £m	Tier 1 Notes (note 4) £m	Total equity £m
At 1 January 2019	72	-	(4)	4,075	4,143	411	4,554
Total comprehensive income for the year attributable to owners	-	-	-	1,643	1,643	-	1,643
Issue of ordinary share capital, net of associated commissions and expenses	-	2	-	-	2	-	2
Dividends paid on ordinary shares (note B4)	-	-	-	(338)	(338)	-	(338)
Coupon paid on Tier 1 Notes, net of tax relief	-	-	-	(23)	(23)	-	(23)
Credit to equity for equity-settled share-based payments (note I1)	-	-	-	11	11	-	11
At 31 December 2019	72	2	(4)	5,368	5,438	411	5,849

For the period from 5 October 2018 to 31 December 2018

	Share capital (note 3)  £m	Share premium (note 3)  £m	Other reserve (note 9) £m	Retained earnings £m	Total £m	Tier 1 Notes (note 4) £m	Total equity £m
On incorporation at 5 October 2018	-	-	-	-	-	-	-
Total comprehensive expense for the period attributable to owners	-	-	-	(3)	(3)	-	(3)
Issue of ordinary shares under scheme of arrangement	72	4,078	(4)	-	4,146	-	4,146
Capital reduction	-	(4,078)	-	4,078	-	-	-
Issue of Tier 1 Notes via substitution	-	-	-	-	-	411	411
At 31 December 2018	72	-	(4)	4,075	4,143	411	4,554

 

 

STATEMENT OF CASH FLOWS

For the year ended 31 December 2019

	Notes	2019 £m	2018 £m
Cash flows from operating activities
Cash generated by operations	14	411	-
Net cash flows from operating activities		411	-
Cash flows from investing activities
Investment income		2	-
Interest received from Group entities		77	29
Net cash flows from investing activities		79	29
Cash flows from financing activities
Proceeds from issuing ordinary shares	3	2	-
Proceeds from new shareholder borrowings, net of associated expenses	5	100	-
Repayment of shareholder borrowings	5	(100)	-
Ordinary share dividends paid		(338)	-
Interest paid on borrowings		(81)	(28)
Coupon paid on Tier 1 Notes		(29)	-
Net cash flows from financing activities		(446)	(28)
Net increase in cash and cash equivalents		44	1
Cash and cash equivalents at the beginning of the period		1	-
Cash and cash equivalents at the end of the period		45	1

 

 

NOTES TO THE PARENT COMPANY
FINANCIAL STATEMENTS

1. ACCOUNTING POLICIES

(a) Basis of Preparation

The financial statements have been prepared on a going concern and on an historical cost basis except for those financial assets and financial liabilities that have been measured at fair value.

The Company has taken advantage of the exemption in section 408 of the Companies Act 2006 not to present its own income statement in these financial statements. Profit attributable to owners for the year ended 31 December 2019 was £1,643 million (2018: £3 million loss).

Statement of compliance

The Company's financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union ('EU') and in accordance with the provisions of the UK Companies Act 2006.

The 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 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.

(b) Accounting Policies

Where applicable, the accounting policies in the separate financial statements are the same as those presented in the consolidated financial statements on pages 147 to 243 with the exception of the two policies detailed below.

The Company's accounting policy for financial assets is in accordance with the requirements of IFRS 9 'Financial Instruments'. As the Group has applied the temporary exemption from IFRS 9 available for entities whose activities are predominantly connected with insurance contracts, a different accounting policy has been adopted in the preparation of the consolidated financial statements. In addition, the Company has not adopted the Group's policy of hedge accounting.

Where an accounting policy can be directly attributed to a specific note to the consolidated financial statements, the policy is presented within that note. Each note within the Company financial statements makes reference to the note to the consolidated financial statements containing the applicable accounting policy. The accounting policy in relation to foreign currency transactions is included within note A2.1 to the consolidated financial statements.

Investments in Group entities

Investments in Group entities are carried in the statement of financial position at cost less impairment.

The Company assesses at each reporting date whether an investment is impaired by assessing whether any indicators of impairment exist. If objective evidence of impairment exists, the Company calculates the amount of impairment as the difference between the recoverable amount of the Group entity and its carrying value and recognises the amount as an expense in the income statement.

The recoverable amount is determined based on the cash flow projections of the underlying entities.

Financial assets

Classification of financial assets

Financial assets are measured at amortised cost where they:

•  have contractual terms that give rise to cash flows on specified dates, that represent solely payments of principal and interest on the principal amount outstanding; and

•  are held within a business model whose objective is achieved by holding to collect contractual cash flows.

These financial assets are initially recognised at cost, being the fair value of the consideration paid for the acquisition of the financial asset. All transaction costs directly attributable to the acquisition are also included in the cost of the financial asset. Subsequent to initial recognition, these financial assets are carried at amortised cost, using the effective interest method.

Financial assets measured at amortised cost are included in notes 10 and 13.

Equities, debt securities, collective investment schemes and derivatives are measured at FVTPL as they are managed on a fair value basis.

Impairment of financial assets

The Company assesses the expected credit losses associated with its loans and deposits, other amounts due from Group entities and cash carried at amortised cost. The measurement of credit impairment is based on an Expected Credit Loss ('ECL') model and depends upon whether there has been a significant increase in credit risk.

For those credit exposures for which credit risk has not increased significantly since initial recognition, the Company measures loss allowances at an amount equal to the total expected credit losses resulting from default events that are possible within 12 months after the reporting date ('12-month ECL'). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, the

Company measures and recognises an allowance at an amount equal to the expected credit losses over the remaining life of the exposure, irrespective of the timing of the default ('Lifetime ECL'). If the financial asset becomes 'credit-impaired' (following significant financial difficulty of issuer/borrower, or a default/breach of a covenant), the Company will recognise a Lifetime ECL. ECLs are derived from unbiased and probability-weighted estimates of expected loss.

See note 15 for detail of how the Company assesses whether the credit risk of a financial asset has increased since initial recognition and the approach to estimating ECLs.

The loss allowance reduces the carrying value of the financial asset and is reassessed at each reporting date. ECLs and subsequent remeasurements of the ECL are recognised in the income statement. For other receivables, the ECL rate is recalculated each reporting period with reference to the counterparties of each balance.

2. FINANCIAL INFORMATION

New Accounting Pronouncements not yet Effective

Details of the standards, interpretations and amendments to be adopted in future periods are detailed in note A5 to the consolidated financial statements, none of which are expected to have a significant impact on the Company's financial statements.

Note A5 outlines that the Group has taken advantage of the temporary exemption granted to insurers in IFRS 4 'Insurance Contracts' from applying IFRS 9 until 1 January 2021 (recommended deferral period extended by IASB to 2022) as a result of meeting the exemption criteria as at 31 December 2015. As detailed above, such an exemption is not applicable to the Company given it is not an insurer. Therefore IFRS 9 has been adopted by the Company and the relevant disclosures are included in these financial statements.

Note A4 outlines that the Group has adopted IFRS 16 'Leases' and amendments to IAS19 'Employee benefits' but the Company currently does not have any leases or pension schemes and therefore has not adopted these changes.

3. SHARE CAPITAL AND SHARE PREMIUM

The Company was incorporated on 5 October 2018 with an issued share capital comprising 2 ordinary shares of £0.10 each and 50,000 redeemable preference shares of £1.00 each.

On 31 October 2018 all issued redeemable preference shares were cancelled.

Under a scheme of arrangement in accordance with section 86 of the Cayman Islands Companies Law between Phoenix Group Holdings ('Old PGH'), the former ultimate parent company of the Group, and its shareholders, all of the issued shares in Old PGH were cancelled and an equivalent number of new shares in Old PGH were issued to the Company in consideration for the allotment to the Old PGH shareholders of one ordinary share in the Company for each ordinary share in Old PGH that they held on the scheme record date, 12 December 2018.

The shares of the Company are listed on the London Stock Exchange and trading in these shares commenced on 13 December 2018.

Following court approval on 18 December 2018, the entire issued share premium of the Company as at that date was cancelled. The sum of £4,078 million arising on the share premium cancellation has been credited to the Company's retained earnings.

During 2019, the Company issued 315,730 shares at a premium of £2 million in order to satisfy its obligations to employees under the Group's sharesave schemes.

	2019 £m	2018 £m
Issued and fully paid:
721.5 million ordinary shares of £0.10 each (2018: 721.2 million)	72	72
2019	Number	£
Shares in issue at 1 January	721,199,214	72,119,921
Ordinary shares issued in the period	315,730	31,573
Ordinary shares in issue at 31 December	721,514,944	72,151,494
2018	Number	£
At incorporation on 5 October 2018	2	-
Issue of shares under scheme of arrangement	721,199,212	72,119,921
Ordinary shares in issue at 31 December	721,199,214	72,119,921

4. TIER 1 NOTES

The accounting policy for the Tier 1 Notes is included in note D3 to the consolidated financial statements.

	2019 £m	2018 £m
Tier 1 notes	411	411

On 12 December 2018 the Company was substituted in place of Old PGH as issuer of the Tier 1 Notes and these were recognised at the £411 million fair value of an intra-group loan that was received as consideration. Details of the terms of the Tier 1 Notes can be found in note D3 to the consolidated financial statements.

5. BORROWINGS

The accounting policy for borrowings is included in note E5 to the consolidated financial statements.

	Carrying value			Fair value
	2019 £m	2018 £m		2019 £m	2018 £m
£428 million subordinated loans (note a)	437	439		503	441
£450 million Tier 3 subordinated notes (note b)	448	447		473	447
US $500 million Tier 2 bonds (note c)	334	343		396	342
€500 million Tier 2 notes (note d)	385	405		473	390
£300 million senior unsecured bond (note e)	128	-		130	-
Loan due to Standard Life Assurance Limited (note f)	288	-		288	-
Total borrowings	2,020	1,634		2,263	1,620
Amount due for settlement after 12 months	2,020	1,634

a. On 12 December 2018, the Company was substituted in place of Old PGH as issuer of the £428 million subordinated notes due 2025 at a coupon of 6.625%, which were initially recognised at fair value of £439 million.

b. On 12 December 2018, the Company was substituted in place of Old PGH as issuer of the £450 million Tier 3 subordinated notes due 2022 at a coupon of 4.125%, which were initially recognised at fair value of £447 million.

c. On 12 December 2018, the Company was substituted in place of Old PGH as issuer of the US $500 million Tier 2 bonds due 2027 with a coupon of 5.375%, which were initially recognised at fair value of £349 million.

d.             On 12 December 2018, the Company was substituted in place of Old PGH as issuer of the €500 million Tier 2 notes due 2029 with a coupon of 4.375%, which were initially recognised at fair value of £407 million.

e. On 18 June 2019, the Company was substituted in place of Old PGH as issuer of the £300 million 7 year senior unsecured bond due 2021 at an annual coupon of 5.75% with principal outstanding of £122 million, which was initially recognised at fair value of £131 million.

f.  On 22 February 2019, the Company recognised a loan to Standard Life Assurance Limited ('SLAL') for £162 million, as consideration for Standard Life International Designated Activity Company ('SLIDAC') due 2024. On 28 March 2019 the purchase price was adjusted by £120 million, which resulted in an increase in the loan principal. Interest accrues at LIBOR plus 1.66% and during 2019 £6 million of interest was capitalised.

g.             On 12 December 2018, the Company became an additional borrower on a £900 million unsecured revolving credit facility, maturing in June 2022. On 27 June 2019, the Company replaced this facility with a £1.25 billion unsecured revolving credit facility (the 'revolving facility'), maturing in June 2024. There are no mandatory or target amortisation payments associated with the facility but the facility does include customary mandatory prepayments obligations and voluntary prepayments are permissible.

The facility accrues interest at a margin over LIBOR that is based on credit rating. On 23 October 2019 the Company drew down £100 million under the facility and the balance was repaid on 25 November 2019. The facility remains undrawn as at 31 December 2019.

h.             On 12 December 2018, the Company became an additional borrower and guarantor to an acquisition facility with an aggregate principal amount of £600 million. The acquisition facility was undrawn as at 31 December 2018. On 27 June 2019, the facility was cancelled.

Borrowings initially recognised at fair value are being amortised to par value over the life of the borrowings.

As part of the substitutions, accrued interest was also transferred to the Company and was settled prior to 31 December 2018.

For the purposes of the additional fair value disclosures for liabilities recognised at amortised cost, all borrowings have been categorised as Level 2 financial instruments.

Reconciliation of Liabilities Arising from Financing Activities

The table below details changes in the Company's liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Company's statement of cash flows as cash flows from financing activities.

		Cash			Non-Cashflow
	At 1 January 2019 £m	New borrowings, net of costs £m	Repayments £m		Loan issued via subsitution1 £m	New borrowings net of issue costs2 £m	Movement in foreign exchange £m	Amortisation £m	Capitalised interest	At 31 December 2019 £m
£428 million subordinated notes	439	-	-		-	-	-	(2)	-	437
£450 million Tier 3 subordinated notes	447	-	-		-	-	-	1	-	448
US $500 million Tier 2 bonds	343	-	-		-	-	(13)	4	-	334
€500 million Tier 2 notes	405	-	-		-	-	(24)	4	-	385
£300 million senior unsecured bond	-	-	-		131	-	-	(3)	-	128
£1.25 billion revolving credit facility	-	100	(100)		-	-	-	-	-	-
Loan due to Standard Life Assurance Limited	-	-	-		-	282	-	-	6	288
	1,634	100	(100)		131	282	(37)	4	6	2,020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

								Non-Cashflow
							At 5 October 2018 £m	Loan issued via subsitution1 £m	Movement in foreign exchange £m	At 31 December 2018 £m
£428 million subordinated notes							-	439	-	439
£450 million Tier 3 subordinated notes							-	447	-	447
US $500 million Tier 2 bonds							-	349	(6)	343
€500 million Tier 2 notes							-	407	(2)	405
							-	1,642	(8)	1,634

1  Loans issued via substitution are a non-cashflow item as consideration was the transfer of loans and deposits (refer to note 10).

2  Loan issued to SLAL, a subsidiary undertaking, was in consideration for the transfer to the Company of its investment in SLIDAC.

6. DERIVATIVES

In 2019, the Company entered into a forward currency swap with another group company to hedge against adverse currency movements in respect of the €287 million capital injection into SLIDAC.

The Company also entered into a forward currency swap in 2019 to hedge against adverse currency movements in respect of the equity and debt holding in a property investment structure which was transferred to the Company.

The Company entered into a cross currency swap with another group company in 2018 to hedge against adverse currency movements in respect of the €500 million Tier 2 notes.

The fair value of the derivative financial instruments are as follows:

	Asset		Liability
	2019 £m	2018 £m	2019 £m	2018 £m
Cross currency swap	-	-	31	1
Forward currency swap	5	-	-	-
	5	-	31	1

Derivative Collateral Arrangements

The accounting policy for collateral arrangements is included in note E4 to the consolidated financial statements.

Assets Accepted

The maximum exposure to credit risk in respect of OTC derivative assets is £5 million of which credit risk of £3 million is mitigated by use of collateral arrangements (which are settled net after taking account of any OTC derivative liabilities owed by the counterparty).

Assets Pledged

The Company pledges collateral in respect of its OTC derivative liabilities. The value of assets pledged at 31 December 2019 in respect of OTC derivative liabilities of £34 million amounted to £3 million.

7. PROVISIONS

During 2019 the Company recognised a Standard Life transition restructuring provision of £159 million and other provisions of £13 million. Details are included in note G7 to the consolidated financial statements.

8. ACCRUALS AND DEFERRED INCOME

The accounting policy for accruals and deferred income is included in note G11 to the consolidated financial statements.

	2019 £m	2018 £m
Accruals and deferred income	58	33
Amount due for settlement after 12 months	-	-

9. INVESTMENTS IN GROUP ENTITIES

	2019 £m	2018 £m
Cost
At 1 January 2019 and 5 October 2018	4,146	-
Additions	6,928	4,146
At 31 December	11,074	4,146
Impairment
At 1 January 2019 and 5 October 2018	-	-
Charge for the year	(4,146)	-
At 31 December	(4,146)	-
Carrying amount
At 31 December	6,928	4,146

On 12 December 2018, the Company became the ultimate parent undertaking of the Group by acquiring the entire share capital of Old PGH via a share for share exchange. The cost of investment in Old PGH, reflected in the table above, was determined as the carrying amount of the Company's share of the equity of Old PGH on the date of the transaction. The difference between the cost of investment and the market capitalisation of Old PGH immediately before the share for share exchange of £4 million has been recognised as an other reserve, and is shown as a separate component of equity.

On 21 February 2019, the Company acquired SLIDAC from its subsidiary SLAL, for an initial consideration of £162 million settled in the form of a loan (see note 5) such that its interest in SLIDAC is now directly held. On acquisition, the Company subscribed for an additional share in SLIDAC for a consideration of £250 million. Following the completion of a Part VII transfer of the European branch business from SLAL to SLIDAC, the purchase price for the acquisition of SLIDAC was increased by £120 million, again settled in the form of a loan, which increased the carrying value of the Company's investment in SLIDAC to £532 million.

On 18 June 2019, the Company acquired Phoenix Life Holdings Limited from its subsidiaries PGH (LCA) Limited and PGH (LCB) Limited for a consideration of £3,356 million, settled via a distribution in-specie. On the same day, the Company also acquired SLAL from Old PGH for an initial consideration of £2,994 million which was subsequently increased by £46 million. The consideration for this acquisition was settled partly through the cancellation of the £825 million loan due from Old PGH (see note 10), with the remainder settled through a distribution in-specie.

Where indicators of impairment have been identified the carrying value of the Company's investments in its subsidiaries has been tested for impairment at the period end. In 2019, impairments of £4,146m (2018: £nil) were recognised to align the carrying value of certain investments to their recoverable amount. The impairment charge arose as a consequence of the receipt of a £5,640 million dividend from Old PGH during the year.

The value in use has been used as the recoverable amount and this has been determined using the present value of the future cash flows of the Company's subsidiaries including the in-force long-term business, the asset management business and the service company. The cash flows used in this calculation are consistent with those adopted by management in the operating plan and, beyond the period of this plan, reflect the anticipated run-off of the in-force life insurance business. Future cash flows have been valued using discount rates which reflect the risks inherent to each cash flow. For the other subsidiaries, the value in use has been determined using net assets values.

For a list of principal Group entities, refer to note H5 of the consolidated financial statements. The entities directly held by the Company are separately identified.

10. LOANS AND DEPOSITS

	Carrying value			Fair value
	2019 £m	2018 £m		2019 £m	2018 £m
Loans due from PLHL (note a)	1,220	1,231		1,363	1,231
Loans due from Old PGH (note b)	-	825		-	808
Loans due from Phoenix Group Employee Benefit Trust (note c)	7	-		7	-
Total loans and deposits	1,227	2,056		1,370	2,039
Amounts due after 12 months	1,227	2,056

All loans and deposit balances are due from Group entities and are measured at amortised cost using the effective interest method. The fair value of these loans and deposits are also disclosed.

a)             On 12 December 2018, the Company was assigned a £428 million subordinated loan by Phoenix Life Holdings Limited ('PLHL'). The loan accrues interest at a rate of 6.675% and matures on 18 December 2025. This loan was initially recognised at fair value of £439 million and is accreted to par over the period to 2025. At 31 December 2019, the carrying value of the loan was £438 million (2018: £440 million).

On 12 December 2018, the Company was assigned a £450 million subordinated loan by PLHL. The loan accrues interest at a rate of 4.175% and matures on 20 July 2022. This loan was initially recognised at fair value of £447 million and is accreted to par over the period to 2022. At 31 December 2019, the carrying value of the loan was £448 million (2018: £448 million).

On 12 December 2018, the Company was assigned a US $500 million loan by PLHL due 2027 with a coupon of 5.375%. This loan was initially recognised at fair value of £349 million and is accreted to par over the period to 2027. Movement in foreign exchange during the period decreased the carrying value by £13 million (2018: £6 million). At 31 December 2019, the carrying value of the loan was £334 million (2018: £343 million).

b)             On 12 December 2018, the Company entered into a new £825 million loan agreement with Old PGH as consideration for the substitution of the Company as issuer of the Tier 1 Notes and €500 million Tier 2 notes. The loan accrued interest at a rate of 6 month LIBOR plus 1.22% and matured on 31 December 2023. On 18 June 2019 the loan was settled as part of the consideration for the Company's acquisition of SLAL from Old PGH (see note 9).

c)             On 18 June 2019, the Company was assigned an interest free facility arrangement with Phoenix Group Employee Benefit Trust ('EBT') of £6 million. During 2019, an additional £4 million was drawn down against this facility. The loan is fully recoverable until the point the awards held in the EBT vest to the participants, at which point the loan is reviewed for impairment. Any impairments are determined by comparing the carrying value to the estimated recoverable amount of the loan. Following the vesting of awards in 2019 £3 million of the loan has been written off. At 31 December 2019, the carrying value of the loan was £7 million.

None of the loans are considered to be past due.

For the purposes of the additional fair value disclosures for assets recognised at amortised cost, all loans and deposits are categorised as Level 3 financial instruments. The fair value of loans and deposits with no external market is determined by internally developed discounted cash flow models using a risk adjusted discount rate corroborated with external market data where possible.

Details of the factors considered in determination of fair value are included in note E2 to the consolidated financial statements.

11. FINANCIAL ASSETS

		2019 £m	2018 £m
Financial assets at fair value through profit or loss:
Derivatives		5	-
Equities		2	-
Debt securities		43	-
Collective investment schemes		200	-
		250	-
Amounts due after 12 months		43	-

Determination of Fair Value and Fair Value Hierarchy of Financial Assets

Details of the factors considered in determination of the fair value are included in note E2 to the consolidated financial statements.

Year ended 31 December 2019		Level 1 £m	Level 2 £m	Level 3 £m	Total £m
Financial assets at fair value through profit or loss:
Derivatives		-	5	-	5
Equities		-	-	2	2
Debt securities		-	-	43	43
Collective investment schemes		200	-	-	200
		200	5	45	250

There were no transfers between levels in 2019.

Level 3 Financial Instrument Sensitivities

The investment in equity and debt securities is in respect of equity and debt holdings in a property investment structure which was transferred to the Company via an in-specie dividend received from Old PGH during 2019.

The structure is valued as a whole on a discounted cash flow basis and allocated to the debt and equity components in order of priority. The valuation is sensitive to the discount rate applied. A decrease in the discount rate of 175bps would increase the value by £9 million whilst an increase of 200bps would decrease the value by £6 million.

12. DEFERRED TAX

The accounting policy for tax assets and liabilities is included in note G8 to the consolidated financial statements.

Movement in Deferred Tax Asset

	1 January 2019 £m	Credit for the year  £m	31 December 2019 £m
Provisions and other temporary differences	-	15	15

The Finance Act 2016 reduced the rates of corporation tax from 20% to 19% in April 2017 and to 17% from April 2020. Consequently a blended rate of tax has been used for the purposes of providing for deferred tax in the Company.

13. CASH AND CASH EQUIVALENTS

The accounting policy for cash and cash equivalents is included in note G6 to the consolidated financial statements.

	2019 £m	2018 £m
Bank and cash balances	45	1

14. CASH FLOWS FROM OPERATING ACTIVITIES

	2019 £m	2018 £m
Profit/(loss) for the period before tax	1,598	(2)
Non-cash movements in profit/(loss) for the period before tax:
Dividend income from other Group entities	(5,640)	-
Impairment of investment in subsidiary	4,146	-
Impairment of loan due from subsidiary	3	-
Investment income	(79)	(5)
Finance costs	103	5
Fair value losses/(gains) on financial assets	19	(2)
Foreign exchange movement on borrowings at amortised cost	(37)	(2)
Share-based payment charge	11	-
Increase in investment assets	(236)	-
Net decrease in working capital	523	6
Cash generated by operations	411	-

15. CAPITAL AND RISK MANAGEMENT

The Company's capital comprises share capital, the Tier 1 Notes and all reserves as calculated in accordance with IFRSs, as set out in the statement of changes in equity. Under English company law, dividends must be paid from distributable profits. As the ultimate parent undertaking of the Group, the Company manages its capital to ensure that it has sufficient distributable profits to pay dividends in accordance with its dividend policy.

At 31 December 2019, total capital was £5,849 million (2018: £4,554 million). The movement in capital in the period comprises the total comprehensive income for the period attributable to owners of £1,643 million (2018: £3 million expense), dividends paid of £338 million (2018: £nil), coupon paid on Tier 1 Notes, net of tax relief of £23 million (2018: £nil), credit to equity for equity-settled share-based payments of £11 million (2018: £nil), issue of ordinary share capital of £2 million (2018: £nil), proceeds from the issue of shares under the scheme of arrangement of £nil (2018: 4,146 million) and the substituted Tier 1 Notes of £nil (2018: £411 million).

In addition, the Group also manages its capital on a regulatory basis as described in note I3 to the consolidated financial statements.

The principal risks and uncertainties facing the Company are interest rate risk, liquidity risk, foreign currency risk and credit risk. The Company has hedged the currency risk on its foreign currency hybrid debt (US $500 million Tier 2 bonds and €500 million Tier 2 notes) through a US $500 million internal loan and a €500 million internal cross currency swap.

Details of the Group's financial risk management policies are outlined in note E6 to the consolidated financial statements.

Credit Risk Management Practices

The Company's current credit risk grading framework comprises the following categories:

Category	Description	Basis for recognising ECL
Performing	The counterparty has a low risk of default and does not have any past-due amounts	12 month ECL
Doubtful	There has been a significant increase in credit risk since initial recognition	Lifetime ECL - not credit impaired
In default	There is evidence indicating the asset is credit-impaired	Lifetime ECL - credit impaired
Write-off	There is evidence indicating that the counterparty is in severe financial difficulty and the Group has no realistic prospect of recovery	Amount is written off

The table below details the credit quality of the Company's financial assets, as well as the Company's maximum exposure to credit risk by credit risk rating grades:

2019	External credit rating	Internal credit rating	12 month or lifetime ECL	Gross carrying amount £m	Loss allowance £m	Net carrying amount £m
Loans and deposits (note 10)	N/A	Performing	12 month ECL	1,227	-	1,227
Other amounts due from Group entities (note 18)	N/A	Performing	12 month ECL	198	-	198
Cash and cash equivalents (note 13)	A	N/A	12 month ECL	45	-	45
2018	External credit rating	Internal credit rating	12 month or lifetime ECL	Gross carrying amount £m	Loss allowance £m	Net carrying amount £m
Loans and deposits (note 10)	N/A	Performing	12 month ECL	2,056	-	2,056
Other amounts due from Group entities (note 18)	N/A	Performing	12 month ECL	20	-	20
Cash and cash equivalents (note 13)	A	N/A	12 month ECL	1	-	1

The Company considers reasonable and supportable information that is relevant and available without undue cost or effort to assess whether there has been a significant increase in risk since initial recognition. This includes quantitative and qualitative information and also forward-looking analysis.

Loans and deposits - The Company is exposed to credit risk relating to loans and deposits from other Group companies, which are considered low risk. Given their low risk, the loss allowance has been set at less than £1 million. The Company assesses whether there has been a significant increase in credit risk since initial recognition by assessing whether there have been any historic defaults, by reviewing the going concern assessment of the borrower and the ability of the Group to prevent a default by providing a capital or cash injection. Specific considerations for the loan to the EBT loan are discussed in note 10.

Amounts due from other Group entities - The credit risk from activities undertaken in the normal course of business is considered to be extremely low risk. Given their low risk, the loss allowance has been set at less than £1 million. The Company assesses whether there has been a significant increase in credit risk since initial recognition by assessing past credit impairments, history of defaults and the long-term stability of the Group.

Cash and cash equivalents - The Company's cash and cash equivalents are held with bank and financial institution counterparties, which have investment grade 'A' credit ratings. The Company considers that its cash and cash equivalents have low credit risk based on the external credit ratings of the counterparties and there being no history of default, and therefore the impact to the net carrying amount shown in the table above is not material.

The Company writes off a financial asset when there is information indicating that the counterparty is in severe financial difficulty and there is no realistic prospect of recovery, e.g. when the counterparty has been placed into liquidation or has entered into bankruptcy proceedings. Financial assets written off may still be subject to enforcement activities under the Company's recovery procedures, taking into account legal advice where appropriate. Any recoveries made are recognised in profit or loss.

16. SHARE-BASED PAYMENTS

For detailed information on the long-term incentive plans, sharesave schemes and deferred bonus share schemes refer to note I1 in the consolidated financial statements.

17. DIRECTORS' REMUNERATION

Details of the remuneration of the Directors of Phoenix Group Holdings plc is included in section B of the Directors' Remuneration Report on pages 114 to 130 of the Annual Report and Accounts.

18. RELATED PARTY TRANSACTIONS

The Company has related party transactions with Group entities and its key management personnel. Details of the total compensation of key management personnel, being those having authority and responsibility for planning, directing and controlling the activities of the Group, including the Executive and Non-Executive Directors, are included in note I4 to the consolidated financial statements.

On 31 August 2018, SLA plc took a 19.98% equity stake in the Enlarged Group, and as a result became a related party of the Company. SLA plc is considered to have significant influence over the Group due to its equity stake and representation on the Board.

During the year ended 31 December 2019 the Company entered into the following transactions with Group entities and SLA plc:

	2019 £m	2018 £m
Dividend income from other Group entities	5,989	-
Interest income from other Group entities	77	5
	6,066	9
Impairment of investment in subsidiary	4,146	-
Impairment of loan due from subsidiary	3	-
Unrealised loss on internal cross currency swap	27	4
Expense to other Group entities	235	-
Interest expense to other Group entities	12	-
	4,423	4
Dividends paid to SLA plc	67	-

Amounts due from related parties at the end of the year:

	2019 £m	2018 £m
Loans due from Group entities	1,227	2,056
Forward currency swap	3	-
Other amounts due from Group entities	198	20
	1,428	2,076
Amount due for settlement after 12 months	1,227	2,056

Amounts due to related parties at the end of the year:

	2019 £m	2018 £m
Loans due to Group entities	288	1
Cross currency swap	31	1
Other amounts due to Group entities	533	-
	852	2
Amount due for settlement after 12 months	288	-

19. AUDITOR'S REMUNERATION

Details of auditor's remuneration, for Phoenix Group Holdings plc and its subsidiaries, is included in note C4 to the consolidated financial statements.

20. EVENTS AFTER THE REPORTING PERIOD

Details of events after the reporting date are included in note I7 to the consolidated financial statements.

N LYONS

C BANNISTER

J MCCONVILLE

A BRIGGS

A BARBOUR

C FLEMING

K GREEN

W MAYALL

J POLLOCK

B RICHARDS

N SHOTT

K SORENSON

M TUMILTY

 

06 March 2020

ADDITIONAL LIFE COMPANY ASSET DISCLOSURES

The analysis of the asset portfolio provided below comprises the assets held by the Group's life companies, and it is stated net of derivative liabilities. It excludes other Group assets such as cash held in the holding and management service companies and the assets held by the non-controlling interests in consolidated collective investment schemes.

The following table provides an overview of the exposure by asset category of the Group's life companies' shareholder and policyholder funds:

31 December 2019

Carrying value	Shareholder and non-profit funds1 £m	Participating supported1 £m	Participating non- supported2 £m	Unit-linked2 £m	Total3 £m
Cash and cash equivalents	3,486	2,009	4,788	6,391	16,674
Debt securities - gilts	3,905	339	14,167	4,870	23,281
Debt securities - bonds	13,744	1,882	24,174	30,242	70,042
Equity securities	145	48	15,962	72,959	89,114
Property investments	92	37	1,890	5,335	7,354
Other investments4	3,508	386	3,738	9,897	17,529
At 31 December 2019	24,880	4,701	64,719	129,694	223,994
Cash and cash equivalents in Group holding companies					275
Cash and financial assets in other Group companies					616
Financial assets held by the non-controlling interest in consolidated collective investment schemes					3,661
Total Group consolidated assets					228,546
Comprised of:
Investment property					5,943
Financial assets					218,871
Cash and cash equivalents					4,466
Derivative liabilities					(734)
					228,546

1  Includes assets where shareholders of the life companies bear the investment risk.

2  Includes assets where policyholders bear most of the investment risk.

3  This information is presented on a look through basis to underlying funds where available.

4  Includes equity release mortgages of £2,781 million, commercial real estate loans of £388 million, income strips of £690 million, policy loans of £10 million, other loans of £284 million, net derivative assets of £3,976 million, reinsurers' share of investment contracts of £8,881 million and other investments of £519 million.

31 December 2018 restated1

Carrying value	Shareholder and non-profit funds2 £m	Participating supported2 £m	Participating non- supported3 £m	Unit-linked3 £m	Total4 £m
Cash and cash equivalents	2,522	2,304	5,046	6,840	16,712
Debt securities - gilts	3,058	378	15,841	5,806	25,083
Debt securities - bonds	12,906	1,633	22,386	29,322	66,247
Equity securities	129	45	13,910	65,618	79,702
Property investments	101	44	2,046	6,059	8,250
Other investments5	2,949	192	2,844	9,185	15,170
At 31 December 2018	21,665	4,596	62,073	122,830	211,164
Cash and cash equivalents in Group holding companies					346
Cash and financial assets in other Group companies					674
Financial assets held by the non-controlling interest in consolidated collective investment schemes					2,990
Total Group consolidated assets					215,174
Comprised of:
Investment property					6,520
Financial assets					204,821
Cash and cash equivalents					4,926
Derivative liabilities					(1,093)
					215,174

1  Following the acquisition of the Standard Life Assurance businesses in 2018, the Group has revised the presentation of certain balances within the statement of consolidated financial position. Total Group consolidated assets has been restated to include £244 million of accrued interest previously reported in prepayments and accrued income. In addition, £2,914 million of unit-linked assets previously reported as collective investments schemes and presented on a look-through basis within the disclosure has been reclassified to reinsurers' share of investment contract liabilities.

2  Includes assets where shareholders of the life companies bear the investment risk.

3  Includes assets where policyholders bear most of the investment risk.

4  This information is presented on a look through basis to underlying funds where available.

5  Includes equity release mortgages of £2,020 million, commercial real estate loans of £449 million, income strips of £654 million, policy loans of £9 million, other loans of £170 million, net derivative assets of £2,825 million, reinsurers' share of investment contracts of £8,331 million and other investments of £712 million.

The following table provides a reconciliation of the total life company assets to the Assets under Administration ('AUA') as at 31 December 2019 detailed in the Business Review on page 41:

		2019 £bn	2018 restated £bn
Total Life Company assets		224.0	211.2
Off-balance sheet AUA1		35.1	31.1
Less: Standard Life Trustee Investment Plan assets2		(10.8)	(15.8)
Assets Under Administration		248.3	226.5

1  Off-balance sheet AUA represents assets held in respect of certain Group Self-Invested Personal Pension products where the beneficial ownership interest resides with the customer (and which are therefore not recognised in the consolidated statement of financial position) but on which the Group earns fee revenue.

2  Assets held within the Standard Life Trustee Investment Plan product are excluded from AUA as materially all profits accrue to third party investment managers.

The following table analyses by type the debt securities of the life companies:

31 December 2019

Analysis by type of debt securities	Shareholder and non-profit funds £m	Participating supported £m	Participating non-supported £m	Unit-linked £m	Total £m
Gilts	3,905	339	14,167	4,870	23,281
Other government and supranational1	1,548	300	9,729	8,737	20,314
Corporate - financial institutions	5,867	577	8,555	7,948	22,947
Corporate - other	5,750	580	5,273	13,387	24,990
Asset backed securities ('ABS')	579	425	617	170	1,791
At 31 December 2019	17,649	2,221	38,341	35,112	93,323

31 December 2018 restated

Analysis by type of debt securities	Shareholder and non-profit funds £m	Participating supported £m	Participating non-supported £m	Unit-linked £m	Total £m
Gilts	3,058	378	15,841	5,806	25,083
Other government and supranational1	1,473	309	9,335	9,669	20,786
Corporate - financial institutions	5,200	650	7,631	10,348	23,829
Corporate - other	5,665	168	4,838	9,141	19,812
Asset backed securities ('ABS')	568	506	582	164	1,820
At 31 December 2018	15,964	2,011	38,227	35,128	91,330

1  Includes debt issued by governments; public and statutory bodies; government backed institutions and supranationals.

The life companies' debt portfolio was £93.3 billion at 31 December 2019 (2018: £91.3 billion). Shareholders had direct exposure to £19.9 billion (2018: 18.0 billion) of these assets (including supported participating funds), of which 99.8% (2018: 99.5%) of rated securities were investment grade. The shareholders' credit risk exposure to the non-supported participating funds is primarily limited to the shareholders' share of future bonuses. Shareholders' credit risk exposure to the unit-linked funds is limited to the level of asset management fee, which is dependent on the underlying assets.

The following table sets out a breakdown of the life companies' sovereign and supranational debt security holdings by country:

31 December 2019

Analysis of sovereign and supranational debt security holdings by country	Shareholder and non-profit funds £m	Participating supported £m	Participating non-supported £m	Unit-linked £m	Total £m
UK	4,452	385	14,411	4,898	24,146
Supranationals	544	73	320	41	978
USA	-	3	52	1,859	1,914
Germany	155	54	3,397	324	3,930
France	59	33	2,559	450	3,101
Netherlands	23	17	360	159	559
Italy	-	-	-	550	550
Greece	-	-	28	19	47
Spain	-	-	-	380	380
Belgium	5	1	783	89	878
Other - non-Eurozone	183	60	1,340	4,521	6,104
Other - Eurozone	32	13	646	317	1,008
At 31 December 2019	5,453	639	23,896	13,607	43,595

31 December 2018 restated

Analysis of sovereign and supranational debt security holdings by country	Shareholder and non-profit funds £m	Participating supported £m	Participating non-supported £m	Unit-linked £m	Total £m
UK	3,443	418	16,051	5,844	25,756
Supranationals	579	84	335	52	1,050
USA	6	3	125	3,433	3,567
Germany	70	62	3,438	386	3,956
France	72	39	2,455	340	2,906
Netherlands	28	19	345	106	498
Italy	46	-	-	340	386
Greece	-	-	12	46	58
Spain	-	-	-	144	144
Belgium	5	1	710	36	752
Other - non-Eurozone	246	51	1,045	4,563	5,905
Other - Eurozone	36	10	659	79	784
Indirectly held debt securities	-	-	1	106	107
At 31 December 2018	4,531	687	25,176	15,475	45,869

Sovereign and supranational debt represented 31% (2018: 29%) of the debt portfolio in respect of shareholder exposure, or £6.1 billion, at 31 December 2019 (2018: £5.2 billion). The vast majority of the life companies' exposure to sovereign and supranational debt holdings is to UK gilts.

All of the life companies' debt securities are held at fair value through profit or loss under IAS 39, and therefore already reflect any reduction in value between the date of purchase and the reporting date.

The life companies have in place a comprehensive database that consolidates credit exposures across counterparties, geographies and business lines. This database is used for credit monitoring, stress testing and scenario planning. The life companies continue to manage their balance sheets prudently and have taken extra measures to ensure their market exposures remain within risk appetite.

The following table sets out a breakdown of the life companies' financial institution corporate debt security holdings by country:

31 December 2019

Analysis of financial institution corporate debt security holdings by country	Shareholder and non-profit funds £m	Participating supported £m	Participating non-supported £m	Unit-linked £m	Total £m
UK	3,055	167	3,184	1,962	8,368
USA	846	80	1,017	862	2,805
Germany	139	4	556	415	1,114
France	203	43	1,089	967	2,302
Netherlands	392	36	244	342	1,014
Portugal	-	-	3	11	14
Italy	30	-	42	37	109
Ireland	-	-	25	19	44
Spain	64	-	150	217	431
Luxembourg	-	-	34	15	49
Belgium	12	3	3	13	31
Other - non-Eurozone	1,044	215	1,942	2,880	6,081
Other - Eurozone	82	29	266	208	585
At 31 December 2019	5,867	577	8,555	7,948	22,947

31 December 2018 restated

Analysis of financial institution corporate debt security holdings by country	Shareholder and non-profit funds £m	Participating supported £m	Participating non-supported £m	Unit-linked £m	Total £m
UK	2,699	163	3,017	1,917	7,796
USA	758	46	934	1,137	2,875
Germany	127	13	410	567	1,117
France	174	52	734	1,405	2,365
Netherlands	412	42	377	745	1,576
Italy	29	-	44	43	116
Ireland	-	-	31	42	73
Spain	58	-	91	209	358
Luxembourg	1	-	18	11	30
Belgium	6	20	84	80	190
Other - non-Eurozone	883	299	1,723	4,073	6,978
Other - Eurozone	53	15	168	119	355
At 31 December 2018	5,200	650	7,631	10,348	23,829

The life companies had £94 million (2018: £87 million) shareholder exposure to financial institution corporate debt of the Peripheral Eurozone, defined as Portugal, Italy, Ireland, Greece, and Spain, at 31 December 2019. The £6,444 million (2018: £5,850 million) total shareholder exposure to financial institution corporate debt comprised £3,376 million (2018: £3,107 million) senior debt, £2,567 million (2018: £2,249 million) Tier 1 debt and £501 million (2018: £494 million) Tier 2 debt.

The £6,444 million shareholder exposure to financial institution corporate debt comprised £3,673 million (2018: £3,535 million) bank debt and £2,771 million (2018: £2,315 million) non-bank debt.

For each of the life companies' significant financial institution counterparties, industry and other data has been used to assess the exposure of the individual counterparties. As part of the Group's risk appetite framework and analysis of shareholder exposure to a potential worsening of the economic situation, this assessment has been used to identify counterparties considered to be most at risk from defaults. The financial impact on these counterparties, and the contagion impact on the rest of the shareholder portfolio, is assessed under various scenarios and assumptions. This analysis is regularly reviewed to reflect the latest economic outlook, economic data and changes to asset portfolios. The results are used to inform the Group's views on whether any management actions are required.

The following table sets out a breakdown of the life companies' corporate - other debt security holdings by country:

31 December 2019

Analysis of corporate - other debt security holdings by country	Shareholder and non-profit funds £m	Participating supported £m	Participating non-supported £m	Unit-linked £m	Total £m
UK	2,742	56	2,371	3,411	8,580
USA	828	26	873	2,757	4,484
Germany	423	45	456	913	1,837
France	580	11	646	802	2,039
Netherlands	103	-	51	286	440
Italy	113	-	109	165	387
Ireland	11	-	15	51	77
Spain	84	1	77	136	298
Luxembourg	-	-	9	80	89
Belgium	115	-	103	145	363
Other - non-Eurozone	722	6	560	2,445	3,733
Other - Eurozone	29	435	3	86	553
Indirectly held debt securities	-	-	-	2,110	2,110
At 31 December 2019	5,750	580	5,273	13,387	24,990

31 December 2018 restated

Analysis of corporate - other debt security holdings by country	Shareholder  and non-profit funds £m	Participating supported £m	Participating non-supported £m	Unit-linked £m	Total £m
UK	2,502	55	2,200	2,499	7,256
USA	877	32	681	2,066	3,656
Germany	509	64	437	702	1,712
France	547	5	472	475	1,499
Netherlands	112	-	79	123	314
Italy	120	1	73	109	303
Ireland	11	-	23	46	80
Spain	95	1	62	95	253
Luxembourg	-	-	4	50	54
Belgium	123	1	97	120	341
Other - non-Eurozone	758	9	626	1,230	2,623
Other - Eurozone	11	-	2	64	77
Indirectly held debt securities	-	-	82	1,562	1,644
At 31 December 2018	5,665	168	4,838	9,141	19,812

The following table sets out a breakdown of the life companies' ABS holdings by country:

31 December 2019

Analysis of ABS holdings by country	Shareholder and non-profit funds £m	Participating supported £m	Participating non-supported £m	Unit-linked £m	Total £m
UK	523	244	481	136	1,384
USA	-	-	2	3	5
Germany	-	21	-	-	21
France	-	35	10	2	47
Netherlands	8	58	30	1	97
Italy	-	-	11	-	11
Ireland	26	1	39	2	68
Spain	-	8	-	-	8
Luxembourg	-	49	10	7	66
Other - non-Eurozone	22	8	34	19	83
Other - Eurozone	-	1	-	-	1
At 31 December 2019	579	425	617	170	1,791

31 December 2018 restated

Analysis of ABS holdings by country	Shareholder and non-profit funds £m	Participating supported £m	Participating non-supported £m	Unit-linked £m	Total £m
UK	510	317	424	115	1,366
USA	-	-	2	1	3
Germany	-	29	-	-	29
France	-	33	8	1	42
Netherlands	8	64	45	12	129
Italy	-	-	5	-	5
Ireland	27	1	32	2	62
Spain	-	17	-	-	17
Luxembourg	-	34	17	5	56
Other - non-Eurozone	23	11	49	22	105
Indirectly held debt securities	-	-	-	6	6
At 31 December 2018	568	506	582	164	1,820

The following table sets out the credit rating analysis of the debt portfolio:

31 December 2019

Credit rating analysis of debt portfolio	Shareholder and non-profit funds £m	Participating supported £m	Participating non-supported £m	Unit-linked £m	Total £m
AAA	1,502	686	5,820	3,322	11,330
AA	6,491	1,163	20,578	7,354	35,586
A	6,498	352	6,188	6,103	19,141
BBB	2,795	3	4,734	5,758	13,290
BB	-	-	221	1,139	1,360
B and below	30	-	413	902	1,345
Non-rated	333	17	387	1,854	2,591
Indirectly held debt securities	-	-	-	8,680	8,680
At 31 December 2019	17,649	2,221	38,341	35,112	93,323

96.7% of rated securities were investment grade at 31 December 2019 (2018: 94.7%). The percentage of rated securities that were investment grade in relation to the shareholder and policyholders' funds were 99.8% and 95.7% respectively (2018: 99.5% and 93.4% respectively).

31 December 2018 restated

Credit rating analysis of debt portfolio	Shareholder and non-profit funds £m	Participating supported £m	Participating non-supported £m	Unit-linked £m	Total £m
AAA	1,505	791	5,633	4,737	12,666
AA	5,230	765	21,898	8,413	36,306
A	5,921	364	5,453	7,074	18,812
BBB	2,920	38	3,990	4,788	11,736
BB	15	3	188	59	265
B and below	71	-	386	3,733	4,190
Non-rated	302	50	595	1,199	2,146
Indirectly held debt securities	-	-	84	5,125	5,209
At 31 December 2018	15,964	2,011	38,227	35,128	91,330

 

 

ADDITIONAL CAPITAL DISCLOSURES

PGH PLC SOLVENCY II SURPLUS

The PGH plc surplus at 31 December 2019 is £3.1 billion (2018: £3.2 billion).

	31 December 2019 Estimated £bn	31 December 2018 £bn
Own Funds	10.8	10.3
SCR	(7.7)	(7.1)
Surplus	3.1	3.2

CALCULATION OF GROUP SOLVENCY

The Solvency II regulations set out two methods for calculating Group solvency, 'Method 1' (being the default accounting based consolidation method) and 'Method 2' (the deduction and aggregation method).

Under Method 2, the solo Own Funds are aggregated rather than consolidated on a line by line basis. The SCR is also aggregated, with no allowance for diversification. Method 2 is used for all entities within the Standard Life Assurance businesses acquired and Method 1 is used for all other entities of the Group. The Group has approval to use a combination of Methods 1 and 2 for consolidating its Group solvency results.

COMPOSITION OF OWN FUNDS

Own Funds items are classified into different Tiers based on the features of the specific items and the extent to which they possess the following characteristics, with Tier 1 being the highest quality:

•  availability to be called up on demand to fully absorb losses on a going-concern basis, as well as in the case of winding-up ('permanent availability'); and

•  in the case of winding-up, the total amount that is available to absorb losses before repayment to the holder until all obligations to policyholders and other beneficiaries have been met ('subordination').

PGH plc's total Own Funds are analysed by Tier as follows:

	31 December 2019 Estimated £bn	31 December 2018 £bn
Tier 1 - Unrestricted	8.3	7.8
Tier 1 - Restricted	0.5	0.5
Tier 2	1.5	1.5
Tier 3	0.5	0.5
Total Own Funds	10.8	10.3

PGH plc's unrestricted Tier 1 capital accounts for 77% (2018: 76%) of total Own Funds and comprises ordinary share capital, surplus funds of the unsupported with-profit funds which are recognised only to a maximum of the SCR, and the accumulated profits of the remaining business.

Restricted Tier 1 capital comprises the Tier 1 Notes issued in April 2018, the terms of which enable it to qualify as restricted Tier 1 capital for regulatory reporting purposes. There is no impact to the treatment of the restricted Tier 1 capital in the Group solvency calculation as a result of the PRA policy statement PS4/19 'Solvency II: Adjusting for the reduction of loss absorbency where own fund instruments are taxed on write down', issued during the period.

Tier 2 capital is comprised of subordinated notes whose terms enable them to qualify as Tier 2 capital for regulatory reporting purposes.

Tier 3 items include the Tier 3 subordinated notes of £0.4 billion (2018: £0.4 billion) and the deferred tax asset of £0.1 billion (2018: £0.1 billion).

BREAKDOWN OF SCR

The Group operates two PRA approved Internal Models, a Phoenix Internal Model covering all the pre-acquisition Phoenix entities and a Standard Life Internal Model which covers the acquired Standard Life Assurance entities, with the exception of the Irish entity, Standard Life International. Standard Life International calculates its capital requirements in accordance with the Standard Formula. An analysis of the pre-diversified SCR of PGH plc is presented below:

	31 December 2019 Estimated		31 December 2018
	Phoenix Internal Model  %	Standard Life Internal Model %	Phoenix Internal Model %	Standard Life Internal Model %
Longevity	26	16	26	15
Credit	19	12	18	13
Persistency	12	28	10	26
Interest rates	8	5	11	10
Operational	6	9	7	8
Swap spreads	2	1	2	1
Property	12	1	9	1
Other market risks	5	15	7	15
Other non-market risks	10	13	10	11
Total pre-diversified SCR	100	100	100	100

The principal risks of the Group are described in detail in note E6 and F4 in the IFRS consolidated financial statements.

MINIMUM CAPITAL REQUIREMENTS

Minimum Capital Requirement ('MCR') is the minimum amount of capital an insurer is required to hold below which policyholders and beneficiaries would become exposed to an unacceptable level of risk if an insurer was allowed to continue its operations. For Groups this is referred to as the Minimum Consolidated Group SCR ('MGSCR').

The MCR is calculated according to a formula prescribed by the Solvency II regulations and is subject to a floor of 25% of the SCR or €3.7 million, whichever is higher, and a cap of 45% of the SCR. The MCR formula is based on factors applied to technical provisions and capital at risk.

The MGSCR represents the sum of the underlying insurance companies' MCRs in respect of the Method 1 part of the Group.

The Eligible Own Funds to cover the MGSCR is subject to quantitative limits as shown below:

•  the Eligible amounts of Tier 1 items should be at least 80% of the MGSCR; and

•  the Eligible amounts of Tier 2 items shall not exceed 20% of the MGSCR.

PGH plc's MGSCR at 31 December 2019 is £1.1 billion (2018: £1.0 billion).

PGH plc's Method 1 Eligible Own Funds to cover MGSCR is £4.3 billion (2018: £4.2 billion) leaving an excess of Eligible Own Funds over MGSCR of £3.2 billion (2018: £3.2 billion), which translates to an MGSCR coverage ratio of 386% (2018: 408%).

The MCR for the Method 2 part of the Group is £1.2 billion (2018: £1.1 billion), with Eligible Own Funds of £4.9 billion (2018: £4.2 billion), leaving an excess of Eligible Own Funds over MCR of £3.7 billion (2018: £3.1 billion), which translates to an MCR coverage ratio of 394% (2018: 377%).

 

ADDITIONAL PERFORMANCE MEASURES

 

The Group assesses its financial performance based on a number of measures. Some measures are management derived measures of historic or future financial performance, position or cash flows of the Group; which are not defined or specified in accordance with relevant financial reporting frameworks such as International Financial Reporting Standards ('IFRS') or Solvency II. These measures are known as Alternative Performance Measures ('APMS').

.APMs are disclosed to provide stakeholders with further helpful information on the performance of the Group and should be viewed as complementary to, rather than a substitute for, the measures determined according to IFRS and Solvency II requirements. Accordingly, these APMs may not be comparable with similarly titled measures and disclosures by other companies.

A list of the APMs used in our results as well as their definitions, why they are used and, if applicable, how they can be reconciled to the nearest equivalent GAAP measure is provided below. Further discussion of these measures can be found in the business review from page 38 and the definitions of all APMs are included in the glossary on pages 268 to 270.

APM	Definition	Why is this measure used	Reconciliation to financial statements
Assets under administration	The Group's Assets under Administration ('AUA') represents assets administered by or on behalf of the Group, covering both policyholder fund and shareholder assets. It includes assets recognised in the Group's IFRS consolidated statement of financial position together with certain assets administered by the Group for which beneficial ownership resides with customers.	AUA indicates the potential earnings capability of the Group arising from its insurance and investment business. AUA flows provide a measure of the Group's ability to deliver new business  growth.	A reconciliation from the Group's IFRS consolidated statement of financial position to the Group's AUA is provided on page 256.
Financial leverage ratio	Financial leverage is calculated by Phoenix (using Fitch Ratings' stated methodology) as debt as a percentage of the sum of debt and equity. Debt is defined as the IFRS carrying value of shareholder borrowings. Equity is defined as the sum of equity attributable to the owners of the parent, the unallocated surplus and the Tier 1 Notes.	The Group seeks to manage the level of debt on its balance sheet by monitoring its financial leverage ratio. This is to ensure the Group maintains its investment grade credit rating as issued by Fitch Ratings and optimises its funding costs and financial flexibility for future acquisitions.	The debt and equity figures are directly sourced from the Group's IFRS consolidated statement of financial position on pages 149 and 150 and the analysis of borrowings note on page 184.
Incremental long-term cash generation	Incremental long-term cash generation 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 UK Open and Europe segments, and from the writing of bulk purchase annuities within our Heritage segment. It excludes any costs associated with the acquisition of the new business.	This measure provides an indication of the Group's performance in delivering new business growth to offset the impact of run-off of the Group's Heritage business and to bring sustainability to future cash generation.	Incremental long-term cash generation is not directly reconcilable to the financial statements as it relates to cash generation expected to arise in the future.
New business contribution - UK Open and Europe	Represents the increase in Solvency II shareholder Own funds arising from new business written in the year, adjusted to exclude the associated risk margin and any restrictions in respect of contract boundaries and stated on a net of tax basis.	This measure provides an assessment of the day 1 value arising on the writing of new business in the UK Open and Europe segments, and is stated after applicable taxation and acquisition costs.	New business contribution is not directly reconcilable to the Group's Solvency II metrics as it represents an in-year movement. Further analysis is provided on page 41.
Operating companies' cash generation	Cash remitted by the Group's operating companies to the Group's holding companies.	The statement of consolidated cash flows prepared in accordance with IFRS combines cash flows relating to shareholders with cash flows relating to policyholders, but the practical management of cash within the Group maintains a distinction between the two. The Group therefore focuses on the cash flows of the holding companies which relate only to shareholders. Such cash flows are considered more representative of the cash generation that could potentially be distributed as dividends or used for debt repayment and servicing, group expenses and pension contributions. Operating companies' cash generation is a key performance indicator used by management for planning, reporting and executive remuneration.	Operating companies' cash generation is not directly reconcilable to an equivalent GAAP measure (IFRS statement of consolidated cash flows) as it includes amounts that eliminate on consolidation. Further details of holding companies' cash flows are included within the business review on pages 39 to 40 and a breakdown of the Group's cash position by type of entity is provided in the additional life company asset disclosures section on page 255.
Operating profit	Operating profit is a financial performance measure based on expected long-term investment returns. It is stated before tax and non- operating items including amortisation and impairments of intangibles, finance costs attributable to owners and other non-operating items which in the Director's view should be excluded by their nature or incidence to enable a full understanding of financial performance. Further details of the components of this measure and the assumptions inherent in the calculation of the long- term investment return are included in note B1.2 to the IFRS consolidated financial statements.	This measure provides a more representative view of the Group's performance than the IFRS result after tax as it provides long-term performance information unaffected by short-term economic volatility and one-off items, and is stated net of policyholder finance charges and tax. It helps give stakeholders a better understanding of the underlying performance of the Group by identifying and analysing non-operating items.	A reconciliation of operating profit to the IFRS result before tax attributable to owners is included in the business review on page 45 and in the primary financial statements on page 161.
Life Company Free Surplus	The Solvency II surplus of the life companies that is in excess of their Board approved capital management policies.	This figure provides a view of the level of surplus capital in the Life companies that is available for distribution to the holding companies, and the generation of Free Surplus underpins future operating cash generation.	Please see business review section page 44 for further analysis of the solvency positions of the life companies.
Shareholder Capital Coverage Ratio	Represents total Eligible Own Funds divided by the Solvency Capital Requirements ('SCR'), adjusted to a shareholder view through the exclusion of amounts relating to those ring- fenced with-profit funds and Group pension schemes whose Own Funds exceed their SCR.	The unsupported with-profit funds and Group pension funds do not contribute to the Group Solvency II surplus. However, the inclusion of related Own Funds and SCR amounts dampens the implied Solvency II capital ratio. The Group therefore focuses on a shareholder view of the capital coverage ratio which is considered to give a more accurate reflection of the capital strength of the Group.	Further details of the Shareholder Capital Coverage Ratio and its calculation are included in the business review on page 38 and the additional capital disclosures section on page 262.